India

IT, Education
Educomp Solutions Reiterate: Buy
CMP: Rs.2820 Target: Rs.3800
With target price of Rs 3800 based on 35x FY10E EPS — We are initiating coverage on
Educomp with Buy. At a price of 3800 company will be trading at 54.1x FY09 Earnings 35x
FY10E EPS and 24x FY11E earnings. Company trades at trailing PEG to ratio of .5 for
Priced on 18th June, 2009 FY09, this ratio will decline further to .4 based on current prices.
±% potential 35%
Our last call on Educomp was in January, where we initiated a buy call on the stock at CMP
1715 with a target of 2750. Earlier in 2008 stock price fell by a huge percentage in 2008
due to rumors regarding company’s accounting policies.

Market Data Company has given detailed clarifications on these allegations and same can be found on
Beta 1.2 the company website.
52Wk hi/lo 4029/1342
Marketcap, INR Crore 5397 From the operations point Educomp has continued to deliver strong earnings and
Shares in issue (mn.) 17.3mn exponential growth, 40% CAGR in both revenues and Net income, is estimated for next
four years.
Reuters EDSO.BO
Bloomberg EDSL.IB
Industry Potential
India has emerged as one of the world’s largest consumer of education services with a
target population of more than 445 millions, with public and private spending on educational
services in India aggregating approximately $100 billion per annum. Spending on
Education in private sector has grown by CAGR of 10.4% since 1994, double the 5.11%
Share Holding Pattern (%) CAGR on total spending.
Promoters 55%
Government spending on education has reached 4% of GDP and is expected to rise further
FII 40%
as India focuses on reducing its literacy rates.
Domestic Inst. & Corp Body. 2%
Public & Others 3%

Company description
Educomp Solutions Ltd, formerly Educomp Datamatics Limited, was incorporated in 1994
and is based in New Delhi, India. It is India's largest educational service provider mainly
focused on the K-12 space.
Educomp group serves over 19,000 schools and 9.4 million learners and educators across
the world. Company operates private schools across various cities and also partners with
various state governments.

It has 27 offices worldwide. In addition, the Company operates through its various
subsidiaries including author GEN, Three brix eServices, Learning.com, USA, AsknLearn
Pte Ltd, Singapore and via its associates such as Savvica in Canada.

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 Buy Educomp Solutions

The company has three primary business segments:

Meanwhile, the use of Smartclass has grown
from 90 private schools in 2006 to 1,730 now,
a bit below expectation of 1,800 by March 09.
For FY09 segment revenue for Smart Class
grew by 146% at Rs. 314 Crore contributing
63% of revenues, with margins at 59%, up
110bps and PBIT up 150% at Rs. 185 crores.
1. Licensing of tools that help existing education system to move to a higher
standard of delivery.
2. Direct Intervention – running schools, pre-schools and tutoring classes,
online delivery etc.
3. Post K-12 initiatives such as vocational and professional education.
Educomp's main business is developing and licensing digital lessons, which are
uploaded onto servers and provided to schools. It also trains teachers (75,000 in the
last quarter), provides vocational training to students with courses such as accounting
and marketing, and offers online and in-person tutoring.

Revenue share from Smart Class business has
been continuously increasing and has gone up
to reach a level a 63%.Considering higher
growth for the division compared to the entire
company. Its share of revenues can increase
further to 70%.
Smart Class business has contributes 76%
of Company’s Operating Margins and going
forward, on standalone basis, contribution
of Smart Class will increase to 80%,
excluding inorganic growth through
acquisitions.
It runs eight K-12 schools. It has joined up in January with New Delhi real estate
developer Ansal Properties & Infrastructure to start 25 private schools in new
townships. It aims to start 150 schools over the next three years.
Educomp's big money-maker is Smartclass, a range of interactive digital lessons with
animation and graphics that's marketed mainly to private schools as they have deeper
pockets than public schools. The multimedia lessons-- 16,000 so far--are based on
the different curricula in place across the country and use 12 of the country's
languages.
Product/ Description Segment
Service
Smart- Highly animated Instructor-led content for schools
TM Private Schools
Class delivered inside the classroom as a "teachers aid"

