FAIRWEALTH SECURITIES PVT. LTD.

January 22, 2009

India
Educomp Solutions (EDSO.BO)
Computers- Education CMP: Rs.1715 Target: Rs.2750
Target price of Rs 2,750 based on 35x FY09E EPS — we are initiating coverage on
Educomp with Buy. Share prices of Educomp have corrected by 40% from its one
month high of 2775. A lot of this fall has been due to various market rumors regarding
Reuters EDSO.BO
allegations about company’s high debtor days, high working capital, profitability,
Bloomberg EDSL IB company’s assets and promoters pledging their shares among others.
BSE Code 532696
Company has given detailed clarifications on these allegations and same can be
found on the company website.
Priced on January 22, 2009
EDUCOMP.BO @ Rs 1715 We consider that markets have oversold this stock and recommend buy at every dip.

Currently the share is trading at 22x FY09E EPS.

12M hi/lo Rs 4799/1,375 From the operations point Educomp has continued to deliver strong earnings and
exponential growth, 50% CAGR in both revenues and Net income, is estimated for
next four years.
12M price target Rs 2750
±% potential +80%
Industry Potential
Target set on 22 Jan 09 India has emerged as one of the world’s largest consumer of education services with
Shares in issue 17.3m a target population of more than 445 millions, with public and private spending on
Free float (est.) 45.0% educational services in India aggregating approximately $100 billion per annum.
Spending on Education in private sector has grown by CAGR of 10.4% since 1994,
Beta 1.4
double the 5.11% CAGR on total spending.
Government spending on education has reached 4% of GDP and is expected to rise
Market cap, INR Millions: 26532.7 further as India focuses on reducing its literacy rates.

Major shareholders
Promoters 55.0%
Company description
Educomp Solutions Ltd, formerly Educomp Datamatics Limited, was incorporated in
FIIs 35.6% 1994 and is based in New Delhi, India. It is India's largest market-listed educational
service provider mainly focused on the K-12 space.
Educomp group serves over 19,000 schools and 9.4 million learners and educators
Sovid Gupta across the world. Company operates private schools across various cities and also
Equity Analyst: Fairwealth Securities Pvt. ltd
partners with various state governments.

It has 27 offices worldwide. In addition, the Company operates through its various
subsidiaries including authorGEN, Threebrix eServices, Learning.com, USA,
AsknLearn Pte Ltd, Singapore and via its associates such as Savvica in Canada.

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 Educomp Solutions - Buy

The company has three primary business segments :

Meanwhile, the use of smartclass has grown
from 90 private schools in 2006 to 1,200 now, 1. Licensing of tools that help existing education system to
Move to a higher standard of delivery.
and Educomp expects it to touch 1,800 by 2. Direct Intervention – running schools, pre-schools and tutoring classes,
March online
delivery etc.
3. Post K-12 initiatives such as vocational and professional education.

Educomp's main business is developing and licensing digital lessons, which are
uploaded onto servers and provided to schools. It also trains teachers (75,000 in the
last quarter), provides vocational training to students with courses such as accounting
and marketing, and offers online and in-person tutoring.

It runs eight K-12 schools. It has joined up in January with New Delhi real estate
developer Ansal Properties & Infrastructure to start 25 private schools in new
townships. It aims to start 150 schools over the next three years.
Smartclass provides 49% of revenues for
Educomp with 60% EBITDA margins Educomp's big money-maker is Smartclass, a range of interactive digital lessons with
animation and graphics that's marketed mainly to private schools as they have deeper
pockets than public schools. The multimedia lessons-- 16,000 so far--are based on
the different curricula in place across the country and use 12 of the country's
languages.
Figure 1:
Segmental Revenues Product/ Description Segment
FY06 FY07 FY08 Service
Smart Class 38% 44% 49% Smart- Highly animated Instructor-led content for schools
ICT Solutions 30% 28% 35% TM Private Schools
Class delivered inside the classroom as a "teachers aid"
Professional
Government
Development 24% 17% 10% Educational Infrastructure and digital content to
ICT Solutions Schools
Retail and bridge the digital divide in government Schools
Consulting 8.00% 11% 6% Private and
Professional Technology aided learning Pedagogy & Cognitive
K-12 0% 0% 0% Government
Development learning workshops for teachers
Source: Company Reports Schools
eTutoring Grades 6 to 12
TM Online portal for students of Mathematics (NCERT Books)
Mathguru
Revenue share from Smart Class business has
been continuously increasing and is likely to Retail online eTutoring on all curricular subjects US/ India /
Learning Hour
stay in between 47%-50% range. and test prep Middle East
Roots to Neighborhood schools for Kindergarten-aged Kindergarten -
TM
Wings children aged children

