Educomp Solutions

Investors with a two-year horizon can buy the shares of Educomp Solutions, an education solutions provider, considering a revenue model that ensures sustainable revenue streams and the rapid addition in schools that adopt its products and services.

At Rs 704, the share trades at 19 times its likely 2010-11 per share earnings. At these levels, the valuations seem attractive due to the superior growth and margin expansion that the company has been able to achieve in its key school learning solutions business. These valuations are also at a substantial discount to historic valuations enjoyed by the stock. Between 2006 and 2009, the company's revenues grew at a compounded annual rate of 125.6 per cent to Rs 637 crore, while net profits grew by 112.2 per cent to Rs 132.9 crore.

In the recent December quarter, Educomp's revenues grew by 37.2 per cent over the same period last year to Rs 260.1 crore, while net profits grew by over 92 per cent (including other income of Rs 15.8 crore) to Rs 61.2 crore.

Smart learning solutions, a business that generates over 75 per cent of revenues for Educomp, comprise two segments — smart class and ICT solutions. Smart class segment, which enjoys over 60 per cent operating (EBIT) margin, has increased contribution over the last couple of years.

This segment involves delivering interactive and innovative multi-media content based on curriculum of various boards and across classes in schools. About 2,574 schools and around 2.9 million students currently use the services of Educomp's smart class offering.

Contracts are usually signed with schools for a five-year period, which creates a sustainable revenue stream for the company. There is an ever increasing focus across private schools on developing newer and interactive pedagogical tools to deliver content to students; this is further reinforced by the fact that Educomp is increasingly getting orders from tier-II and -III cities.

In the three quarters of FY10, this segment alone has grown by over 75 per cent for the company. The ICT solutions division, which caters to computerisation efforts of state government schools, has also been getting robust order inflows.

This is a low margin business as it is hardware-intensive. There is also competition from players such as NIIT and Everonn Education. But it has still managed to win orders from state governments, the most recent ones being from Andhra Pradesh, Tripura and Haryana.

The other divisions such as online learning, catering to overseas students, joint ventures with overseas print and educational institutions are all generating revenues, but are still in the capex phase and would turn profitable only over the next two-three years.

via BL