Educational Infrastructure and digital content to Government

ICT Solutions
bridge the digital divide in government Schools Schools
Private and
Professional Technology aided learning Pedagogy & Cognitive
Government
Development learning workshops for teachers
Schools
Figure 1:
eTutoring Grades 6 to 12
Segmental Revenues Mathguru
TM Online portal for students of Mathematics
(NCERT Books)
FY07 FY08 FY09 Retail online eTutoring on all curricular subjects US/ India /
Learning Hour
Smart Class 44% 49% 63% and test prep Middle East
ICT Solutions 28% 35% 23% Roots to Neighborhood schools for Kindergarten-aged Kindergarten -
Professional TM
Wings children aged children
Development 17% 10% 6%
Millennium
Retail and TM Brick and Mortar Kindergarten to Grade 12 Schools K-12
Consulting 11% 6% 8% Schools
Source: Company Reports

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Smart Class: Company has covered 27 cities
with total plan of 80 cities. EBIT margins for
this business more than 50%
On the school addition targets, Educomp
closed the year with 12012 schools in ICT in
line with the wide guidance of 12000 – 15000.
Margins for the ICT business settled at 20% for
the quarter as against 31% in corresponding
th
4 last year. Margin deceleration was very
much expected however sharp fall has lead to
downward revisions. We estimate margins for
the business to settle at 15% post FY 2011
as against 20% anticipated earlier.
Educomp achieved growth rate of 700% on its
education portal Mathguru.com on paying
customers.
Subsequently in last quarter Math Guru portal
has been made free for all customers.
Margins for retail business improved from 41%
to 71%.
Key Developments during Q4 FY09
Fairwealth Securities
Buy Educomp Solutions
Smart Class: This is the multimedia education business of Educomp catering to
Private schools. Company charges upwards of 3000 Rs. Per student per month from
each school. Company keeps infrastructure (multimedia content) on its books and
transfers the content at the end of the contract.
Company added 258 schools in Smart Class in 4Q09 taking cumulative number of
schools to 1737. Cumulative number of students under smart class has increased to
1.98 million. Company doesn’t have any major competitors and we expect strong
revenue growth of 50%+ for next three years and margins to stay above 55% for this
business. This segment will continue to remain main driver of business for the
Company.
Company has projected that number of Schools will reach 2800-2900 by FY10E,
resulting in 60% growth.
ICT Solutions: This is computer literacy initiative funded by Union/ State
Governments. Company manages and installs labs in public schools and bills to
government.
Highlight of this business is long term contracts (5-year). However, it results to high
debtor days of around 180 days.
Company added 2042 schools in 4Q09, revenue growth of 2% Y-o-Y, and taking
cumulative number of schools to 12000. Margins have fallen sharply by 1000bps and
will continue to fall to settle at around 15%.
Number of states covered till now is 14. This business is likely to face major
competition from several regional and national players forcing the margins down.
This segment will witness high top line but lower bottom line growth as revenues are
likely to grow at more than 35% for period FY09-FY11 but margins are expected to
decline further to around 15% post FY11.
Higher revenue share of this business would hinder company in reducing its working
capital requirements down to below 120 days. When company attains steady state
(post FY12) this business will constitute less than 15% EBITDA share of the
company.
Professional Development: Company trained 90000+ teachers in 4Q09 which is
less than 7% of its total 1.4 million teachers. Revenues for the segment for 4Q09
increased by 12%( Y-o-Y). Margins for this business shall continue to remain high
(above 60%).
Revenue growth for this business will remain around 20%.
Retail and Consulting: Company is putting a lot of stress on its retail business
growth by focusing on both organic and inorganic channels. Company’s online
education portal MathGuru has witnessed ~700% growth rate. Company is growing
its Preschool portfolio (Root to Wings) by expanding through franchisee. Company
bought 50% stake in Euro kids taking preschool number under its umbrella to 500.
This business will continue to see lot of inorganic growth as company explores new
ways to enter retail markets.
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 Buy Educomp Solutions

