Education Industry

PRIME BROKING
Indian Education Services: Largely priced in...

August 26, 2008
Analyst: Soumitra Chatterjee

Director Research: Sonam Udasi
Research: 91-22-24981515
Dealing: 91-22-24982525
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TABLE OF CONTENTS
Industry Section
• Evolution of education in India ............................................................................... 5
• Private Initiatives and constitutional structure .................................................. 6
• Market structure and size........................................................................................ 7
• Market segmentation ................................................................................................. 8
• Schools ........................................................................................................................... 9
• Higher education ....................................................................................................... 11
• Vocational training ..................................................................................................... 14
• Technology in education.......................................................................................... 15
• Present Situation: Why the sector is lagging .................................................... 17
• Macro indicators of Indian Education ................................................................. 19
• What could spur up the sector ........................................................................... 20
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TABLE OF CONTENTS
Company Section
• Global comparative valuations .............................................................................. 22
• Sector valuation snapshot ...................................................................................... 23
• Educomp Solutions .................................................................................................... 24
• Everonn Systems ....................................................................................................... 40
• NIIT ............................................................................................................................... 55
• Core Projects and Technologies ........................................................................... 71
• Greycells Entertainment.......................................................................................... 86
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Industry Section
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The evolution of education in India

The history and structure of education system in India
Upto 17th century The first millennium (& few centuries preceding it) saw the flourishing
has not been stable. With India having a history of
of higher education at Nalanda, Takshila, Ujjain, & Vikramshila
invasion during the feudal period, the system of
Universities. Takshila specialized in medicine, while Ujjain specialised
imparting education also kept changing.
in astronomy. Nalanda was the biggest centre and it handled all
Indian educational system has moulded itself on the branches of knowledge.
pattern of British education system. Post Independence, Prior to British rule Indigenous education was widespread with a school for every temple,
all government’s greatly emphasised the importance of mosque or village in most regions of the country.
spreading education to all corners of the country. The In British rule The current system of education was introduced & funded by the
central and state governments in accordance with British during this time, following recommendations by Macaulay.
constitutional directives, have tried their best to Traditional structures were not recognized by the British govt. &
implement them. have been on the decline since.
Post Independence till Education became the responsibility of the states. The Central
Keeping all these developments in mind, we can safely
1976 Government's only obligation was to co-ordinate in technical and
assume that, although Indian Education System has
higher education and specify standards.
noticeable blemishes, things have definitely improved in
From 1976 till 2005 Education was made a joint responsibility of the State and the Centre.
the last decade. Indian education policy makers have tried
National Policy on Education (NPE) 198, stated that free and
to prepare a well defined curriculum, which enables
compulsory education should be provided for all children up to 14
Indian students maintain their position in the top quartile
years of age before the commencement of 21st century. Government
on international stage.
made a commitment that by 2000, 6% of GDP will be spent on
Currently, with hundreds of universities and education, out of which half would be spent on primary education.
thousands of colleges affiliated to them, India has From 2005 Government proposes to introduce a grade based system to move
positioned itself comfortably as a country that away from marks based system. This was done to ease competitive
provides quality higher education to its people in pressure on students.
specific and to the world in general. Source: Prime Broking
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Private Initiatives and GATS

Education in India was not open for private participation. However, off late, the government has given permission to private bodies to
run schools and colleges for profit. Now the WTO (World Trade Organisation) has widened its sphere of control by introducing
GATS (General Agreement on Trade in Services). GATS is a legally enforceable agreement aimed at deregulating international markets
in services, including education. This covers not only services in production sectors (banking, transportation) but also essential
social services like healthcare and education.
Increased demand for education has led to major changes in supply. Higher education has now entered the market fray. Universities
that had a virtual monopoly for decades and even centuries are now encountering a range of competitors - virtual consortia, global
branches of universities, for-profit institutions - that are vying for revenues and profits.
The Constitutional Structure

Till late 70s, school education was on the State List of the constitution, which meant that states had the final say in their respective
education systems. However, in 1976, education was transferred to the Concurrent list and currently the Centre makes the policies
on education while the States just follow it.
Constitutional provisions
• Article 15 (4) gives the right to the States to make special provision for advancement of socially and educationally backward
class and for SCs and STs.
• Article 21 (A) provides that the State shall provide free and compulsory education to all children in the age group of 6 to 14
years.
• Article 51A (k) provides that it is the duty of the parent or guardian of all children to give opportunities for education between
the age of six and fourteen.
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Market Structure and Size
India is one of the largest markets for education in the world in terms of number of students. Currently, there are over 1 MM schools
in India providing education to over 200 MM students. The number of teachers in India currently stands at 5.8 MM (Source: Everonn
RHP).
(A) Schools
Managed by (%)
Type of Institutions Number (MM) Govt. Local body Private (Aided) Private (Un-Aided)
Primary 0.8 43.3 46.9 2.6 7.2
Upper Primary 0.3 43.0 29.2 6.4 21.4
Sec./Sr.Sec. 0.2 33.1 7.9 29.4 29.6
Source: http://www.education.nic.in/stats.asp
(B) Higher education institutes and others (B) Higher education institutes and others
Type of Institutions Number Type of Institutions Number (MM)
(I) Institutions running Diploma and Certificate courses Primary 2.2
Polytechnics 1,171 Upper Primary 1.6
Teacher training institutions 1,465 High Schools 1.1
Tech., Indus., Arts & Crafts 5,114 Hr./Sr. Secondary 1.0
Total (I) 7,750 Total 5.8
(II) Universities and colleges Source: http://www.education.nic.in/stats.asp
Universities 543
Colleges 16,009
Total (II) 16,552
Source: http://www.education.nic.in/stats.asp
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Indian Education System - Segmentation

The Indian Education System can be broadly divided into three segments; namely Schools, which include pre schools and the K12
segment, Professional colleges imparting education in the field of medicine, engineering and management, and lastly, Vocational
training institutes, which includes IT training and teacher training institutes.
Source: Prime Broking
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Schools
Pre-Schools are places where formal education is not imparted, but children are taught basic activities which, help them get independent
faster. While pre-school has been an old concept in the west, it is catching up in India, mainly because of working parents.
Currently, there are no listed players in this segment in India. The largest pre-school player is KidZee, part of Essel Group (Zee
Group). It has over 700 centres across 265 cities in India and abroad. Apart from KidZee, the pre-school market is very fragmented
and going by the way the concept is catching up in India, we expect some consolidation in this space mainly by listed players like
Educomp, which has already entered the K12 segment and has indicated intentions to cater to the pre-school segment. The big
advantage in the pre-school segment is that it is not capital intensive and can generate positive cash flows as early as second year of
operations currently.
K12 Segment: In the K12 segment, formal education is imparted to children. It starts with lower kinder garten (LKG) till XII
standard, following which, students go for professional education. Currently, most schools are run by non-profit charitable institutions.
In the past few years, urban areas, in particular, have witnessed rapid growth in number of private unaided schools. This was mainly
due to resource crunch in public schools, which suffer from high rates of teacher absenteeism. Private schools are divided into two
types namely; recognised schools and unrecognised schools. Some famous schools include Delhi Public School (DPS), Dayanand Anglo
Vedic (DAV) and Ramakrishna Mission Schools. Setting up of schools involves huge initial investment to be made. The break even
period is about 4-5 years per school.
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Schools
Private Tutoring for schools: Private tutoring has become a flourishing business in India with an estimated market size of almost
US$2 Bn. While the sector is very fragmented, with classes being run even in residential premises, larger players like Chate Coaching
Classes, Mahesh Tutorials etc., who have a wide network, are benefiting from this growing market. Initial investment for setting up the
infrastructure is high but break even period is about 2 to 3 years, and generates good cash flows.
Pre Schools in India Status Number of schools
KidZee It’s a part of Zee Group 700
Shemrock Agencies Private Limited 90
Apple Kids Private Limited 60
SunShine PreSchools Private Limited 9
Euro Kids, Tree House etc...
K12 Schools in India Status Number of schools
Delhi Public School (DPS) Managed as trust NA
Dayanand Anglo Vedic (DAV) Managed as trust 700
Ramkrishna Mission Managed as trust NA
Maharshi Vidya Mandir Managed as trust 143
Vidya Bharti Schools * Managed as trust 28,925
VHP Schools Managed as trust 130
Amity University Private Limited 7
Private Tutoring Company Number of classes

