educomp solutions everonn education reinitiating coverage jan 09 2012

7/28/2019 Educomp Solutions Everonn Education Reinitiating Coverage JAN 09 2012

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FIRST GLOBALwww.firstglobal.in

India Research

Sector: EducationReinitiating Coverage

Educomp Solutions Ltd.(EDSL.IN/EDSO.BO)&

Everonn Education Ltd.(EEDU.IN/EVED.BO)Relevant Index: CNX Nifty: 4,746.9 (J an 07, 12)

Stock Name Reco.CMP(Rs)

Market Cap(Rs Bn)

Educomp Solutions Ltd Underperform 199.9 19.1

Everonn Education Ltd Underperform 330.8 6.3

Governments focus on education, a large & growing target market, increasing willingness tospend on quality education and skill gaps bring huge growth opportunities for private players

Educomp Solutions: Superior products & aggressive organic & inorganic growth strategies arethe positives but Concern remains over pricing pressure on account of intensifying competition

Everonn Education: Gaining strength in select segments though a laggard in the ICT solutionsbusiness while, ViTELS business to remain key contributor to growth & profitability

J anuary 09, 2012

TO ACCESSF IRST GLOBAL RESEARCH ON BLOOMBERG,TYPE FGSL

Research Contact: Associate Director, Research: Hitesh Kuvelkar Mob. +91 9833 732633Email: [email protected]

Sales Offices: India Sales: Tel. No: +91-22-400 12 440 Email: [email protected]@bloomberg.net

UK, US & Europe: Tel.: + 44-203-189 0057 Email: [email protected]

Research Note issued by First Global Securities Ltd., IndiaFirst Global (UK ) Ltd. is a member of London Stock Exchange and is regulated by

Financial Services Authority (FSA), UKFirst Global Stockbroking is a member of Bombay Stock Exchange & National Stock Exchange, India

IMPORTANT DISCLOSURES CAN BE FOUND AT THE END OF THIS REPORT

For Private Circulation only


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FIRST GLOBAL www.firstglobal.inIndia Research

1

Table of ContentsThe Story... 3-4

Part I - Sector Analysis - The Big Business of Education - Key Growth Drivers 5-9

54% of the population is


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Business Highlights 26-28

Expansion of SmartClass centres & ICT schools driving growth 26-28Financial Highlights 29-30

Revenue growth, margins and return ratios 29-30 Working capital cycle 30

Quarterly Result analysis (Standalone) 31

Price and Rating History Chart 32

Everonn - Financial Snapshot (consolidated) 33-35

Everonns Key Ratios (Consolidated) 36

Everonns Business in Pictures (FY11) 37

The Story 38-39

Company Background 40

Business Highlights 41-43

ViTEL S 41-42 ICT 42 NSDC-Everonn J V 42 Key points of the contract 43 ESDL Managements Plan and current situation 43

Financial Highlights 44-45

Free Cash Flow 46-47

Capex plans 46 Working Capital Management 47 Equity dilution drives RoE decline 47

Everonns Quarterly Result analysis (Consolidated) 48

Annexure: Financials 49-62

Educomp Solutions Ltd 49-55 Everonn Education Ltd 56-62


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The StoryIn a country in which the education system is woefully (and famously) inadequate for the 553 mnlearning aspirants (population below 24 years of age) the business opportunities in the segment arehuge and growing. The conventional brickn mortar institutions are as much in demand as istechnology-based pedagogy that offers the benefits of enhanced learnability for users in varioussegments and easy delivery and scalability for service providers.

The Governments focus education, evident in the passing of the Right to Education Bill in 2010and in the increasing budgetary and Plan allocations for the sector, has generated significantopportunities for companies in the business. In the Union Budget of FY11-12, Rs. 420 bn wasallocated for the Ministry of Human Resource Development (an increase of 17% over last year),Rs. 310 bn for the Department of School Education and Literacy and Rs. 110 bn for highereducation. The government schools technology investments have been funded by the Information& Communication Technology (ICT) school initiative under the Sarva Shiksha Abhiyan(education for all) scheme of the Government of India.

Companies like Educomp Solutions, Everonn Education and NIIT, with their strong contentdevelopment capabilities and scalable delivery models, have an early-mover advantage in theeducation business. In the period FY06-FY11, as the number of schools adopting technology inclassrooms increased rapidly, Educomps revenues recorded a CAGR of 81% while Everonns andNI ITs were up at a CAGR of 69% and 23% respectively. According to our estimate, the size of

the Indian education market is a whopping Rs. 895 bn and weexpect to grow at a healthy 20% per annum going forward.Educomp, Everonn and NIIT together have penetrated a little overa third of the segment; their total revenues, at 26.94 bn at the endof FY11, represent just 3% of the potential addressable market.Clearly, there is enormous room for growth. Not surprisingly,

competition is intensifying, particularly due to the low entrybarrier, and many other players like Tata Interactive System (TIS),Navneet Publications, Pearson, Zee Learn etc have been able togain a foothold in the market.

Apart from digital content for schools, there are numerous other segments in education which arewitnessing robust demand growth like online tutoring, vocational training, and training inemployability skills, IT training etc., providing additionalgrowth and diversification opportunities. Besides, thegovernments emphasis on Public Private Partnerships isopening up several avenues for growth -- the recent joint-venture of Everonn Education and National Skill

Development Corporation (NSDC), for example, will cater toRs. 144 bn market, of a whopping 15 mn students.

The governments emphasis onPublic Private Partnerships isopening up several avenues for

growth -- the recent joint-venture

of Everonn Education andNational Skill Development

Corporation (NSDC), for example,will cater to Rs. 144 bn market, of

a whopping 15 mn students.

Educomp, Everonn and NI ITtogether have penetrated a

little over a third of thesegment; their total revenues,at 26.94 bn, represents just

3% of the potentialaddressable market


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Along with enormous growth potential, the education business offers the comfort of strong annuity-based cash flows for content vendors since the companies generally enter into 3-5 year contracts with

educational institutions. The business provides strong revenuevisibility as well, because education remains a priority evenduring periods of economic downturn spending on education iscertainly not discretionary in nature for the Indian middle class.Large upfront capital requirements remains a challenge forcompanies in the business as it results in negative Free CashFlow companies like Everonn are trying to tackle it by optingfor equipment leasing, but that adversely impacts operatingmargins. In projects undertaken with the Government, decisionand payment delays are a constant worry and result in high

receivables. Besides, there are risks associated with changes in government policies on the role of theprivate sector.

Read on for an analysis of the business and current valuations of two major players in the educationbusiness -- Educomp Solutions Ltd. and Everonn Education India Ltd.

The business provides strongrevenue visibility as well,

because education remains apriority even during periods ofeconomic downturn spendingon education is certainly not

discretionary in nature for theIndian middle class


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Part I - Sector AnalysisThe Big Business of Education

Key Growth Drivers54% of the population is


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Due to the governments focus on education there have been improvements in educationalinfrastructure and literacy levels. There are around 10.48 mn government schools and about2.54 mn private schools in the country. Currently 132 mn students in the age-group of 4-18 study ingovernment schools, which is 37% of the total schooling population; about 40% i.e. 143 mn are stillout of school.

Spending on education growing at a CAGR of 20%

Expenditure on education, which is mandatory rather than discretionary in nature, has beenincreasing at a healthy 20% CAGR, which reflects the priority accorded to education by the Indianmiddle-class. This increase is, interestingly, in congruence with the rise in education loans extendedby banks. As per the latest report of the Reserve Bank of India (RBI), education loans have increasedfrom Rs. 366 bn in year 2010 to Rs. 438 bn, representing a significant growth of 20%.

The size of the addressable market for private players is a whopping Rs. 895 bnEstimate of Potential Market Size

Number of govt. schools 1,048,046

Number of students (mn) 132

Average student per govt. school 126

Number of private schools (aided and unaided) 254,178

Number of students (mn) 78

Average student per private school 306

a) Private aided schools 71,206

Assumed Fees in private aided schools per month (Rs.) 400

Market size of private aided schools (Rs. bn) 104.6

b) Private un-aided schools 182,971

Unaided premium schools 20,000

Unaided standard school 162,971

Assumed fees in private unaided premium schools per month (Rs.) 1,500

Assumed Fees in private unaided standard premium schools per month (Rs.) 1,000

Market size of unaided private schools (Rs. bn) 708.6

Total Market size of private schools in K-12 segment (Rs. bn) 813.2

ICT budget under XI Five Year Plan (Rs bn) 411.0

Opportunity per annum (Rs. bn) 82.2

Total Market opportunity for private players (Rs. bn.) 895.4

Source: Education.nic.in, Company reports & FG Research

Size of the K-12 segment: Rs. 813 bn (F irst Globals Estimate)

As per the latest data of the Ministry of Human Resource Development, the average number ofstudents per classroom in India is 35. Private schools, on an average, charge Rs. 400 per student permonth while unaided premium schools charge Rs. 1,000 to Rs 1,500 per student per month.According to First Globals estimates, the size of the education market catered to by privateeducational institutions in the Kindergarten- Class 12(K12) segment is about Rs. 813.2 bn.


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Huge potential for growth in enrolments in higher education

The number of students pursuing higher education has doubled to16 mn in the last decade and the government aims to increase this to25 mn over the next decade. The number of universities has been

increasing at the rate of 5% annually since 1950 & the number ofcolleges has been increasing at the rate of 8% since 1990. Today,there are 26,000 colleges and 527 universities in the country.Despite having such a large number of institutes for highereducation, the Gross Enrolment Ratio is only 12%, which is wellbelow the global average of 50%.

Private participation in ICT: Rs. 82 bn opportunity / year

Private players have been participating in the governments Instructional Computing andTechnology (ICT) education initiative under the Sarva Shiksha Abhiyan (SSA) program. The Rs.411 bn allocated in the XI Five Year Plan for setting up ICT infrastructure across government

schools translates into an opportunity of Rs. 82.2 bn per year for education companies.