Received financial closure for Rs 725cr of debt
for its K-12 business.
Debtor days for company have come down
from 179 days to 145 days.
K-12 Initiatives: Under this company will operate and manage entire schools and
provide access to all its intellectual property. Total of 11 schools with 14000+ students
have been established in 9 cities. Company targets 24 schools under K-12 initiatives
this year. Company has already received financial closure for Rs 725 cr of debt
including - Non-Convertible Debentures (Rs 100cr), out of which 250 crore has
already been utilized.
Company has planned 140 million of capital expenditure per school and expects EBIT
of Rs. 45 million (at 60% margins) per year per school. This segment will see around
100% growth rate over FY09-FY12 and margins will remain above 60%. In steady
state (FY14) this business will constitute more than 15% of the revenues and with
negative debtor days of the company.
Results Analysis and Outlook
Smart Class

Revenues Q4 FY Q4 FY Var. Smart Class revenues grew by 120% contributing 60% of Net income with PBIT
09 08 (%) witnessing growth of 102 bps at 62.5 crores. Margins for the business stood at 57.2%
down 420 bps. For full year revenues were 314 crores up 146% from FY08. Margins
Smart Class 111 50 120 of 59.1 % improved 110 bps resulting in PBIT of 185.6 crores.
ICT
56 55 2
Solutions ICT Business
Professional
7 7 12
Dev. For FY09, the segment revenues grew 22% at Rs 113.42 Crore contributing 23% of
Retail &
10 7 49 the revenues with PBIT margins of 23.2% down 600bps and PBIT was down 4% at
Consulting
Rs 26.28 Crore.
Total 184 118 56
FY10E FY09 FY08 Var. (%)

PBIT Q4 FY Q4 FY Var.
Sales 833 497 262 90
09 08 (%)
Smart Class 63 31 105 OPM (%) 50 54 48
ICT OP 416 268 125 115
11 16 -34
Solutions Other income
Professional 15 10 12 -17
5 4 7 PBIDT
Dev. 431 278 137 103
Retail & Interest
-2 4 PL 25 12 4 175
Consulting
PBDT 406 267 133 100
Total 77 55 39
Depreciation 110 75 32 132
PBIT Q4 FY 09 Q4 FY PBT before EO 296 191 101 90
margins(%age) 08 Forex gain/Loss - FCCB - -7 -2 208
Smart Class 57 62 PBT after EO 296 199 103 93
ICT Solutions 19 30 Tax Provision 97. 70 33 114
Professional
61 64 PAT 198 128 70 83
Dev.
Retail & EPS (Rs) 109 70 38
-23 54
Consulting
P/E 26 39 73
Total 41.6 46.6

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 Buy Educomp Solutions

Analysis of Ratios:
Ratios:
Company’s Debt Equity Ratio has increased Profitability Ratios
significantly from 0.11 in 2006 to 1. 7 in 2009. % Mar-08 Mar-07 Mar-06
Company has already made financial closure Operating Profit
of secured debt for capital expenditure Margin 48.2 48.12 50.58
requirement for K-12 business up to the year Gross Profit Margin 35.87 39.31 40.44
2011. Company’ Interest coverage ratio
Net Profit Margin 25.51 25.54 25.89
remains comfortable as most of the debt of the
company is in the form of FCCB maturing in Turnover Ratios
2012. Company had high inventory turnover Inventory Turnover
Ratio 185.88 32.75 30.1
ratio as company has built up inventory of
Debtor Turnover
installing computers for its SmartClass and
Ratio 2.29 2.16 2.08
ICT business.
Fixed Asset
Turnover Ratio 1.27 1.67 2.76
Solvency Ratio
Current Ratio 5.41 4.5 5.33
Debt Equity Ratio 1.28 1.09 0 .11
Interest Covering
Ratio 21.69 25.81 37.13

Figure : Revenue & EBIDTA mar. Estimates

Future Outlook
Company is poised to continue perform exceeding well with more than 70% revenue
growth for the period FY09-FY11 and margins to stay above 45%.