Chate Coaching Classes Private Limited 89
Mahesh Tutorials Private Limited NA
Aggarwal Classes Private Limited NA
* Includes formal and informal schools
Source: Data sourced from website of respective institutions. Actual number may differ.
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Higher Education
The growth of higher education in India has been commendable. However, on the flip side, India's spending on higher education (as
% of GDP) has been among the lowest in the world. In 1951, India's spending on higher education was 0.2% of the GDP, which
increased to 1% in 1980s. But the share in higher education dropped considerably in mid-90s to about 0.4% and since then, the
spending on higher education has been languishing in this range.
Currently, both public and private institutions operate simultaneously. But as far as universities are concerned, only central and
state government can open a new university and that too by legislation in parliament and state. Debate over private universities
has continued for more than a decade. In 1995, the Private Universities (Establishment and Regulation) bill was introduced in the
Parliament. While a central legislation for private universities is still pending for want of a consensus, several state governments
have established private universities through state legislation. Today, there are 10 private universities in Indian higher education.
The resources and spending of government on higher education is not enough to tackle the rapid growth in the enrollment in
higher education, which India is currently witnessing. Also, the management and supervision of the government funded higher
education institutes is fairly dismal.
To improve quality of imparting higher education and to attract foreign students, the government may have to allow private institutes
to operate in the country in a free manner. While free entry and exit of foreign institutes into India may take time due to political
issues, private sector initiatives in higher education have started making their presence felt.
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Higher Education
The distinction between a private and public institutions in Indian higher education is ambiguous. If the government promotes and
sets up an institution, it is referred to as a 'public institution'. On the other hand, an institution promoted and set up by a private
party is referred to as a 'private institution'. However, some private institutions are supported by government and are thus highly
regulated. Although they come under the category of private institutions, these are in fact public institutions. Hence, private institutions
actually mean only institutions that are set up by private promoters and do not receive government funding.
Currently in India, there are over 700 private colleges and 10 private universities imparting education in the field of engineering,
medical and management studies. To ease the pressure of central legislation over private universities, the government has started
granting deemed university status to private institutions. The transition from private college to private deemed university
is a new and growing trend.
The economics of imparting higher education are such that, barring a few courses in arts and commerce, imparting quality education
in science, technology, engineering, medicine etc. requires huge investments in infrastructure, all of which cannot be recovered
through student fees, without making higher education inaccessible to a large section of students. Unlike many better-known
private educational institutions in western countries that operate in the charity mode with tuition waivers and fellowships, most
private colleges and universities in India are pursuing a profit motive. This is the basic reason for charging huge tuition fees, apart
from forced donations, capitation fees and other charges. Despite huge public discontent, media interventions and many court
cases, the governments’ (both centre and state) have not been able to regulate the fee structure and donations in these institutions.
Even the courts have only played with the terms such as payment seats, management quotas etc., without addressing the basic issue
of fee structure. On the other side, Indian fee structure continues to be lower than most of the developed world.
Private Tutoring for higher education
The private tutors in higher education include Brilliant Tutorials, IMS, TIME, Career Launcher etc., which provide coaching facilities in
particular stream of higher education. Brilliant Tutorials is into engineering and medical segment coaching, while IMS provides coaching
for MBA aspirants.
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Professional Colleges
Private Colleges Company Number of campus
Amity University Private Limited 38
IIPM Private Limited 9
IBS (ICFAI) Private Limited 19
Manipal University Private Limited 20
BITS Pilani Private Limited 3
Vedanta University Private Limited Yet to be operational
Private Tutoring Company Number of centres

Brilliant Tutorials Private Limited 10
TIME Private Limited 150
IMS Private Limited 80
Career Launcher Public Limited 130
Source: Data sourced from website of respective institutions. Actual number may differ.
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Vocational Training
Vocational Courses
This is the third segment in education services. Vocation is an
IT Training Company Number of centres
occupational skill on which a person is specifically trained.
NIIT Public Limited 500
Currently, in India there are many privately owned institutes that
Aptech Public Limited 400
are providing vocational training. NIIT's and Aptech's core IT training
Jetking Public Limited 100
business falls under vocation. Frankfinn Institute of Airhostess Training,
which provides training to airhostesses, also comes within the
Teacher Training Company No of teachers trained
ambit of vocational training institutes.
Educomp Public Limited 80,750
Teacher Training Source: Company
Teacher training also comes within the aspect of vocational training. Educomp has a separate division for teacher training. In FY08,
Educomp trained 81,000 teachers. IT Training, by its very nature comes under vocation, but for the purpose of this report, we have
classified it separately.
IT Training
The IT sector currently employes around 1.7 MM people and has grown at a CAGR of 26.6% from FY04 to FY07 (Source: NASSCOM).
Thus, the requirement for skilled people in the sector continues to grow at a healthy rate, which will definitely benefit companies
like NIIT and Aptech. The Global IT training industry has grown a little over 3% in CY07 and stood at US$24 Bn. More importantly,
the IT industry is facing a shortage of employable professionals and going forward, this problem is likely to worsen. So there is ample
scope for growth of core IT training companies like NIIT and Aptech.
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Technology in Education
E learning and online tutoring

India's education policy has largely missed out on taking Technology in Education
advantage of technological revolution in education. The E-learning and Online Tutoring Company Number of subscribers
general notion is that e-learning is expensive and entails Educomp Public Limited 46,342
huge investment as it is inconvenient to use. But the reality Extramarks Private Limited NA
is that E-learning is not expensive and its biggest advantage Learning Hour Public Limited 50,000
is that a student can opt for employment while still Source: Company
pursuing his studies.
Thus, as far as India is concerned, online education is the need of the hour, but at the same time, this is heavily dependent on reliable
and high-speed Internet coverage. Also, it is essential that different parts of the country be connected with broadband Internet.
Current players include Educomp (through mathguru, learning hour and learning.com), Extramarks and Tutor Vista.
ICT in public schools
India recognized the importance of Information & Communication Technology (ICT) in education as early as 1984-85 when the
Computer Literacy And Studies in Schools (CLASS) Project was initially introduced. A total of 12,000 computers were distributed to
secondary and senior secondary schools through State Governments. The CLASS project was subsequently adopted as a centre
sponsored scheme during the 7th plan. During the 8th plan the scheme was widened to provide financial grants to institutions, which
were earlier given computers and also to cover new aided schools. A total of about 2600 schools were covered during the 8th plan.
The CLASS program was renamed in FY02 and was subsequently reintroduced as 'ICT@School'.
The scheme has been a huge success in the last couple of years and every year different state governments are rolling out tenders for
100s of public schools within their state. This has resulted in rapid growth in companies like Educomp, Everonn and NIIT.
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Stages of IT integration in schools
Source: Educomp Website
Providing digital content in private schools

Unlike the government schools, for private schools, companies like Educomp, NIIT provide educational content in digital format
through its software packages. Educomp has its Smart_Class offering for private schools while NIIT has e-Guru. Everonn has recently
started i-school, which is in line with Educomp’s Smart_Class for private schools. These companies are witnessing increased adoption
of these products in the schools and more private schools will be going the digital way.
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Present Situation: Why the sector is lagging?

Highly regulated sector
• Indian education sector is regulated by two agencies namely the University Grants Commission (UGC) through the UGC Act
and the All India Council for Technical Education (AICTE) through the AICTE Act.
• The UGC controls the establishment of private universities in the country while the AICTE has the sole authority to plan and
maintain technical education in the country. Obtaining approval for setting up of a higher education institution is a lengthy and
cumbersome process and the regulation and fees fixation are also highly ambiguous. Also, the AICTE acts as a 'controller'
where it should have been acting as an 'enabler'.
• Secondly, since the sector is controlled by the government, it is marred by the poor governance and high absenteeism of
teachers in rural as well as urban areas. Teachers are paid full wages and all the perquisites and their salaries are higher than
that of teachers in unaided schools leading to poor quality of schooling.
• Another reason for slow pace of growth in this sector can be attributed to delay in allowing FDI in education. Every year the
outflow of funds on higher education from Indian to foreign countries amount to US$4 Bn and if foreign universities are
allowed to operate here, then this amount can be saved. However, the government is gradually allowing more private institutions
after having relied, for decades, on publicly funded institutions and the IITs and IIMs, for higher education. This was mainly because
of lack of ability of the government to add capacity in the publicly funded institutions.
• Also, there is an effort on the part of the government to block the entry of foreign universities into India. The case of CFA
Institute (Formerly AIMR) is a classic example of bureaucracy in education in India. It is, however, interesting to note that
countries like Singapore, Dubai and China have allowed foreign universities to set up operations in their countries so that
students can have easy access to degrees from well recognised universities. However, in India, there is a statutory requirement of
partnership with Indian institutions, which restricts the autonomy of the foreign institutions. The worst affected due to these are
the economically weaker students, who cannot afford to go abroad and acquire foreign degrees.
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Present Situation: Why the sector is lagging?

Lower government spending on education
• On the recommendation of the education commission (Kothari
Commission led by Dr. Vijay Kothari) in 1966, the government
in 1968 fixed a target of investing 6% of the GDP (Gross
Domestic Product) in education by 1986 but this target was
never achieved. Current spending on education in India is not
more than 3.5% of GDP and it is worthwhile to note that it
has never risen beyond 4.3% of the GDP. Secondly, the spending
per student has come down over the years and the share of
education in five-year plan has fallen considerably.
• When compared with other countries, USA spends 12% on
education, France 7%, Indonesia's 8%, Philippines spends 17%;
Malaysia spends 20% and Thailand 27%. Also, of the total
amount spent on education, the centre contributes to only
about 15% and the balance 85% is contributed by the state
governments.
• In terms of spending on higher education, the situation is grimmer. India currently spends about 0.4% of GDP on higher education
and this is the prime cause of outflow of students from the country. Developed countries like US spend 1.5% of GDP on
higher education, whereas UK spends about 1% on higher education. Also, India has not been able to attract foreign students.
As per available data, India attracts about 20,000 foreign students for education every year, whereas China attracts more than 1.5
lacs students annually.
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Macro Indicators of Indian Education
Gross enrollment ratio Drop out rates
(%) All SC ST (%) All SC ST

Class 1-5 107.8 115.3 121.9 Upto Class 5 29 34 42
Class 6-8 69.9 70.2 67.0 Upto Class 8 51 57 66
Class 9-12 39.9 34.7 27.7 Upto Class 10 62 71 79
Higher Education 10.0 6.7 4.9 Source: Ministry of Human Resource Development
Source: Ministry of Human Resource Development
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What could spur up the sector?
De-regulations
FDI in Education including, higher education, is allowed under the automatic route, without any sectoral cap, since 2000. We believe
that if FDI is allowed in education, it will arrest the outflow of Indian students to foreign countries for higher studies. Also, if
foreign educational institutions are allowed to operate freely in India then it will compete with the local institutions enabling them
to become internationally competitive. This competition would force the local institutions to change their curricula and respond to
the immediate needs of the students. And by this, the degrees offered by these institutions will become internationally comparable
and acceptable. Further, the FDI in education would create new institutions and infrastructure and generate employment.
E - Learning/Online Tutoring
United States is the leader in e-education. Private companies like Kaplan, BPP and Apollo Group also have their e-learning ventures.
Kaplan is a subsidiary of Washington Post. BPP Professional Education has tied up with British Universities so that students enrolled into
their professional courses can earn degrees from the Boston Post Graduate University. University of Phoenix is the first University to
offer a full time on-line degree and is owned by the Apollo Group.
India's education policy has largely missed out on taking advantage of technological revolution in education. On the positive side,
on-line tutoring is catching up in India. Tutor - Vista, a company set up in Bangalore provides Indian teachers in English, Maths, Physics,
Chemistry and Biology for 3rd to 12th standard students in UK and the US charging less than half the local rates there. The
success of mathguru, extramarks, learning hour will ensure that in the coming year's e-learning and online tutor will change the mode
of teaching in India.
We believe that focus on education is only going to intensify, opening huge opportunities for companies that operate in this space.
The Indian education sector is at the crossroads. This report analyses prospects of four key players in the sector; Educomp Solutions,
Everron Systems, NIIT and Core Projects.
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Company Section
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Global Comparative Valuations
EPS P/E P/BV

