education sector jm fin - jan 10

8/8/2019 Education Sector JM Fin - Jan 10

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JM Financial Institutional Securities Private Limited

Indian Education

Buy the Book

JM FINANCIALAnalysts:

Diviya Nagarajan

[email protected]

Tel: (91 22) 6646 0020

Subhashini Gurumurthy

[email protected]

Tel: (91 22) 6646 0021


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Indian Education

JM Financial Institutional Securities Private Limited Page 210 August 2008

Contents

Indian Education: Buy the Book 3

Aptech: All priced in 5

Career Launcher: A great launch pad 15

Core Projects: Future potential 19

Educomp Solutions: Smart Class for the new Millennium 21

Everonn Systems India: Not private enough 57

KidZee: Preschool play 73

Mahesh Tutorials: Breaking regional shackles 75

NIIT: Transforming into an all-rounder 77


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JM Financial Institutional Securities Private LimitedPlease see important disclosure at the end of the report.

Buy the bookThe last few years have seen increased private participation in the Indianeducation sector both in government-led areas of spending as well as privateschooling and vocational training. We estimate Indian private education(schools and vocational training) to be a US$50 bn opportunity. The Indianeducation sector stands at an inflexion point, with activity levels expected toreach a crescendo over the next few years. We initiate with a Buy on Educompand NIIT and a Hold on Aptech and Everonn.

All priced in: Over CY04-06, Aptech has restructured its businesses byrationalising the franchisee network for IT training and exiting thegovernment schools business. While profitability is expected to besteadier, slower revenue growth in India and China, and slower than

expected take off in air hostess training could dampen the revival. Weestimate revenue CAGR of 30.1% and profit CAGR of 50.4% over CY07E-09E. Hold with a target price of Rs240, an upside of 6.3% from CMP.

Smart Class for the new Millenn ium: Educomp is fast becomingthe leader in the Indian education sector with offerings straddling multiplesegments. Its foray into K-12 schools and faster penetration of curriculumbased content is set to improve profitability and cash generation. Weexpect revenue CAGR of 94.2% and profit CAGR of 108.2% over FY08-10E. Buy with a target price of Rs3,910, an upside of 19.1% from CMP.

Not private enough: Everonn is amongst the Top three players in thegovernment school (ICT) business. While we expect growth to remainhigh, greater dependence on capex-heavy, lower margin ICT businesswould continue to weigh down valuations vis--vis Educomp. We expect

Everonn to report CAGR of 93% in revenue and profit CAGR over FY08-10E. Hold with a target price of Rs560, an upside of 5.3% from CMP.

Transforming into an all-rounder: NIIT , the leader in the IT trainingspace, is trying to transform itself into a full fledged education company.Its ventures into high potential areas such as financial services (IFBI),management (Imperia), ITES (NIPE), professional life skills (Evolv), andschools are expected to boost the growth momentum. We expect revenueCAGR of 19.7% and core profit CAGR of 42.4% over FY08-10E. Buy with atarget price of Rs110, an upside of 20.8% from CMP.

Exhibit 1: Recommendation snapshot

Educomp Everonn NIIT Aptech

Recommendation Buy Hold Buy Hold

Target price (Rs) 3,910 560 110 240Upside (%) 19.1 5.3 20.8 6.3

Revenue FY10E (Rs mn) 10,788 3,412 14,433 3,801

EBITDA margin FY10E (%) 52.1 46.2 12.5 26.1

Net Profit margin (%) 26.3 15.0 8.7 18.0

PE FY10E (x) 21.7 17.1 12.1 15.3

EV / EBITDA FY10E (x) 11.4 6.3 8.9 8.4

EV / Sales FY10E (x) 6.0 2.9 1.1 2.2

EPS CAGR (FY08-10E) (%) 106.7 76.7 28.7 46.0

PEG (x) 0.4 0.4 0.6 0.5

Source: Company data, JM Financial. Note: Valuations as of 20 August 2008

Initiating Coverage

Indian EducationSector: EducationDiviya Nagarajan

[email protected]

Tel: (91 22) 6646 0020Subhashini Gurumurthy

[email protected]

Tel: (91 22) 6646 0021

Country: India20 August 2008


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M Financial Institutional Securities Private Limited Page 4

Educatio n comp anies Revenue (mn) * EPS* P/E(x) EV/EBITDA(x) EV/Sale

FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY0

CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY0

Global peers

Blackboard 239 314 384 0.7 0.8 1.3 57.2 50.8 29.0 24.5 21.8 13.5 5.4 4

K12 217 279 348 0.2 0.4 0.7 109.2 58.8 37.6 22.1 14.6 10.2 2.3 1

Noah Education Holdings 91 114 146 0.5 0.5 0.6 11.7 11.4 8.8 5.2 3.0 2.4 0.7 0

Nobel Learning Communities 205 233 251 0.7 0.8 1.0 21.1 18.3 15.1 1.6 1.5 1.3 0.2 0

Megastudy Co 156 204 247 6.9 8.7 10.7 32.2 25.7 21.0 26.7 20.3 16.3 10.1 7

New Oriental Education 275 380 530 1.7 2.7 3.9 41.5 27.0 18.6 22.3 14.9 10.2 6.5 4

Raffles Education 133 188 262 0.03 0.04 0.05 26.8 18.9 14.0 27.3 18.3 13.7 14.4 10

Learning tree international 189 197 - 0.9 0.9 - 17.3 15.9 - 8.2 7.5 - 1.1 1

SkillSoft-NetG 281 336 368 0.5 0.4 0.5 21.7 28.6 21.6 15.3 12.4 10.1 4.0 3

SumTotal 122 136 151 28.3 12.5 9.8 0.2 0.4 0.5 20.0 7.4 6.3 0.9 0

Indian peers

Educomp Solutions 2,861 5,821 10,788 35.4 75.2 151.3 92.7 43.7 21.7 44.6 20.5 11.4 19.7 10

Everonn Systems 916 1,888 3,412 10.0 18.2 31.1 53.4 29.2 17.1 22.0 10.2 6.3 8.0 4

NIIT 10,068 11,900 14,433 4.6 5.1 7.5 20.0 17.9 12.1 15.7 12.2 8.9 1.6 1

Aptech 2,245 2,927 3,801 6.9 9.8 14.7 32.7 23.0 15.3 17.6 12.9 8.4 4.0 3

Indian Education

20 August 2008 JM Financial Institutional Securities Private Limited

Exhibit 2: Valuation comparison

Source: Company, JM Financial, Note: * Amount expressed in US$ for global peers and in Rs for Indian peers


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Please see important disclosure at the end of the report.

All priced inOver CY04-CY06, Aptech has restructured its businesses by rationalising thefranchisee network for IT training solutions and exiting the government

schools business. While profitability is expected to be steadier, slower revenue

growth in India and China, and slower than expected take off in air hostess

training could dampen revival going forward.

Uncertain environment to slow revival in IT training: With thecompletion of restructuring in CY06, revenue growth in India IT trainingimproved to 4.3% in CY07E versus -6.3% CAGR over CY05-07E. While weexpect growth rates to remain positive, we have factored a slower revivaldue to the current slowdown in the Indian IT services sector.

China to contribute more, but grow slower: We believe that althoughChina will contribute increasingly to revenue, growth within China wouldtaper off given the high market penetration (32% market share). Weexpect China to grow at 37.5% CAGR over CY07E-09E versus 50% overCY04-CY07.

Macro environment could delay new ventures: Over the last fewquarters, Aptech has entered into several new ventures, including AvalonAviation Academy (Airhostess training), Attest (Testing services) and

nPower (Hardware training). While we believe revenue contribution fromthese segments would improve (11.1% in CY07E to 19.5% in CY09E), asluggish macro environment is unlikely to aid strong takeoff.

Initiate with a Hold and target price of Rs240: We initiate coverageon Aptech with a Hold recommendation and a target price of Rs240. This isbased on a target PE multiple of 16x on CY09E EPS and implies an upsidepotential of 6.3%.

Initiating Coverage

AptechBloomberg: APTR IB

Hold

Price: Rs226 Target Price (Aug 09): Rs240

Exhibit 1: Financial summary (Rs mn)

Y/E Decemb er CY06 CY07E CY08E CY09E

Net sales 1,741 2,245 2,927 3,801

Sales growth (%) 12.8 28.9 30.3 29.9

EBITDA 361 510 702 993

EBITDA (%) 20.7 22.7 24.0 26.1

Adjusted net profit 162 302 455 684

EPS (Rs) 4.3 6.9 9.8 14.7

EPS growth (%) 134.1 61.8 41.9 50.2

ROCE (%) 14.5 20.8 24.1 28.8

ROE (%) 17.1 18.4 19.9 23.8

PE (x) 52.9 32.7 23.0 15.3

Price/Book value (x) 9.0 6.0 4.6 3.6

EV/EBITDA (x) 23.3 17.6 12.9 8.4

Source: Company data, JM Financial. Note: Valuations as of 20 August 2008.

20 August 2008

Sector: Education

Diviya Nagarajan

[email protected]


[email protected]

Tel: (91 22) 6646 0021

Key Data

Market cap Rs10 bn/US$ 226 mn

Shares in issue (mn) 43.8

Diluted share (mn) 46.4

3-mon avg daily val (mn) Rs242.8/US$5.6

52-week range Rs449/139

BSE sensex (20/08/08) 14,678

Nifty (20/08/08) 4,416

Rs/US$ 43.7

Shareholding Pattern (%)

2Q CY08 2Q CY07

Promoters 32.3 27.8

FIIs 29.5 33.7

MFs/FIs/Banks 4.5 5.5

Others 33.7 33.0

Price Performance (%)

1M 3M 12M

Absolute 17.0 (7.6) (24.1)

Relative* 9.3 7.2 (25.9)

* To the BSE Sensex

Daily Performance

-

5,000

10,000

15,000

20,000

25,000

Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08

100

200

300

400

500Sensex Aptech

(As of 20 August 2008)

Country: India


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Aptech


I . IT training revival to be slowed down

Over CY04-CY06, Aptech restructured its businesses, which included

rationalising the franchisee network for its IT training solutions as well as an

exit from the government schools business. Today, Aptech is the second

largest IT training organisation in India with a network of close to 300 centres.

