IPO Note : Everonn: Going the Educomp way - Look for listing gains !

India is one of the largest markets for School Education in the World. India currently has around 1.18 million schools in both Government and Private segment providing education. About 5 mn teachers across India need support in training in IT and other subjects so that they in turn can teach others.

The approved outlay for education in the 10th Plan is around Rs. 30,000 crores while for secondary education and higher (including vocational training is Rs. 13825 crores. The Government of India has spent over Rs.10,000 crores (USD 2.2 billion) on Elementary Education in the country during 2005-06 and around Rs 2563 crores on Higher/Secondary Education. Education in the country is funded through a 2% Education Cess and other Budgetary Allocations.

Despite the steps taken by the Government to improve the education and see that the literacy rate improves only 15,000 schools in the country have access to IT Infrastructure and Education. This represents less than 2% of the Schools in the Government Segment.

Everonn Systems India Limited (Everonn) is in the field of education and training. The company is fully integrated offering a range of services like creating knowledge resources, designing and delivering the learning and training programs through the medium of computers and other resources. The company also sets up infrastructure and delivery platform for enabling the same.

The company gets its revenue from two sources i.e. Education and training which contributes almost 95% of the total revenue while the rest is from sale of hardware which is very small. Governments of various states are its key clients as almost 70% comes from them while the rest 30% are from private schools and colleges.

Everonn has two Strategic Business Units (SBUs) which are; the Institutional Education and Infrastructure services (IEIS) and Virtual and Technology Enabled Learning Solutions (ViTELS). The IEIS division mainly looks for setting up the IT Education Infrastructure in Schools & colleges and also delivers IT education in them. The division also offers Turnkey Education and software Solutions. Currently the company has a presence in over 1900 schools spread over 8 states. Under this division the company employs more than 2000 people.

The second units that is ViTELS focuses more on providing specialized content trough a computer or a LCD monitor which is the latest mode of education. In virtual learning the students are in one area while the teacher is sitting some where else and teaches the student virtually through the computer. The company mainly targets the colleges, schools, working professionals, corporate and also the retail segment. The company also provides Management Education from Premier Institutes like IIM?s, MICA and many more on Direcway Platform from more than ten centers across India. The company has also software called Zebra Kross through which virtual learning is taught in more than 115 centers currently.

Zebra Kross provides solutions to Institutions, Retails and Corporate. In the Institutional side the company conducts different programmes and courses for curriculum and extracurricular activities also. Job oriented courses, preparatory and entrance exam coaching, etc. are also provided in the schools and colleges. The Corporate side is further divided into two sub divisions as Training Department and Placement Department. The company has recently started these services and sees good potential here in the future. The Training Department has different programmes which include training in corporate products, value adds, diplomas, Management Development Programmes (MDP's) etc while the Placement Department direct access to more than 1,00,000 employable students in the colleges. Everonn's campus training would make them employable in the job market.

Everonn has entered into an agreement with Hughes Escorts Communication Ltd (HECL), earlier called Hughes Escorts Communication Ltd as a lead partner to help it in developing business for remote education and training through satellite broad band technologies. Management courses are offered through Hughes Net (Direcway) Interactive learning.

Everonn Systems public issue of Rs 50 crore has been fixed with a price band of Rs 125 and Rs 140 per share. The current paid up capital is 10.28 million shares and the company will increase it by almost 35.71 lakh shares at the upper end and approx 40 lakh shares at the lower end of the IPO. Out of the total IPO proceeds Rs 30 crore would be utilized for IT infrastructure services. The company plans to expand their operations close to 1000 schools every year. Rs 17.25 crore towards capital expenditure for virtual and tech-enabled learning solutions and Rs 8 crore has been earmarked for mergers and acquisitions of contents during 2007-08. Part of the funds would be also utilized towards brand building.

The company recently announced a Rs 30 crore order from Gujarat for computer education in 1256 government schools. The total schools will exceed 3000 in numbers with this order. The company also intends to tap foreign markets starting with the Middle East and Singapore.

There is huge opportunity for the company as the market is really huge and there are few players. About 95% of the market still remains untapped with almost 10 lakh schools and about 17,500 colleges which is a huge market. Competition is from the biggie Educomp Solution which has had a fiery track record of late and NIIT. (Interestingly NIIT is opting out of this Govermnent business saying that its unviable and not exciting.

The company has a huge receivables from the government which affects the company's balance sheet and cash flows. Payment from the government usually gets delayed. For example, in a state like Delhi, the contract period is normally six months and so you have 180 plus 30 days and so it is a 210-day working capital needed. Everonn gets 70% of revenues from the government. The company targets to change this ratio to 50 - 50 in favour of revenues from the private school segment.

Everonn Systems has seen revenue growth of 22% (CAGR) and profit after tax at a CAGR of 64%. For the year ended March 31, 2007, the company recorded a turnover of Rs 43 crore while the net profit stood at Rs 4.86 crore.

Having said all the good things about valuations and the potential in the industry we would add that we are not convinced on the business model. The company has content for 9th 10th , 11th and 12th. It is in the process of developing content for 5h 6th 7th and 8th. The model of tranmitting its lectures through satelite does not gel with us. The audience is likely to be limited. What is exciting about Educomp model is that the content facilitates the teaching. However in this case Everonn attempts to replace the Teachers. The reistance to this model is certainly likely to be high. The fees charged per student is higher in the case of Everon ( the school does not need to spend on teachers).

Valuation may appear attractive as compared with Educomp. EPS post issue stands at 3.5 times while the P/E comes around 40 at the upper end of the price range on trailing earnings. Compared with Educomp, which is 124 X its trailing earnings. The stock is bound to draw in interest as comparison with Educomp will keep the buyers interested. Of course this company is closest in capability to switch to an Educomp model driven by content. They have some content which could be refined.. or they could buy tie up for content from other providers. This possibility could bring in the valuatoin. We suggest that in this euphoria... of the huge education market and that created by Educomp.. one could look for Listing gains here ! As a long term investment Educomp remains the preferred pick given its highly refined content driven business model