Company B'berg Code Country Year End Currency CY08E CY09E CY08E CY09E CY08E CY09E
Indian
Educomp EDSL IN India March Rs 61.6 108.9 51.9 29.3 22.0 15.7
Everonn ESIL IN India March Rs 13.2 22.6 39.1 22.8 9.4 3.0
NIIT NIIT IN India March Rs 5.6 7.1 15.5 12.3 3.1 2.7
Aptech APTR IN India December Rs 12.2 14.4 15.4 13.1 4.6 3.5
Core Projects CPTL IN India March Rs 9.2 11.8 31.0 24.2 6.0 4.8
US
Apollo Group APOL US USA August $ 2.8 3.3 21.4 17.8 11.9 8.4
Devry Inc DV US USA June $ 1.8 2.2 29.8 24.2 5.1 4.3
ITT Education Services ESI US USA December $ 4.7 5.2 18.5 16.6 21.4 11.1
Strayer Education STRA US USA December $ 5.6 6.7 38.6 31.9 16.5 13.6
Career Education Corporation CECO US USA December $ 0.8 0.9 21.8 17.9 1.6 1.5
Others
Benesse Corporation 9783 JP Japan March JPY 205.2 220.8 21.8 20.2 2.2 2.1
Mega Study 072870 KS South Korea December KRW 9,263.7 12,348.2 25.6 19.2 7.5 5.6
Raffles Education RLS SP Singapore June Sing$ 0.0 0.1 31.4 21.4 9.8 7.8
Anhanguera Educational AEDU11 BZ Brazil December Rial 0.9 1.2 32.5 23.0 4.2 6.4
ABC Learning Centres ABS AU Australia June Aus$ 0.1 0.2 10.0 4.3 0.2 0.2
Source: Prime Broking/Bloomberg; Valuations as on Aug 25, 2008
*For Indian companies year ending is FY09E and FY10E
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Indian Education Sector Valuation Snapshot

Educomp Everonn NIIT Core Projects Greycells
Operational Performance
Sales CAGR (08-11E) (%) 68.0 56.8 17.5 36.0 139.0
EBITDA CAGR (08-11E) (%) 68.0 56.8 17.9 27.7 138.0
PAT CAGR (08-11E) (%) 68.7 50.3 24.4 25.1 387.0*
EPS CAGR (08-11E) (%) 68.7 50.3 24.4 25.1 387.0*
Ratios (FY11E)
EBITDA Margin (%) 44.2 36.6 10.4 18.2 24.6
PAT Margin (%) 24.9 13.6 8.9 14.7 100.4*
ROE (%) 35.8 39.0 22.7 21.8 48.0*
ROA (%) 12.9 6.9 10.5 11.6 42.5*
Fixed Asset Turnover (x) 1.0 0.7 2.0 2.8 0.8
Valuation Parameters (FY11E)
Price/Earnings (x) 18.8 17.5 9.9 17.5 9.8
Price/Book Value (x) 10.3 2.6 2.3 3.8 4.7
Price/Cash Flow (x) 14.3 14.4 6.3 44.4 -
Price/Sales (x) 4.7 2.4 0.9 2.6 -
Recommendation
CMP (Rs) 3,195 516 87 285 326
Target Price (Rs) 3,709 592 106 222 Not Rated
Target Date Sep-09 Sep-09 Sep-09 Sep-09 -
CAGR Return based on target price (%) 14.5 13.3 36 (20.3) -
Valuation methodology DCF DCF DCF DCF -
Rating HOLD HOLD BUY SELL Not Rated
* Including 26% stake in AAT Limited.
Source: Prime Broking; Valuations as at close of Aug 22, 2008
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Educomp Solutions: Leading from the front CMP:3,195; Target:3,709 HOLD

Bloomberg Code EDSO.BO First Mover Advantage: We believe that Educomp will have a first mover advantage in the
Reuters Code EDSL IN education sector in India. The company has diversified offerings in government, as well as private
BSE Code 532696 schools. In the ICT project, the company currently, has 6,000 government schools. We expect this
NSE Code EDUCOMP figure to grow over 3x to about 20,600 schools by FY11E. Under Smart_Class, the company has
52-week H/L (Rs) 5,650/2,225 over 900 schools, which we foresee growing 4.5x by FY11E.
Monthly H/L (Rs) 3,620/2,840
6 Mth avg vol 59,381 K12 schools - the next big thing: Educomp will start 6 K12 schools in FY09 and has a target
Shares O/s (MM) 19.9 of 100 schools by FY10. We believe that this is a smart move by Educomp to tap the private
M Cap (Rs MM) 63,566 school segment. However, we believe that the 100 target is agressive, considering the huge capex
M Cap (US$ MM) 1,461 requirement in this space, and hence, have factored in only 25 schools by FY11.
EV (Rs MM) 67,339 Based on these initiatives, we foresee Educomp clocking revenue CAGR of 68.0%
Valuation Parameters (FY11E) and PAT CAGR of 68.7% over FY08 to FY11E, underlining the high growth potential
EV/EBITDA (x) 12.9 of this sector. Our DCF value translates to a target price of Rs3,709 thus giving 16.1%
Mcap/EBITDA (x) 10.5 upside over CMP of Rs3,195. At our target price, the stock is trading at a P/E of 60.2x
EV/Sales (x) 5.7 and 34.1x on our estimated EPS of Rs61.6 and Rs108.9 for FY09 and FY10 respectively.
P/E (x) 18.8 We thus, initiate coverage on Educomp with a “HOLD” rating. We believe that
Shareholding Pattern
Educomp with first mover advantage, will grow much faster largely on the back of
diversified offerings in the education sector.
Rs MM Revenue EBITDA EBITDA PAT PAT No. of shares EPS P/E

(%) (%) (MM) (Rs) (x)
FY07 (A) 1,101 506 46.0 285 25.9 19.9 14.3 -
FY08 (A) 2,861 1,266 44.2 706 24.7 19.9 35.5 90.1
FY09 (E) 5,526 2,445 44.2 1,225 22.2 19.9 61.6 51.9
FY10 (E) 9,088 4,021 44.2 2,166 23.8 19.9 108.9 29.3
FY11 (E) 13,575 6,007 44.2 3,386 24.9 19.9 170.2 18.8
(A) Audited; (E) Estimated; FV = Rs10
EDUCATION SECTOR 24
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Company Background
Educomp was incorporated in Sept 1994 as a private limited company by Mr. Shantanu Prakash and Dr. Anjlee Prakash. Since inception
till 1999, the company was engaged in the business of setting up and maintaining of computer labs in private schools under BOOT
model and in government schools under subcontract awarded by the government.
• 1994 - Incorporation of the company.
• 1998 - Launched eCampus - a student information system.
• 1999 - Launched PlanetVidya.com - a portal.
• 2000 - The company was converted into a public limited company and PE Fund Carlyle Group made a strategic investment.
• 2002 - Started Edumatics Corporation - a wholly owned subsidiary in US.
• 2003 - Launched Smart_Class content solutions.
• 2004 - ISO 9001:2001 certification for ICT Solutions
• 2005 - Started Online Tutoring for teaching mathematics to students in US.
• 2006 - Raised Rs500 MM through IPO which was oversubscribed 34 times.
• 2007 - Acquired 76% stake in ThreeBrix - an online tutoring startup.
• 2008 - Acquired 51% stake in Learning.com.
EDUCATION SECTOR 25
PRIME BROKING
Revenue & PBIT Composition