The size of the total addressable market (providingcontent and technology to private and governmentinstitutions) is thus Rs. 895.4 bn. In FY11, the combinedsales of the three major education companies NIIT,Educomp Solutions and Everonn Education aggregated Rs.26.9 bn, which is merely 3.0% of the total potentialaddressable market. Clearly, there is enormous room forgrowth for private education companies.

Growing acceptance of technology in education

Technology requirements of private unaided schools & demand for out-of-class(online) education are increasing

Private unaided schools (there are about 182,971 schools in this category) have greater flexibility inadopting new technologies/learning methodologies for education. Since there is no governmentinterference, decision-making is speedy. The segment represents an attractive opportunity for privateeducation companies. In the past few years, there has been significant growth in the number ofprivate school clients of Educomp and Everonn for their SmartClass and ViTELS programs

respectively (See Part II -- Company analysis).

In FY11, the combined sales of the threemajor education companies NIIT,Educomp Solutions and Everonn

Systems aggregated Rs. 26.94 bn at theend of FY11, which is merely 3.0% ofthe total potential addressable market.Clearly, there is enormous room for

growth for private education companies

Despite having such a largenumber of institutes for

higher education, the GrossEnrolment Ratio is only12%, which is well belowthe global average of 50%


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Number of schools offering SmartClass and ViTELS

Source: Company ReportSmartClass & ViTELS are private school products offered by Educomp & Everonn respectively*Everonns total ViTELS Centres are at the end of Q1FY12, as company has not given numbers for Q2FY12.

Demand for online education higher in urban areas

The demand for out-of-class (online) education has taken a huge leap with growth in Internet access.For instance, sites such as mathguru.com, WiziQ.com, eclassontheweb.com are attracting hugeamounts of traffic. This trend also throws up significant opportunities for private educationcompanies. Majority of demand for online education currently comes from urban areas due tohigh Internet penetration. As Internet penetration increases in rural areas, online educationservices are expected to grow further, as demand is huge.

Governments focus on educationIncrease in budget allocation driving deployment of technology in governmentschools

Governments spending on education increased from 2.20% of GDP in 1974-75 to 4.28% in 2000-01and has been in the range of 3.5-4.0% of GDP in the last 8 years. The amount is, however, low incomparison to global standards UK spends 5.4% of GDP on education and the US spends 5.6% ofGDP. The present Congress government has clearly mentioned education as a key area of priority.Some of its initiatives are:

Enacting the Right to Education Bill Allocating Rs. 1,571 bn to be spent on education by various agencies (central government,

state governments and Union Territories) under the XI the Five-Year Plan.

Increasing the budgetary allocation for education in the last three years and thus driving thedeployment of technology in schools. In the Union Budget for FY11-12, Rs. 390 bn was setaside for education and a lot of emphasis was given on proper utilisation of funds andimplementation of policies and programmes.

933

6,538

8,107

426

1,373

3,432

1,737

3,511*

3,421

2,617

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY08 FY09 FY10 FY11 H1FY12

SmartClass ViTEL S Centres


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Proposal to increase the budget for higher education by Rs. 96 bn toRs. 131 bn. The fundsare likely to be used for setting up premier technology and management institutes like theIITs and IIMs.

Implementation ofSarva Shiksha Abhiyan programmes, with an allocation of Rs. 210 bnfor FY11-12 in order to ensure primary education for all.

Mobilizing resources for education through education cess etc.Total spending on education as per XI th Five- Year Plan (Rs. bn)For setting up ICT Labs 411

National skill Development Programme 310

Plan Outlay for Higher education 850

Total 1,571

Budget allocation (Rs. bn)

FY09-10 FY10-11 FY11-12

For School Education 268 310 390

For Higher Education 96 110 131Total 364 420 521

Source: Education.nic.in, Company reports

Break-up of school education budget (Rs bn)Break-up of School education budget of Rs 389.6 bn as below:

Sarva Shiksha Abhiyan(SSA)Mid-day meal scheme(MDM)

210103

Secondary Education 62

Adult Education Programme 6

Others 9

390

Source: Education.nic.in

Public - Private partnerships

Governments proposed policy on PPP in education to open up new opportunities

The government proposes to use the Public Private Partnership (PPP) model in several areas ofeducation. Opening up of the secondary level and higher education segments to the PPP modelrepresents a huge opportunity for education companies in India.

According to estimates of the planning commission, $250 bn (Rs 12,250 bn) is required to meet the

demand for education in the country. The amountallocated for education under the XI Five Year Plan wasonly $32 bn (Rs. 1570 bn). The PPP model is absolutelyessential to bridge the large resource gap in education.

According to estimates of theplanning commission, $250 bn (Rs12,250 bn) is required to meet the

demand for education in the country.The amount allocated for educationunder the XI Five Year Plan was only$ 32 bn (Rs. 1570 bn). The PPP model

is absolutely essential to bridge thelarge resource gap in education


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Key ConcernsCapital-intensive business

High capex and working capital requirements in the ICT in education segmentand in brick n mortar schools

Education is a capital-intensive business, requiring heavy upfront investments in land acquisition,infrastructure, teaching aids etc. The business is also characterized by long payback periods. Thecapital expenditure incurred for each computer lab ranges between Rs. 0.2-Rs 0.4 mn and thehardware is transferred to the schoolat the end of the BOOT period

The capex and working capital requirements are highespecially in the ICT in education segment and in brickn mortar schools because of which free cash flows ofcompanies in the business tend to be negative. Delays in

payments by the government result in slow DebtorTurnover for companies in the ICT business, which is acause for concern. This is one of the reasons whycompanies like Educomp and Everonn have increasedtheir focus on private institutions and on their brandedproducts for the schools segment like SmartClass(Educomp) and ViTELS (Everonn).

Debtor Days: Educomp Solutions and Everonn Education

159

181169

220

194 193179

146

0

50

100

150

200

250

FY08 FY09 FY10 FY11

Educomp Solutions Everonn Systems

Source: Company Report

Execution Risks

Decision-making and payment delays by the government increase execution risks

Execution risks are high in the education sector, particularly in the ICT programmes ofgovernment-run institutions. These projects are vulnerable to policy changes, bureaucratic red-tape and inordinate payment delays by government departments etc., and the resolution of theseissues is beyond the control of education companies.

Companies also face huge challenges in managing large schools and maintaining qualitystandards in the franchisee model.

Delays in payments by the governmentresult in slow Debtor Turnover for

companies in the ICT business, whichis a cause for concern. This is one of

the reasons why companies likeEducomp and Everonn have increasedtheir focus on private institutions and

on their branded products for theschools segment like SmartClass

(Educomp) and ViTELS (Everonn)


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Obsolescence of content

Need for strong content development capabilities

One of the most critical challenges facing education companies is related to content development and

presentation, which need to be done in a manner that enhances learnability. Content obsolescence isparticularly rapid in technology-related areas and companies need to update / re-develop content atregular intervals. Companies need to have strong content development teams consisting of subjectmatter experts, instructional designers, animators etc. who can convert curricula into digitizedcontent and to adapt/remodel content according to changing requirements.

Intense competition

Realization per school on a decline

Competition in the ICT segment has been increasing with the entry of small companies and this has

resulted in declining realizations per school.

In the private schools segment, competition is intense among providers of quality digital content.While smaller players do not have a significant presence in thissegment, larger companies are vying for a share in this space. NIIT,for example, has made an aggressive foray into this segment as havemany other new players seeking to gain a foothold both at theelementary and the high school levels, attracted by the strong growthprospects and the low entry barriers in digital technology.Companies like HCL Infosystems, Zee Learn, and Tata InteractiveSystems have managed to capture a slice of the pie.

Government policies

Policy change on private sector participation, budgetary allocation etc, will impactrevenue prospects

Education companies are vulnerable to changes in government policies relating to the role of theprivate sector, budgetary allocation for ICT initiatives etc. The governments intention of curbingprofiteering in education may impact companies in the business, as it could result in lower margins.

Companies like HCLInfosystems, Zee Learn,

and Tata InteractiveSystems have managed tocapture a slice of the pie


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Part II - Company AnalysisEducomps comprehensive portfolio

VsEveronns focussed approach

Educomp Solutions & Everonn Education: Quick comparison of business models

Product/Solution for Educomp Solutions Everonn Education*

Private schools

Product: SmartClass: Instructor-led ,animated digital content offered as teachers aidNumber of schools (at the end of Q2FY 12):

8,107

Revenue Contribution:87% of aggregaterevenues in Q2 FY12

Product: ViTELS: Quality digital content combinedwith course delivery provided from state-of-the-artstudios

Number of schools /centres (at the end of Q1 FY 12):3,511 (As management has not given total no. of centresat the end of Q2FY12)

Revenue Contribution: 43% of total consolidatedrevenues in Q1FY12

Government schools

Installing computer laboratories in governmentschools under the ICT@ schools programmeand providing content.