We believe that Aptech stands at the beginning of a steadier profit growth inIT training in India, driven by stable margins. However, slower revenue growth

in India and China, and slower than expected take off in Avalon Aviation (air

hostess training) could dampen revival going forward.

I .1. Uncertain environment to slow revival

Restructuring in India based IT training from CY04-06 : Aptechderives 10.7% of revenue from India based IT training at present, downfrom over 20.1% in CY04. Revenue from India based IT training solutionsdeclined steadily over CY04-CY06 as the company exited unprofitablefranchises. Aptech reduced the number of franchises from over 950 inCY04 to 200 in CY06, which resulted in a write off of over Rs1 bn.

Exhibit 2: Aptech heavily pruned its network over CY04-06

951

859

200

280

661

459391

421

CY04 CY05 CY06 CY07E

Aptech Training Centres (Nos) NIIT Training Centres (Nos)

Source: Company data, JM Financial

Exhibit 3: Stronger franchisee network to sustain steadier grow th

0

250

500

750

1000

CY04 CY05 CY06 CY07E CY08E CY09E

0.3

0.5

0.8

1.0

1.3

Aptech Training Centres (Nos) Aptech's Revenue/Centre (Rs mn)



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Aptech


Revival in India based IT training to be dampened by sluggishdemand in I T Services: With the completion of the restructuring exercisein CY06, revenue growth in India based IT training bounced back in CY07Ewith a positive growth of 4.3% YoY as against -6.3% CAGR over CY05-07E. Going forward, we expect steadier growth in revenues (20.5% CAGRover CY07E-09E) driven by a stronger franchisee network. We expect thegrowth rates over CY07E-CY09E to be lower than the managements

expectations of nearly 30% CAGR due to the current slowdown in demandfor the Indian IT services sector.

International IT training to grow faster: Aptech has presence in newand emerging markets such as Vietnam, Turkey, Nigeria, Fiji, Yemen,Sudan, South Africa, Malaysia and Philippines. International IT training isexpected to post steady revenue growth with increased penetration intoexisting geographies as well as entry into new markets. Today Aptech hasover 100 centres outside India, and is expected to invest in more centresin emerging geographies. By CY09, we expect faster revenue growth fromInternational IT training (27.5% CAGR over CY07E-09E as against 12.5%CAGR over CY04-07E), which would also contribute to higher marginprofile for the company.

Exhibit 4: Aptech has w idespread geographic presence

Geography Centres (Nos)

Asia Pacific 37

Middle East 26

Africa 17

South Asia 16

Common Wealth of Independent States (CIS) 6

Latin America 4

Total 106

Source: Company data


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Aptech


I I. China to grow slower

IT training in China is the single largest revenue driver for Aptech, contributingclose to 41% of consolidated revenue. Aptechs JV with the Beijing Universityis the largest IT training network in China with a 32% market share, accordingto IDC estimates. NIIT, its biggest competitor, is a distant second with marketshare of just 8%. Revenue from China has grown at a healthy CAGR of 50%

over CY04-07E, driven by deeper penetration into China. Profitability remainshigher than India (40% EBITDA versus 30% in India), driven by higherenrolment fees.

Exhibit 5: Aptech in China A snapshot

China - Business details

Started in January 2000 as a 50-50 JV between Aptech and Beida Jadebird IT Co. Ltd. (Affiliate of Beijing Univ)

Market leader with over 32% market share, nearest competitor NIIT at 8% (IDC data)

Over 250 centres in 23 provinces

Offers ACCP, BNET, BTEST

Arena Multimedia to be launched in CY2008


Incremental market penetration in China to be a challenge: Webelieve that although China will contribute increasingly to revenue, growthwithin China would taper off given the high market penetration. We expectrevenue from China IT training to grow at 37.5% CAGR over CY07E-09Eversus 50% over CY04-CY07E. This is also reflected in growth from Chinatapering off over the last few quarters. That said, we believe that thelaunch of multimedia courses (which currently operate under the Arenabrand in India) through its Beida Jadebird alliance, could help sustaingrowth rates over CY07E-CY09E.

Exhibit 6: China to grow at a slower clip

0

500

1000

1500

2000

CY05 CY06 CY07E CY08E CY09E

0

20

40

60

80Revenue (Rs mn) Growth rate (%)



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Aptech


I II . New ventures could take more time

New business will contribute to revenue growth: Over the last fewquarters, Aptech has entered into several new ventures, including AvalonAviation Academy (Airhostess training), Attest (Testing services) andnPower (Hardware training). These are high growth ventures that areexpected to contribute incremental proportions to revenue over CY07E-09E(11.1% in CY07E to 19.5% in CY09E). The company has been investing inthese businesses through CY07E.

Exhibit 7: Aptechs new ventures are in high potential segments

New ventures Description Market dynamics CompetitorsRevenue

contributionCY2007E (%)

RvenuecontributionCY2009E (%)

Avalon AviationAcademy

Career oriented cabin crew andground staff training programmes. 40centres in CY07, of which 30 wereadded during the year.

Demand for 21,500 cabin crew and ground staffover the next two years

Frankfinn, Kingfisher,AirHostess Academy

2.2 3.7

AttestTechnology based Testing andAssessment solutions

US$94 mn market in 2009. CAT (MBA entranceexam) expected to go online in 2009, which islikely to trigger mass adoption. Employee testingmarket is expected to be increasingly outsourced

Brainware, EuphonyHR, MeritTrac

8.9 12.6

nPower Hardware training coursesDomestic hardware market of US$11.5 bn,growing at 24% CAGR to drive training market upto US$1 bn by 2015 at 28% CAGR

NIIT Network Labs,JetKing, CMSInstitute

NA 3.2

Source: IDC, World Bank, NASSCOM, JM Financial estimates

Slowdow n in aviation to dampen grow th over near term: We believerevenue contribution from all newer segments would improve despite asluggish macro environment as these market spaces being at a nascentstage. However, we have been conservative in revenue growthexpectations for these segments given the slowdown expected in theeconomy. With Aptech having completed initial investments in theseventures, incremental revenue would flow to the bottom-line from CY08Eonwards. However, this would be lower than our initial expectation (as wellas the managements) due to the sluggish macro environment.

Exhibit 8: Impact of turnaround to be marginal over CY07E-CY09E

Revenue (Rs mn)

1,935 2,365 2,994

310 562 807

CY07E CY08E CY09E

Old businesses New businesses EBITDA (Rs mn)

698 879 1,151

29 74

-32

CY07E CY08E CY09E

Old businesses New businesses



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Aptech


IV. Financials

30% CAGR in revenue over CY07E-CY09E: We expect Aptech to reportrevenue CAGR of 30.1% over CY07E-09E, driven by 37.5% growth inChina and 27.5% growth in International IT training. While India basedIT/multimedia training is likely to grow faster than CY05-07E levels, itwould be weighed down by sluggishness in the Indian IT services sector.

Exhibit 9: Growth rates in key businesses

Revenue (Rs mn) CY07E CY08E CY09ECAGR over

CY07E-09E (%)

CAGR over

CY05-07E (%)

India IT training 240 283 348 20.5 (6.3)

ROW IT training 229 286 372 27.5 22.2

China IT training 915 1,235 1,729 37.5 44.4

Arena 252 276 345 17.2 58.9

Source: JM Financial

50% profit CAGR over CY07E-09E: We expect profit CAGR over CY07E-09E of 50.4% to outpace revenue growth, driven by higher revenuecontribution from China, as well as increased contribution from Avalon,nPower and Attest, which are expected to turn profitable in CY08E.Further, reducing contribution from government schools would alsocontribute to better profitability.

Exhibit 10: China, new business to drive grow th

Revenue cont ribu tion (%) CY07E CY08E CY09E

Retail b usinesses 75.1 77.2 80.4

India IT training 10.7 9.7 9.2

ROW IT training 10.2 9.8 9.8

China IT training 40.7 42.2 45.5

Arena 11.2 9.4 9.1

Avalon 2.2 3.4 3.7

nPower - 2.7 3.2

Institutional businesses 24.9 22.8 19.6

Govt schools 6.7 4.1 0.3

Learning solutions 6.7 5.6 5.0

Synergetics (corporate IT training) 2.7 2.1 1.8

Attest 8.9 10.9 12.6Source: Company data, JM Financial


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Aptech


V. Valuation and risks

Initiate with a Hold and target price of Rs240: We initiate coverage on

Aptech with a Hold recommendation and a target price of Rs240. Our target

price implies PE of 16.0x on FY10E EPS, which is a 15% discount to the target

PE multiple assigned to NIITs core business of 19x. Our target price implies an

upside potential of 6.3% from the CMP. Assumptions in our estimates includerevenue CAGR of 30.1% and profit CAGR of 50.4% over CY07E-09E.

Key risks, which might prevent the target price being met, are listed below:

Company specific risks include: 1) better scale up in profitable franchises

Industry specific risks include: 1) faster than expected revival in IT/ITESindustry, 2) quicker pick up in aviation business given lower oil prices and3) faster than anticipated scaling up in new businesses.