FY08 Actuals (Revenue) FY10 Estimated (Revenue)
FY08 Actuals (PBIT) FY10 Estimated (PBIT)
EDUCATION SECTOR 26
PRIME BROKING
Investment Rationale
Smart_Class to grow 4.5x by FY11: Educomp through its Smart_Class offering has truly redefined education in the private
schools. The purpose of the Smart_Class program is to empower teachers with technology and enable them to use digital contents
developed using graphics, animation in addition to traditional methodology of teaching. We believe that Smart_Class is the 'Nextgen'
methodology of teaching and it will find increased acceptance from schools, students and parents going forward.
In Smart_Class, Educomp enters into long-term contracts, usually for 3-4 years, with
private schools wherein it licenses the Smart_Class program for a specified time period
and also provides end-to-end solutions. At the end of the contract the computer
hardware are transferred to the schools at a nominal value of Re1, while the Smart_Class
content and other IPR protected hardware developed by Educomp are retained by it.
The number of private schools that have switched to Smart_Class has grown 44.4x from
FY05 to FY08. Currently, 933 private schools are using Smart_Class (up from 21 in FY05)
and we believe that this will grow 4.5x by FY11E. We have factored in 4,186 private
schools for Smart_Class by FY11.
In FY08, this segment contributed to 45% to overall revenues and 52% to EBITDA. By FY11, we forsee this segment
clocking 77% and 71% CAGR in revenues and EBITDA (49% and 61% of revenues and EBITDA). Since this is a high
margin and high ROCE business, the company’s overall profitability will improve.
Smart class - Private schools FY05 FY06 FY07 FY08 FY09E FY10E FY11E
No of schools 21 91 331 933 1,776 2,871 4,186
Revenue (Rs MM) 29 201 466 1,278 2,739 4,699 7,136
EBITDA 6 120 271 740 1,531 2,533 3,704
EBITDA Margin (%) 21.3 59.8 58.1 57.9 55.9 53.9 51.9
Capital employed 7 100 632 1,593 3,093 5,093 7,593
ROCE (%) 90.0 119.9 42.8 46.5 49.5 49.7 48.8
Source: Company,Prime Broking
EDUCATION SECTOR 27
PRIME BROKING
ICT set for 3.4x momentum by FY11: The ICT segment of the company focuses on the government school side of business. The
government schools have, in the past, lagged in adopting technology in education when compared to private schools. However, this
attitude is slowly changing and the government schools are increasingly focussing on computer aided learning. The progress of IT in
government schools is divided into 2 phases. In phase 1, the government seeks to wire
up the schools and focus primarily on computer literacy and in phase 2 the computer is
used as a resource for learning i.e. providing education content A number of states have
successfully moved on to the 2nd phase. Educomp enters into a long-term contract with
govt. schools, and provides entire IT solution for the schools earmarked by the contract.
The contract operates under BOOT model, where all assets are transferred to the school
at a nominal residual value at the end of the contract period. The development process
for the content for government projects is similar to that for Smart_Class, except that
the government gives the outline for content development.
The number of government schools in which Educomp is serving has grown 10x from
FY05 to FY08. Currently, 6,000 government schools are covered by Educomp under ICT (up from 600 in FY05) and we believe that
this will grow by 3.4x till FY11E. We have factored in 20,629 public schools for ICT segment by FY11.
In FY08, ICT segment contributed 33% to revenues and 19% to EBITDA. By FY11, we forsee this segment clocking
60% and 41% CAGR in revenues and EBITDA (26% and 13% of revenues and EBITDA).
ICT - Government schools FY05 FY06 FY07 FY08 FY09E FY10E FY11E
No of schools 600 700 2,808 6,004 10,159 15,145 20,629
Revenue (Rs MM) 133 159 302 933 1,712 2,680 3,788
EBITDA 33 60 98 273 432 595 766
EBITDA Margin (%) 24.6 37.9 32.5 29.2 25.2 22.2 20.2
Capital employed 146 135 264 503 803 1,203 1,603
ROCE (%) 22.4 44.4 37.1 54.3 53.8 49.5 47.8
EDUCATION SECTOR 28
PRIME BROKING
Teacher training revenues to grow 2x by FY11: Educomp is a leader in professional development and partners with Learning
Links Foundation and Learning Leadership Foundation for carrying out various professional development programs in India. These
programs train teachers to integrate technology into the school curriculum, as well as, empower teachers by providing them skills in
the areas of inquiry based learning.
In addition to these, the company runs its own training program QuEST (Quality Education
for Students and Teachers), which trains teachers, students as well as parents.
The number of teachers trained by Educomp has grown 36% in FY08, while the
corresponding figure in revenue growth was 46%. Going forward, we believe that demand
for teachers will continue to grow in light of shortage of teachers and widening gap of
teachers to pupil ratio. We have factored in 2x growth in number of teachers trained for
the period FY08 to FY11E (CAGR of 27%) and revenue growth for the segment at 29%
CAGR for the period FY08 to FY11E.
In FY08, this segment contributed 9% to overall revenues and 11% to overall EBITDA. By FY11, we forsee this segment
clocking 29% and 28% CAGR in revenues and EBITDA (4% and 5% of FY11 revenues and EBITDA).
Teacher Training FY05 FY06 FY07 FY08 FY09E FY10E FY11E
Number of teacher trained 120,000 159,575 225,000 305,750 398,613 505,404 628,215
Revenue (Rs MM) 103 123 175 256 340 436 547
EBITDA 67 75 105 156 203 261 328
EBITDA Margin (%) 65.2 60.7 60.1 60.9 59.9 59.9 59.9
Capital employed NA NA NA 168 218 278 348
ROCE (%) NA NA NA 93.0 93.5 94.1 94.2
EDUCATION SECTOR 29
PRIME BROKING
Online education to grow at 57% CAGR till FY11E: In its retail solutions: Educomp
owns two online portals namely www.mathguru.com and www.learninghour.com.
While mathguru.com was developed in-house by Educomp, learninghour.com was acquired
by Educomp through its acquisition of ThreeBrix e-services in FY07. Mathguru is a
mathematics help program for school students studying in classes VI to XII. The portal
uses a virtual notebook and pen to explain the solutions step by step in their own voice.
The repository in the portal contains all problems from the NCERT maths book and is
arranged in structured topic format.
The company is also planning to incorporate maths syllabus of other boards. Educomp
charges Rs1,800 per annum per student for using the portal. The number of students
using the portal in FY08 alone increased by 4.6x to 46,300 students. We have factored in students registration growth of 65% CAGR
for the period FY08 to FY11E.
In FY08, the retail segment contributed 5% to overall revenues and 6% to EBITDA. By FY11, we forsee this segment
clocking 57% and 56% CAGR in revenues and EBITDA (4% and 5% of FY11 revenues and EBITDA).
e-Learning FY06 FY07 FY08 FY09E FY10E FY11E
Number of subscribers 4,000 10,000 46,342 91,770 146,283 208,972
Average no of subscribers 4,000 7,000 28,171 69,056 119,026 177,627
Annual subscription fees 1,800 1,800 1,800 1,800 1,800 1,800
Revenue (Rs million) 7 13 51 124 214 320
Source: Company, Prime Broking
EDUCATION SECTOR 30
PRIME BROKING
K-12 schools - New growth horizon: Educomp plans to own and manage 100 schools by FY11. The capital investment required in
each school is estimated to be Rs140 MM (total capex thus, Rs14 Bn). For this purpose, it has formed two 100% subsidiaries namely,
Edu Manage and Edu Infra. While this is an ambitious project, we are conservative with regards to the number of schools that will be
operational by FY11 largely because of legal issues involved. We have factored in 25 fully operational schools by FY11.
Edu-Infra will hold real estate assets for the schools, while Edu-Manage will help school trusts manage these schools. School trusts
would transfer 14.5% of capital employed to Edu-Infra and will pay 4.5% of revenue every year and an initial one-time management
fee of Rs5 MM. The residual income left in school trust (after deducting 1% trust charges) would be transferred to Edu-Manage.
Revenue Model for K12 Schools

Edu Infra (a) annual income of 14.5% of the capital employed for setting up own school
(b) annual income of 4.5% of the revenues of own school
(c) one time income of Rs5 MM at the inception of school
Edu Manage (a) residual earnings of the school post payment to Edu Infra
(b) net earnings from the other incidental services provided by the school
K12 Schools FY09E FY10E FY11E

No of schools 7 15 25
Revenue (Rs MM) 227 567 1,013
EBITDA 136 340 608
EBITDA Margin (%) 60.0 60.0 60.0
Capital employed 980 2,100 3,500
ROCE (%) 13.9 16.2 17.4
EDUCATION SECTOR 31
PRIME BROKING
Risks and Concerns

Execution risk: Educomp is way ahead in terms of competition from its peers but it faces execution risk. The ICT and the
Smart_Class segment operate under the BOOT model and require huge investment in setting up the infrastructure in the school
including computers, printers, UPS, servers, speakers, furniture and fittings. Most of the schools do not have computers in classrooms
and the schools do not have enough resources to make upfront investments in setting up such infrastructure. This entails huge capex,
which may be funded through debt.
Content obsolensce: Under the Smart_Class program, Educomp has developed a vast repository of digital content for subjects like
science, mathematics, social sciences from kindergarten to class 12. This program enables teachers to select the content as per their
requirements and use these to teach their specific subjects effectively in the classroom. While the syllabus of Physics, Chemistry and
Mathematics are not likely to change any time soon, any changes in the syllabus will render the content module obsolete. Also, in
order to stay ahead to competition, Educomp will have to keep investing in upgrading the content. Thus, content obsolence is a risk
and will continually put pressure on the company.
Increasing competition from other players: Educomp will face increasing competition from players like NIIT and Everonn in the
coming years. While NIIT has recently bagged a 900 school order from government of Maharashtra and Bihar, Everonn on the other
hand, has started i-schools, which is on the same lines as Educomp’s Smart_Class. While Educomp will continue to grow the fastest
among its competitors, a part of the growth will be compromised due to competition.
EDUCATION SECTOR 32
PRIME BROKING
Valuations and Outlook

We believe that DCF method is the best way to value Educomp largely because of annuity nature of revenues and negative free cash
flow till FY12, resulting from huge capex required initially in setting up centres. Besides this, the DCF model gives us flexibility in
terms of changes in sales and expenses that implies changing growth rates over time.
We expect Educomp to achieve CAGR of 68.0% and 68.7% in revenues and net profit over FY08 to FY11E respectively. Post its
listing, the company has traded at huge premium to the benchmark indices mainly due to high growth nature of the business. However,
we believe that P/E based valuation is not the correct metric to value a company like Educomp, as it does not capture the growth of
the business and provides information on current valuations.
Our DCF value translates to a target price of Rs3,709 thus giving 16.1% upside over CMP of Rs3,195. At our target
price, the stock is trading at a P/E of 60.2x and 34.1x on our estimated EPS of Rs61.6 and Rs108.9 for FY09 and FY10
respectively. We thus, initiate coverage on Educomp with a "HOLD" rating. We believe that Educomp with first
mover advantage, will grow much faster largely on the back of diversified offerings in the education sector. However,
much of the growth assumptions are getting factored into the sector as a whole.
DCF Output Terminal Value

PV of cashflows 9,224 FCF in terminal year (Rs MM) 15,356
PV of terminal value 63,618 EXIT FCF multiple: (1+g)/(WACC-g) 12
EV 72,843 Long term growth rate 5.0%
Cash 943 Terminal value of FCF (Rs MM) 187,836
Equity value 73,786 Exit EBITDA multiple 4.9
Shares O/S (m) 19.9 Source: Prime Broking
Equity value per share 3,709

EDUCATION SECTOR 33
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DCF calculation details