Millennium
TM Brick and Mortar Kindergarten to Grade 12 Schools K-12
Schools

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 Educomp Solutions - Buy

Key Developments during 1HFY2009

Smart Class: This is the multimedia education business of Educomp catering to

Smart Class: Company has covered 27 cities
with total plan of 80 cities. EBIT margins for
this business more than 50%
Private schools. Company charges upwards of 3000 Rs. Per student per month from
each school. Company keeps infrastructure (multimedia content) on its books and
transfers the content at the end of the contract. Company added 231 schools in Smart
Class in 2Q09 taking cumulative number of schools to 334 in 1H09 versus 172 last
year. Cumulative number of students under smart class has increased to 1.43 million.
Company doesn’t have any major competitors and we expect strong revenue growth
of 80%+ for next three years and margins to stay above 55% for this business. This
segment will continue to remain main driver of business for the Company.

ICT Solutions: This is computer literacy initiative funded by Union/ State

Governments. Company manages and installs labs in public schools and bills to
government.
Highlight of this business is long term contracts (5-year). However, it results to high
debtor days of around 180 days.
Margins for ICT improved to 35% from 27%
Company added 1626 schools in 2Q09 at contract value of 110 crores taking
earlier, however such margins are cumulative number of schools to 8900+. Margins for ICT have improved to 35% from
unsustainable in the long run, and are likely to 27% earlier.
settle around 20%.
Number of states covered till now is 14. This business is likely to face major
competition from several regional and national players forcing the margins down.
This segment will remain a low growth segment for the business with revenues
growing at more than 70% for period FY09-FY11 but margins are expected to decline
further to around 20% post FY11.
Higher revenue share of this business would hinder company in reducing its working
capital requirements down to below 120 days. When company attains steady state
(post FY15) this business will constitute less than 15% EBITDA share of the
company.

Professional Development: Company trained 81000+ teachers in 2Q09 which is

less than 7% of its total 1.2 million teachers. Revenues for the segment for 2Q09
increased by 4.3% (YoY) while number of teachers trained increased 51% for the
quarter (YoY). Margins for this business shall continue to remain high (abover65%).
Revenue growth for this business will remain around 20-25%.

Educomp achieved growth rate of 700% on its
education portal Mathguru.com on paying
customers.
Margins for retail business improved from 41%
to 71%.
Retail and Consulting: Company is putting a lot of stress on its retail business
growth by focusing on both organic and inorganic channels. Company’s online
education portal MathGuru has witnessed ~700% growth rate. Company is growing
its Preschool portfolio (Root to Wings) by expanding through franchisee. Company
bought 50% stake in Euro kids taking preschool number under its umbrella to 500.
This business will continue to see lot of inorganic growth as company explores new
ways to enter retail markets.
Company might find some difficulty in raising money under tight credit conditions.
However, this business will help company by lowering its debtor days, providing
brand value and goodwill to the company.

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 Educomp Solutions - Buy

Received financial closure for Rs 725cr of debt
for its K-12 business.
Debtor days for company have come down
from 179 days to 145 days.
K-12 Initiatives: Under this company will operate and manage entire schools and
provide access to all its intellectual property. Total of 11 schools with 14000+ students
have been established in 9 cities. Company targets 24 schools under K-12 initiatives
this year. Company has already received financial closure for Rs 725 cr of debt
including - Non-Convertible Debentures (Rs 100cr), out of which 250 crore has
already been utilized.
Company has planned 140 million of capital expenditure per school and expects EBIT
of Rs. 45 million (at 60% margins) per year per school. This segment will see around
100% growth rate over FY09-FY12 and margins will remain above 60%. In steady
state (FY14) this business will constitute more than 15% of the revenues and with
negative debtor days of the company.
Financials

Good 2QFY09 results: %age share of revenue among various segments has
changed significantly.
Figure;

Q2 FY08 Q2 FY09

Figure

Source: Company Reports nd

2 quarter saw huge increase in contribution from SmartClass and Retail line of
business, going forward SmartClass, will continue to remain main driver for growth for
next three financial years.

