1 0 12032011Fullerton Educomp Solutions 10th Mar 2011

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March 10, 20

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DUCOMP SOLUTIONS STRONG BUY

ucomp Solutions is a provider of technology-based education products and services for

ndergarten to twelfth grade (K-12) education. Educomp provides technology enabled

oducts and services to both public and private schools, including Smart Class, instructional

d computing technology solutions (ICT solutions) and runs a network of brick and mortar

12 schools and reaches 25,000 schools and 15.5 million learners across the world.

Indian education opportunity Indian education services sector is estimated to grow at

6.3% CAGR to Rs 3,700bn by 2013. With a student base of 232 million in schools and 15.5

million in college, the company has ample opportunity helped with Governments

annual spending of USD30bn per annum in the sector. The wide presence in the number

of schools present strong opportunity for Educomp while reducing its customer

concentration risk.

Strong Smart Class classroom addition Smart class will continue to lead the revenue

growth and currently contributes approx 70% to the topline due to addition of 2,457

schools and 19,144 classrooms over the past 3 quarters. This growth will be led by the

ramp up in the business development team which comprises of approx 380 sales

personnel and higher renewal of the contracts that expire.

K-12 schools growth K-12 school growth is expected to leverage complete spectrum of

education in India and huge demand of high quality K-12 schools. The combination of

owned schools, franchisee and dry management will help the company to avail the

opportunity within the sector as it currently operates 50 schools with a visibility of 31

more schools.

sed on a consolidated FY12E EPS and on a P/E multiple of 14, we arrive at a

luation of Rs 636 for the stock

STOCK DATABSE / NSE CodeBloomberg CodeNo. of Shares (Mn)Sensex / NiftyPRICE DATACMP Rs (9th Mar '11)BetaMarket Cap (Rs mn)52 Week High-lowAverage Daily VolumeSTOCK RETURN (%)

30D 3M 6M Educomp 12% -12% -21% -3Sensex 5% -4% -2% Nifty 5% -4% -2% SHARE HOLDING PATTERN (%)

PromoterInstitutionNon InstitutionTotal

1 Year Price Performance (Rel. to Sensex)

7

532696 / EDUEDSL I

18470

Financial SnapshotProjections (RsMn)

FY08 FY09 FY10 FY11E FY12E

Revenue 2,861 6,371 10,395 13,323 20,653Y-o-Y Growth % 159.9% 122.7% 63.2% 28.2% 55.0%

EBITDA 1,460 3,291 6,133 6,495 9,866Y-o-Y Growth % 154.2% 125.4% 86.3% 5.9% 51.9%PAT 706 1,329 2,268 2,899 4,345

Y-o-Y Growth % 146.1% 88.3% 70.6% 27.8% 49.9%EPS Rs 7.4 13.9 23.7 30.3 45.5BVPS Rs 162.5 243.2 173.5 198.8 241.5

EBITDA % 51.0% 51.7% 59.0% 48.8% 47.8%NPM % 24.7% 20.9% 21.8% 21.8% 21.0%ROE % 25.2% 31.6% 13.8% 15.3% 18.8%

PER x 14.9 9.9P/B Ratio 2.3 1.9

Recommendations 20% p.a.Buy Expected Returns from 10 to 20% p.a.Hold Expected Returns from 0 % to 10% p.a.Reduce Expected Returns from 0 % to 10% p.a. with possible downside risk Sell Returns < 0 %


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March 10, 20


Educomp operates under four business segments School Learning solutions, Higher Learning

lutions, K-12 schools and Supplemental, Online & Global segment.

chool Learning solutions : The company has two brands under this segment namely Smart Class

nd Edureach (ICT). Smart Class is a comprehensive solution designed to assist teachers to enhance

assroom experience using digital, 3D and multimedia content of the curriculum mapped and it has

ached 5,534 schools covering 3.9million students. Edureach provides solutions for computer aided

arning in government schools in 11 regional languages across the country.

igher Learning solutions : The company has JVs with Pearson and currently reaches 52,500 students

rough its different models such as ETEN. Company has also entered into JV with Raffles Education

nd has set up Raffles Millenium International centers to provide higher education and courses in

shion designing, hospitality, management, commerce, English language etc.

-12 Schools : Educational programmes through chain of high school and preschool with currently 50

perational under the brands Millennium schools, Takshila schools and Vidya Prabhat schools. Under

eschool, Roots-to-Wings is the owned brand while the company has 50% stake in Eurokids brand

nd the company has 799 operational schools covering 48,100 children making it the largest

eschool company in the country.

Smart class reached 5,534 schocovering 3.9millstudents

nline, Supplementary & Global : Offline services include tutoring services through VMC centers targeting IIT JEE aspirants.

WiziQ is the largest virtual classroom interface partnering LMS companies worldwide with over 1 million registered users and

vailable in multiple languages having features such as live audio, video, whiteboard and text chat elements. Learnhub has

tal 525,000 users, Jumbo Tests have 200,000 users and Studyplaces has 665,000 users. LearnHub is a social networkingebsite for community building, online tutoring, and web based learning and digital content. Singaporelearning.com, a

bsidiary of AsknLearn serves an online learning portal for parents and students and also as an e-shop for educational

oducts.

