Educomp Solutions

Good market potential
Success in the US can open up huge opportunities

Educomp Solutions is promoted by the husband and wife team of Shantanu Prakash (IIM, Ahmedabad, alumunus) and Anjlee Prakash (PhD in education). Headquartered in New Delhi, Educomp employs more than 850 professionals and has a presence in 27 locations in India. It has a fully owned subsidiary in the US.

Educomp Solutions focuses on K-12 (Kindergarten to Class 12) education. It mainly operates in four segments: Smart Class, Professional Development, ICT (Information Computer Technology) and Others (Retail).

Smart Class is a technology-enabled learning solution, which caters to private schools in India under the build, own, operate and transfer (BOOT) model. In FY2005, this segment contributed around 8.5% (Rs 2.95 crore) of the total revenue and 3.5% of the gross profit (Rs 63 lakh), with a gross margin of around 21.4%. The company is planning to increase its presence in the US market through this product in the coming years. However, in the US market, only the content solution will be provided under licence to private schools, and not the hardware as is done in the Indian market.

The professional development segment focuses on training teachers by providing them skills in inquiry-based learning, creative thinking, and building problem-solving skills among students. In this segment, Educomp Solutions partners with Wipro, Microsoft, and the Azim Premji Foundation. This segment contributed around 30% to the top line in FY 2005 and 40% to the gross profit, with an impressive gross margin of around 65%.

The ICT business segment caters to government and state schools in India. In this segment, Educomp Solutions enters into a long-term (usually five years) contract with the government schools to provide the entire IT solution. The contract is a BOOT arrangement, translating all assets to the school at a nominal residual value at the end of the contract period. The payment terms are usually on a quarterly basis. The company has worked with a number of states in India such as Karnataka, Tamil Naidu, Andhra Pradesh, Assam and Orissa. This segment contributed around 38% of the revenue in FY 2005, and 20% of the gross profit, with gross margin of around 25%.

The forth segment caters to the retail market, with a range of toys like Playgo and Learning Road, and educational CDs. Educomp Solutions plans to launch a chain of retail stores, Play – n – Learn, on franchise. The first of such stores has already been launched in Gurgaon, Haryana.

There are some other businesses like online tutoring for the US market, learning portal PlanetVidya.com, campus management system eCampus, and annual maintenance contracts. The 'other' business segment contributed around 24% of the revenue with a gross margin of 88%, generating 41% to the gross profit in FY 2005.

The proceeds of the current IPO will be utilised to fund the capex required for the Smart Class project (Rs 15.93 crore), capital expenditure for the education infrastructure projects (Rs 30.83 crore), capital expenditure for the content development facility in Bangalore, India, for US Smart Class project (Rs 10.98 crore), and investment in the US subsdiary (Rs 8 crore). Educomp Solutions has also earmarked Rs 10 crore for acquisition.

Strengths

• The market size is apparently huge as computer literacy is still very low and an increasing number of schools and state governments are realising the need to provide computer literacy and computer-aided learning to students as well as teachers.
• Over the next few years, Educomp Solutions plans to expand its global business with a focus on North America. It will build on its existing initiatives to provide digital content to schools as well as online tutoring in the US, which is the world’s largest education market, with a K-12 content spend of over $10.2 billion (2004 figures) and an online tutoring market spend of over $4 billion.

Weaknesses

• Educomp Solutions derived around 32% of its total revenue from the orders placed by trusts managed by the related parties. In FY 2005, Rs 10.29 crore of income (32.06% of total income) was generated from trusts. In the April-June quarter of FY 2006, Rs 1.99 crore of income (36.64% of total income) was generated from trusts.
• In the last three years (till FY 2005), the top line of Educomp Solutions grew at a CAGR of only 16% to Rs 33.13 crore. Net profit spurted from Rs 1.26 crore to Rs 7.93 crore, mainly due to the jump in the operating profit margin to 47.6%.
• Educomp Solutions's business is seasonal and most of the revenue and profit is booked in the second half, specially the fourth quarter.

Valuation

• The offer price band of Rs 110-125 discounts FY 2005 EPS of Rs 5 on post-issue equity capital by 22 to 25 times. PE is high for a small company. But considering the market size in India and the US market opportunity, the offer looks interesting.