Exhibit 11: Comparison w ith consensus

Consensus estimates (Rs mn) CY08E CY09E

Revenue 3,057 3,786

EBITDA 780 1,111

Net Profit 542 638

EPS (Rs) 12.2 14.4

EPS (Rs)- JM Financial estimates 9.8 14.7

Source: Bloomberg data, JM Financial

Exhibit 12: PE Band Chart

0

100

200

300

400

500

600

700

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08

15x

20x

25x

30x

35x

40x45x

Source: Bloomberg data, Company data, JM Financial


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Aptech


VI. Company background

VI.1. History


VI.2. Share captial history

Exhibit 13: Share capital details

Source: Company data, Note: Assumption

mn CY05 CY06 CY07E

Shares outstanding at the beginning of the year 33.5 37.6 37.9

Dilution during the year 4.1 0.3 5.9

Shares outstanding at the end of the year 37.6 37.9 43.8

Options exercised 0.2 0.3 0.2

Conversion of warrants to promoters @Rs113 2.1

Conversion of warrants to M/S Aptech investments @ Rs56 3.6

1986 - Started operations with an IT Training Centre in Mumbai

1986 - Started operations with an IT Training Centre in Mumbai

1996 - Launched Arena Multimedia

2000 - Forayed into software development

2003 - Merged with SSI Education.- SSI Ltd. buys promoter Atul Nishars stake.

- ALS & Attest launched

2005 - SSI stake sold to Rakesh Jhunjhunwala & associates

2006 - Acquired Avalon Aviation Academy, Synergetics

2007 - launched N-Power, the hardware training division


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Aptech


VII. Market size estimates

Exhibit 14: IT/ ITES training market

Graduates turnout by FY08E (Nos) 2,962,900

Target market @ 40% 1,185,160

Average realization per student (p.a) 35,000

Market size in FY08 (US$ bn @ US$/INR of 40) 1.0

Graduates turnout in FY15E (Nos) 5,132,340

Target market @ 50% 2,566,170

Average realization per student p.a (Rs) 50,000

Market size in FY15E (US$ bn @ US$/INR of 40) 3.2

CAGR over FY08-15E (%) 17.5

Source: NASSCOM, JM Financial

Exhibit 15: Avalon Aviation Academy

Total Indian Fleet 2008 (Nos) 472

Average cabin crew per aircraft (Nos) 50

Total cabin crew 2008 (Nos) 23,499Ground staff per aircraft (Nos) 75

Total Engineers/Technicians 2008 (Nos) 35,198

Total Cabin Crew/Ground Staff 2008 (Nos) 58,697

Training cost/ person (Rs) 125,000

Market size 2008 (Rs mn) 746

New orders placed til 2010 (Nos) 173

Total Indian Fleet by 2010 (Nos) 645

Total Cabin Crew/Ground Staff 2010 (Nos) 80,210

Requirement over next 2 years (Nos) 21,514

Potential market 2010 (Rs mn) 2,689

CAGR 2008-2010 (%) 89.8

Avalon 's Current market share (%) 20

Project ed market share 2010 (%) 23.5

Source: World Bank, Industry data, JM Financial

Exhibit 16: nPow er

Market Size estimati on FY07 FY15E CAGR over FY07-15E (%)

IT/ITES Training Market (US$ bn) 0.7 3.2 21.0

Hardware as % of overall training market (%) 30.0 35.0

Hardware Training Market (US$ bn) 0.2 1.1 23.3

Source: NASSCOM, IDC, JM Financial


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Aptech


VII I. Financial Tables

Profit & loss statement (Rs mn)

Y/E March CY06 CY07E CY08E CY09E

Net sales 1,741 2,245 2,927 3,801

Growth (%) 12.8 28.9 30.3 29.9

Other operational income 0 0 0 0

EBITDA 361 510 702 993

EBITDA (%) 20.7 22.7 24.0 26.1

Growth (%) 11.9 41.2 37.5 41.5

Other non-operational income 18 22 29 38

Depreciation & amortisation 149 170 194 221

EBIT 230 363 537 811Interest (income)/expense(net) 29 17 17 15

Pre tax profit 201 346 520 795

Taxes 38 43 65 111Extraordinary(income)/expense (net) 1 0 0 0

Adjusted net profit 162 302 455 684

Margin (%) 9.3 13.5 15.6 18.0

Diluted shares (mn) 37.9 43.8 46.4 46.4

EPS (Rs) 4.3 6.9 9.8 14.7

Growth (%) 134.1 61.8 41.9 50.2Source: Company, JM Financial.

Balance sheet (Rs mn)


Share capital 379 438 464 464

Reserves & surplus 776 1,168 1,829 2,411

Warrants 81 35 0 0

Networth 1,236 1,640 2,293 2,875

Minority Interest 2 2 2 2

Total loans 227 161 111 77

Sources of funds 1,466 1,803 2,407 2,954

Intangible assets 30 30 30 30

Fixed assets 1,528 1,738 1,988 2,258

Less: Depreciation/amortisation 992 1,162 1,356 1,577

Net block 535 575 632 681

CWIP 2 2 2 2

Investments 0 0 0 0

Deferred tax assets/(liability) 0 0 0 0

Current assets 1,044 1,874 2,636 3,510Inventories 29 38 50 65

Sundry debtors 477 603 762 937

Cash & bank balance 345 1,031 1,561 2,166

Loans & advances 192 202 263 342

Current liabilities & provisions 435 679 894 1,269

Current liabilities 411 597 704 986

Provisions and others 24 82 189 284

Net current assets 609 1,195 1,743 2,241

Others (net) 320 30 30 30

Applicatio n of funds 1,466 1,803 2,407 2,954Source: Company, JM Financial

Cash flow statement (Rs mn)


Net profit 199 346 520 795

Depreciation/amortisation 149 170 194 221

(Inc)/dec in working capital -76 45 -120 17

Others -12 10 -42 -79

Net cash from operations (a) 260 570 552 954

(Inc)/dec in investments 0 0 0 0

Capex -117 -212 -250 -270

Others -41 22 29 38

Cash flow from inv. (b) -158 -190 -221 -232

Inc/(dec) in capital 14 435 301 0

Proceeds from issue ofwarrants 61 -47 -35 0

Dividends paid + dividend tax 0 0 0 -68

Inc/dec in loans -235 -66 -50 -34

Others 147 -17 -17 -15

Financial cash flow ( c ) -13 305 200 -117

Net inc/dec in cash (a+b+c) 89 686 530 605

Opening cash balance 256 345 1,031 1,561

Closing cash balance 345 1,031 1,561 2,166Source: Company, JM Financial

Key ratios


ROCE (%) 14.5 20.8 24.1 28.8

ROE (%) 17.1 18.4 19.9 23.8

Debt-equity ratio (x) 0.2 0.1 0.0 0.0

Valuation ratios (x)

PER 52.9 32.7 23.0 15.3

PBV 9.0 6.0 4.6 3.6

EV/EBITDA 23.3 17.6 12.9 8.4

EV/Sales 4.8 4.0 3.1 2.2

Turnover ratios (no.)

Debtor days 104 88 85 82

Inventory days 12 11 11 11

Creditor days 76 75 75 75Source: Company, JM Financial


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A great launch padCareer Launcher (CL) is one of the leading players in the test prep segmentwith revenues of ~Rs900 mn in FY08. CLs vision is to be a one-stop shop forbest-in-class career advice and training straddling school & college test prep,employability training and core capacity in K12, pre-school and highereducation.

Leader in test prep

Test prep market size to grow to US$2.5 bn in 2015: CL hastrained ~50,000 students in the test prep segment in FY08, and expectsto train ~75,000 students in FY09. The company currently has around135 centres in 105 cities. This is expected to grow to 175 cities withabout 250+ centres in India and overseas over the next 12-18 months.

While CL is present in all school and college test prep segments, exceptUG medical and a few other niche areas, MBA test prep (30% marketshare) remains the largest segment (75% of revenues in FY08).According to industry sources, the test prep market opportunity iscurrently at US$0.7 bn and is expected to grow at 19.8% CAGR toUS$2.5 bn over 2008-2015E.

Exhibit 1: CAT aspirants have nearly doubled over 2003-2007

2003 2005 2004 2006 2007 2015E

CAT aspirants (Nos) 130,000 170,000 NA 206,612 250,000 924,556

CAGR over FY03-07 (%) 18%

Source: Industry data, JM Financial

Exhibit 2: Test prep market potential of US$2.5 bn in 2015

Test preptakers in

2008E (Nos)

Average feesp.a in 2008E

(Rs)

Revenuesin 2008E

(Rs bn)

Test preptakers in

2015E(Nos)

Average feesp.a in 2015E

(Rs)

Revenuesin 2015E

(Rs bn)

Engg. Entrance Tests 459,480 33,000 15.2 1,212,570 48,000 58.2

MBA entrance tests 137,500 15,000 2.1 600,960 30,000 18.0

BBA /HMEntranceTests

21,690 9,500 0.2 38,260 27,000 1.0

Law Entrance Tests 8,540 21,000 0.2 100,840 30,000 3.0

Fashion EntranceTests

4,020 22,000 0.1 31,340 40,000 1.3

Medical Entrance Tests 267,400 40,000 10.7 428,300 45,000 19.3

Total test prep marketsize (Rs bn)

28.4 100.8

Total test prep marketsize (US$ bn @USDINR of 40)

0.7 2.5

Source: Industry data, JM Financial

Career Launcher

Not Rated

20 August 2008

Sector: Education

Diviya Nagarajan

[email protected]


[email protected]

Tel: (91 22) 6646 0021

Country: India


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Career Launcher


Emerging leader in employability training

Employability training is currently a small market and the managementexpects it to grow rapidly to US$2 bn in the next five years. CL willleverage its current expertise in test prep and national reach in over 105cities to source and train students for jobs in financial services, IT/ITESand other mushrooming sectors. CL plans to have around 25 finishing

schools by CY08. With the vocational training market in India justopening up, we believe that there is immense growth potential for earlyplayers like CL.

K-12 schools to add to growth potential

Like Educomp, CL has also ventured into mainstream school education(K-12) by setting up brick and mortar schools. While test prep isexpected to remain the primary revenue contributor in the near term, CLis betting on K-12 to be the future growth driver.

150 K-12 schools and 125 pre-schools in the next five years: CLcurrently has five operational schools with a target of 12 schools byFY09. The company plans to roll out 150 K-12 schools and 125 pre-schools in the next five years under the brand of Indus World Schoolsand Ananda Pre-schools.