Net Profits are expected to rise 4 fold from Rs.700 million in 2008 to 2800 million in
FY11 giving a CAGR of 58%.

Price Earning to Growth Rate

Source: Fairwealth Securities Analyst Estimate
FY07 FY08 FY09 FY10E
PAT 28 70 128 198
EPS 38 70 108
P/E @ 2900 76 41 27
High growth rate period is expected to Profit Growth 150% 71% 65%
continue to the middle of next decade, Rate(%age)
Educomp can well become blue chip PE/Growth ratio 0.51 0.50 0.41
Company of the future.

Ideal Price Earning to Growth rate for a high growth company should be between 0.8
and 1, which easily justifies a 100% price appreciation form these levels.

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 Buy Educomp Solutions

Growth Outlook
Company is likely to post very high growth rate for a long time. Revenue figures are
expected to show a CAGR of 70% for the period 2009-2011, 35% for the period 2011-
2014 and 20% for the period 2014-2016.

We forecast strong 50% CAGR in Net Profits over FY09-FY11E and see limited risks
to the estimates given.

Company has forward P/E of for FY-2011 on constant prices while growth rate is
expected to be upwards of 30% for year FY11-FY14. Company will continue to shine
even in downturn as spending on Education and price levels are highly resilient to
Segmental Revenues economic downturns.
FY09E FY10E FY11E
Another positive for this company is its short payback period on its investment as
Smart Class 60% 65% 68%
significant business comes from long term contracts of 5 years.
ICT Solutions 23% 17% 12%
Professional 7% 5% 3% Company understands its strengths and challenges ahead to deal with
Development these challenges. Company has recognized four areas of opportunities/
Retail and 10% 8% 10% strengths as under:
Consulting
K-12 0% 5% 5%
Source: Fairwealth Securities Analyst Estimates 1. Large market opportunity(scale)
2. Create barriers of entry for other players through strong IP and
product differentiation.
Smart Class’s Contribution to Revenues and
Profits will increase substantially while ICT 3. High operating margins (50%+)
business contribution will decrease. 4. Experience and ability to execute

Risks:
 Due to high margins and nature of business, company might face competition from new entrants.
 Company is in high growth phase; PEG (P/E to Growth) ratio will be an important consideration for the stock. Any disappointment
on Earnings Growth numbers will see a sharp downward price movement. For FY09 margins for the sectors decreased
substantially however strong revenue growth in Smart Class business, improved overall margins for Company, which will ot be the
case going forward.
 Free cash flows to remain negative for a while; if credit market tightens or company fails to deliver on expectation, raising fresh
funds will be a problem.
 If government reduces spending on education, earnings and growth potential are likely to taper down.
 Company faces huge execution risks in its Edu-Infra business. Also company has been very aggressive in its growth plans, both
Organic and Inorganic, and it would be very difficult to manage such growth plans under unforeseen circumstances (E.g.-Key
Man Risk, Death of MD/Promoter)

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 Buy Educomp Solutions

Previous year Financials Statements (Balance Sheet, Income Statement and Cash Flow Statement)
Figure
Balance sheet(All figures in millions)
Shareholders’ funds FY06 FY07 FY08
Share capital 160 160 172
Reserves and surplus 736 988 2629
Net worth 895 1148 2884
Minority interests 2 128 194
Loan funds
Secured loans 109 183 622
Unsecured Loans 1071 3150
Deferred Tax Liability 0 60 210
Company Debtor days are high, as both ICT Total source of funds 1021 2590 7061
and Smart class segment revenue collection Fixed assets
starts post 90 days. It is around 120 days for Gross block 375 949 2890
Smart Class and more than 150 days for ICT. Net Block 185 723 2342
These will take time to reduce as K-12 and Capital work in progress 67 108 372
retail business are just beginning to pick up.
Total 252 831 2714
Post FY15, we expect debtor days to come to
around 100 days from 150 days presently. Investments 21 102 36
Goodwill 1 138 282
Current assets, loans and advances
For Q4 FY09 Debtor days are at 175 – 180 Inventories 17 33 18
days up from 170 days in the sequential Sundry Debtors 260 496 1157
quarter. Cash 609 1106 2912
Loans and Advances 49 110 490
Total Current assets, loans and advances 935 1761 4639
Less current liabilities and provisions 187 242 610
Net current assets 748 1519 4029
Total Applications 1021 2590 7061

