Thud: Edu-shares Everonn and Educomp hit the skids

It was a jinxed day for the education sector. On Friday, Everonn Education hit the lower circuit on-down 20 percent at Rs 350.65-on the news of the company’s managing director being arrested in a bribery case. Educomp closed lower 3.41 percent at Rs 197.05 on news of the company deferring its $250-million fund raising plan.

P Kishore, managing director of Everonn, was arrested after the income tax department conducted a raid and found that the company may have concealed nearly Rs 116 crore of taxable income. Kishore allegedly tried to pay a bribe of Rs 50 lakh to income tax officials to escape the net. Andasu Ravindar, additional commissioner of income iax in Chennai, was also held with the bribe amount.

The stock opened down and touched the lower circuit at Rs 351.45 with only 100,000 shares trading on the two main exchanges. Everonn has nearly 29 percent institutional investors, including 27.5 percent as foreign institutional investors. None of the funds were able to sell their shares. What is surprising is hat there is no sizeable domestic fund holding in the company, though the stock was trading at attractive valuations of around 10 times its 2011 profits.

The stock has the potential of being the next Satyam Computers as the issue here is not really bribery, but concealment of revenue. Everonn posted a revenue of Rs 301 crore for the financial year 2011. In other words, nearly 40 percent of the company’s revenue were concealed. The company’s management will find it very difficult to explain to investors how or why the numbers were concealed.

The timing couldn’t have been worse for the company. It had been hit by poor financial performance in the first quarter of the current fiscal. Net profit fell to Rs 9.7 crore from Rs 26.2 crore in the fourth quarter of the previous fiscal. This was sharply lower than market expectation of Rs 17.5 crore.

The bigger problem is the sector getting downgraded. Between Educomp and Everonn, the latter was supposed to have better corporate governance standards. Though Educomp is bigger, margins at the operating level are the same for both companies. Educomp had revenues of Rs 1,397 crore and a profit of Rs 336 crore in 2010-11. However, the company has a debt of nearly Rs 1,430 crore, including nearly Rs 350 crore as foreign currency convertible bonds (FCCB). Finding a subscriber for the $250 million issue will be increasingly difficult.

As for Everonn, nearly 50 percent of the promoter holdings, or 20 percent of the equity capital, is pledged. Falling prices will create pressure on this stock and the fear of pledged shares being liquidated will act as an overhang.