Exhibit 3: Current operational schools


CLs K-12 business model is expected to have a mix of owned, managedand franchisee schools. Amongst the current operational schools, threeare owned while the rest are on franchisee model.

Exhibit 4: K-12 mode of operation

Managed

Owned by developer and managed

by CL

Mode of oper ation

Franchisee

Owned and manged by

franchisee

Owned

Owned and run by CL


Targeted at mainstream middle class households: CLs schools,with average tuition fees of Rs1,400-2,000 per student p.m., intend totarget middle class households. We believe its K-12 venture will besuccessful given:

Location Standard

Hyderabad Preschool to 8th

Indore 1st to 7th

Bhiwani LKG to 4th

Mandi LKG to 2nd

Raipur LKG to 2nd


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Career Launcher


o Burgeoning middle class spend on education in India:

According to MGI estimates, the share of urban middle and upperclass households is expected to increase from 13.0% in 2005 to 60%by 2015. These households will also assume a significant proportionof spend on education at 89% by 2015, up from 58% in 2005.

o Demand for 20,000 urban schools by FY15: With over 14 mnchildren expected to be added to the urban academic system by

2015, we believe over 20,000 urban schools will be required.

Exhibit 5: Holist ic learning at CL schools


Exhibit 6: CLs Indus school, Hyderabad


Ananda

(Pre schoo l- 3rd Std)

Focus on joy of learning

Jigyasa

(Std 3rd-8th Std)Focus on understanding

Sadhana

(Std 8th-10th Std )

Focus on application


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Career Launcher


Expansion into higher education

CL is working on creating a pan-India footprint in higher education and hasstarted its first business school program with 120 enrolments in Noida (IndusWorld School of Business).

Exhibit 7: CLs B-school has association w ith distinguished personalities

Name LocationCommencementof operations

Degrees offered Associated members

Indus World Schoolof Business

GreaterNoida

June 2008PGPM (Post GraduateProgram in Management)

Mr. Philip Anderson - INSEAD Alumni Fund Professor of Entrepreneurship

UGPM (Under GraduateProgram in Management)

Sridhar Iyengar - Board Member of Infosys, ICICI Bank, Career Launcher, Rediff.com

Ishwar Dayal - Founding Director, IIM Lucknow; Former Faculty at IIM Ahmedabad, IIMCalcutta

Prof Mirza Saiyadain - Former Faculty at IIM Ahmedabad

Prof K K Mehta - Founder Member of Indian Society of Applied Behavioral Scientistsand Indian Society for Individual and Social Development

Sanjeev Bikhchandani - Founder and CEO of Infoedge

Vishwadeep Bajaj - Founder and CEO, ValueFirst

Shantanu Prakash - Founder Educomp Solutions


New businesses to drive future growth: While we expect CL tocontinue to lead the MBA test prep market, expansion into high growthareas such as K-12, vocational training and higher education will put thecompany in a high growth trajectory in the next few years.


19/96



Future potential

Acquisition led entry into education: Core Projects (Core) entered theeducation domain with the acquisition of US-based ECS Inc, and UK-basedAzzuri and KC Management in 2007. Following the acquisitions, Coresofferings include solutions in the areas of School Management Systems,Assessment Systems, Accountability Systems and IT InfrastructureSystems. Revenue from education currently forms 65% of consolidatedrevenue, with primary exposure to the US and UK.

Virtual reality led visualisation labs have met with early success:Core has developed a virtual reality based visualisation application incollaboration with NASA, which is used to simulate experiments incolleges. This has met early success with the Indira Gandhi National OpenUniversity (IGNOU), which is expected to spend US$750 mn over the nextfive years. The company expects to set up labs in 100 IGNOU centres by2010, with an average fee of Rs500 per student for a 45 minute lesson.

Funds administration is an undiscovered market in India: Throughthe ECS and Hamlet acquisitions, Core has gained entry into the fundadministration and assessment segment in the US and UK. It is currentlyimplementing a pilot project with Jharkhand state government for thesame. However, we believe that this is an undiscovered market in India,which lacks the maturity levels necessary for Cores product.

IETS JV to tackle the PPP opportunity: Core has formed a JV withIL&FS Education and Technology Services (IETS) for a PPP school model.The JV is running a pilot with Jharkhand for 400 schools, but withoutmeaningful revenue contribution.

Management guides for >100% revenue growth: Cores managementhas guided for revenue of Rs9.5 bn in FY09, driven by Rs3.5 bn revenuefrom India, led by revenue accretion from IGNOU and Jharkhand.

Exhibit 1: Financial summary (Rs mn)Y/E March FY06 FY07 FY08

Net sales 867 1,956 4,460

Sales growth (%) - 125.5 128.0

EBITDA 125.0 392.0 979.0

EBITDA (%) 14.4 20.0 22.0

Adjusted net profit 106 334 845

EPS (Rs) 2.8 4.8 9.4

EPS growth (%) - 71.9 96.7

ROCE (%) 54.2 27.0 18.3

ROE (%) 53.0 21.4 21.5

PE (x) 99.7 58.0 29.5

Price/Book value (x) 64.4 18.2 5.9

EV/EBITDA (x) 193.1 48.7 15.5

Source: Company data, JM Financial. Note: Valuations as of 20 August 2008.

Core Projects

Bloomberg: CPTL IB

Not Rated

Price: Rs277

20 August 2008

Sector: Education

Diviya Nagarajan

[email protected]


[email protected]

Tel: (91 22) 6646 0021

Key Data

Market cap Rs23 bn/US$523 mn




52-week range Rs464/119

BSE sensex (20/08/08) 14,678

Nifty (20/08/08) 4,416

Rs/US$ 43.7


1QFY 09 1Q FY08

Promoters 47.6 54.7

FIIs 6.8 2.0


Others 41.4 40.4


1M 3M 12M

Absolute 57.4 27.4 100.3

Relative* 49.8 42.2 98.6

* To the BSE Sensex

Daily Performance

-

5,000

10,000

15,000

20,000

25,000


0

100

200

300

400

500Sensex Core Projects & Technologies


Country: India


20/96

Indian Education


This page has been intentionally left blank


21/96

JM F inancial Institutional Securities Private Limited


Smart Class for the new Millennium

Educomp is fast becoming the leader in the Indian education sector withofferings straddling multiple segments. Its foray into K-12 schools and fasterpenetration of curriculum based content is set to improve profitability and cashgeneration. We expect Educomp to gain market share in its focus segments,paving way for sustained long term growth.

K-12 - cash cow in the making: Educomp plans to set up to 150 K-12schools, aimed at a demand of over 20,000 new urban schools by 2015.Schools can be extremely profitable, with ~62% steady state EBITmargins. We believe that Educomp can leverage its expertise in schoolcontent and teacher training to succeed in the K-12 segment. We expectK-12 to contribute 10.5% of revenues and 18.0% of EBITDA in FY10E.

Content set for increased adoption: Educomp is an early entrant in theschool content space with its product Smart Class. With over 1,000schools in its portfolio, we believe that Educomp has reached critical massfor faster growth ahead. We expect SmartClass to contribute 48.8% ofrevenues and 56.2% of EBITDA in FY10E.

Leadership in the ICT space: Educomp is the largest player in thegovernment schools with 6,004 schools in FY08. We believe Educomp will

continue to lead this market with strong wins in FY09E and FY10E. Weexpect contribution of 24.6% in revenues and 13.2% in EBITDA by FY10E.

Initiate with a Buy: We initiate coverage on Educomp with a Buyrecommendation. Our target price of Rs3,910 implies: (1) 20x FY10E PERfor the core business, and (2) 25x FY12E PER for the K-12 business. Ourtarget price offers an upside potential of 19.1%.

Initiating Coverage

Educomp SolutionsBloomberg: EDSL IB

Buy

Pr ice: Rs3,283 Target Price (Aug 09): Rs3,910

Exhibit 1: Financial summary (Rs mn)

Y/E March FY07 FY08 FY09E FY10E

Net sales 1,101 2,861 5,821 10,788

Sales growth (%) 98.3 159.9 103.5 85.3

EBITDA 506 1,266 2,957 5,623

EBITDA (%) 46.0 44.2 50.8 52.1Adjusted net profit 287 706 1,412 2,841

EPS (Rs) 17.3 35.4 75.2 151.3

EPS growth (%) 54.6 104.4 112.3 101.2

ROCE (%) 22.7 19.4 23.2 29.8

ROE (%) 28.1 35.0 40.0 51.8

PE (x) 189.5 92.7 43.7 21.7

Price/Book value (x) 45.7 19.3 13.5 8.3

EV/EBITDA (x) 103.9 44.6 20.5 11.4

Source: Company data, JM Financial. Note: Valuations as of 20 August 2008

20 August 2008

Sector: Education

Diviya Nagarajan

[email protected]


[email protected]

Tel: (91 22) 6646 0021

Key Data

Market cap Rs57 bn/US$1,295 mn




52-week range Rs5,650/2,225

BSE sensex (20/08/08) 14,678

Nifty (20/08/08) 4,416

Rs/US$ 43.7


1QFY 09 1Q FY08

Promoters 55.0 60.1

FIIs 33.0 24.8


Others 9.2 14.0


1M 3M 12M

Absolute 15.1 (18.6) 36.3

Relative* 7.5 (3.8) 34.6

* To the BSE SensexDaily Performance

-

5,000

10,000

15,000

20,000

25,000


1,000

3,000

5,000

7,000Sensex Educomp


Country: India


22/96

Educomp Solutions


I . K-12 - cash cow in the making

Educomp has ventured into the business of setting up state-ofthe-art brick

and mortar schools offering classes to children from kindergarten to standard

12 (K-12 schools). The company currently has eight operational schools and

intends to ramp it up to 150 schools over the next three to four years. Our

analysis indicates that over 20,000 additional urban schools would be requiredby 2015, which offers potential for emerging players such as Educomp to

establish branded school chains across India.