No of schools (at the end of Q2 FY 12):10,937Contract period: 3-5 years

Installing computer laboratories in government schoolsunder the ICT@ school programme and providingcontent

No of schools (at the end of Q1 FY12): 6,628

Contract period: 3-5 years

Pre-school segment

- Roots -to-Wings: 233 centres- Euro Kids (50:50 joint -venture):595

schoolsKinderstand: 32 centres

K-12 segment(High School)

Schools under Millennium and Euro Kidsbrands run on 3 formats:

Owned by Educomp Dry Management basis Franchisee model

Number of schools (at the end of Q2 FY12):65

Kenbridge Schools:9 SchoolsWinfinity Schools:1 Schools

Vocational Education

50:50 joint ventures with Pearson Inc. forvocational education.IndiaCan=308 centres with 60,815 studentscovered in this segment at the end of Q2 FY 12

Running skill development courses and job- orientedcertificate and diploma courses in 31 centres byQ1FY12

Source: Company Report*Everonns business models are at the end of Q1FY12, as company has not given numbers for Q2FY12


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Price and Rating History ChartRatings Key

B =Buy BD =Buy at Declines OP =OutperformPositive Ratings

S-OP =SectorOutperform

M-OP =Market Outperform MO-OP=ModerateOutperform

Neutral Ratings H =Hold MP =Market Perform SP =Sector Perform

S =Sell SS =Sell into Strength UP =UnderperformNegative Ratings

A =Avoid MO-UP =Moderate Underperform S-UP =Sector Underperform

ST: Short Term MT: Medium Term LT: Long Term

Educomp Solutions Limited (EDSL.IN/EDSO.BO)The stock was not under active coverage from J un 2010 to Dec 2011

7-J an-12

UP

19 May 10

UP

3-Feb-10

OP

30-Oct-09

OP

1-Oct-09

OP

75

200

325

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825

950

1075

1200

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Feb-

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325

475

625

775

925

1075

1225

(INR)

Rel ati ve to Ni fty (L HS) FG Reco EDUC OMP Share Price (RHS)

6-Feb-2006 =100 (LHS)

Represents an Upgrade

Represents a Downgrade

Represents Reiteration of Existing Rating

Details of First Globals Rating System given at the end of the report


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Educomp Solutions

Financial Snapshot (Standalone)Key Financials

YE March (Rs. mn) FY09 FY10# FY11## FY12E## FY13E

Total Revenues 5,012 8,322 10,207 11,628 13,060

Revenue Growth (Y-o-Y)% 91.2% 66.1% 22.6% 13.9% 12.3%

EBIDTA 2,745 4,619 4,902 5,793 6,530

EBIDTA Growth (Y-o-Y)% 120.1% 68.3% 6.1% 18.2% 12.7%

Net Profit 1,316 2,219 3,889 2,844 3,160

Net Profit Growth (Y-o-Y)% 87.8% 68.6% 75.3% (26.9%) 11.1%

Net Profit Excl. extra-ordinaries 1,260 2,219 3,846 3,691 4,015

Net Profit Growth Excl. extra-ordinaries (Y-o-Y)% 84.1% 76.0% 73.3% (4.0%) 8.8%

Shareholders Equity 4,240 12,240 16,256 19,014 22,089

Adjusted number of Diluted shares (mn) 89 101 102 102 102

Key Operating Ratios

YE March FY 09 FY 10 FY11 FY 12E FY13E

Diluted EPS (Rs.) 14.9 22.5 37.8 28.0 31.1

Diluted EPS Growth (Y-o-Y)% 111.6% 51.5% 67.7% -26.0% 11.1%

Diluted EPS Excl. extra-ordinaries (Rs.) 14.2 22.5 37.3 36.3 39.5

Diluted EPS Excl. extra-ordinaries Growth (Y-o-Y)% 107.3% 58.2% 65.8% -2.9% 8.8%

CEPS Excl. extra-ordinaries (Rs.) 22.7 31.0 41.6 40.9 44.5

EBIDTA (%) 54.8% 55.5% 48.0% 49.8% 50.0%

NPM (Excl Extra-ordinaries) (%) 25.1% 26.7% 37.7% 31.7% 30.7%

Tax/PBT (%) 34.1% 40.0% 10.9% 24.5% 25.0%

RoE (Excl Extra-ordinaries) (%) 35.2% 26.4% 26.9% 20.9% 19.5%

RoCE (Excl Extra-ordinaries) (%) 16.2% 17.2% 21.0% 16.7% 16.1%

Book Value Per share (Rs.) 47.9 121.6 158.9 186.9 217.1Debt/Equity (x) 1.2 0.5 0.4 0.5 0.5

Dividend Payout Ratio (%) 3.8% 14.0% 1.5% 3.0% 2.7%

Free Cash Flow Analysis

YE March (Rs. mn) FY 09 FY 10 FY11 FY 12E FY13E

Operating Cash Flows 50 2,705 2,579 2,574 4,385

Capex 2,637 -1,964 400 567 518

Investment- Strategic 1,357 5,799 5,877 1,000 1,200

Total Free Cash Flows -3,538 -1,210 -3,893 262 1,856

Valuation Ratios

YE March FY12E FY 13E

P/E (x) 5.5 5.1

P/BV (x) 1.1 0.9P/CEPS (x) 4.9 4.5

EV/Sales (x) 2.0 1.6

EV/EBIDTA (x) 3.9 3.3

Market Cap./ Sales (x) 1.7 1.5

Net cash/Market Cap (%) NM NM

NM -Not Meaningful


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Market Cap. and Enterprise Value Data as on J an 07, 2012

Current Market Price (Rs.) 200

No. of Basic Shares (mn) 95

Rs bn US$ bn

Market Cap. 19.1 0.4

Total Debt * 6.7 0.1

Cash & Cash Equivalents* 2.9 0.1

Enterprise Value 22.9 0.4

* Debt & Cash & Cash Equivalents as of FY11, Ex. Rate INR 52.78

DuPont Model


EBIDTA/Sales (%) 54.8% 55.5% 48.0% 49.8% 50.0%

Sales/Operating Assets (x) 0.7 0.8 0.6 0.5 0.5

EBIDTA/Operating Assets (%) 40.6% 41.7% 29.5% 26.4% 26.8%

Operating Assets/ Net Assets(x) 0.8 0.8 0.8 0.9 0.8

Net Earnings/ EBIDTA (%) 45.9% 48.0% 78.5% 63.7% 61.5%Net Assets/ Equity (x) 2.3 1.7 1.4 1.5 1.5

Return on Equity (%) 35.2% 26.4% 26.9% 20.9% 19.5%

Common Sized Profit & Loss Account


Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0%

Less:

Cost of Goods Sold 20.6% 19.6% 28.0% 25.8% 25.5%

Personnel expenses 12.2% 12.0% 13.8% 14.8% 14.0%

Administration & other Exp. 12.4% 12.9% 10.2% 9.6% 10.5%

EBIDTA 54.8% 55.5% 48.0% 49.8% 50.0%

Depreciation 15.0% 10.9% 4.0% 4.1% 4.0%

Interest Paid 2.7% 4.5% 5.3% 6.9% 9.1%Non-operating Income 1.6% 4.9% 3.6% 3.1% 4.0%

Foreign Exchange Fluctuation loss/(gain) -1.7% 0.0% -0.5% 9.7% 8.7%

Profit Before Tax 40.3% 45.0% 42.7% 32.4% 32.3%

Tax 13.7% 18.0% 4.6% 7.9% 8.1%

Net Profit 26.3% 26.7% 38.1% 24.5% 24.2%

Net Profit Excl. extra-ordinaries 25.1% 26.7% 37.7% 31.7% 30.7%

Source: Company Report & FG Research#In FY10 Educomp has deleted assets of Rs. 4,742 mn (tangible & intangible asset) and added new asset of Rs. 1,533 mn##Educomp is expected to report negative profit (excl. Extraordinaries) growth due to higher interest and taxprovisioning in FY12. In FY11 the company had availed MinimumAlternative Tax (MAT) of Rs. 395 mn, which hasreduced tax liability.


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Top Management TeamDesignation Name

Chairman & Managing Director Shantanu Prakash

Whole-time Director Jagdish Prakash

Director Gopal Jain

Director Sankalp Srivastava

Director Shonu Chandra

Company Secretary Mohit Maheshwari

Director Shayama Chona

Director Rajiv Krishan Luthra

Capital Issue History

DateShare Capital

(Rs. mn)Mode of Capital Raising

6/1/2006 159.6 Public Issue

23/01/2007 159.9 Bond Conversion










13/07/2009 189.3 Preferential Issue Of Shares

Key Statistics

Share Holding Pattern (30/9/2011)

Promoters

49.5%

Institutions

2.5%

Non

Promoter

Corporate

Holding

5.0%

Foreign

29.8%Public &

Others

13.1%

Industry: Education

52 Week Hi:Lo: Rs.555.6/ 162.0

CMP: Rs 199.9

Avg Daily Vol (20 days): 2.0 mn

Avg Daily Val (20 days): 393.5 mn

Performance over 52 weeks:

EDUCOMP : Down 60.9%

Nifty: Down 19.6%


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Educomps Key Ratios(Standalone)YE March FY09 FY10* FY11# FY12E # FY13E

Cost of goods sold/Sales (%) 20.6% 19.6% 28.0% 25.8% 25.5%

Non-Operating Income / PBT (%) 3.9% 10.8% 8.3% 9.7% 12.4%EBITDA Margin (%) 54.8% 55.5% 48.0% 49.8% 50.0%

Tax / PBT (%) 34.1% 40.0% 10.9% 24.5% 25.0%

Net Profit Margin (%) 26.3% 26.7% 38.1% 24.5% 24.2%

RoE (%) 35.2% 26.4% 26.9% 20.9% 19.5%

RoCE (%) 16.2% 17.2% 21.0% 16.7% 16.1%


Debt/ Equity (X) 1.2 0.5 0.4 0.5 0.5

Interest Coverage (x) 20.0 12.5 9.1 7.3 5.5

Interest / Debt (%) 3.1% 6.7% 8.6% 9.8% 12.0%

Growth in Gross Block (%) 97.3% (61.5%) 21.8% 20.4% 17.0%

Sales Growth (%) 91.2% 66.1% 22.6% 13.9% 12.3%Operating (EBITDA) Profit Growth (%) 120.1% 68.3% 6.1% 18.2% 12.7%

Net Profit Growth (%) 87.8% 68.6% 75.3% (26.9%) 11.1%

Debtors (Days of net sales) 194 220 181 185 185

Creditors (Days of Raw Materials) 43 69 85 85 85

Inventory (Days of Optg. Costs) 46 29 25 26 26

Current Ratio (x) 3.1 3.8 3.8 4.5 4.8

Net Current Assets/Capital Employed (%) 34.1% 49.4% 34.4% 43.3% 46.4%

Number of Diluted Shares (mn) 89 101 102 102 102

Diluted EPS (Rs.) 14.9 22.5 37.8 28.0 31.1

Diluted EPS Excl. Extraordinaries (Rs.) 14.2 22.5 37.3 36.3 39.5

EPS Growth Excl. extra-ordinaries (%) 107.3% 58.2% 65.8% (2.9%) 8.8%

Dividend Payout (%) 3.8% 14.0% 1.5% 3.0% 2.7%

Diluted CEPS (Rs.) 22.7 31.0 41.6 40.9 44.5

Book Value Per Share (Rs.) 47.9 121.6 158.9 186.9 217.1

Source: Company Report & FG Research*In FY10 Educomp has deleted assets of Rs. 4,742 mn (tangible & intangible asset) and added. New asset of Rs. 1,533mn

#Educomp is expected to report negative profit (excl. Extraordinaries) growth due to higher interest and taxprovisioning in FY12. In FY11 the company had availed MinimumAlternative Tax (MAT) of Rs. 395 mn, which hadresulted in lower tax liability.