Forward Estimates Long Term Forward Estimates
Fiscal Year 2008(A) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 2,861 5,526 9,088 13,575 19,598 27,312 36,699 48,210 61,885 77,583 94,935
% Growth 159.9% 93.2% 64.5% 49.4% 44.4% 39.4% 34.4% 31.4% 28.4% 25.4% 22.4%
EBITDA 1,266 2,445 4,021 6,007 8,573 11,812 15,688 20,367 25,835 32,001 38,683
% Margin 44.2% 44.2% 44.2% 44.2% 43.7% 43.2% 42.7% 42.2% 41.7% 41.2% 40.7%
EBIT 935 1,787 2,951 4,432 6,395 8,939 12,016 15,801 20,285 25,417 31,010
% Margin 32.7% 32.3% 32.5% 32.7% 32.6% 32.7% 32.7% 32.8% 32.8% 32.8% 32.7%
Tax rate 33.1% 33.1% 33.1% 33.1% 33.1% 33.1% 33.1% 33.1% 33.1% 33.1% 33.1%
NOPAT 625 1,196 1,974 2,966 4,279 5,981 8,040 10,573 13,573 17,007 20,749
Depreciation and amortization 331 658 1,071 1,574 2,178 2,873 3,671 4,566 5,550 6,583 7,673
% margin 11.6% 11.9% 11.8% 11.6% 11.1% 10.5% 10.0% 9.5% 9.0% 8.5% 8.1%
% GFA 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5%
Working capital (excl cash) 1,117 1,858 2,725 3,806 5,691 8,204 11,391 15,446 20,446 26,409 30,416
% of sales 39.1% 33.6% 30.0% 28.0% 29.0% 30.0% 31.0% 32.0% 33.0% 34.0% 32.0%
Change in working capital (704) (741) (867) (1,082) (1,885) (2,513) (3,187) (4,055) (5,000) (5,962) (4,008)
Operating Cash Flows 253 1,113 2,179 3,458 4,573 6,341 8,525 11,084 14,123 17,628 24,415
Capex 1,941 2,850 3,600 4,390 5,268 6,058 6,967 7,803 8,583 9,012 9,508
Capex to sales 67.8% 51.6% 39.6% 32.3% 26.9% 22.2% 19.0% 16.2% 13.9% 11.6% 10.0%
GFA 2,890 5,740 9,340 13,730 18,998 25,056 32,023 39,826 48,409 57,422 66,930
Sales/GFA 1.0 1.0 1.0 1.0 1.0 1.1 1.1 1.2 1.3 1.4 1.4
Unlevered FCF (1,688) (1,737) (1,421) (932) (695) 282 1,558 3,281 5,540 8,616 14,907
Discount Rate (WACC) 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6%
Projection Year 0.0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5
Discount Factor 1.0000 0.9383 0.8261 0.7273 0.6403 0.5637 0.4963 0.4370 0.3847 0.3387
FCF (1,737) (1,334) (770) (506) 181 878 1,628 2,421 3,314 5,049
EDUCATION SECTOR 34
PRIME BROKING
Sensitivity of Educomp’s Share price to the WACC and growth rates

Weighted average cost of capital
9.5% 10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5% 17.5%
0% 4,391 3,755 3,243 2,822 2,473 2,180 1,932 1,719 1,537
1% 4,849 4,103 3,511 3,034 2,642 2,316 2,043 1,811 1,613
Growth Rates
2% 5,429 4,531 3,836 3,285 2,839 2,474 2,171 1,915 1,699

3% 6,184 5,072 4,236 3,588 3,075 2,659 2,319 2,035 1,797
4% 7,210 5,778 4,742 3,963 3,359 2,879 2,492 2,174 1,909
5% 8,683 6,736 5,402 4,436 3,709 3,146 2,698 2,336 2,039
6% 10,979 8,113 6,297 5,053 4,152 3,474 2,948 2,530 2,192
7% 15,052 10,257 7,584 5,890 4,729 3,888 3,255 2,763 2,373
8% 24,266 14,061 9,588 7,094 5,513 4,429 3,643 3,052 2,592
9% 65,037 22,669 13,144 8,968 6,639 5,163 4,150 3,416 2,862
Our DCF value of Rs3,709 is based on 13.5% weighted average cost of capital (WACC) and 5.0% terminal
growth rate. The company has a debt to equity ratio of almost 1x. However, this situation is likely to
change considerably post the US$250 MM GDR issue, which the company has planned to come out with,
to finance its expansion plans. Thus, we have assumed a target debt to equity ratio of 20:80. Based on this,
out cost of equity works out to 15.0% and post tax cost of debt is 7.9%, thereby giving an overall WACC of
13.5%.
EDUCATION SECTOR 35
PRIME BROKING
Annexure 1: Profit & Loss A/c

Particulars FY03(A) FY04(A) FY05(A) FY06(A) FY07(A) FY08(A) FY09(E) FY10(E) FY11(E)
Income from operations 212 260 331 555 1,101 2,861 5,526 9,088 13,575
Total operating expenditure 159 194 174 288 595 1,595 3,081 5,067 7,568
EBITDA 54 66 158 267 506 1,266 2,445 4,021 6,007
Depreciation 31 37 53 56 96 331 658 1,071 1,574
Interest Charges 3 4 6 6 14 48 289 425 567
Other Income 1 13 26 15 59 178 343 564 842
Pre-Tax 21 38 125 220 454 1,064 1,841 3,090 4,708
Tax 8 16 45 81 170 351 610 918 1,317
Net Profit 13 22 80 139 285 713 1,231 2,172 3,391
Minority Interest - 0 0 1 0 7 5 5 5
Net Profit 13 22 79 138 285 706 1,225 2,166 3,386
Diluted EPS (Rs) 0.6 1.1 4.0 7.0 14.3 35.5 61.6 108.9 170.2
Adjusted EPS (Rs) 0.6 1.1 4.0 7.0 14.3 35.5 61.6 108.9 170.2
Extraordinary - - - - - 2 - - -
Dividend - Ordinary 13 8 13 - - 43 51 59 68
Addition to Reserves (0) 12 65 140 285 655 1,166 2,097 3,307
Shares (MM) 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9
Avg Shares (MM) 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9
Div. Per share (Rs) 0.7 0.4 0.7 - - 2.2 2.5 3.0 3.4
Rs MM; (A) Audited; (E) Estimated
EDUCATION SECTOR 36
PRIME BROKING
Annexure I1: Balance Sheet

Assets
Gross Fixed Assets 144 188 261 375 949 2,890 5,740 9,340 13,730
Less: Acc. Depreciation 52 89 135 190 226 548 1,206 2,277 3,851
Net Block 92 99 126 185 723 2,342 4,534 7,063 9,879
Goodwill 3 3 4 1 137 280 280 280 280
CWIP 1 3 20 67 108 372 335 268 188
Investments - 2 10 21 102 36 46 58 73
Cash & cash in kind 11 13 30 606 1,106 2,912 4,640 6,786 9,814
Current Assets (Exc. Cash) 110 156 226 325 655 1,727 2,782 4,245 6,077
Miscellaneous expenses 1 1 1 1 1 1 1 1 1
Total Assets 219 277 417 1,205 2,832 7,671 12,618 18,701 26,312
Liabilities
Share Capital 45 45 45 160 160 255 255 255 255
Reserves and surplus 94 112 182 736 988 2,629 3,801 5,903 9,215
Total Networth 139 156 227 895 1,148 2,884 4,056 6,158 9,470
Deferred Tax Liability 10 15 20 16 59 210 210 210 210
Minority Interest 1 1 (0) 2 128 194 194 194 194
Debt 14 30 45 110 1,255 3,773 7,235 10,620 14,168
Current Liabilities 55 74 125 182 242 610 924 1,520 2,270
Total Liabilities 219 277 417 1,205 2,832 7,671 12,618 18,701 26,312
EDUCATION SECTOR 37
PRIME BROKING
Annexure III: Cash Flow Statement

PBT 21 38 125 220 454 1,064 1,841 3,090 4,708
Add: Depreciation as per P&L 31 37 53 56 96 331 658 1,071 1,574
Add: Others 10 (4) (4) 4 14 113 289 425 567
Opr. C/F before working cap. changes 61 71 174 280 565 1,509 2,788 4,585 6,849
Changes in current assets 33 44 70 118 332 1,171 1,055 1,463 1,833
Changes in current liabilities 22 25 56 53 102 519 314 596 751
Tax paid 4 16 45 81 170 351 610 918 1,317
Cash flow from operating activities (A) 46 36 114 134 165 505 1,437 2,801 4,450
Cash consumed for investing in fixed assets 49 45 90 160 616 2,205 2,813 3,533 4,310
Cash consumed for making invesment - 2 8 11 81 (66) 10 12 15
Others - (0) 9 (5) 22 (37) - - -
Cash flow from investing activities (B) 49 47 108 167 719 2,102 2,822 3,545 4,325
Cash flow from fresh equity issue - - - 115 0 13 - - -
Cash flow from debt issue 5 16 15 65 1,146 2,518 3,462 3,384 3,548
Cash used for paying dividend - - - - - - (59) (69) (79)
Others (2) (2) (5) 428 (92) 872 (289) (425) (567)
Cash flow from financing activities (C) 3 13 11 608 1,054 3,403 3,113 2,890 2,902
Net cash generated (A-B+C) 1 2 17 575 500 1,806 1,729 2,146 3,028
Opening cash balance 11 11 13 30 606 1,106 2,911 4,640 6,786
Closing cash balance 11 13 30 606 1,106 2,911 4,640 6,786 9,814
EDUCATION SECTOR 38
PRIME BROKING
Annexure IV: Ratios