We believe that running schools can be extremely profitable, with a well

managed school making ~62% EBIT margins on a steady state basis. Further,

we believe that Educomp can successfully leverage its expertise in the school

content and teacher training businesses to emerge successful in the newly

launched K-12 segment as well. We expect the K-12 segment to contribute

10.5% of revenues and 18.0% of EBITDA in FY10E.

Exhibit 2: K-12 business A snapshotEstimated built up

schools (Nos)

Estimated operational

schools (Nos)

Average fees

per month (Rs)

Real estate for schools Mode of operation

FY09E FY10E FY09E FY10ETotal finalized

sites (Nos)Tie-ups for realestate

Royalty basedmodel

Standalonebranding

Acquisition

24 50 8 24 3,000 70 Ansals, DLF

Co-branding withtop schools suchas PSBB , DonBosco andRaffles

The Millenniumschools

Acquisitionof existingoperationalschools


Exhibit 3: Current operational schools

School Location

PSBB Millennium Chennai

PSBB Learning Leadership Academy Hulimavu, Bangalore

PSBB Learning Leadership Academy Lakshmipura Village, Bangalore

Millennium school Noida

Millennium school Mohali

Chiranjeev Bharati School Palam Vihar,Gurgoan

Chiranjeev Bharati School Sushant Lok, Gurgoan

Not announced (Residential school) Mussoorie



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Educomp Solutions


I .1. Why is Educomp w ell-placed in K-12?

I.1.1. Demand for 20,000 urban schoo ls by 2015

Huge demand-supply gap: According to NCERT (2001), there are78,290 schools in urban areas with an average enrolment of 660 students

per school. With over 14 mn children expected to be added to theacademic system by 2015, this translates into a huge demand of over20,000 schools. Educomp intends to set up 150 schools over the next fouryears to cash in on the huge demand-supply gap.

Exhibit 4: 20,000 urban schools need to be added by 2015

Demand calcu lation 2001 2015 2025

School going urban children (mn) 59.8 73.9 82.7

Urban schools (Nos) 78,290 98,433 111,351

Additional schools required (Nos) NA 20,143 12,918Source: NCERT, JM Financial

I.1.2. Rising affluence to spur education spending

We believe that expansion in middle/upper class population, which havegreater aspirations through education, coupled with increasing spending willfuel growth in private education.

The middle/upper class population have greater aspirations through education.We believe expansion in this class of population coupled with increasingspending will fuel growth in private education.

Boom in the middle/ upper class will drive spending: According toMcKinsey Global Institute (MGI) estimates, the Indian middle and upperclasses will touch 614 mn people, representing 43% of Indias populationby 2025. Further, share of urban middle and upper class households isexpected to increase from 13.0% in 2005 to 60% by 2015, moving up to awhopping 83% by 2025. These households will also assume a significantproportion of spend on education at 89% by 2015, up from 58% in 2005.

Private spending has tilted more in favour of education: Currently,Indian households spend over 56% of disposable income on food andbeverages. Expenditure on education at


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Educomp Solutions


Exhibit 5: Private spending on education has grown at 16.4% CAGR

0%

20%

40%

60%

80%

100%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Food, beverages & tobacco Clothing & footwear Rent, fuel & power

Furniture,appliances Medical services Transport & comm.

Recreation & other Education Misc

Source: CMIE

Per child spending is set to increase sharply: According to thegovernments data, per child expenditure on education was Rs609 permonth in 2001. This is expected to be Rs1,547 per month by 2015,increasing sharply to Rs4,606 by 2025. Over 2001 levels of Rs609, thismarks a rise of 6.9% CAGR by 2015, after which it is expected to growfaster at 11.5% CAGR till 2025.

We believe that significant market exists for schools such as Educomp thatcharge up to Rs3,000 per month as fees. This belief is strengthened by thehigh average spend by upper and middle classes, who spent an average ofRs4,066 in 2001.

Our spending survey (refer page 53) indicates that parents at JM Financialspend an average of over Rs5,000 per month (excluding textbooks,uniforms, lab fees etc.) on education, with the percentage of children

paying higher fees increasing over the last few years. This leads us tobelieve that there is opportunity for a player like Educomp to offer highquality education at a slight premium.

Exhibit 6: Upper/ middle classes expected to spend more per child

609

1,547

4,6064,066

3,306

6,157

2001 2015 2025

Per child spend p.m. (Rs) Per child spend p.m. (Rs) -Upper/Middle classes

Dip is due to bulge in

lower middle class

Source: CMIE, MGI, JM Financial


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Educomp Solutions


I.1.3. India lacks significant pan-Indian non-missionary chains

School chains in India are still mission-led: Currently, India does nothave many non-missionary private school chains with a pan-Indiapresence, the Delhi Public School (DPS) being a notable exception. Webelieve that this scenario offers opportunity for a player like Educomp toestablish itself as a high quality school chain in India.

Exhibit 7: Current schools chains in I ndia

Vidya Bharti (RSS) 14,055

Dayanand Anglo-Vedic Schools (D.A.V ) 667*

Nasik District Maratha Vidya Prasarak Samaj (NDMPS) 186

Bharti Vidya Bhavan 86

Viishwa Hindu Parishad (VHP) 821

Chinamaya Vidyalaya 76

Delhi Public School (DPS) 110

Source: Industry data, Trust statistics, *includes schools and colleges

I.1.4. Educomps 3-tier system suits regulatory requirements

Indian schools need to be governed by a trust: Most Indian Statesdo not allow K-12 schools to operate on a for profit basis. Historically,schools have been managed by charitable trusts/societies, which are non-profit entities. Central Board of Secondary Education (CBSE) bye-lawsstate that in case of private unaided schools there should be a properlyconstituted Registered Society/Trust. Hence, each individual school has tobe governed by an independent trust. However, profits from the trust canbe taken out for paying the suppliers of various goods and services to theschool - lease rentals, school management fees, content fees, etc.

Educomp conforms to the regulatory guidelines: All of Educompsschools will be governed by an Independent Trust/Society. Educomp

Infrastructure Pvt Ltd (69.4% stake) will hold all the real estate and leaseit out to the trust for a period of 30 years. Educomp School ManagementLtd (68.0% stake) will provide intellectual property (IP) content, otherschool management services and in turn get licensing and service fees.Educomp will provide the content and content-related services to EducompSchool Management Ltd (Edu Manage) for a 10% revenue share.


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Educomp Solutions


Exhibit 8: Educomps school structure conforms to regulatory guidelines

Trust

Owns & runs the school

Edu Manage(68% stake)

Provides IP/content

Edu I nfr a (69.4% stake)Owns the real estate and

leases out to school

i) 14.5% of development costs

ii) 4.5% of school revenue

iii) one-time fee of Rs5 mn

Educomp

School

69.4% 68.0%

Tution fees Admission fees

Salaries (13% of revenues) Other operating costs (13% of revenues)

Balance 74% operating surplus

Average fees of

Rs850 per student

per month


I.1.5. Comprehensive model to ensure quick scale up

We like Educomps comprehensive strategy, which encompasses all thealternatives required to scale up its K-12 initiative. Apart from setting its ownbranded school chains under the Millennium brand, it has a three-prongedstrategy to ensure a faster scale up.


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Educomp Solutions


Exhibit 9: Three pronged strategy for faster scale up in K-12

Educomp's K-12

model

Tie-ups with real estate

players - Ansals, DLF

Acquisition of existing schools

- Ansals Chiranjeev Bharti,

Mussorie

Tie-ups with established

schools - PSBB, Don

Bosco, Raffles


Co-branding with established schools to ensure initial ramp ups:Educomp has forged tie-ups with established brands in the K-12 segmentsuch as Padma Seshadri Bal Bhavan (PSBB), Don Bosco and RafflesInternational to set up co-branded schools. Such schools will beestablished and managed by Educomp and run in line with the culturefollowed by the respective schools. The company currently has two co-branded schools under the PSBB Millennium brand in Chennai (see PSBBMillennium School, Chennai our impressions on page 40) and Bangalore.We believe that the co-branding strategy would benefit both Educomp andthe licensing school due to the following reasons:

o Strong brand equity enjoyed by the leading schools will ensurefaster capacity utilisation.

o Schools would receive royalties from Educomp for lending theirbrand.

Exhibit 10: Existing co-branded schools

PSBB Millenium school

Chennai

Standard: Pre KG to 9th Std

Number of students: 1,950Year of establishment: June 2005

PSBB Learning Leadership Academy

Bangalore

Standard: Pre KG to 5th Std

Number of students: 1,026 (FY08)Year of establishment: June 2006



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Educomp Solutions


Acquisition/ management of existing schools: Educomp also plans toacquire existing schools and refurbish them. This will save the initial set uptime required to build a school (~9-10 months) and give it a captiveaudience as well. Educomp recently acquired a well-established residentialschool in Mussoorie, in addition to two schools from Ansals. We believethat the acquisition route would prove to be a more expensive and lesslucrative avenue for investment for Educomp. Alternately, Educomp also

plans to manage existing schools wherein it would not own the schoolinfrastructure, which would eliminate high start-up costs.

I.1.6. Well-placed to address teacher requirements

While there are concerns over the lack of good quality teachers in the system,we believe that Educomp is well placed to deal with these issues given its in-house training facilities and innovative HR strategies.

Large in-house teacher training institute: Educomp has the largestteacher training institute in India and has trained over 1 mn teachers tilldate. Educomp derived 9.0% of revenues from Professional Development(teacher training) in FY08. We believe that such a captive talent pool

places the company in a better position to recruit teachers for its schools

Exhibit 11: Educomp has trained over 1 mn teachers till date

280,000

440,000

655,000

960,570

1,135,295

FY05 FY06 FY07 FY08 1Q FY09


Innovative HR strategy: Educomp plans to recruit star teachers frompopular local schools and offer them a better career graph by placing themin higher positions (Principal, Vice Principal, Head of Department, etc)within its schools. These star teachers would then drive teacherrecruitment and quality within individual schools, thereby ensuring highquality teaching.