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Educomps Business in Pictures (FY11)(Standalone)

(All figures are in Rs. mn except where stated otherwise) All percentages are percent of revenues, unless otherwisestated)

Operations/ Value added

Total Revenues: Rs.10, 207 mn (100%)

Personnel: Rs. 1,406 mn (13.8%)

Adm. & other Exp.:

Rs. 1, 042 mn (10.2%)

EBIDTA

Rs. 4,902 mn (48.0%)

Profit before Tax

Rs. 4,361 mn (42.7%)

Interest: Rs.541mn (5.3%)Depreciation: Rs.411mn (4.0%)

Non-Operating Income: Rs.414mn (4.0%)

Taxes:

Rs. 474 mn (4.6%)

Profit after Tax:

Rs 3,889 mn (38.1%)

Competition: -

Everonn Systems

NIIT Ltd

Core Projects

Zee Learn

Edserve Softsyst

Aptech

Revenue Mix

1) Smart class =8,875 mn (87%)2) Instructional Computing

Technology =1,115 mn (11%)

3) K-12 Schools =26 mn (0.25%)4) Higher Learning Solutions =169

mn (1.65%)

Major Customers:

For SmartClass:All Private schools

For ICT: State Govts for Govt schools

No of Centres:

SmartClass schools: 6,538

ICT schools: 10,572

Operational Expenses

Rs.2, 857 mn (28.0%)

BelowOperating

Line

Balance Sheet(FY 11)

Liabilities

Rs. 25,793mn(100%)

Equity: Rs. 381mn (1.5%)Reserves: Rs. 15,876 mn (61.6%)

Total Loan: Rs. 6,714 mn (26.0%)

Sundry creditors: 1,229 mn (4.8%)

Provisions: Rs 341 mn (1.3%)

Other Current Liab.: Rs 1,253 mn (4.9%)

Assets

Rs. 25,793mn (100%)

Fixed Assets: Rs. 1,281 mn (5.0%)

Capital work in progress: Rs. 36 mn (0.1%)

Investments: Rs. 13,743 mn (53.3%)

Inventory: Rs 361 mn (1.4%)

Sundry debtors: Rs. 5,066 mn (19.6%)

L&A: Rs. 2,315 mn (9.0%)

Cash: Rs. 2,946 mn (11.4%)

Other non-current assets: Rs. 44 (0.2%)


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The StoryEducomp Solutions, founded in 1994, is the largest education company in India today. After gainingan early-mover advantage, the company has established a strong presence across the entire pre-

school to K-12 segment over the years. Armed with a huge content library of over 16,000 modules in12 different languages, Educomp has successfully made inroads into both the private school andgovernment school segments.

Educomp operates its School Learning Solutions segment through SmartClass and ICT (InstructionalComputing and Technology) at Schools. ICT focuses primarily on setting up computer laboratoriesat government schools, while SmartClass provides interactive technology enabled learning solutionsin classrooms at private schools, under a contract arrangement for a period of five years. SmartClass,Educomps flagship product for private schools, continues to gain traction and the company enjoysan early mover advantage in this product segment. The company added 3,461 schools in FY11 and1,570 schools in H1FY12, thus taking the total number of schools that have adopted SmartClass to8,107. SmartClass accounted for 87% of Educomps total revenue in Q2 FY12.

Educomp is the largest player in the ICT (Edureach) in education business segment and is currentlyworking with over 10,937 government schools.

Though a growing opportunity, the business suffersfrom execution risks and falling realizations.Educomp, however, continues to expand its presencein the segment, which contributed 11% of revenuesQ2FY12.

In the K-12 segment, the company is alsoaggressively expanding its network of schools underthe Millennium Schools brand, using a combination

of franchisee & company-operated models. Thecompany currently runs 65 schools, out of which, 37

are run by Educomp and 14 Euroschools are run under the Eurokids brand through its subsidiaries.

Determined not to miss any growth opportunity in the education sector, Educomp has been tryingto establish itself in niche segments like vocational training, online tutoring and professionaltraining through joint-ventures/stake acquisitions with other strong players. It has a joint-venturewith Pearson plc. for developing content for vocational training and another with Raffles Educationof Singapore, called Raffles Millennium International, which offers training courses in creative arts,fashion, lifestyle and management. It has also acquired a stake in several online tutoring portals.

Over the period FY06-11, Educomps standalone revenue grew at a CAGR of 81% to Rs. 10,207 mn,while its EPS grew at a CAGR of 77% to Rs.38. The robustgrowth momentum in SmartClass and K-12 schools islikely to continue and we expect Educomp to double thenumber of its SmartClass centres to 10,000 by the end ofFY12. In the ICT segment, the company is very selectiveand its revenue is expected to decline, as a number ofgovernment school contracts will expire in the comingquarters.

Educomp is the largest player in the ICT ineducation business segment and iscurrently working with over 10,937

government schools. Though a growingopportunity, the business suffers fromexecution risks and falling realizations.

Educomp however, continues to add to thenumber of schools in the segment, whichcontributed 11% of revenues and Q2FY12

The robust growth momentum inSmartClass and K-12 schools is likelyto continue and we expect Educomp todouble the number of its SmartClasscentres to 10,000 by the end of FY12.In the ICT segment, the company is

very selective and its revenue isexpected to decline, as a number of

government school contracts will expirein the coming quarters


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Educomp does have better product offerings in comparison to its competitors and enjoys acomprehensive presence in a gamut of segments from pre-schooling to professional courses.

However, we believe that Educomp could facescalability issues due to logistical bottlenecks, such asinvestments in delivery infrastructure, like computerlabs and other digital equipments, and the companywill need to significantly improve its executioncapability. The company could also witness loss ofpricing power, as the competition intensifies, renewalrates decline and its penetration increases in Tier IIand Tier III cities. Moreover, under this arrangement,Educomp is required to invest in hardware and contentthat is installed in schools, while the fees are collectedover the five year tenure of the arrangement, thereby

negatively impacting the companys cash flow in the initial years.

At the current market price of Rs. 200, the stock is trades at P/E multiple of 5.1x FY13E and P/BV of0.9x FY13E while, on EV/EBIDTA basis, the stock trades at 3.3x FY13E. In view of the scalabilityissues regarding ICT & SmartClass, as well as concern over pricing pressure and decline in renewalrates in the SmartClass segment on account of intensifying competition, we reinitiate coverage ofEducomp with a rating of Underperform.

Comparative Valuation

EBIDTA RoE RoCE Annual Annual

(%) (%) (%) EPS SalesEPS (Rs) P/E P/S P/BV EV/Sales EV/EBITDA

GrowthGrowthCompany YE

MktCap(Rsbn)

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY12E FY12E (13/12) (13/12)

EDUCOMP Mar 19.1 28.0 31.1 5.5 5.1 1.7 1.5 1.1 0.9 2.0 1.6 3.9 3.3 49.8% 20.9% 16.7% 11.1% 12.3%

NIIT Mar 6.4 5.4 5.4 7.2 7.1 0.5 0.5 0.8 0.7 0.4 0.3 3.0 2.5 12.6% 12.8% 11.9% 0.7% -3.6%

EVERNON Mar 6.3 18.0 26.9 18.4 12.3 1.4 1.2 1.2 1.1 1.7 1.5 4.6 3.8 37.3% 6.8% 7.8% 49.2% 19.9%

Source: FG Research

However, we believe that Educomp couldface scalability issues due to logistical

bottlenecks, such as investments indelivery infrastructure, like computer labs

and other digital equipments, and thecompany will need to significantly

improve its execution capability. Thecompany could also witness loss of pricing

power, as the competition intensifies,renewal rates decline and its penetrationincreases in Tier II and Tier I I I cities


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ValuationsWe have used sum-of-the-parts valuation for Educomp and have arrived at a price of Rs. 213 pershare.

Sum-of the -Parts

Business (Rs. mn)Valuation

BasisValuationMultiplier

DriverValueFY 12E

ValuePer Share

Value(Rs.)

Investments in subsidiaries P/BV 1.2 12,377 14,852 153

Investments in mutual funds P/BV 1.0 19 19 0.2

Investments in associates P/BV 1.1 273 300 3

Other Investments P/BV 1.0 875 875 9

Higher Learning Solutions

School learning solutions

K-12 schools

Online schooling

EV/EBIDTA 3.3 6,530 21,337 220

Total Enterprise Value 37,523 385

Cash & Equivalents Book Value 1.0 2,337 24

Total debt Book Value 1.0 19,089 197

Shares outstanding (mn) 97

Equity Value/ Share (Rs.)213

Source: Company Report & FG Research

Basis of Valuation

Key Assumptions:

The companys standalone business has been valued at 3.3x EV/EBIDTA value; per sharevalue of the company on stand alone basis is Rs. 220.

We have valued all the 50 subsidiaries using 1.2x P/BV multiple, since these subsidiarieshave a low contribution to the total revenue and a majority of them have a negativeEBIDTA value. In order to arrive at the value of the company, we have not considered theschools that are still under the construction stage in the EISML segment

We have valued investments in associates at 1.1x P/BV; per share value contribution isRs.3. the company have two associates, Greycells 18Media Ltd and Gateforum EducationService Pvt Ltd.