BUSINESS PROFILE

78%

9%4% 9% School Learn

K12 Schools

Higher Learn

Online, SuppGlobal

Revenue segment

89%

11%

India International

Revenue geographic segment

Business segment

School Learningsolutions

Smart Class

ICT Edureach

K 12 schools

Roots-to-WingsPreschools

Euro KidsPreschools

Higher Learningsolutions

Raffles JV (Highereducation)

Pearson JV(Vocationaleducation)

Online & Global

learning.com,studyplaces.com

WiziQ (virtualclassroom)

asknlearn


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March 10, 20


The company restructured its revenue segments in FY2010 and it has witnessed strong growth in revenue. Revenue increase

s on account of higher revenue contribution from school learning solutions and increase in its customer base. In the School

rning solutions, consolidated revenue for Q3FY11 grew at 41% Y-o-Y to Rs 2,794mn and contributed 78.2% to the revenue.

is was led primarily by the addition of 949 schools to the Smart Class portfolio taking the nine month FY11 implementation of

144 classrooms while the average pricing per classroom stood at Rs 0.38mn. The ICT business currently reaches 10,550

hools and 5.8mn students will participate in upcoming tender for 20,000 schools. K-12 segment grew over 20% Y-o-Y to Rs

4mn contributing 8.2% to the revenue and it plans to address education capacity shortages at various price points across

mography. The Higher Learning solutions business is structured under the subsidiary Educomp Infrastructure and School

anagement Ltd. and reported Rs 146mn in Q3FY11 contributing 4.1% to the revenue which was led by growth in IndiaCan

earson JV that has 279 points of presence covering 52,500 students). This segment is in investment mode and reported losses

60mn for Q3FY11 however, the management expects this segment to turn profitable after 12-18 months. The online

gment reported revenue of Rs 333mn but reported loss at EBIT level and the management expects this segment to turn

ofitable after 12 months. The company generated 11% of the revenue from outside India in Q3 FY11. Purchase of finished

ods/ computers and employee expenses accounted for 75% of the total operating expenses and the advertising expense

ve increased as the company increased its marketing spend on Smart Class.

Revenue increadue to highcontributionfrom schlearningsolutions (SmClass)

K-12 segmgrowth over 12%

eer Comparison

Educomp is the leader in its segment and its nearest competitors include Everon Education, NIIT and Aptech with the latter two

eing active in IT space relative to conventional education space. Educomp dominates in the digital classroom with over 60%

hare and is the largest online education provider. Operating metrics such as EBITDA margins and PAT margins are superior to its

ompetitors and its valuation is not expensive relative to its peers.

BUSINESS PERFORMANCE

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FY08 FY09 FY10 FY11E FY12E

Revenue, EB ITDA & PAT M argin

R ev en ue (R s M n) EB ID TA M ar gi n PAT M ar gi n

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500100015002000250030003500400045005000

Revenues (Rs mn)

Quarterly Performance

Net Revenue (Rs mn) EBITDA Margins

Peer Group Comparison

CompaniesRevenue(Rs. mn)

EBIDTA

Margin(%)

PAT

Margin(%) ROE (%)P/E(x)

P/B(x)

MarketCap/ Sales

CMP(Rs.)

FV(Rs.)

Educomp 11,952 41% 21% 15% 17.2 2.6 3.61 452 2 Everon 3,954 34% 15% 13% 19.4 2.4 2.84 589 10 Aptech 1,742 10% 4% 3% 74.1 2.0 2.84 102 10 NIIT 12,842 13% 7% 18% 9.1 1.6 0.63 49 2 ttm figures

0%

20%

40%

60%

80%

100%

120%

140%

FY09 FY10 FY11E FY12E

Revenue & PAT Growth

Revenue Growth PAT Growth


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March 10, 20


4,000 school additionestimated for FY12

VALUATION

We estimate classroom addition of 11,250 for Q4FY11 to take the annual FY11 tally to 30,394 additions inhe Smart Class segment. Management had guided 25,000-30,000 for FY11 which looks to be met. For

Y12, school addition of 4000 has been estimated and the average classroom per school estimate is 7.5. K-

2 segment is estimated to grow by 21% in FY12.

Revenue is expected to grow at a CAGR of 41% during FY10-12. EBIT is expected to grow at 26% CAGR

ver FY10-12 and PAT is estimated to grow 38.4% CAGR during FY10-12.

Based on a consolidated FY12E EPS and on a P/E multiple of 14, we arrive at a valuation of

Rs 636 for the stock

We recommend a STRONG BUYrating on the stock.