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Educomp Solutions


Exhibit 12: Innovative HR practices to offer better career path



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Educomp Solutions


I .2. Schools can be highly pro fitable

I.2. 1. Schools are high margin businesses

We believe that running schools can be extremely profitable, with a wellmanaged school making ~62% EBIT margins on a steady state basis. An

abridged version of the school P&L has been presented in exhibit 13 below. Wehave built in lower utilization (both ramp up and peak) as well as lower feestructure in our model versus management estimates.

Exhibit 13: Financials Standalone school

Trust (Rs mn)

Year 1 2 3 4 5 6 7 8 9 10 11 12

StandardPre KG-

6thPre KG-

8thPre KG-

10thPre KG-

12thPre KG-

12thPre KG-

12thPre KG-

12thPre KG-

12thPre KG-

12thPre KG-

12thPre KG-

12thPre KG-

12th

Students(Nos) 392 792 1,144 1,560 1,768 1,768 1,768 1,768 1,768 1,768 1,768 1,768

Utilization (%) 35.0% 55.0% 65.0% 75.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0%

Tuition fees p.m (Rs) 2,750 2,888 3,032 3,183 3,343 3,510 3,685 3,870 4,063 4,266 4,479 4,703

Admission fees p.a (Rs) 30,000 31,500 33,075 34,729 36,465 38,288 40,203 42,213 44,324 46,540 48,867 51,310

Revenue from tuition fees-recurring 12.9 27.4 41.6 59.6 70.9 74.5 78.2 82.1 86.2 90.5 95.0 99.8

Revenue from admissionfees-one time 11.8 12.6 11.6 14.4 7.6 6.8 7.1 7.5 7.8 8.2 8.6 9.1

Total revenues from tuitionand admission fees 24.7 40.0 53.3 74.0 78.5 81.2 85.3 89.6 94.0 98.7 103.7 108.9

Ancillary revenue 3.6 7.4 10.8 15.0 17.2 17.4 17.7 18.0 18.2 18.5 18.8 19.1

Total reven ue 28.3 47.4 64.1 89.0 95.7 98.7 103.0 107.5 112.3 117.3 122.5 128.0

Teacher salaries 2.3 4.7 7.1 10.5 10.9 11.4 11.8 12.3 12.8 13.3 13.9 14.4

% of revenue 8.0% 10.0% 11.1% 11.8% 11.4% 11.5% 11.5% 11.5% 11.4% 11.4% 11.3% 11.3%Support staff salaries 0.3 0.7 1.0 1.4 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.8

% of revenue 1.1% 1.4% 1.5% 1.6% 1.5% 1.5% 1.5% 1.5% 1.5% 1.4% 1.4% 1.4%

Electricity charges 0.8 1.1 1.4 1.7 1.8 1.9 2.0 2.0 2.2 2.3 2.4 2.5

% of revenue 2.8% 2.2% 2.1% 1.9% 1.8% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9%

Ancillary costs 2.5 5.2 7.6 10.5 12.0 12.2 12.4 12.6 12.8 13.0 13.2 13.4

% of revenue 8.9% 10.9% 11.8% 11.8% 12.6% 12.4% 12.0% 11.7% 11.4% 11.1% 10.8% 10.5%

Other overheads 1.4 1.9 1.9 2.7 2.9 3.0 3.1 3.2 2.2 2.3 2.4 2.6

% of revenue 5.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% 2.0%

Total oper atin g costs 7.3 13.5 19.0 26.8 29.1 29.9 30.8 31.8 31.6 32.6 33.6 34.6

% of revenue 25.8% 28.5% 29.6% 30.1% 30.4% 30.3% 29.9% 29.5% 28.2% 27.8% 27.4% 27.1%

EBITDA 21.0 33.9 45.1 62.2 66.6 68.8 72.2 75.8 80.7 84.7 88.9 93.3

% of revenue 74.2% 71.5% 70.4% 69.9% 69.6% 69.7% 70.1% 70.5% 71.8% 72.2% 72.6% 72.9%

Depreciation 5.3 6.9 7.1 7.1 7.1 7.3 7.3 7.3 7.6 7.6 7.6 7.8

EBIT 15.7 27.1 38.0 55.1 59.5 61.4 64.9 68.4 73.1 77.1 81.3 85.6

% of revenue 55.6% 57.0% 59.4% 62.0% 62.2% 62.3% 63.0% 63.6% 65.1% 65.8% 66.4% 66.8%

IRR (%) 27.0%



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Educomp Solutions


Conservatism built into our estimates: We have been conservativeabout our school P&L estimates to allow for the execution risks inherent inthis business. Some of the main assumptions, which have gone into ourschool P&L are:

o Full capacity: 1,770 students versus the managements estimate of2,300.

o Capacity utilisation: 35% in Year 1, 55% in Year 2, 65% in Year 3,75% in Year 4 and 85% from Year 5 onwards. The managementestimates 100% capacity utilisation in Year 3.

o Number of grades: Pre KG to 6th grade in Year 1, Pre KG to 8thgrade in Year 2, Pre KG to 10th grade in Year 3, Pre KG to 12th gradefrom Year 4 onwards. The management estimates it would be able tooffer 12th grade in Year 3.

o School fees: Rs2,750 in Year 1 with 5.0% YoY inflation for successiveyears versus current range of Rs2,500 4,500.

o Admission fees: Rs30,000 in Year 1 with 5.0% YoY inflation forsuccessive years. PSBB Millennium in Bangalore charges Rs40,000 atpresent.

o Number of schools: We expect 150 schools to come up over a periodof six years versus the managements current expectations of three four years.


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I .3. Cost control i s key to profitability

We believe that cost control would be extremely crucial for profitability in the

K-12 business. Our analysis indicates that while land costs can be kept under

check through a mix of reserved zones and revenue share agreements with

land owners, construction costs will be tougher to control. Constructed area

would be a critical element if Educomp wants to keep costs under control.

I .3.1. Land costs can be kept in check

Reserved zones to help keep land costs in check: Educomp plans toacquire land in zones reserved for schools, which would help keep landcosts reasonable. Such land pockets would be available for schooldevelopment at lower rates than for commercial development.

Exhibit 14: Reserved zones to keep land cost reasonable

Particulars Rs mn

Average cost of land per acre 29.0

Average number of acres per school 1.7

Average land cost per school 50Source: Company data, JM Financial, for details refer to Annexure on page 51

Exhibit 15: Land cost Sensitivity analysi s

Acres per school

Cost per acre (Rs mn) 1.25 1.70 3.00

15 19 26 45

29 36 50 87

45 56 78 135Source: Industry data, JM Financial

JV with real estate players in expensive areas: Educomp has forgedtie-ups with leading real estate players such as Ansals, wherein the real

estate developer would own the land and provide it on a 60 year lease toEducomp. In areas where land costs are higher than current plans,Educomp would adopt a JV strategy wherein Educomp would construct thecampus on land owned by the real estate developer in exchange for a fixedrevenue share. Such tie-ups work would help reduce the upfrontinvestment required for setting up these schools.

I.3.2. Construction costs w ill depend on area per student

CBSE norms stipulate ~25 square feet per student: The affiliationbye-laws of the Central Board of Secondary Education (CBSE), to whichEducomp plans to affiliate its schools (except Raffles, which will beaffiliated to the International Board), stipulates a minimum of 25 square

feet per student per school. We have factored 50 square feet per studentto allow for larger classrooms, auditoriums and assembly halls.


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I .4. Edu Infra and Edu Manage the fine print

Educomp Infrastructure Management (Edu Infra) and Educomp SchoolManagement (Edu Manage) are the primary revenue sources for Educompfrom the K-12 schools business. We expect Edu Infra and Edu Manage tocontribute Rs1.14 bn in revenue and Rs84 mn in profit in FY10E.

Exhibit 18: Edu Infra/ Edu Manage - A snapshot

Entity Educomp Promoter Business Profile Revenue Streams Net margin

Educomp InfrastructureManagement - Edu Infra

69.4% 30.6%Owns assets and leases out toschools.

i) 14.5% of development costs, ii) 4.5% of schoolrevenue, iii) one-time fee of Rs5 mn

~17%

Educomp SchoolManagement -Edu Manage

68.0% 32.0%Provides educational content andIntellectual Property

Balance after paying out teacher salaries, Edu Infrafees and 1% to trust

~62%


Exhibit 19: Edu Infra/ Edu Manage Financial Snapshot

FY09E FY10E FY11E

Built up schools (Nos) 24 50 80

Operational schools (Nos) 8 24 50

Year 0 (Nos) 16 26 30

Year 1 (Nos) 3 16 26

Year 2 (Nos) 1 3 16

Year 3 (Nos) 3 1 3

Year 4 (Nos) 1 3 1

Year 5 (Nos) 1 3

Year 6 (Nos) 1

Total stud ents (Nos) 6,960 16,240 34,928

Edu Infra

Revenue (Rs mn) (A) 391 910 1,640

PAT (Rs mn) (11) 7 53

PAT margin (%) -2.7% 0.7% 3.2%

Edu Manage

Revenue (Rs mn) (B) 94 207 398

PAT (Rs mn) 53 117 227

PAT margin (%) 56.6% 56.3% 57.0%

Edu Manage royalty to Educomp @10% (Rs mn) (C) 9 21 40

Total revenue to Educomp (Rs mn) (A+B+C) 494 1,138 2,077

PAT (Rs mn) 43 123 279

Minority Interest (Rs mn) 14 39 89

PAT contributio n to Educomp (Rs mn) 29 84 191



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I.4.1. Edu Infra w ill have steady revenue

Three revenue streams: Edu Infra, which will own and lease assets toeach school, will receive three streams of revenue as detailed below:

o One-time fee of Rs5 mn: Edu Infra will charge a one-time fee of Rs5mn from each school as advance payment.

o Rental revenue of 14.5% of cost plus escalation: Edu Infra willcharge 14.5% of development cost as fee in Year 1 of operations ofthe school. Management expects to set an escalation fee of 15% perannum over the first year fee. We have factored an escalation of 5%per annum.

o Revenue share of 4.5%: In addition to the lease rental, Edu Infrawill receive a revenue share of 4.5% of the schools revenue everyyear.

