Educomp Solutions – Focus on cashflow

Q3FY10 results review and earnings revision - ICICI Securities

Educomp Solutions' consolidated revenues, EBITDA and PAT rose 37%, 86% and 92% YoY to Rs2.6bn, Rs1.33bn and Rs612mn respectively. Educomp, as indicated in Q2FY10, initiated the process of securitising Smart_Class revenue and outsourcing it to Edusmart. In Q3FY10, the company transferred 518 schools with contracts worth Rs980mn (300 schools in Q2FY10 with contracts worth Rs630mn). Educomp has received sanctions worth Rs4.15bn for securitisation of Smart_Class revenues from many leading banks and has received Rs2.45bn disbursement. Besides, securitisation proposal worth Rs2-3bn is under consideration. We believe the transfer of existing Smart_Class contracts to Edusmart would be done in 2-3 tranches over the next 6-9 months. The new Smart_Class model would improve cashflow for the company and would address the issue of frequent equity dilution, but aggressive accounting policy of recognising revenue upfront (we disagree) would lead to more lumpiness and the resultant de-rating. The stock trades at FY11E P/E of 15.4x and EV/E of 9.4x, which we believe factors the possible de-rating. We believe Educomp is better poised to take advantage of possible education reforms in India, given the strong portfolio of Educomp's offerings across the education value chain. Execution remains strong; we maintain BUY with Rs890 target price.

Source : Equity Bulls

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