Particulars FY04(A) FY05(A) FY06(A) FY07(A) FY08(A) FY09(E) FY10(E) FY11(E)
Valuation Ratios (x)
Adjusted P/E - - 459.5 223.3 90.1 51.9 29.3 18.8
Price/Book Value - - 280.5 71.0 55.4 22.0 15.7 10.3
EV/EBITDA - - 238.1 128.1 53.2 29.0 18.4 12.9
EV/Sales - - 114.7 58.9 23.5 12.8 8.2 5.7
Market Cap/Sales - - 114.5 57.7 22.2 11.5 7.0 4.7
Per Share Ratios (Rs)
Earnings 1.1 4.0 7.0 14.3 35.5 61.6 108.9 170.2
Cash Earnings 3.0 6.7 9.9 19.1 52.1 94.7 162.7 249.3
Dividend 0.4 0.7 - - 2.2 2.5 3.0 3.4
Book Value 7.0 7.9 11.4 45.0 57.7 145.0 203.9 309.5
Profitability Ratios (%)
Operating Margin 25.2 25.5 47.6 48.2 46.0 44.2 44.2 44.2
EBIT Margin 16.0 39.3 40.6 42.6 38.9 38.5 38.7 38.9
PAT Margin 8.3 23.9 24.9 25.9 24.7 22.2 23.8 24.9
Turnover Ratios (x)
Debtors Turnover Ratio 1.4 1.6 3.3 6.7 19.4 39.5 64.9 97.0
Fixed Asset Turnover Ratio 1.4 1.3 1.5 1.2 1.0 1.0 1.0 1.0
Solvency Ratios (x)
Current Ratio 2.3 2.1 5.1 7.3 7.6 8.0 7.3 7.0
Debt Equity Ratio 0.2 0.2 0.1 1.1 1.3 1.8 1.7 1.5
Interest Coverage Ratio 10.9 23.3 37.9 32.6 23.1 7.4 8.3 9.3
Performance Ratios (%)
Return on Capital Employed 22.4 48.0 22.5 19.5 16.7 18.9 20.9 22.3
Return on Net Worth 13.9 35.0 15.4 24.8 24.5 30.2 35.2 35.8
EDUCATION SECTOR 39
PRIME BROKING
Everonn Systems: Good, needs to get better CMP: 516; Target:592 HOLD
Bloomberg Code EVSI.BO i-school to boost revenues: Everonn has recently introduced i-school, which is on the same
Reuters Code ESIL IN lines as Educomp’s Smart_Class for private schools. Already 21 schools have converted to i-school
BSE Code 532876 and we believe that more schools will take up the product going forward. But the product is in
NSE Code EVERONN a very nascent stage and its acceptance is yet to be evaluated. Hence, we have factored in 150
52-week H/L (Rs) 1236/401 schools for FY09, 300 in FY10 and 500 in FY11 on a conservative basis.
Monthly H/L (Rs) 575/425
Aban acquisition will scale up ViTELS: Everonn acquired the e-learning division of Aban
6 Mth avg vol 57,854
Informatics, a part of Aban. The acquisition will enable Everonn to gain access to content for K-
Shares O/s (MM) 16.2
12 segment and will enable Everonn to become a complete e-learning solution provider. Prior to
M Cap (Rs MM) 8,350
this acquisition, Everonn was catering to content from 9th standard till 12th Standard, but post
M Cap (US$ MM) 192
the acquisition it will be able to address students from 4th standard onwards till 12th standard.
EV (Rs MM) 10,085
Valuation Parameters (FY11E) Our estimates indicate Everonn clocking revenue CAGR of 56.8% and PAT CAGR of
EV/EBITDA (x) 6.9 50.3% over FY08 to FY11E. Our DCF value translates to a target price of Rs592, a
Mcap/EBITDA (x) 6.5 13.3% upside over CMP of Rs516. At our target price, the stock is trading at a P/E of
EV/Sales (x) 2.5 44.8x and 26.2x on our estimated EPS of Rs13.2 and Rs22.6 for FY09 and FY10
P/E (x) 17.5 respectively. We thus, initiate coverage on Everonn with a "HOLD" rating. We believe
that Everonn’s revenue mix will shift towards the high margin ViTELS segment,
thereby improving overall profitability and ROCE. Also, better than expected response
to i-school may lead to upgrade.
RSMM Revenue EBITDA EBITDA PAT PAT No. of shares EPS PE
(%) (%) (MM) (Rs) (x)
FY07 (A) 430 176 41.0 49 11.3 16.2 3.0 -
FY08 (A) 912 334 36.7 141 15.4 16.2 8.7 59.4
FY09 (E) 1,548 594 38.3 213 13.8 16.2 13.2 39.1
FY10 (E) 2,433 914 37.6 366 15.1 16.2 22.6 22.8
FY11 (E) 3,517 1,288 36.6 477 13.6 16.2 29.5 17.5
(A) Audited; (E) Estimated; (!) FV=Rs10
EDUCATION SECTOR 40
PRIME BROKING
Company Background
Everonn Systems was incorporated in April 2000 as a public limited company. The original initiative and expansions were funded by
the promoters. In the year 2000, Net Equity Ventures and Virmac Investments invested to fund a part of Everron’s Computer Education
Project in Tamilnadu and other places.
• 2000 - Formed as a public limited company.
• 2000 - Contract for 332 government schools in Tamilnadu for computer education awarded by State Government.
• 2002 - Partners Hughes Net (Direcway) Global Education and brings management Education through Virtual classrooms in 7
locations
• 2004 - Launched 'Zebra Kross', a branded Virtual classroom network and state of art studio in Chennai. Adds 2 more Hughes Net
(Direcway) Centres.
• 2005 - Test launch of Virtual Learning at schools and Corporations. Adds one more Hughes Net (Direcway) Centre.
• 2006 - Launch of Retail Centres to cater to various segments of customers. Expansion with a second studio. Point of presence has
crossed 1,500 Institutional Education and Virtual Classrooms.
• 2007 - Point of presence crosses 2,000 Institutional Education and Virtual Classrooms.
• 2008 - Acquired e-learning division of Aban Informatics.
EDUCATION SECTOR 41
PRIME BROKING
vsds Composition
Revenue & PBIT
Source: Company
EDUCATION SECTOR 42
PRIME BROKING
ICT schools to grow 2x: The ICT division of the company concentrates in executing IT education related contracts in schools and
colleges, where the projects are identified through government tenders. The company enters into long term contract (usually 5 years)
with the government or private schools or colleges and gets paid on quarterly or half
yearly basis. The contracts are on BOOT model and assets are transferred to the school
at nominal value at the end of the contract.
Besides, Everonn has also been allowed in some states to utilize the infrastructure
installed after school hours to generate additional revenue for which it pays a rent of
Rs1,000 per month in advance for the utilization of the premises.
The number of schools and colleges working with Everonn has increased by 64% YoY in
FY08. We believe that Everonn will be able to double this number by FY10E. We have
factored in 8,800 schools for the IEIS (ICT) division for FY11E (up from 3,156 in FY08).
IEIS - Institutional Education and IT Infrastructure Services FY06 FY07 FY08 FY09E FY10E FY11E
No of schools 1,000 1,919 3,156 4,764 6,694 8,817
Revenue (Rs MM) 113 263 536 836 1,279 1,824
EBITDA NA NA 177 259 371 492
EBITDA Margin (%) NA NA 33.0 31.0 29.0 27.0
In FY08, this segment contributed 59% to overall revenues and 50% to EBITDA. By FY11, we forsee this segment
clocking 50% and 41% CAGR in revenues and EBITDA (53% and 41% of revenues and EBITDA). However, since this
is a capital intensive and thus, low ROCE business, the company’s overall profitability will be under pressure.
EDUCATION SECTOR 43
PRIME BROKING
ViTELS - Everron’s USP: This division concentrates on providing specialized content through an interactive remote delivery
mechanism targeting colleges and schools, working professionals and corporates. ViTELS has three subdivisions namely
• Institutional Segment - wherein it provides education to students in schools and
colleges. The courses are curriculam as well as non curriculam based.
• Corporate Segment - wherein it provides the ViTELS platform to different
companies to train its employees. However, the training may be provided by the
company in house or by Everonn.
• Retail Segment - wherein it provides professional coaching to students for
competetive examinations like IIT-JEE, CET etc.
The company has remodeled the school segment into i-school which is in line with
Educomp’s Smart_Class product for private schools. Earlier it had one classroom, which
was VSAT enabled and all students had to assemble there to attend their interactive
classes taken by the teachers and from Everonns' studio.
Now, Everonn has enhanced that model and made the content available to students and teachers in the school for all the subjects
directly to the classroom and not just for the VSAT classes, which was only a portion of the entire classes. Thus, the teachers can use
the content for every single class rather than just for VSAT class.
The company is planning to charge Rs180 per month per student for the i-school product. As per the company, already 21 schools
have adopted i-school. The company expects that it will get atleast 1,000 students per school. We believe that going forward more and
more schools will adopt the i-school product. However, since the concept is currently in a nascent stage, its acceptance is to be seen.
Hence, for i-schools, we have factored in 150 schools in FY09, 300 in FY10 and 500 in FY11 on a conservative basis, as against the
company’s target of 700 schools in FY09 itself.
The number of centres in ViTELS has grown 14x from FY05 to FY08. Currently, under ViTELS there are 449 operational centres (230
schools, 180 colleges, 29 retail and 10 Hughes Direcway) and we believe this will grow by 3.6x by FY11E. We have factored in 1,600
centres in ViTELS by FY11.
EDUCATION SECTOR 44
PRIME BROKING
ViTELS explained
Source: Company
EDUCATION SECTOR 45
PRIME BROKING
ViTELS - Everron’s USP

We believe that the ViTELS division is the USP of Everonn and a major chunk of the company’s future growth will be contributed by
this division. In FY08, this segment contributed 41% to overall revenues and 50% to EBITDA. By FY11, we forsee this
segment clocking 65% CAGR in revenues as well as EBITDA (47% and 59% of revenues and EBITDA). Since this is a
high margin and thus, high ROCE business, the company’s overall profitability will improve backecd by its strong
growth pace.
ViTELS FY05 FY06 FY07 FY08 FY09E FY10E FY11E
No of centres 32 83 197 449 775 1,167 1,600
Revenue (Rs MM) 36 73 169 376 712 1,155 1,693
EBITDA NA NA NA 177 335 543 796
EBITDA Margin (%) NA NA NA 47.0 47.0 47.0 47.0
Aban Informatics to help consolidate ViTELS division