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 Educomp Solutions - Buy

Figure :

Figure: EBIT Margins Ratios:

Profitability Ratios % Mar-08 Mar-07 Mar-06
Operating Profit Margin 48.2 48.12 50.58
Gross Profit Margin 35.87 39.31 40.44
Net Profit Margin 25.51 25.54 25.89
Turnover Ratios
Inventory Turnover Ratio 185.88 32.75 30.1
Debtor Turnover Ratio 2.29 2.16 2.08
Fixed Asset Turnover
Ratio 1.27 1.67 2.76
Solvency Ratio
Current Ratio 5.41 4.5 5.33
Debt Equity Ratio 1.28 1.09 0 .11
Interest Covering Ratio 21.69 25.81 37.13
Professional Development segment margins
remain high and will continue to remain highest Valuation Ratio
however revenue contribution from this
P/E adjusted 35 110 na
business will remain small.
Company closed 2Q FY09 with 60% margins P/BV 18 24 31
without considering forex losses. Source: Company Reports, Fairwealth Research

Analysis of Ratios:

Company’s Debt Equity Ratio has increased significantly from 0.11 in 2006 to 1.27 in 2008. Company has already made financial closure of
secured debt for capital expenditure requirement for K-12 business up to the year 2011. Company’ Interest coverage ratio remains comfortable
as most of the debt of the company is in the form of FCCB maturing in 2012. Company had high inventory turnover ratio as company has built
up inventory of installing computers for its SmartClass and ICT business.

Future Outlook Future Outlook

Year FY09E FY10E FY11E
Company is poised to continue perform Revenues 5722 11100 16400
exceeding well with more than 70% revenue Other Income 148 60 60
growth for period FY09-FY11 and margins
staying above 45%.
Oper. Expenses 2977 6125 9050
EBITDA(Mn) 2745 5235 7510
Net Profits are expected to rise 5 fold from EBITDA(%) 48% 47% 46%
Rs.700 million in 2008 to 3566 million in Depreciation 718 1154 1614
FY11giving a CAGR of 70%.
EBIT 2027 4081 5896
Finance Charges 217 498 634
PBT 1958 3644 5322
Company’s P/E to growth ratio is highly
discounted for FY10 and FY11, as company is Tax 646 1202 1756
expected to continue its growth trajectory of Net 1312 2441 3566
30% for several more years. EPS 77 140 205
P/E@1715 22 12.25 8.4
Source: Fairwealth Securities Analyst Estimates

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 Educomp Solutions - Buy

Figure : Revenue & EBIDTA mar. Estimates

Growth Outlook
Company is likely to post very high growth rate for a long time. Revenue figures are
expected to show a CAGR of 70% for the period 2009-2011, 35% for the period 2011-
2014 and 20% for the period 2014-2016.

We forecast strong 65% CAGR in Net Profits over FY09-FY11E and see limited risks
to estimates given.

EBITDA margins are likely to improve as revenue share of high margin retail and
Source: Fairwealth Securities Analyst Estimates online business is likely to improve considerably. We expect ROE to double and settle
in the range between 30-35%.

Company has forward P/E of 7.5 for FY-2011 on constant prices while growth rate is
Segmental Revenues expected to be upwards of 30% for year FY11-FY14. Company will continue to shine
FY09E FY10E FY11E even in downturn as spending on Education and price levels are highly resilient to
economic downturns.
Smart Class 45% 48% 45%
ICT Solutions 26% 29% 24% Another positive for this company is its short payback period on its investment as
Professional significant business comes from long term contracts of 5 years.
Development 7% 5% 6%
Retail and Company understands its strengths and challenges ahead to deal with these
Consulting 18% 12% 16% challenges. Company has recognized four areas of opportunities/ strengths
K-12 4% 6% 9% as under:
Source: Fairwealth Securities Analyst Estimates

Revenues will start coming for K-12 business
from 2009 and should contribute more than 10
percent in 3 years. All other segments might
see dilution in share to adjust for K-12
business.
On segmental basis ICT business will see
margin dilution, while new business K-12 and
Retail will deliver high margins and growth.
1. Large market opportunity(scale)
2. Create barriers of entry for other players through strong IP and
product differentiation.
3. High operating margins (50%+)
4. Experience and ability to execute