Companys Cash & Equivalents and Total Debt on consolidated basis are valued at bookvalue.


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Company BackgroundEducomp Solutions Ltd. (EDSL.IN/EDSO.BO) was founded by Mr. Shantanu Prakash in 1994. Thecompany was initially co-funded by the Carlyle Group, which subsequently sold its stake in 2005.

Educomp went public in January 2006 by issuing 4 mn shares at Rs. 125 per share.

Educomp has over 12,000 employees working at its 40 offices worldwide. (34 offices in India, 2 inSingapore, 1 in Sri Lanka, and 3 in US).

Educomps subsidiaries are AuthorGen, Threebrix.com, E-Servicesand Learning.com in the US andAsknLearn Pte Ltd, Singapore Learning.com ltd and Pave Education Limited in Singapore. It alsooperates through associate companies, one of which is Savvica in Canada.

Educomp has now emerged as a comprehensive service provider in the field of school education inIndia, with a presence in the pre-school and K-12 segments, offering offline & online tutoring &providing professional training in a joint-venture with Raffles Education of Singapore and vocational

training in partnership with Pearson. Educomps ICT solutions for government schools and theSmartClass initiative for private schools have become successful largely on account of its 3D contentlibrary of 16,000 modules which is aligned to Indian as well as international learning standards.Educomps content is available in 12 regional languages.

According to the management, the company has reached 15 mn students and 26,000 schools.Educomp operate about 828 pre-schools, 65 K-12 schools, 8 colleges, 308 vocational training centresand has trained over 2 mn teachers, installed SmartClass content in more than 8,107 schools, set up10,937 ICT labs in government schools and more than 3.8 million students enrolled in e-learningwebsites.


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Strategies & Strengths

New Business Model for SmartClass

Educomp has adopted a new business model for SmartClass

In FY10 Educomp adopted a new business model for its flagship product SmartClass under whichthe content is sold on an upfront basis to private schools, while a group entity, Edusmart, providesmaintenance services.

This approach is different from the Build-Own-Operate-Transfer(BOOT) model adopted earlier. Under the new contract, Educompwill provide hardware and content to classrooms, for which it willreceive 75% of the contract value over a two-year period fromEdusmart. Edusmart will be responsible for maintenance services andwill receive revenues from schools over a five-year period. Edusmartwill securitize the contract to pay Educomp.

This model will help in improving Educomps Free Cash Flow, which has been in the negativeterritory. However, it is too early to say whether the model will be successful as there is lack ofclarity on its implementation.

Strong content development capabilities

Educomp has a content library of over 16,000 modulesEducomps strong content development capabilities help it to stay ahead of competition. Thecompany has a team of 400 professionals working on development of quality content and R&D team

of 80 upgrading content and technology.

Educomp has developed over 16,000 modules of content in 12 languages. A large part of itscontent is scalable and can be used anywhere in the world with minor modifications. I t is alsoworking on educational content for Microsofts Xbox 360 gaming platform.

Educomp has formed a joint-venture with Pearson (the media company that owns Financial Timesand Penguin) for development of content for vocational training courses. The company has acquired

a strategic stake in Vidya Mandir Classes Pvt. Ltd, for thepreparation of engineering tests (for IIT-JEE, AIEEE,NSIT, DCE, BITS etc.) and has also formed a joint-venturewith Zeebo Inc., which provides wireless education andentertainment services.

Content obsolescence is the biggest challenge whichEducomp faces. Besides, given the intensely competitivenature of the business, talent attrition also remains a highrisk.

The company has acquired a strategicstake in Vidya Mandir Classes Pvt.

Ltd for the preparation ofengineering tests (for I IT-J EE,AIEEE, NSIT, DCE, BITS etc.) and

has also formed a J V with Zeebo Inc.,which provides wireless education

and entertainment services

Educomp will providehardware and content toclassrooms, for which itwill receive 75% of the

contract value over a two-year period from Edusmart


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Comprehensive range of services

Geared to take advantage of growth opportunities in the pre-school, K-12,vocational training and online tutoring segments

Educomp has now emerged as a comprehensive provider of educational services in the schoolssegment. It has a presence across the pre-school to K-12 segment, in online tutoring & in vocationaltraining through its joint-venture with Pearson. With only about 3% of the Rs. 895 bn (First Globalsestimate) education market catered to by the private sector at present, there is enormous room forgrowth and Educomp is in a position to take advantage of growth opportunities in various segments.

Expansion of the Millennium Schools network

Rapid expansion of Millennium Schools through franchisees

Educomp has launched brick-and-mortar schools under the Millennium Schools brand. It is

currently running 65 schools of which 37 are run by Educomp and 14 Euroschools come under theEurokids brand. Schools under Educomp include 37 owned schools and 14 schools under JV/DryManagement model. The management has laid down ambitious expansion plans for MillenniumSchools. Besides, there are 36 schools currently in various stages of development -- land has beenacquired for some while others are under construction or is a part of joint-ventures.

Subsidiaries for brick-and-mortar schoolsSubsidiary % Stake

EISML 81% Remaining 19% stake is with Promoters and third party.

Eurokids 51% Remaining 49% stake is with Eurokids International Ltd.

Raffles (50:50 JV) 50% 50% stake with Raffles Education, Singapore.

Source: Company report

By FY12, 50% of the schools will be set up under thefranchisee model. Under the terms of the franchiseeagreement, Educomp will receive 15% of the total feescollected by the schools as payment for providing the brandname and digital content.

The expansion in this segment requires huge initial investmentwhich could be a strain on the cash flows of the company

Providing online tutoring across verticals

Stake acquisitions in portals driving expansion

Educomp is expanding its presence in the online tutoring market by setting up its own portals andalso by acquiring a stake in a number of portals catering to different market segments. The strategyhas helped the company to incorporate changes in technology and global best practices in theeducation sector into its services.

By FY12, 50% of the schools willbe set up under the franchiseemodel. Under the terms of the

franchisee agreement, Educompwill receive 15% of the total fees

collected by the schools aspayment for providing the brand

name and digital content


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Educomp has acquired

a 76% stake in Threebrix.com E-Serviceswhich owns an online tutoring portal calledwww.learninghour.com and threebrix.com.

a majority stake in test preparation firm Gateforum Education service limited to preparefor the GATE exam (engineering post-graduate)

a 51% stake in AuthorGen Technologies, which owns technology platforms on the Web2.0 domain for online learning. AuthorGen also owns a portal, www.wiziq.com, whichconnects students and teachers on any web browser and operating system.

a majority stake in Zeebo Inc., to form a joint-venture and launch a wireless educationplatform.

a 70% stake in a Canadian e-learning company, Savvica, which builds online communitiesaround e-learning

New initiatives in professional education and pre-school segments

J oint- venture with Raffles of Singapore for professional education programmes

In the professional education segment, Educomp has signed 50:50, joint-venture with RafflesEducation, Asia Pacifics largest private education group. The joint-venture will bring Rafflesprogrammes in design, executive management and hospitality to India, and will also provide India-specific courses to address the employability gap in the country.

In the pre-school segment, Educomp has acquired a 51% stake in Eurokids International for Rs. 390

mn.


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Business HighlightsEducomp Solutions products and services are classified under four heads: Higher Learningsolutions, school learning solutions (SmartClass & ICT), K-12 Schools & Online supplemental and

global. SmartClass & ICT together contribute over 98% of the companys total revenue onstandalone basis. SmartClass and ICT contributed 87% and 11% respectively of the companys totalrevenue in Q2 FY12.

Business segment-wise revenue contribution (%)

Source:Company Report

Expansion of SmartClass centres & ICT schools driving growthSmartClass: Number of SmartClass centres expected to reach 10,000 by FY12

SmartClass, the animated, instructor-led teaching aid delivered inside the classroom is Educompsflagship product. The product, which contributed 63% of revenues in FY09 and 87% in FY11, isexpected to bring in 89% of revenues in FY12.

In FY 11, 3,461 new schools adopted SmartClass,taking the total to 6,538. In the H1 of FY12,1,570 schools were added. We expect thenumber of schools adopting SmartClass increase

to 10,000 at the end of FY12.

New revenue model for SmartClass: 75% of contract value within two years

The new revenue model adopted by Educomp for SmartClass is different from the Build-Own-Operate-Transfer (BOOT) model implemented earlier. Under the new contract with schools,Educomp will provide hardware and content to classrooms while Edusmart will be responsible formaintenance services. Edusmart will receive revenue from schools over a five-year period.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY09 FY10 FY11 H1FY12

SmartClass (%) ICT (%) K-12 Schools (%) Higher Learning (%)

In FY11, 3,461 new schools adopted SmartClass,

taking the total to 6,538. In the H1 of FY12,

1,570 schools were added. We expect the number

of schools adopting SmartClass to increase to

have increased to 10,000 at the end of FY12


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Edusmart will securitize the contract and to pay Educomp 75% of the contract value over a 2-yearperiod.

Number of SmartClass centres & ICT schools

6004

12,012

15,426

10,572 10,572 10,937

933

8,1077,202

6,538

3,077

1,684

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

FY08 FY09 FY10 FY11 Q1FY12 Q2FY12Smartclass schools ICT Schools


ICT (Edureach)

Largest player in the government school segment

Edureach business covers ICT Government and computer-aided learning projects. Educomp is thelargest player in the ICT solutions business (Total ICT schools of 10,937 at end of Q2FY 12) forgovernment schools. The segment contributed 11% of revenues in Q2FY12.

The number of government schools where Educomp is offering ICT solutions has increased by29%, from 12,012 in FY09 to 15,426 FY10 but declined by 31% to 10,572 in FY11. Given thegovernments focus on education, we expect Educomp to offerICT solutions to an even larger number of schools in the comingyears. Revenue from ICT under the BOOT contract is recognizedover the period of the contract. But with payment delays leadingto an increase in Debtor Days and negative cash flows in the ICTsegment, the management is keener to focus on driving SmartClassadoption by private schools.

