Learning curve for Educomp flattens, stock loses lustre

Citi has put out a ‘sell’ rating for Educomp after its fourth quarter numbers missed its estimate and a change in business model in SmartClass, a digital initiative by the company, required a new valuation parameter.

Here is a snapshot of Citi’s broader analysis.

[caption id=“attachment_18366” align=“alignleft” width=“380” caption=“Citi has put out a ‘sell’ rating for Educomp. Suzanne Plunkett/Reuters”]  [/caption]

Consolidated net profit of Rs 336.67 crore came in below Citi’s expectations of Rs 390 crore. Though revenue and earnings before interest and tax (EBIT) have been in line, higher interest and tax outgo led to lower reported profits.

The management has given a healthy guidance on a consolidated basis. Revenues are expected to grow 30% to Rs 1,760 crore while profits are likely to surge 19% to Rs 400 crore. The guidance factors in SmartClass classroom addition at 40,000-45,000 and also Rs 60-75 crore in revenues and profits from the proposed stake sale of strategic investments.

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SmartClass annual revenue swelled 38% over the previous year - this includes Rs 300 crore of non-recurring content revenues. Its EBIT margins were at 58%, which gained from non-recurring high-margin content revenues.

Educomp has ventured into a number of other businesses like K12, vocational training, higher education, pre-schools and the like. However, most of these ventures are at an early stage and running up losses.

For some time now, the management has been maintaining that the company is adequately funded for the next few years. However, along with the results, the announcement of an enabling resolution to raise $250 million and restructuring of the $78.5-million FCCB has taken Citi by surprise.

Net debt of the company stood at Rs 990 crore compared to Rs 260 crore in FY10. The company is considering a capacity addition of Rs 1,000 crore during the year against Rs 700 crore in the previous year.

Return on Equity (RoE) of Educomp has tanked sharply from 37% in FY09 to 18% in FY11.