Everonn acquired the e-learning division of Aban Informatics, a part of Aban in FY08. The acquisition will enable Everonn to gain
access to content for K-12 segment and will enable Everonn to become a complete e-learning solution provider.
The e-learning division of Aban group consists of www.classontheweb.com. It is an educational portal catering to all academic needs,
preparatory material and tools to help students in exams. It also has a unique intranet based e-learning solution for schools. The
acquisition will help Everonn to gain access to over 30,000 students and will add 40 schools to its kitty.
Prior to this acquisition, Everonn was catering to content from 9th standard till 12th Standard. Post acquisition, it will have capability
to deliver educational content from 4th standard onwards upto 12th standard. This acquisition was the prime reason for remodeling
the ViTELS schools division (as mentioned in the previous point) and the company expects the average number of students to
increase to 1,000 students per school in FY09 from 225 students per school in FY08. We believe that this acquisition will provide
scalability to the ViTELS division.
EDUCATION SECTOR 46
PRIME BROKING
Risks and Concerns

Execution risk: Execution is the key risk for Everonn largely because it has to compete with larger players like Educomp and NIIT
in the ICT space. There are chances that Everonn may not be able to qualify as bidder in certain ICT contracts, which will hamper its
future growth. Also, the ICT segment operate under the BOOT model and require huge investment in setting up the infrastructure in
the school including computers, printers, UPS, servers, speakers, furniture, fittings required to run the class. Most of the schools do not
have computers in classrooms and the schools do not have enough resources to make upfront investments in setting up such
infrastructure. This entails huge capex, which may be funded through debt. Also, while Everonn will continue to grow the at a fast
pace, stiff competition from the larger players could shorten the pace of growth.
Equity dilution: Everonn has recently raised Rs910 MM through allocation of 1.26 MM shares to a group of private equity investors
including New Vernon, Blackstone and Deutsche Group. The issue was priced at Rs720 per share. Also, an additional Rs810 MM will
be raised through warrants to promoters and the private equity investors at the same valuation (which seems unlikely in based on
CMP). Everonn has huge capex requirement and to fund it, the company will have to raise capital. We see equity dilution to fund the
capex requirement, as an EPS dilutive risk.
EDUCATION SECTOR 47
PRIME BROKING

Post its listing in 2007, Everonn, like Educomp, has traded ata huge premium to the benchmark indices largely because of high growth
anticipated in the business. We, however, believe that DCF method is the best way to value Everonn, largely because of annuity nature
of revenues and negative free cash flow till FY13, resulting from huge capex required initially in setting up centres.
Our estimates indicate Everonn clocking revenue CAGR of 56.8% and PAT CAGR of 50.3% over FY08 to FY11E,
making it the second fastest growing company under our coverage. Our DCF value translates to a target price of
Rs592, a 13.3% upside over CMP of Rs516. At our target price, the stock is trading at a P/E of 44.8x and 26.2x on our
estimated EPS of Rs13.2 and Rs22.6 for FY09 and FY10 respectively. We thus initiate coverage on Everonn with a
"HOLD" rating. We believe that Everonn’s revenue mix will shift towards the high margin ViTELS segment, thereby
improving overall profitability and ROCE. Also, better than expected response to i-school may lead to upgrade.

PV of cashflows -1,636 FCF in terminal year (Rs m) 2,308
Cash 928 Terminal value of FCF (Rs m) 29,542
Equity value per share 592

EDUCATION SECTOR 48
PRIME BROKING

Fiscal Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 912 1,548 2,433 3,517 4,907 6,602 8,552 10,650 12,730 14,580 15,970
% Growth 111.9% 69.7% 57.2% 44.5% 39.5% 34.5% 29.5% 24.5% 19.5% 14.5% 9.5%
EBITDA 334 594 914 1,288 1,785 2,385 3,068 3,795 4,504 5,122 5,570
% Margin 36.7% 38.3% 37.6% 36.6% 36.4% 36.1% 35.9% 35.6% 35.4% 35.1% 34.9%
EBIT 237 400 606 853 1,211 1,664 2,193 2,758 3,298 3,738 3,999
% Margin 26.0% 25.9% 24.9% 24.3% 24.7% 25.2% 25.6% 25.9% 25.9% 25.6% 25.0%
Tax rate 35.9% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%
NOPAT 152 264 400 563 799 1,099 1,448 1,821 2,177 2,467 2,640
Depreciation and amortization 97 193 308 435 575 721 875 1,036 1,206 1,384 1,571
% Growth 18.5% 98.6% 59.6% 41.1% 32.1% 25.5% 21.3% 18.5% 16.4% 14.8% 13.5%
% margin 10.7% 12.5% 12.7% 12.4% 11.7% 10.9% 10.2% 9.7% 9.5% 9.5% 9.8%
% GFA 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%
Working capital (excl cash) 500 858 1,350 1,945 2,469 2,991 3,447 3,760 3,858 3,689 3,242
% of sales 54.8% 55.4% 55.5% 55.3% 50.3% 45.3% 40.3% 35.3% 30.3% 25.3% 20.3%
Change in working capital (252) (357) (492) (595) (524) (522) (456) (313) (98) 168 447
Operating Cash Flows (3) 100 216 403 850 1,297 1,867 2,544 3,285 4,020 4,658
Capex 600 1,146 1,376 1,515 1,667 1,750 1,838 1,929 2,026 2,127 2,234
GFA 1,162 2,309 3,684 5,200 6,866 8,617 10,454 12,384 14,410 16,537 18,771
Sales/GFA 0.8 0.7 0.7 0.7 0.7 0.8 0.8 0.9 0.9 0.9 0.9
Unlevered FCF (603) (1,046) (1,160) (1,112) (817) (453) 29 614 1,259 1,893 2,424
Projection Year 0.0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5
Discount Factor 1.0000 0.9386 0.8270 0.7286 0.6420 0.5656 0.4983 0.4391 0.3868 0.3408
FCF (1,046) (1,088) (920) (595) (291) 17 306 553 732 826
EDUCATION SECTOR 49
PRIME BROKING
Sensitivity of Everonn’s Share price to the WACC and growth rates

9.5% 10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5% 17.5%
0% 729 600 497 412 342 284 235 193 157
1% 823 671 552 455 377 312 257 212 173
Growth Rates
2% 941 759 618 507 417 344 283 233 190

3% 1,097 870 700 569 465 382 314 257 210
4% 1,309 1,015 804 645 523 427 349 285 233
5% 1,616 1,213 940 743 592 481 391 318 259
6% 2,097 1,500 1,125 870 686 548 442 358 290
7% 2,964 1,949 1,392 1,043 805 633 505 406 327
8% 4,986 2,759 1,813 1,293 967 745 585 465 372
9% 15,099 4,648 2,570 1,686 1,201 896 689 539 427
Our DCF value of Rs592 is based on 13.5% WACC and 5% terminal growth rate. The company has a debt
to equity ratio of over 3x. However, this situation is likely to change as the company has recently raised
Rs910 MM through private equity placement and further Rs810 MM is planned to be raised as equity from
same group of investors. Despite this, the company will have a debt to equity ratio of 1x by FY11E. If we
assume a target debt to equity ratio of 50:50, then WACC comes to about 11.5%.
While this may seem theoritically correct, but a business with debt to equity ratio of 1x is a risky business
by any means. Hence, the cash flows need to be discouted by a higher cost of capital to compensate for
the higher risk. Thus, based on this rationale, we have discounted Everonn’s free cash flow with a WACC of
13.5%.
EDUCATION SECTOR 50
PRIME BROKING

Income from operations 160 162 194 309 430 912 1,548 2,433 3,517
Total operating expenditure 87 80 95 166 254 578 955 1,519 2,229
EBITDA 73 82 100 144 176 334 594 914 1,288
Depreciation 49 53 59 46 82 97 193 308 435
Interest Charges 17 18 14 16 23 33 104 135 266
Other Income - - 0 0 - 15 26 41 59
Pre-Tax 7 11 26 83 71 219 322 511 647
Tax 6 5 11 33 22 79 109 145 170
Net Profit 1 6 15 49 49 141 213 366 477
Minority Interest - - - - - - - - -
Net Profit 1 6 15 49 49 141 213 366 477
Diluted EPS(Rs) 0.1 0.4 0.9 3.0 3.0 8.7 13.2 22.6 29.5
Adjusted EPS (Rs) 0.1 0.4 0.9 3.0 3.0 8.7 13.2 22.6 29.5
Extraordinary - - - - - - - - -
Dividend- Ordinary - 9 4 2 - - - - -
Addition to Reserves 1 (4) 10 47 49 141 213 366 477
Sh's (MM) 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2
Avg Sh's (MM) 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2 16.2
Div. Per share (Rs) - 0.5 0.3 0.1 - - - - -
EDUCATION SECTOR 51
PRIME BROKING
Annexure I1: Balance Sheet

Assets
Gross Fixed Assets 322 328 375 591 562 1,162 2,309 3,684 5,200
Less: Acc. Depreciation 114 167 225 271 197 294 488 796 1,231
Net Block 207 161 149 320 365 868 1,821 2,889 3,969
Goodwill - - - - - - - - -
CWIP - - - - - - - - -
Investments 5 5 0 0 0 0 - - -
Cash & cash in kind 6 12 17 30 42 928 346 664 507
Current Assets (Exc. Cash) 71 61 112 232 342 674 1,112 1,720 2,467
Miscellaneous expenses 13 10 5 2 - - - - -
Total Assets 302 248 284 584 749 2,470 3,279 5,272 6,943
Liabilities
Share Capital 17 17 17 17 103 103 271 1,782 1,782
Reserves and surplus 110 106 116 163 263 404 617 983 1,461
Total Networth 127 123 133 180 366 506 888 2,765 3,242
Deferred Tax Liability 5 9 19 44 54 54 54 54 54
Minority Interest - - - - - - - - -
Debt 138 92 105 269 235 1,735 2,083 2,083 3,124
Current Liabilities 32 24 27 91 93 173 254 370 522
Total Liabilities 302 248 284 584 749 2,470 3,279 5,272 6,943
EDUCATION SECTOR 52
PRIME BROKING