With payment delays leading

to an increase in Debtor

Days and negative cash flows

in the ICT segment, the

management is more keen to

focus on driving SmartClass

adoption by private schools


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Professional Development segment

Revenue share declined to 1.65% in FY11 from 2.4% in FY10

Educomps Professional Development business is part of its Higher Learning Solutions which also

include higher education and vocational courses. The Professional Development segment impartstraining to teachers in technology-aided learning pedagogy & offers cognitive learning workshops.

The Professional Development segment contributed2.4% of revenues in FY10 and 1.65% in FY11. InQ2FY 12, the revenue declined by 50% Y-o-Y to Rs.27.9 mn. We expect the revenue share to decline to 13%in FY12, primarily due to higher growth in othersegments.

E-tutoring

Revenue share set to increase from Rs. 23 mn in FY11 to Rs. 27 mn in FY12

The e-tutoring segment includes online businesses such as LearnHub.com and WiziQ.com;supplement business such as counselling & assessment, global business such as Learning.com in theUS and AsknLearn in Singapore.

The segment contributed less than 0.5% of revenues in FY11 but its share is expected to increase inFY12 with 3.8 mn online using various products of Educomp.

A new initiative by Educomp is the ETEN (Educomp Tele Education Network) CA program -- atechnology-enabled coaching for CA aspirants. There are 45,000 students enrolled for the program in150 centres across India. The program may take some time to gain traction. Educomp is alsomanaging 17 Industrial Training Institutes (ITI) in states like UP, Rajasthan, Haryana, Punjab andDelhi under the EDU-CSR initiative and more than 11,000 students have been trained through thisinitiative.

The Professional Development segmentcontributed 5.8% of revenues in FY09 and

1.65% in FY11. In Q2FY12, therevenue declined by 50% Y-o-Y to Rs.27.9 mn. We expect the revenue share todecline to 13% in FY12, primarily due to

higher growth in other segments


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Financial Highlights

Revenue growth, margins and return ratios

Revenue likely to grow at CAGR of 13% over FY11-13

Over the period FY06-11, Educomps standalone revenues grew at a CAGR of 81% to Rs. 10,207mn, while its EPS grew at a CAGR of 77% to Rs. 38. The robust growth momentum in SmartClassand K-12 schools is likely to continue -- we expect Educomp to double the number of its SmartClasscentres to 10,000 by the end of FY12. In the ICT segment, the company is very selective and itsrevenue is expected to decline, as a number of government school contracts will expire in the comingquarters. Over the period FY11-13, company's topline is likely to grow at CAGR of 13%.

EBIDTA margin to improve to 50% in FY12

Educomps EBIDTA margin is declined from 54.8% in FY 09 to 48% in FY11, on account of lowerrealisation in the ICT segment and intensifying competition in the Private school segment and due toan increase in the operating expenditure. The increase in operating expenditure was driven by a risein the cost of goods sold and higher personnel expenses due to the addition of 200 employees to thecompanys sales forces in FY11. In FY12 EBIDTA margin will improve to 50%, driven by increasedcontribution from high margin SmartClass segment.

Margin trends

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FY08 FY09 FY10 FY11 Q1FY12 Q2FY12

EBITDA Margin (%) NPM (Excl Extra-ordinaries) (%)


RoE expected to decline to 21% by FY12Over the period FY06-11, the capital employed in the business grew at CAGR 86%, while, the RoCEdeclined from 21.3% in FY 06 to 21% in FY11, though the RoE improved from 23.9% to 27%, onaccount of an increase in the equity multiplier from 1.1x to 1.4x.


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Going forward, we expect Educomps sales-to-operating assets ratio to decline further to 0.8x inFY10 and to 0.5x in FY12. We estimate the RoCE to decline from 21.0% in FY11 to 16.7% in FY12,the RoE to decline from 26.6% in FY10 to 21% in FY12, primarily on account of a decline in theoperating margin and a fall in the equity multiplier from 1.7x in FY10 to 1.5x in FY12.

DuPont AnalysisYE March FY09 FY10 FY11 FY12E FY 13E

EBIDTA/Sales (%) 54.8% 55.5% 48.0% 49.8% 50.0%




Net Earnings/ EBIDTA (%) 45.9% 48.0% 78.5% 63.7% 61.5%

Net Assets/ Equity (x) 2.3 1.7 1.4 1.5 1.5

Return on Equity (%) 35.2% 26.4% 26.9% 20.9% 19.5%

Source: Company Reports & FG Research

Working capital cycle

Fall in debtor days to result in shortening of working capital cycle

Working capital cycle (in days)YE March FY08 FY09 FY10 FY11 FY12E FY13E

Debtors (Days) 159 194 220 181 185 185

Creditors (Days) 106 43 69 85 85 85

Inventory (Days) 4 46 29 25 26 26

Total working Cycle 57 197 180 121 126 126


0

50

100

150

200

250

FY08 FY09 FY10 FY11 FY12E FY13E

Debtors (Days) Creditors (Days)

Inventory (Days) Total working Cycle


Educomps net working capital cycle has declined from 197 days in FY09 to 121 days in FY11, dueto a fall in debtor days from 194 in FY 09 to 181 in FY11, due to a shift in the companys focus toprivate schools and its selective approach in the ICT segment. The companys creditor daysincreased from 43 days in FY09 to 85 days in FY 11. The benefits of the new business model forSmartClass are expected to become visible in the companys FY 12 numbers.


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Quarterly Result Analysis (Standalone)

YE March (Rs. mn)Q2

FY12Q2

FY11Y-o-Y

change %Q1

FY12Q-o-Q

change %6M

FY126M

FY11Y-o-Y

change %

Net Sales 2,193 1,992 10.1% 1,857 18.1% 4,049 3,650 11.0%

Less:

Cost of Goods Sold 601 545 10.1% 457 31.3% 1,058 1,181 (10.4%)

Administration& other Exp. 195 214 (8.9%) 207 (5.8%) 401 393 2.1%

Personnel expenses 423 359 17.8% 379 11.6% 801 626 28.1%

Total Expenditure 1,218 1,118 9.0% 1,043 16.8% 2,260 2,200 2.8%

EBIDTA 975 874 11.6% 814 19.7% 1,789 1,450 23.4%

Less: Depreciation 113 101 11.4% 118 (4.8%) 231 198 16.5%

EBIT 862 773 11.6% 696 23.9% 1,558 1,252 24.5%

Less: Interest 175 103 70.8% 203 (13.7%) 378 178 112.9%

Add: Other income 24 116 (79.2%) 74 (67.4%) 99 190 (48.1%)

Extraordinary Income/(Expenses) (374) 22 NM 0 NM (374) 22 NM

Profit Before Tax 337 809 (58.3%) 567 (40.6%) 904 1,286 (29.7%)

Profit Before Tax Excl. extra-ordinaries 711 787 (9.6%) 567 25.4% 1,279 1,264 1.1%

Less: Total Tax 76 56 35.2% 132 (42.3%) 208 92 126.8%Profit After Tax 261 752 (65.3%) 435 (40.0%) 697 1,194 (41.7%)

Profit After Tax Excl. extra-ordinaries 551 732 (24.7%) 435 26.5% 986 1,174 (16.0%)

Diluted EPS (Rs.) 2.57 7.15 (64.1%) 4.28 (40.0%) 6.85 11.66 (41.3%)

Diluted EPS Excl. extra-ordinaries (Rs.) 5.41 6.96 (22.2%) 4.28 26.5% 9.69 11.46 (15.4%)

Diluted Shares Outstanding (mn) 102 105 102 102 102

Margin Analysis (%)Changein bps

Changein bps

Changein bps

EBIDTA Margin 44.5% 43.9% 58 43.8% 61 44.2% 39.7% 445

EBIT Margin 39.3% 38.8% 52 37.5% 185 38.5% 34.3% 418

NPM 11.9% 37.8% -2586 23.5% -1154 17.2% 32.7% -1553

NPM Excl. extra-ordinaries 25.1% 36.7% -1163 23.5% 167 24.4% 32.2% -781

Effective Tax Rate 22.6% 7.0% 1561 23.2% -68 23.0% 7.1% 1586

NM: Not Meaningful

Educomps topline for Q2 FY12 came in well below street expectation. The company reported aProfit after Tax (PAT) of Rs. 261 mn for Q2 FY12, down 65.3% Y-o-Y from Rs. 752 mn in Q2FY11, driven by an increase of 70.8% Y-o-Y in interest charges from Rs. 103 mn to Rs. 175 mnand also due to exceptional loss of Rs. 374 mn of forex impact due to currency fluctuations mark-to market pertaining to FCCB of US $ 78.5 mn..

In Q2 FY 12, the EBIDTA grew 11.6% Y-o-Y to Rs. 975 mn, while the EBIDTA marginexpanded by 58 bps Y-o-Y from 43.9% in Q2 FY11 to 44.5%, on account of a fall of 8.9% Y-o-Yin the administration and other expenses from Rs. 214 mn in Q2 FY11 to Rs. 195 mn.

In Q2 FY12, Educomps standalone net sales grew 10% Y-o-Y , and 18% sequentially to Rs.2,193 mn driven by strong traction in SmartClass segment.

Revenue from the SmartClass segment increased 27% Y-o-Y to Rs. 1,910 mn and contributed87% of the total revenue in Q2 FY12, while revenue contribution of ICT segment declined to

just 10.9% of total revenue , as the company is focusing on more profitable private schools in theSmartClass segment.

Educomp added 905 schools in the SmartClass segment (total of 8,107 schools), and added 582new addition in the ICT segment (total of 10,937) in Q2 FY12. In the K-12 segment, 65schools are now operational as against to 43 schools in Q2FY11.


