Ambit Capital's warning a new blow for Everonn

Everonn, after an eventful week, is doing some damage control and has assured its investors of equity infusion by Varkey, the Middle-East based education group. The Varkey Group has announced to come out with an open offer at a 51 percent premium to its previous close, which means those who do not want the stock can exit. But Ambit Capital is categorical: It has asked investors to Sell Everonn and not hold on to it.

The managing director of Everonn was arrested on 30 August and subsequently, the share price crashed. With the Varkey Group buying 12 percent fresh equity at Rs 528 per share, an open offer is in the offing. Ankur Rudra, an analyst with Ambit, keeps investors clued in as to what they must ask at the shareholders meeting on 19 October before deciding what to do with their stock.

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[caption id=“attachment_92080” align=“alignleft” width=“380” caption=“With the Varkey Group buying 12 percent fresh equity at Rs 528 per share, an open offer is in the offing. Reuters”]  [/caption]

One, who will be the new captain of the ship? The founder and managing director, P Kishore, had taken the company to higher levels with initiatives like K-12 and some bold measures in the vocational education space. He had also played a key role in turning around the fortunes of Everonn’s core business. So, now that he is gone, the management is desperately looking for some direction. Now there is intense speculation as to who is going to take over the reins. With independent director JJ Irani’s exit, the board looks “imbalanced”, which puts a big question mark on its independence.

Second, the charges against P Kishore are serious. So, whosoever replaces him must enjoy the confidence of the investors.

Third, Everonn has suddenly ramped up its capital intensity, which does not sit well with its plan of asset light models like leasing instead of building and owning assets. So, what has led to this change in strategy? They spent Rs 1,100 crore in the first quarter of this year against Rs 2,200 crore in the whole of last year. Everonn’s core has not been able to get free positive cash flows and it’s ready to diversify into vocational training. So, someone needs to tell them what their core competency is and how to optimize it before looking at greener pastures.

Ambit had initiated its coverage on Everonn in December 2010 with a Sell rating. Through this year, it has not seen any consistency between the profit numbers and other performance indicators. Since it had no access to crucial numbers like enrollment, it was difficult to gauge what actual numbers could look like. Moreover, though the Varkey Group is experienced, it has not been successful in India and does not bring anything to the table for investors to stay on. While on the one hand, the company has gone for multiple experiments, its debt tripled in the last quarter which does not look too good in the balance sheet.

So, here’s what Ambit Capital has to advise. “We therefore urge shareholders to pass the resolution for fresh equity investment by the Varkey Group (at Rs 528 per share) on 19 October and tender shares in the open offer.”