The yearly escalation in lease rental, combined with the 4.5% revenue share

will ensure that Edu Infra breaks even in the second year of operations, with

profitability increasing as school revenues pick up, averaging 17% net margins

in steady state.

1.4.2. Edu Manage w ill ramp up in proportion to school revenue

Exhibit 20: Edu Infra/ Edu Manage revenue streams

Trust

Owns & runs the School

Remainder to Edu

Manage

(33% of revenue)

Lease rental & revenue

share to Edu Infra

(41% of revenue)

School

Tution fees Admission fees

Salaries (13% of revenues) Other operating costs (13% of revenues)

Balance 74% operating surplus

School management services

MilleniumLearning system

Multimedia content

Recruitment of teachers/ staff

Textbooks

Examinations Source: Company data, JM Financial


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Edu Manage revenue to be directly proportional to school revenue:Edu Manage will be paid the remainder after paying out salaries and othercosts as well as Edu Infra revenue. Unlike Edu Infra, which will startreceiving steady revenue from Year 1 onwards, Edu Manage revenue willscale up in proportion to school revenue (refer exhibit below).

Exhibit 21: Edu Manage and Edu I nfra revenue

0

3,000

6,000

9,000

12,000

FY09E FY10E FY11E FY12E FY13E FY14E FY15E

Schools (Rs mn) EduInfra (Rs mn) EduManage (Rs mn)


Edu Manage w ill be highly profitable from the first year: The primarycost to Edu Manage would be the 10% royalty paid to Educomp for theeducational content/ Intellectual property. We expect high margins in EduManage from the first year of operations, averaging 62% net margins insteady state.

1.4.3. Holding in Edu I nfra to increase

Exhibit 22: Edu Infra/ Edu Manage Financial snapshot

(Rs mn) Issued share capital Reserves and Surplus Loans

FY07 FY08 FY07 FY08 FY07 FY08

Edu Infra 0.4 0.3 251.8 508.0 0.0 92.9

Edu Manage 0.5 0.5 12.5 74.2 0.0 0.0Source: Company data

Holding in Edu I nfra likely to increase over the near term: Edu Infrawas incorporated by Educomp promoters with seed capital of Rs1.8 mn inFY07. In the same year, Educomp invested Rs500 mn for 69.4% stake inEdu Infra. Currently, Educomp has infused an additional Rs500 mn equityinto Edu Infra. This is expected to increase the stake holding by Educomp

in Edu Infra from current levels of 69.4%. We expect Educomps stake toincrease to 76%, assuming valuation of US$180 mn for Edu Infra.

Stake in high margin Edu Manage likely to remain at 68%: EduManage was incorporated by Educomp promoters with seed capital of Rs0.2 mn in FY07. Educomp invested Rs50 mn for 68% stake in Edu Managein FY07. We expect stake in high margin, asset light Edu Manage to remainat current levels.


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I .5. US$5.4 mn per school valuation for Educomp

School value at US$12 mn, US$5.4 mn value to accrue to Educomp:Based on our estimates for the K-12 business, we have arrived at a DCFbased valuation of US$5.4 mn per school for Educomp versus US$12 mnfor the school. This is due to Educomps 69.4% stake in Edu Infra and68% stake in Edu Manage, even though Educomp has full exposure to the

underlying risks in the business.

Exhibit 23: Fair value per school of US$5.4 mn for Educomp

Valuation per school Worst case Base case Best case

Investment per school (US$ mn) @ US$/INR 40 3.1 4.0 5.8

Fair value per school (US$ mn) @ US$/INR 40 2.3 12.0 29.4

Fair value per school for Educomp (US$ mn) * 1.0 5.4 13.2

K-12 Valuation for Educo mp @ 150 scho ols (US$ mn) 155 810 1,976Source: JM Financial, *68% share assuming full tax paid by Educomp.

Exhibit 24: K-12 assumptions

AssumptionsWorst case Base case Best case

Students at full capacity (Nos) 1,140 1,770 2,300

School fees p.m (Rs) 2,000 2,750 3,500

One time admission fees (Rs) 20,000 30,000 40,000

Ancillary fees p.a (Rs) 5,000 5,000 5,000

Capex (Rs mn) 125 161 230


Exhibit 25: DCF Assumptions

Risk free rate of return (Rf) (%) 9.0

Beta (x) 1.2

Expected market rate of return (Rm) (%) 14.0

Cost of equity (Ke) (%) 15.0

Proportion of equity (x) 0.3

Cost of debt (%) 13.0

Proportion of debt (%) 0.7

WACC (%) 10.5

Terminal growth rate (%) 1.0


Exhibit 26: Our estimate factors in a failure rate of 30%Number of

schools% oftotal

Value per school(US$ mn)

Investment perschool (US$ mn)

Successful 25 17% 13.2 5.8

Moderately successful 80 53% 5.4 4.0

Failure 45 30% 1.0 3.1

Average value per sch ool (US$ mn) 5.4Source: JM Financial


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I.6. Strong profit growth sustainable post FY10

We expect K-12 to generate Rs29 mn and Rs84 mn profits in FY09E andFY10E, respectively. Going forward, we expect an 84.1% CAGR in net profitfrom K-12 over FY10-15E as built up schools become operational over theperiod.

Exhibit 27: All schools to be operational by FY14E

(Nos) FY08 FY09E FY10E FY11E FY12E FY13E FY14E FY15E

Built up schools 8 24 50 80 120 150 150 150

Operational schools 3 8 24 50 80 120 150 150Source: Company data, JM Financial

Exhibit 28: K-12 profit CAGR of 136% over FY09-12E

(Rs mn) FY09E FY10E FY11E FY12E CAGR FY09E-FY12E (%)

Revenue 494 1,138 2,077 3,451 91.1

PAT (after MI) 29 84 191 383 136.3

PAT margin (%) 5.9 7.4 9.2 11.1Source: JM Financial

I.6.1. Established schools w ill become cash cows

According to our calculations, schools would become free cash flowpositive from Year 2 of its operations. Going into Year 3 and beyond, whenincremental capex is lower, the school starts generating significant freecash flows. We expect K-12 to start generating substantial FCF from FY14Eonwards as majority of the schools traverse into steady state operations.Thus, existing K-12 schools will become cash cows to fund new schools.

Exhibit 29: FCF for single green field school

(Rs mn) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12

Cash surplus from operations 0.0 21.0 33.9 45.1 62.2 66.6 68.8 72.2 75.8 80.7 84.7 88.9 93.3

Change in current liabilities 2.6 2.9 2.8 3.6 2.3 0.7 0.7 0.8 0.8 0.9 0.9 1.0 0.0

Cash flow from operating activities 2.6 23.9 36.7 48.7 64.5 67.3 69.5 73.0 76.6 81.5 85.6 89.8 93.3

Capex -109.8 -25.6 -25.6 -0.7 0.0 0.0 -0.7 0.0 0.0 -0.7 0.0 0.0 -0.7

Free Cash Flow -107.2 -1.6 11.2 48.0 64.5 67.3 68.8 73.0 76.6 80.8 85.6 89.8 92.6Source: JM Financial. Note: Assuming school does not pay any taxes


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I.7. Funds in place for K-12 expansion

Rs7.25 bn of debt funds tied up: Educomp has arranged for debt to theextent of Rs7.25 bn, supported by Rs2.5 bn equity infusion to fund the K-12 business expansion. Of this, Rs1 bn has already been raised on EduInfras books in the form of Non Convertible Debentures (NCDs). Anadditional Rs6.25 bn will be raised over the next two years.

Equity infusion from Educomp and external investors: Educomp hasinfused Rs500 mn equity into EduInfra and is seeking an external entity toinfuse another US$50 mn. However, the company believes that it canarrange for the funds on its own in the event that it is unable to find anexternal investor.

Current funds enough to set up 61 schools: The available funds aresufficient for building 61 schools till FY10, slightly lower than companyintended 68. This is due to our assumption of higher capex (Rs161 mnversus management estimate of Rs150 mn). However, we have assumedonly 42 additional schools by FY10E.

Exhibit 30: Edu Infra funds tie-up enough to fund 61 schools

Non convertible debenture @ 12.5% (Rs mn) 1,000

Line of credit available @13% from a nationalised bank (Rs mn) 6,250

Debt (Rs mn) 7,250

Current equity infusion from Educomp (Rs mn) 500

Further equity infusion assumed from external entity (Rs mn) 2,000

Total Equity infusion (Rs mn) 2,500

Total fund s available for K-12 (Rs mn) 9,750

Average capex per school (Rs mn) 161

Schoo ls that can be buil t - FY10E (Nos) 61

JM Financial assumption of new schools - FY10E (Nos) 42Source: Company data, JM Financial


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PSBB Millennium School our impressions

We visited PSBB Millennium School in Chennai to understand the K-12 business better. Our interactions suggest that the co-brandingstrategy with PSBB has worked very well for Educomp with theschool running at full capacity. Further, modern learning aids such

as Smart Class and laptops are actively used in the school to aidstudent learning outcomes.

PSBB Millennium, Chennai, was started in June 2005. The school currentlyhas 1,950 enrolments and has classes from junior KG to the 9th grade. Theschool is currently on rented premises and is at present operating at fullcapacity. It has not expanded beyond the 9th grade due to space constraint(the school opened the 5th section per class from K-9 because of heavydemand). If the school operates all grades from K-12, it should have~2,500 students at full capacity.

Exhibit 31: In full capacity - PSBB Millennium School, Chennai


PSBB co-branding working in favour of Educomp: Due to thestrong brand equity for PSBB schools in Tamil Nadu, the school saw anintake of around 900 students in the first year of its operations asagainst initial expectations of 600 students. Due to the paucity ofspace, the management is planning another campus at DLF OMRproperty, which is expected to be operational in the next academic year(2009-2010). The new campus will have a higher capacity of ~2,500

students.