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Everonn Education Ltd

Price and Rating History ChartRatings Key

B =Buy BD =Buy at Declines OP =OutperformPositive Ratings S-OP =Sector

OutperformM-OP =Market Outperform

MO-OP=ModerateOutperform

Neutral Ratings H =Hold MP =Market Perform SP =Sector Perform

S =Sell SS =Sell into Strength UP =UnderperformNegative Ratings

A =Avoid MO-UP =Moderate Underperform S-UP =Sector Underperform

ST: Short Term MT: Medium Term LT: Long Term

Everonn Education Ltd. (EEDU.IN/EVED.BO)The stock was not under active coverage from J un 2010 to Dec 2011

7-J an-12

UP

1-Oct-09

OP

23-Oct-09

OP

29-J an-10

OP 24-May-10

OP

20

50

80

110

140

170

200

1-

Aug-

07

23-

Oct-

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14-

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J ul-

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22-

Sep-

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18-

Dec-

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17-

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12-

J un-

09

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Sep-

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26-

Nov-

09

19-

Feb-

10

17-

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10

4-

Aug-

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25-

Oct-

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11

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11

22-

Sep-

11

19-

Dec-

11

50

250

450

650

850

1050

1250

Relative to NIFTY (LHS) FG RECO Everonn Systems Share Price (RHS)

1-Aug-2007 =100 (LHS)

Represents an Upgrade

Represents a Downgrade

Represents Reiteration of Existing Rating

Details of First Globals Rating System given at the end of the report


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Everonn Education Ltd

Financial Snapshot (Consolidated)Key Financials

YE March (Rs. mn) FY09 FY10 FY11 FY12E # FY13E#

Total Revenues 1,447 2,935 4,247 4,420 5,298

Revenue Growth (Y-o-Y) 57.9% 102.9% 44.7% 4.1% 19.9%

EBI DTA 512 1,010 1,555 1,647 2,013

EBIDTA Growth (Y-o-Y) 53.3% 97.1% 54.0% 6.0% 22.2%

Net Profit 221 454 676 374 557

Net Profit Growth (Y-o-Y) 60.0% 105.8% 48.8% (44.8%) 49.2%

Net Profit Excl. extra-ordinaries 221 454 676 374 557

Net Profit Growth Excl. extra-ordinaries (Y-o-Y) 60.0% 105.8% 48.8% (44.8%) 49.2%

Shareholders Equity 2,137 2,559 5,283 5,621 6,142Number of Diluted shares (mn) 16 15 17 21 21

Key Operating Ratios

YE March FY09 FY10 FY11 FY12E FY13E

Diluted EPS Excl. extra-ordinaries (Rs.) 14.1 30.1 40.1 18.0 26.9

Diluted EPS Excl. extra-ordinaries Growth (Y-o-Y) 29.9% 113.5% 33.4% -55.1% 49.2%

CEPS Excl. extra-ordinaries (Rs.) 24.2 46.8 65.0 51.0 61.4

EBIDTA (%) 35.4% 34.4% 36.6% 37.3% 38.0%

NPM (%) 15.3% 15.5% 15.9% 8.5% 10.5%

Tax/PBT (%) 35.2% 30.9% 28.9% 31.5% 32.0%

RoE (%) 14.3% 19.2% 17.2% 6.8% 9.5%

RoCE (%) 12.2% 16.7% 14.8% 7.8% 8.8%Book Value Per share (Rs.) 136.3 169.3 313.1 271.1 296.3

Debt/Equity (x) 0.2 0.3 0.4 0.7 0.7

Dividend Payout Ratio (%) 0.0% 7.9% 5.3% NA NA

NA=Not Applicable

Free Cash Flow Analysis

YE March (Rs. mn) FY09 FY10 FY11 FY12E FY13E

Operating Cash Flows -166 167 179 1,223 1,260

Capex 713 779 2,249 1,501 1,119

Total Free Cash Flows -848 -514 -2,020 -304 177


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Market Cap. and Enterprise Value Data as on J an 07, 2012

Current Market Price (Rs.) 331

No. of Basic Shares (mn) 19

Rs bn US$ bn

Market Cap 6.3 0.12

Total Debt* 2.1 0.04Cash & Cash Equivalents* 1.5 0.03

Enterprise Value 7.0 0.13

* Debt & Cash & Cash Equivalents as of FY11 ,INR Exchange Rate 52.78

Valuation Ratios

YE March FY12E FY13E

P/E (x) 18.4 12.3

P/BV (x) 1.2 1.1

P/CEPS (x) 6.5 5.4

EV/Sales 1.7 1.5

EV/EBIDTA (x) 4.6 3.8

Market Cap./ Sales (x) 1.4 1.2

Net cash/Market Cap (%) NM NM

NM Not Meaningful

DuPont Model


EBIDTA/Sales (%) 35.4% 34.4% 36.6% 37.3% 38.0%




Net Earnings/ EBIDTA (%) 43.1% 45.0% 43.5% 22.7% 27.7%

Net Assets/ Equity (x) 1.4 1.3 1.4 1.6 1.7

Return on Equity (%) 14.3% 19.2% 17.2% 6.8% 9.5%

Common Sized Profit & Loss Account


Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0%

Net Purchase of trading items 15.1% 21.6% 18.6% 14.9% 17.8%

Personnel 19.2% 13.1% 14.5% 15.8% 15.2%

Other expenditure 30.4% 30.9% 30.3% 32.0% 29.0%

EBIDTA 35.4% 34.4% 36.6% 37.3% 38.0%

Depreciation and Amortization 11.0% 8.6% 9.9% 15.5% 13.5%

Interest Paid 3.6% 3.5% 5.0% 10.0% 9.5%

Non-Operating Income 2.7% 0.2% 0.6% 0.5% 0.5%

Profit Before Tax 23.6% 22.4% 22.4% 12.3% 15.5%

Tax 8.3% 6.9% 6.5% 3.9% 5.0%

Net Profit 15.3% 15.5% 15.9% 8.5% 10.5%

Net Profit Excl. extra-ordinaries 15.3% 15.5% 15.9% 8.5% 10.5%

Source: Company Report &FG Research#Management has not provided any details on the financial implications of the NSDC-Everonn project and hence, wehave not included the same in our projections.


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Top Management TeamDesignation Name

Managing Director P Kishore

CEO & Whole-time Director Susha John

Director R Sankaran

Director Joe Thomas

Director K M Marimuthu

Company Secretary S Vijayanand

Additional Director Nikhil Gandhi

Additional Director S Vijay Kumar

Capital Issue History

DateEquityCapital(Rs mn)

Reason

12/6/2000 13.5 Equity shares issued

15/03/2001 16 Further Issue

7/3/2003 17.1 Further Issue

31/05/2006 85.7 Bonus Issue




24/07/2007 138.5 Public Issue


7/9/2010 190.3 Debenture Conversion

23/05/2011 192.0 Debenture Conversion

Key Statistics

Shareholding Pattern as on 30/09/2011

Non

Promoter

(Non-

Institution)

44.8%

Indian

(Promoter &

Group)

42.7%

Non

Promoter

(Institution)

12.9%

Industry: Education

52 Week Hi:Lo: Rs. 723.0 / 227.3

CMP: Rs. 330.8

Avg Daily Vol (20 days): 0.2 mn

Avg Daily Val (20 days): Rs. 49.4 mn

Performance over 52 weeks:

Everonn Education Ltd : Down 46.7%

Nifty: Down 19.6%


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Everonns Key Ratios (Consolidated)YE March FY09 FY10 FY11 FY12E # FY13E#

Cost of goods sold/Sales (%) 15.1% 21.6% 18.6% 14.9% 17.8%

Other Income/EBT (%) 11.4% 0.7% 2.9% 4.4% 3.2%EBITDA Margin (%) 35.4% 34.4% 36.6% 37.3% 38.0%

Tax / PBT (%) 35.2% 30.9% 28.9% 31.5% 32.0%

Net Profit Margin (%) 15.3% 15.5% 15.9% 8.5% 10.5%

RoE (%) 14.3% 19.2% 17.2% 6.8% 9.5%

RoCE (%) 12.2% 16.7% 14.8% 7.8% 8.8%


Debt/ Equity (X) 0.2 0.3 0.4 0.7 0.7

Interest Coverage (x) 9.9 9.7 7.4 3.7 4.0

Interest / Debt (%) 11.0% 15.6% 14.2% 14.4% 12.3%

Growth in Gross Block (%) 74.8% 56.9% 80.2% 38.5% 18.5%

Sales Growth (%) 57.9% 102.9% 44.7% 4.1% 19.9%

Operating (EBITDA) Profit Growth (%) 53.3% 97.1% 54.0% 6.0% 22.2%

Net Profit Growth (%) 60.0% 105.8% 48.8% (44.8%) 49.2%

Debtors (Days of net sales) 193 146 179 180 178

Creditors (Days of Op. Costs) 68 7 16 15 15

Current Ratio (x) 3.9 5.8 6.1 8.2 7.9

Net Current Assets/Capital Employed (%) 47.9% 51.7% 50.4% 53.3% 52.8%

Number of Diluted Shares (mn) 16 15 17 21 21

Diluted EPS (Rs.) 14.1 30.1 40.1 18.0 26.9

Diluted EPS Excl. extra ordinaries (Rs.) 14.1 30.1 40.1 18.0 26.9

EPS Growth Excl. extra-ordinaries (%) 29.9% 113.5% 33.4% (55.1%) 49.2%

Dividend Payout (%) 0.0% 7.9% 5.3% 9.5% 6.4%

Diluted CEPS (Rs.) 24.2 46.8 65.0 51.0 61.4

Book Value Per Share (Rs.) 136.3 169.3 313.1 271.1 296.3

Source: Company Report & FG Research#Management has not provided any details on the financial implications of the NSDC-Everonn project and hence, wehave not included the same in our projections.