Income Statement
Rs million FY06 FY07 FY08
Company’s debt equity ratio for FY09 stands at Sales 555 1065 2620
around 1.7, higher than 1.3 last year. Going Other Income 14 59 150
forward Debt Equity ratio will decrease to Total 569 1124 2770
around 1.2 as debt of USD 80 will get Cost of goods sold 95 304 798
converted in to Equity which will also help Personnel Expenses 91 105 338
company in raising cheaper debt in future.
Admin & Other Expenses 100 155 238
Total Expenditure 286 564 1374
EBITDA 269 501 1246
Depreciation 57 93 322
EBIT 212 408 924
Finance Charges 6 14 42
PBT 220 453 1032
Total Taxes 79 170 330
Profit after tax and before prior period items 141 283 702
Balance bought from previous year 115.2 229 455
Amount Available for App 254 512 1157
Balance Carried to Reserves 220 455 1035
EPS 11 18 41

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 Buy Educomp Solutions

Cash Flow Statement(All figures in millions)

On consolidated basis, Cash & Cash Key Cash Flow Statement Data FY06 FY07 FY08
Equivalents at the end of the quarter of Rs
186.5 Crore and debt of Rs 907.4 Crore. Net Income (Reported) 141 284 711
Debtor days are at 175 – 180 days up from 170 Depreciation & Amortization 56 96 331
days in the sequential quarter. Change in Working Capital -60 (225) (730)
Deferred Taxation Charge NA NA
Other Adjustments, Net 0 10 193
Cash Flow from Operations 137 165 505
The Company plans to sell both content and Purchase of Fixed Assets -162 (675) (2,224)
hardware together. The Company plans to Purchase of investments -50 -389 -16
approach financial institutions for securitization Net Cash used in Investing activities -212 -719 -2102
of receivables and finally outsource resource Shares Issue / (Repurchase) 557 0 0
coordinators and logistics. Proceeds/ repayment of long term
borrowing 53 71 334

The model would reduce the cash burden on FCCB Raised 1094 3109
Temporary Overdraft facility against fixed
the Company and lighten its working capital deposits 75 3 106
needs.
Net cash from financing activities 615 1088 3393
Source: Company reports

TECHNICAL OUTLOOK EDUCOMP

Source:IRIS

Educomp is in a long term bullish trend .However the stock is in a short term correction & may
touch 2800-2600 levels .this price should be used as a buying opportunity in the stock for a price
Target of 3800-4000 in next 5-6 months.

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 Buy Educomp Solutions

Why Buy: Valuations at 33x FY09, 22x FY2010E and 16x FY2011E. Growth rate from FY11-FY16 at 20%. EBITDA margins for
4QFY09 excluding extraordinary foreign exchange losses were around 60%. Although Company has only 180 crores of cash and a
debt of 910 crores, we expect there could be a bonus issue as well as Split as Company has a very small share capital of only 18.3
Crore.

With company’s extensive database and competitive edge in Global Education industry in the K-12 segment, there lies unlimited
potential to expand geographically to emerging and undeveloped nations. Although we have not included any future growth into
countries like, China, MENA (Middle East and North Africa) , we believe potential is immense and exponential growth period of this
company might extend to next decade.

Disclaimer:

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While
the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making
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Updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory
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Thereof while this report is in circulation.

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