Financial Analysis and Projections

Particulars (Rs Mn) FY08 FY09 FY10 FY11E FY12E

Net Revenue 2,861 6,371 10,395 13,323 20,653

Other Income 178 229 1,264 451 984

Total Income 3,024 6,894 11,697 13,774 21,637

Operating Expenditure 1,564 3,603 5,564 7,279 11,771

Depreciation 331 814 1,142 955 1,941

EBIT 1,129 2,477 4,990 5,540 7,924

EBIT Margin (%) 39.5% 38.9% 48.0% 41.6% 38.4%Interest 65 302 590 1,019 1,239

Profit Before Tax 1,064 2,175 4,400 4,521 6,685

Less: Tax 351 770 1,584 1,582 2,340

Profit After Tax 706 1,329 2,268 2,899 4,345

PAT Margin (%) 24.7% 20.9% 21.8% 21.8% 21.0%

ROE (%) 25.2% 31.6% 13.8% 15.3% 18.8%

EPS (Rs) 7.4 13.9 23.7 30.3 45.5

BVPS (Rs) 162.5 243.2 173.5 198.8 241.5

Valuation Ratios (x) FY11E FY12EP/E 14.9 9.9

P/B 2.3 1.9


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March 10, 20


d of Directorstor Name Current Position Description

nu PrakashExecutive Chairman of the Board, ManagingDirector

Mr. Shantanu Prakash is Executive Chairman of the Board, Managing Director of Educomp Solutions Ltd. He isthe founder member of Educomp Solutions Limited and has been responsible for its overall operations sinceinception in September 7, 1994. He is a PGDBM from IIM, Ahmedabad and is an in Education Technology andPedagogy.

Prakash Whole-Time DirectorMr. Jagdish Prakash is Whole-Time Director of Educomp Solutions Ltd. He is responsible for warehousemanagement and logistics and operational issues. He has over 49 years of experience in materialsmanagement as well as logistics in Steel Authority of India Limited as a Chief Materials Manager.

ain Independent Non-Executive Director

Mr. Gopal Jain is Independent Non-Executive Director of Educomp Solutions Ltd. He holds B. Tech (IIT Delhi).He is the Managing Director of Gaja Capital Partners, a Private equity firm. He was the Managing Director, Indiaof View Group, a venture capital firm focused on US-India corridor. He is also a charter member of TIE aglobal body of entrepreneurs of Indian origin.

Chandra Independent Non-Executive Director

Mr. Shonu Chandra is Independent Non-Executive Director of Educomp Solutions Ltd. He holds MA in MassCommunications fromMass Communication Research Centre (J.M.I.) and holds a Post Graduate Diploma (CYD)from Institute of Social Studies (The Hague, The Netherlands). At present he is Executive Producer and DirectoratWaves Communication Pvt. Ltd. He is with Waves Communications Pvt. Ltd for the past 17 years and hasdirected over a 100 video productions including documentaries, serials, corporate films and advertisements.He hasworked for major International Development agencies, i.e. Plan, UNICEF,WHO, USAID, AUSAID, CEDPA,CARE, CASP, DRF, etc. and various Ministries of the Government of India. He has designed and implementedthe Children Have Something To Say project for Plan India which won the coveted OneWorld SpecialAchievement Award 2003'. He is also a guest Faculty at Brown University (Providence, USA),Wigan & Leigh,Mass Communication Research Centre (N. Delhi).

Srivastava Independent Non-Executive Director

Mr. Sankalp Srivastava is Independent Non-Executive Director of Educomp Solutions Ltd. He holds B.E.(Electronics & Communication Engineering)/University of Roorkee is founder of Mark & Space, which isengaged in design, development and the manufacture of micro-processor based telecom, power control andenergy management systems. He has been involved in the design and development of Indias IndigenousDigital Telephone Exchange at C-DoT. He also led the development of business management softwareproduct suite at Cube Software and the development of a series of embedded Telecom products at Mark &Space.

uthra Independent Non-Executive Director

Mr. Rajiv krishan Luthra is Independent Non-Executive Director of Educomp Solutions Ltd. He is Founder &Managing Partner, Luthra & Luthra Law Offices one of the law firms in India and recipient of various Nationaland International awards. Rajiv Luthra has been nominated as one of the worlds lawyers by Chambers - AsiaLawyers, Asia Legal Pacific and IFLR 1000. The Lawyer.comincluded him among its top 40to have beenmakingthe biggest waves outside the UK.He ranked amongst ALBs Hot 100 in recognition for his contribution tovarious sectors and was cited asone of themost acclaimed legal experts in the Asia-Pacific regionby AsiaLawLawyers for the practice areas Capital Markets & Corporate Finance and General Corporate Practice.

a Chona Independent Non-Executive Director

Dr. Shayama Chona is Independent Non-Executive Director of Educomp Solutions Ltd. Dr Shayama Chona,Padma Shri and Padma Bhushan Awardee, is the past Principal of Delhi Public School RK Puram, New Delhi - aworld class institution. She serves as a member on 97 Advisory Boards and Committees and is Trustee of theNehru Bal Samiti and Special Olympics, Patron ofConcerned Action Now, Vice- Chairman of the Society forHuman Development, besides being on theManaging Committee of 46 schools and other educationalinstitutions. She is the proud recipient of 54 awards, themost prestigious being the Padma Bhushan in 2008and Padma Shri in 1999 and two National Awards in 1994 and 1997 and one State Award in 1993 for her work in the field of education and social welfare.

1 0 12032011Fullerton Educomp Solutions 10th Mar 2011

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