Risks:
• Due to high margins and nature of business, company might face competition from new entrants.
• Company is in high growth phase; PEG (P/E to Growth) ratio will be an important consideration for the stock. Any disappointment
on Earnings Growth numbers will see a downward price movement.
• Free cash flows to remain negative for a while; if credit market tightens or company fails to deliver on expectation, raising fresh
funds will be a problem.
• If government reduces spending on education, earnings and growth potential are likely to taper down.
• Company faces huge execution risks in its Edu-Infra business. Also company has been very aggressive in its growth plans, both
Organic and Inorganic, and it would be very difficult to manage such growth plans under unforeseen circumstances (E.g.-Key
Man Risk, Death of MD/Promoter)

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 Educomp Solutions - Buy

Appendix1: Previous year Financials Statements(Balance Sheet, Income Statement and Cash Flow
Statement)
Figure
Balance sheet(All figures in millions)
Shareholders’ funds FY06 FY07 FY08
Share capital 160 160 172
Figure3: One year stock price movement: Reserves and surplus 736 988 2629
Net worth 895 1148 2884
Minority interests 2 128 194
Loan funds
Secured loans 109 183 622
Unsecured Loans 1071 3150
Deffered Tax Liab 0 60 210
Total source of funds 1021 2590 7061
Fixed assets
Gross block 375 949 2890
Net Block 185 723 2342
Capital work in progress 67 108 372
Price fall Total 252 831 2714
Investments 21 102 36
1m 30%
Goodwill 1 138 282
3m 10% Current assets, loans and advances
1y 60% Inventories 17 33 18
Sundry Debtors 260 496 1157
Price fall in last one month has been due to Cash 609 1106 2912
various rumors in the markets, company has Loans and Advances 49 110 490
responded immediately by giving just Total Current assets, loans and advances 935 1761 4639
explanations.
Less current liabilities and provisions 187 242 610
Net current assets 748 1519 4029
Total Applications 1021 2590 7061

Income Statement
Company Debtor days are high, as both Rs million FY06 FY07 FY08
ICT and Smart class segment revenue Sales 555 1065 2620
collection starts post 90 days. It is around Other Income 14 59 150
120 days for Smart Class and more than Total 569 1124 2770
150 days for ICT. These will take time to Cost of goods sold 95 304 798
reduce as K-12 and retail business are Personnel Expenses 91 105 338
just beginning to pick up. Post FY15, we Admin & Other Expenses 100 155 238
expect debtor days to come to around 100 Total Expenditure 286 564 1374
days from 150 days presently.
EBITDA 269 501 1246
Depreciation 57 93 322
EBIT 212 408 924
Finance Charges 6 14 42
PBT 220 453 1032
Total Taxes 79 170 330
Profit after tax and before prior period items 141 283 702
Balance bought from previous year 115.2 229 455
Amount Available for App 254 512 1157
Balance Carried to Reserves 220 455 1035
EPS 11 18 41

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 Educomp Solutions - Buy

Cash Flow Statement(All figures in millions)

Key Cash Flow Statement Data FY06 FY07 FY08
Net Income (Reported) 141 284 711
Company has negative free cash flows Depreciation & Amortization 56 96 331
which are likely to turn positive by Change in Working Capital -60 (225) (730)
FY13. Deferred Taxation Charge NA NA
Other Adjustments, Net 0 10 193
Cash Flow from Operations 137 165 505
Purchase of Fixed Assets -162 (675) (2,224)
Purchase of investments -50 -389 -16
Net Cash used in Investing activities -212 -719 -2102
Shares Issue / (Repurchase) 557 0 0
Proceeds/ repayment of long term
borrowing 53 71 334
FCCB Raised 1094 3109
Temporary Overdraft facility against fixed
deposits 75 3 106
Net cash from financing activities 615 1088 3393
Source: Company reports

Why Buy: Valuations at 22x FY09E, 12.25x FY2010E and 8.5x FY2011E, on the lower side look cheap. More over company is
expected to post CAGR of 50%+ in revenues for next four years. EBITDA margins for 2QFY09 excluding extraordinary forex losses
were around 60%. Earnings have been forecasted keeping EBITDA on the lower side at 45-50%.Higher EBITDA will lead to further
revision in Earnings Estimate. Continue recessionary conditions will make this stock more attractive relatively as Education segment
remains recession proof.

Downside Risks:
1. Short Term Market sentiments (High beta of 1.4)
2. Lower Earnings than market expectations
3. Execution/Regulatory/Key Man Risks
4. Tight credit conditions will pose difficulty for company to raise more cash at cheaper interest rates.

Disclaimer:

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While
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the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information
updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory
Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,
Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale
Thereof while this report is in circulation.

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