Good review for Smart Class from both teachers and students:Majority of the classes in PSBB Millennium are wired with Smart Class.Our interaction with the teachers and students suggest that they seeclear benefits from the usage of Smart Class. The animation led real lifeapplications of theory in Smart Class seems very valuable as it explainsdifficult concepts clearly.


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Exhibit 32: Smart Class in action


Explorative learning with the aid of laptops: PSBB Millenniumlaunched O3 or One-on-One CPMC (Classmate Personal Computer) to

aid the students to learn their lessons and do assignments andprojects. This is also in conjunction with PSBBs explorative learningmethodology, which encourages students to explore subjects on theinternet. All students and teachers were given laptops in February2008 to get used to the idea of using laptops in day-to-day classroomsessions before implementing it in regular sessions beginning from theacademic year 2008-2009.

Exhibit 33: Childs play - children using Laptops


PSBB culture retained in the school: PSBB Millennium teachershave been trained on running the school in the PSBB way on the PSBBcampus. PSBB teachers have also taught at PSBB Millennium for oneday per week for the first two years, which we believe is indicative ofthe close relationship and brand association with PSBB.


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I I . Content is set for increased adoptionEducomp is an early entrant in the school content (multimedia for schools)space with its successful product Smart Class. Educomps private schoolsportfolio has grown more than 10x over FY06-08, which clearly demonstratesits increasing adoption in schools. Smart Class contributed to 44.3% of FY08consolidated revenue, having grown at a CAGR of 151% over FY06-08.

Current penetration levels of less than 7% offer scope for growth ahead.

Strong growth expected despite new competition: Despite newentrants such as NIIT (eGuru) entering this segment, we expect strongsustainable growth in the medium term due to: (1) a high potentialmarket with low penetration, (2) Educomps early mover advantage and(3) an interesting product with fully mapped content.

Exhibit 34: Scope for further penetration fo r Smart Class

FY08 FY15E

Existing urban schools (Nos) 87,786 98,433

Target urban private schools (Nos) 15,000 29,530

Target urban private schools (%) 17.1% 30.0%

Classes per school (Nos) 25 25

Students per class (Nos) 45 45

Fees per student per month (Rs) 150 150

Smart Class market size (US$ bn @ US$/INR of 40) 0.8 1.5

CAGR over FY08-15E (%) 10.2

Educomp's private school portfolio (Nos) as on 1Q FY09 1,036

Current target market penetration 6.9%Source: Industry data, JM Financial

Aggressive sales focus to drive growth: While newer players will haveto work towards creating a market for their product, Educomp, with analready proven product and virtually no established competition, can focuson scaling up its market share with an aggressive sales strategy. The

company has nearly doubled its Smart Class sales force from 60 in FY07 to~150 people in FY08. Plans are on to increase it to ~170 by FY09E.

Exhibit 35: Smart class is well -established

Parameter Educo mp NIIT Everonn

Content Fully mapped Maths, Science 6-12 Std

Interactivity Rating sale (1-5) 4 5 3

Model usedHardware +Content

PrimarilyContent

VSAT + Hardware +Content

Syllabus covered CBSE/ICSE NA CBSE/ICSE

Current geographical presence pan-India pan-India Restricted to Tamil Nadu

Avg. pricing per student per month (Rs) 150/75* 60* 160

Private schools using multimedia product 1,036 25 88Installed base of private schools with across-selling opportunity NA 1,223 144

Source: Company data, JM Financial. Note:*Only content


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Smart Class revenue contribution expected to increase: We expectSmart Class revenue contribution to increase over FY08-10E from 44.3%to 48.8%. We expect EBITDA margins in Smart Class to rise by 232 bpsdue to higher operating leverage. However, revenue and EBITDAcontribution would be overshadowed by the strong growth from the K-12segment from FY10E.

Exhibit 36: Smart Class to add to revenue, margin grow th

42.3% 44.3%49.4% 48.8%

60.0%

58.1%57.7%

58.7%

0%

20%

40%

60%

FY07 FY08 FY09E FY10E

54%

56%

58%

60%

Revenue contribution EBITDA margins



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I II . Leadership in the ICT space

Market leader in the I CT space: Educomp displaced NIIT to become thelargest player in the ICT segment in FY08. The companys unwaveringfocus on the government schools segment saw it more than double to6,004 schools in FY08. We believe Educomp will continue to lead thismarket with strong school wins in FY09E and FY10E.

Exhibit 37: Educomp to remain the market leader in I CT segment

1,900

5,914

9,414

2,808

6,004

12,004

21,004

4,5943,164

3,006

11,644

7,844

FY07 FY08 FY09E FY10E

Everonn Educomp NIIT


Lowering dependence on ICT: Despite a strong growth in ICT, portfoliodependence on ICT is expected to reduce going forward, given therelatively stronger growth in other businesses. ICT is a relatively lowermargin business with 29.2% EBITDA margin in FY08 as against companyaverage of 44.2%. Though it remains susceptible to the vagaries of doingbusiness with the government, we view this as positive step towards moreprofitable growth.

Exhibit 38: Reducing EBITDA contribution from ICT

20% 22% 18% 22%13%

4%

44% 50%58%

57% 56%

77%

34% 32%20% 28% 31%

15%

FY05 FY06 FY07 FY08 FY09E FY10E

ICT Smart Class Others


Leasing alliances to reduce capex burden: Educomp has entered intoa leasing agreement with RentWorks, an operating lease company, to fundthe capex needs in the ICT and Smart Class segments (Rs1 bn line ofcredit). This reduces the upfront investment and costs can be spread overthe lease term, which reduces the capex burden for Educomp.


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IV. New ventures embed option valueEducomp has several interesting ventures that are currently small but havethe potential to become blockbusters in the medium to long-term. While it istoo early to factor in meaningful ram ups, we believe these ventures provide ahigh option value to the stock.

IV.1. JV w ith Raffles opening doors to China

Win-win proposition: Educomp has entered into two joint ventures (JVs)with Raffles Education, Singapore (FY07 revenue of US$80.9 mn, currentmarket capitalisation of US$1.93 bn) for pursuing strategic opportunities inIndia and China. While the JV in India would focus on tapping thevocational education space, the China JV would focus on introducingEducomps entire suite of offerings in the Chinese education market.

Exhibit 39: Chinas education market

Institutions (Nos) Students (mn)

Pre-school 130,495 22.6

Special schools 1,605 0.4

Primary schools 341,639 107.1

Secondary schools 76,703 84.5

Vocational secondary schools 6,100 6.8

Institutes for higher education 1,867 17.4

Source: National Bureau of Statistics of China

Raffles is strong in APAC, but has minimal presence in India: RafflesEducation is the largest player in the private education space with 28colleges (FY07). These operate under four education brand names inAPAC, namely, Raffles University, Hartford Corporation, China Educationand Zhongfa Education. Currently, around 63% of Raffles revenue comesfrom China, but its presence in India is currently restricted to only onecentre in Mumbai. Educomp plans to set up five new Raffles institutesacross India by the end of FY09.

Exhibit 40: Raffles presence in I ndia

Institu te Revenue in FY07 Course

Raffles Design International, Mumbai US$0.65 mn 3 year degree course in Bachelor of Design


We believe that Educomp-Raffles tie-up could be a winning proposition forboth the players, since this would aim to leverage Educomps leadership inthe Indian private education space and Raffles strong presence in China.

IV.2. Learning hour - expansion into off line tutoring

Educomp acquired 76% stake in online tutoring service provider, ThreeBrix e-Services, for Rs25 mn in 2007. ThreeBrix owns the Learning Hour brand thatprovides online tutoring for 6th-12th Standard in India and the Middle East. Postthe acquisition, Learning Hour has been using Educomps Smart Classmodules as a part of the course offering. It also uses the online learningplatform from AuthorGen (where Educomp holds 51% stake) for deliveringonline tutoring sessions.


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Online tutoring restricted scale given low broadbandpenetration: While Learning Hour is a well established brand in onlinetutoring, the current market is small due to the low broadband penetrationin India. According to Crisil, India is estimated to have only 3 mnhousehold broadband subscribers in FY08, which implies a very smalltarget market. According to our estimates, the target market potential foronline tutoring would reach only ~US$0.5 bn by FY15. Hence, although

Learning Hour is an interesting venture, we believe its scalability remainsan issue.

Exhibit 41: Online tutoring has low market potential

Urban enrolment in2015E (mn)

Assumedpenetration in

2015E (%)

Target urbanpopulation in2015E (mn)

Tuition fees p.a in2015E (Rs)

Online tutoringmarket size (US$bn @USD/INR 40)

in 2015E

36.9* 10.0% 3.7 5,262 0.5

Source: NCERT, JM Financial;*Assuming only students from V1-XII take online tuitions

Expansion into offline tutoring could be more lucrative: LearningHour currently has eight centres in the National Capital Region (NCR) andplans to set up close to 50 offline centres by FY09. We understand that theoffline tutoring market is highly fragmented and is dominated by regionalplayers. While we do not expect Learning Hour to become a marketleader, entry into the US$3.3 bn offline tutoring market could boostrevenue over the medium term.

Exhibit 42: Offline tutoring market potential at US$3.3 bn

StandardUrban

enrolment in2008E (mn)

Targeturban

populationin 2008E

(%)

Targeturban

populationin 2008E

(mn)

Tuitionfees p.a

in 2008E(Rs)

TutoringMarket size

(US$ bn@USD/INR

40) in FY08E

Urbanenrolment

in 2015E

Targeturban

populationin 2015E

(%)

Targeturban

populationin 2015E

(mn)

Tuition fees p.ain 2015E (Rs)

TutoringMarket size

(US$ bn@USD/INR 40)

in 2015

education sector jm fin - jan 10

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