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Everonns Business in Pictures (FY11)Consolidated

(All figures are in Rs mn except where stated otherwise) All percentages are percent of revenues, unless otherwisestated)

Revenue Mix

i) ViTELS =Rs. 2,162 mn (50.9%)

ii) Instructional & computing

Technology =Rs. 860 mn ( 20.3%)

iii) Edu-Resources =Rs. 900 mn (21.2%)

iv) Tutors Tutorials =Rs. 170.5 mn (4%)

No of Centres (FY11):

ViTEL S total centres:

3,421

I-Schools 1,455

Virtual Colleges 1,920Retail Outlets --46

ICT schools: 6,640

Competition: -

Educomp Solution Ltd

NIIT Ltd

Core Projects

Cyber learning (Reliance Venture)

Tata Interactive systems

Major Customers:

For ViTELS:all Private schools & Colleges

For ICT: State Govts for Govt schools

Net Purchase of

trading items--

Rs. 789 mn (18.6%)

Operations/ Value added

Total Revenues: Rs. 4,247 mn (100%)

Manpower: Rs. 617 mn (14.5%)

Operating Exp.: Rs. 1,286 mn (30.3%)

EBIDTA

Rs. 1,555 mn (34.41%)

Profit before Tax:

Rs. 952 mn(22.4%)

Interest: Rs. 211mn (5.0%)

Depreciation: Rs.420 mn (9.9%)

Non-Operating Income: Rs. 27mn (0.6%)

Taxes:

Rs. 275 mn (6.5%)

Profit after Tax:

Rs 676 mn (15.9%)

BelowOperating

Balance Sheet(FY 11)

Liabilities

Rs.8,330 mn (100%)

Equity Cap: Rs.265mn (3.2%)Reserves: Rs. 5, 017 mn (61.2%)

Total Loan: Rs. 2,119 mn (25.4%)

Deferred Tax Liab: Rs.183 mn (2.2%)

Minority Interest: Rs.0.02 mn (0.0%)

Other Current Liabilities: Rs.288 mn (3.5%)

Sundry Creditors: Rs 115 mn (1.4%)

Provisions: Rs 342 mn (4.1%)

Assets

Rs. 8,330 mn(100%)

Fixed Assets: Rs. 2,935 mn (35.2%)

Capital work in progress: Rs. 595 mn (7.1%)

Investments: Rs. 223 mn (2.7%)

Goodwill: Rs. 5 mn (0.1%)

Debtors: Rs.2,088 mn (25.1%)

Cash: Rs. 1,469 mn (17.6%)

L&A: Rs. 1,015 mn (12.2%)


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The StoryEveronn Education India Ltd (EEDU.IN/EVED.BO), a fully-integrated knowledge managementcompany, had fairly humble beginnings back in 2000, when it started out offering computer training

to government school students. Today, it has establishedvirtual learning centres at 3,511 private schools and collegesin 50 cities across the country where it delivers curriculum-based content and employability training through a programcalled Virtual Technology Enabled Learning Solutions(ViTELS). Everonn also offers ICT solutions to over 6,628government schools, providing turnkey solutions for settingup computer labs to impart information technology education,computer-aided learning, computer literacy and teacherstraining projects.

Everonn has taken two significant steps that have strengthened its content capabilities and service

portfolio The company became Microsofts academic service partner in India in February 2011 forproviding training, courseware and certification tomore than 300,000 students over the next three years,as well as entered into a joint venture (JV) withNational Skill Development Corporation (NSDC) totrain 15 mn students over the next 10 years. The JV isexpected to generate orders worth Rs. 144 bn to beexecuted over the next decade. Management has notprovided any details on the financial implications ofthe project and hence, we have not included the samein our projections.

Everonns sales grew at a robust CAGR of 69% to Rs. 4,247 mn in the period FY06-11 and its EPSincreased at a CAGR of 28% to Rs. 40.1 (Number of shares increased from 7 mn in FY06 to 17 mnin FY 11). The company is catering to only 6,628 schools in the ICT segment as against Educomps10,937. The average revenue per school in the ICT segment increased from Rs. 0.128 mn in FY10 toRs. 0.134 mn in FY11.

In FY11-12, we estimate Everonns topline to grow 4.1% Y-o-Y to Rs.4.4 bn, as against Rs.4.24 bnin FY 11, and expect the net profit to decline 45% toRs.374 mn, as against Rs.676 mn in FY11. The growthwill be driven mainly by the addition in the number ofschools and colleges in the ViTELS SBU and anincrease in the average number of classrooms per

school. However, recent media reports regarding thetax liability and consequent allegations againstEveronns managing director, Mr. P Kishore, hasresulted in loss of credibility for the company, whichcould impact its business.

In FY11-12, we estimate Everonnstopline to grow 4.1% Y-o-Y to Rs.4.4 bn,

as against Rs.4.24 bn in FY11, and expectthe net profit to decline 45% to Rs.374

mn, as against Rs.676 mn in FY11. Thegrowth will be driven mainly by the

addition in the number of schools andcolleges in the ViTELS SBU and anincrease in the average number of

classrooms per school

Everonn also offers ICT solutionsto over 6628 government schools,providing turnkey solutions for

setting up computer labs to impartinformation technology education,

computer-aided learning,computer literacy and teachers

training projects

The company became Microsofts academicservice partner in India in February 2011for providing training, courseware and

certification to more than 300,000 studentsover the next three years, as well as enteredinto a joint venture (J V) with National SkillDevelopment Corporation (NSDC) to train

15 mn students over the next 10 years


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Everonn is expected to incur capex of Rs.1.5 bn in FY12 in the ViTELS and ICT segments, forincreasing the average classroom per school from 2.9 in Q4 FY11 to 5 by FY13, as well as add 700I-schools and 600 V-colleges in the ViTELS segment. The company will expand its presence in theICT segment and add 800-1000 government schools. The capital expenditure incurred for eachcomputer lab ranges between Rs. 0.2-0.4 mn and the hardware is transferred to the school at the endof the BOOT period.

With greater focus on the ViTELS SBU, the companys working capital requirements are expected todecrease. Everonns Free Cash Flow will continue to remain negative for some more time, on accountof its capex plans and working capital requirements.

At a CMP of Rs. 331, the stock trades at a P/E of 12.3x FY13E earnings. However, high receivables andnegative free cash flow still remain a concern for Everonn. The company plans to adopt a capital lightmodel in its school business in order to resolve the problem of negative cash flow. The recent newsregarding its tax liability issue will raise concern among investors over the companys corporategovernance. We reinitiate coverage on Everonn Education with a rating of Underperform.

Comparative Valuation

EPS (Rs) P/E P/S P/BV EV/Sales EV/EBI TDAEBIDTA

(%)RoE(%)

RoCE(%)

AnnualEPS

Growth

AnnualSales

GrowthCompany YE

MktCap(Rsbn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY12E FY12E (13/12) (13/12)

EVERNON Mar 6.3 18.0 26.9 18.4 12.3 1.4 1.2 1.2 1.1 1.7 1.5 4.6 3.8 37.3% 6.8% 7.8% 49.2% 19.9%

NIIT Mar 6.4 5.4 5.4 7.2 7.1 0.5 0.5 0.8 0.7 0.4 0.3 3.0 2.5 12.6% 12.8% 11.9% 0.7% -3.6%

EDUCOMP Mar 19.1 28.0 31.1 5.5 5.1 1.7 1.5 1.1 0.9 2.0 1.6 3.9 3.3 49.8% 20.9% 16.7% 11.1% 12.3%

Source: FG Research


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Company BackgroundIncorporated in 2000, Everonn Education is a Chennai-based Education and training company. In theinitial years, the company offered computer training at government schools. Today, its services

include creation of knowledge resources, designing and delivering learning and training programmesand setting up infrastructure for course delivery. Present across 27 states in the country and operatingfrom 10,139 learning centres, Everonn currently offers its services to over 3 million students. Thecompany operates in two segments: Instructional and Computing Technology (ICT) and Virtual

Technology Enabled Learning Solutions (ViTELS). ViTELS contributes over 43% of the company'stotal revenue, ICT brings in 25% and the balance comes from Everonn's subsidiaries - EDURES and

Toppers. Everonn works with a number of state governments, providing full-fledged curriculum &non-curriculum courses for Preschool to 12th Grade students at private schools and offering soft-skills and vocational courses at colleges.

At the end of Q1 FY12, Everonn worked with 6,628 government schools under the ICT programmeand had established virtual learning centres at 3,511 private schools and colleges in 50 cities across

the country. After acquiring the Patna based Tutor Tutorials in FY08, the company has begunproviding coaching for IIT JEE examinations at 33 centres across India. Everonn also administers

TOEFL, TOEIC and GRE tests. Company has joined hands with National Skill DevelopmentCorporation (NSDC) with the launch of International Skills School to provide skills to people fromnine sectors in order to make them employable. Everonn's wholly-owned subsidiary, Everonn SkillDevelopment Ltd. (ESDL), has been mandated by NSDC to train 15 mn people by 2022. NSDC willinvest Rs. 141.5 mn towards obtaining equity of 27% in Everonns wholly-owned skill developmentsubsidiary, ESDL. The total investment required for setting up 271 multi-skill development centreswill be Rs. 1.54 bn.


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Business HighlightsEveronn operates its businesses through two SBUs - ICT at Schools and Virtual & TechnologyEnabled Learning Systems (ViTELS). ICT at Schools focuses primarily on setting up computerlaboratories at government schools, while ViTELS caters to private schools, colleges, providinginteractive technology enabled learning solutions in classrooms. Private unaided schools (about182,971 schools exist in this category) have greater flexibility in adopting new technologies/learningmethodologies for education. Since there is no government interference, decision-making is speedy.

The company reach extended to 3,511 centres in the ViTELS segment and 6,628 schools in the ICTsegment by the end of Q1 FY12. Over the coming years, the growth will be driven primarily byadditions to the number of schools and colleges in the ViTELS SBU, as the decision making andimplementation is much faster in private schools in comparison to government run schools.

Number of ViTELS centres & ICT at schools

4,442

5,862

6,6286,640

3,5113,421

2,617

1,373

222

educomp solutions everonn education reinitiating coverage jan 09 2012

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