PBT 7 11 26 83 71 219 322 511 647
Add: Depreciation as per P&L 49 53 59 46 82 97 193 308 435
Add: Others 19 21 17 18 26 33 104 135 266
Opr. C/F before working capital changes 75 85 102 147 179 350 620 955 1,348
Changes in current assets 20 (4) 52 115 108 332 438 608 747
Changes in current liabilities 10 (4) 13 89 13 80 81 116 152
Tax paid 0 5 11 33 22 79 109 145 170
Cash flow from operating activities (A) 65 80 52 86 62 19 153 318 582
Cash consumed for investing in fixed assets 87 6 47 217 (29) 600 1,146 1,376 1,515
Cash consumed for making invesment 1 0 (5) - - - (0) - -
Others 9 1 - 0 156 - - - -
Cash flow from investing activities (B) 97 7 42 217 127 600 1,146 1,376 1,515
Cash flow from fresh equity issue - - - - 86 - 168 1,511 -
Cash flow from debt issue 48 (46) 12 164 (33) 1,500 347 - 1,041
Cash used for paying dividend - - - - - - - - -
Others (15) (21) (16) (22) 25 (33) (104) (135) (266)
Cash flow from financing activities (C) 33 (66) (4) 143 78 1,467 411 1,376 776
Net cash generated (A-B+C) 1 6 5 12 13 886 (582) 318 (157)
Opening cash balance 5 6 12 17 30 42 928 346 664
Closing cash balance 6 12 17 30 42 928 346 664 507
EDUCATION SECTOR 53
PRIME BROKING
Annexure IV: Ratios

Adjusted P/E - - - - 59.4 39.1 22.8 17.5
Price/Book Value - - - - 16.5 9.4 3.0 2.6
EV/EBITDA - - - - 25.9 14.6 9.5 6.9
EV/Sales - - - - 9.5 5.6 3.6 2.5
Market Cap/Sales - - - - 14.4 8.7 5.5 3.7
Earnings 0.4 0.9 3.0 3.0 8.7 13.2 22.6 29.5
Cash Earnings 3.6 4.6 5.9 8.1 14.7 25.1 41.7 56.4
Dividend 0.5 0.3 0.1 - - - - -
Book Value 7.6 8.2 11.1 22.6 31.3 54.9 170.9 200.4
EBIT Margin 18.0 21.0 31.7 21.9 27.7 27.5 26.6 25.9
PAT Margin 3.7 7.8 15.9 11.3 15.4 13.8 15.1 13.6
Turnover Ratios (x)
Solvency Ratios (x)
Current Ratio 3.1 4.7 2.9 4.1 9.2 5.7 6.4 5.7
Interest Coverage Ratio 1.6 2.8 6.3 4.0 7.6 4.1 4.8 3.4
EDUCATION SECTOR 54
PRIME BROKING
NIIT: Exploring new horizons CMP: 87; Target:106 BUY

Bloomberg Code NIIT.BO Resurgence in school business: NIIT school business is coming back on track after lagging
Reuters Code NIIT IN behind in FY08, adding only 400 schools. The company plans to add 4,000 government schools
BSE Code 500304 every year from now on. However, we have factored in 2,000 schools each till FY11. NIIT has
NSE Code NIITLTD already won a 900 school ICT contract from governments’ of Maharashtra and Bihar. With
52-week H/L (Rs) 172/85 education being the key focues area in the union budget, we believe that there is huge scope for
Monthly H/L (Rs) 98/85 growth for NIIT.
IT training continues to impress: We expect core IT training segment to achieve revenue
CAGR of 19% over FY08 to FY11E, as we believe that NIIT leadership position in core IT
M Cap (Rs MM) 14,461
training will continue on the back of rising shortage of skilled people in the sector.
M Cap (US$ MM) 332
EV (Rs MM) 16,518 New business break even ahead of schedule: This business has broken even ahead of target
Valuation Parameters (FY11E) given by management and the company has set an optimistic revenue target of Rs1,500 MM by
EV/EBITDA (x) 13.1 FY10. We have factored in revenues of Rs1,000 MM by FY11.
Mcap/EBITDA (x) 8.5 Overall, We expect NIIT to achieve revenue and net profit growth of 17.5% and
EV/Sales (x) 1.0 24.4% respectively over FY08 to FY11E. The net profit growth is inclusive of NIIT’s
P/E (x) 9.9 25% stake in NIIT Technologies. At the CMP of Rs87, the stock is tading at a P/E of
Shareholding Pattern 15.4x and 12.3x on our estimated FY09 and FY10 EPS of Rs5.6 and Rs7.1 respectively.
We initiate coverage on NIIT with a “BUY” rating based on our DCF target price of
Rs106 from September 09 perspective.
(%) (%) (MM) (Rs) (x)
FY07 (A) 7,951 763 9.6 560 7.0 166.2 3.4 25.8
FY08 (A) 10,068 1.035 10.3 756 7.5 166.2 4.5 19.1
FY09 (E) 11,832 1,207 10.2 938 7.9 166.2 5.6 15.4
FY10 (E) 13,869 1,429 10.3 1,177 8.5 166.2 7.1 12.3
FY11 (E) 16,312 1,696 10.4 1,454 8.9 166.2 8.7 9.9
(A) Audited; (E) Estimated; (!) FV=Rs2
EDUCATION SECTOR 55
PRIME BROKING
Company Background
NIIT is India’s premier IT training company, with a 55% market share in the organized Indian IT education and training market and is
nearly four times the size of its next-largest competitor, Aptech.
1981 - Founded by Rajendra S. Pawar and Vijay K. Thadani.
1982 - Set up education centres in Mumbai, Delhi and Madras.
1983 - Introduced corporate training programs. Opened centre in Bangalore.
1991 - Set up its first overseas office in US. IBM awarded NIIT its first Corporate Business Training assignment.
2000 - Software operations in 18 countries.
2001 - Conferred Microsoft’s ‘Best Training Company Award’.
2002 - Acquired three companies in the US and launched NIIT SmartServe for Business Process Management.
2003 - Achieved CMMi Level 5 for software business.
2004 - NIIT’s Global Solutions Business was spun off into NIIT Technologies Limited.
2005 - Launch of Edgengineers program for Engineers.
2006 - Acquisition of Element K.
2007 - Launch of IFBI.
2008 - Joint Venture with Genpact for NIPE.
EDUCATION SECTOR 56
PRIME BROKING
Revenue & PBIT Composition

EDUCATION SECTOR 57
PRIME BROKING
Investment rationale
Individual learning solutions - Set for 28% CAGR: This is the key segment of NIIT. The company offers career and non-career
programmes both in India and other developing countries. More than 95% of its revenues come from the career segment. The
company trains over 0.5 MM students each year and has an alumni base of over 3 MM. The method of learning is primarily instructor
led, though it is supplemented by e-learning. The company believes that demand for skilled professionals in future will be the key
growth driver. The IT industry on a whole has grown at a CAGR of 33.5% from FY04 to FY07 (Source: NASSCOM).
In the individual learning business, revenue growth is dependent on capacity expansion and increase in price points, while the success
of this segment is dependent on increase in enrolments and rise in placements. The IT training industry has grown a little over 4% in
CY06 at US$22.4 Bn. More importantly, the IT industry is facing a shortage of employable professionals and going forward, this
problem is set to worsen. So, a company like NIIT, which is a market leader in the IT training and education sector, is expected to be
a key beneficiary.
To ensure smooth inflow of skilled professionals into the IT sector, NIIT will be focusing on: Increasing seat capacity at 12% every
year for next 3 years; Capacity utilisation to increase by 2% to 3% every year for the next 3 years and OPM improvement in the range
of 1% to 2% over the next 3 years.
Individual learning solutions
Estimates FY07(A) FY08(A) FY09(E) FY10(E) FY11(E)
Total seat years (Nos) 164,584 189,000 217,350 249,953 287,445
Utilisation rate (%) 54.0 55.0 57.0 59.0 61.0
Seat years utilised (Nos) 88,875 103,950 123,890 147,472 175,342
Revenue per utilsed seat (Rs) 27,792 31,178 33,673 36,367 39,276
Total revenues (Rs MM) 2,470 3,241 4,172 5,363 6,887
EBITDA (Rs MM) 434 664 797 956 1,138
EBITDA Margin (%) 17.6 20.5 19.1 17.8 16.5
EDUCATION SECTOR 58
PRIME BROKING
Institutional learning solutions - The worst seems to be over: Here, NIIT focuses
on training in schools, both government and private. Currently, 30% of the company's
revenues come from private schools and remaining 70% comes from government schools.
As per the management, the institutional business is expected to gather pace in FY09
after lagging in FY08, which was mainly due to delay in government school segment.
In government school business, NIIT generates its revenues through the BOOT Annuity
Model, the Services Annuity Model and licensed products. For example: If the Total
Contract Value (TCV) of an ICT project in a government school is of Rs1 MM spread
equally over 5 years, NIIT will get annual revenues of Rs0.2 MM each year. But to set up
the centre, NIIT will have to incur initial capex of Rs0.3 MM, which will be amortized
over the period of the contract.
Thus, NIIT's annual revenues from each school will be = 1/5 of TCV - 1/5 of initial capex - other operating expenses.
EDUCATION SECTOR 59
PRIME BROKING
In the private schools, NIIT follows the services subscription annuity model, where the schools have their own computer and IT
infrastructure and students enroll for specific courses on a yearly basis. The company also has licensed products for private schools,
which is a learning software for teachers and students. The revenues are based on the number of schools, which NIIT is able to take
into its fold and fees is charged per student per month.
We expect the company's growth in this segment to be around 30% in FY09, largely backed by growth in the ICT segment. The
government is expected to roll out 10,000 to 15,000 ICT tenders each year over the next two years and NIIT is expecting to win
4,000 schools each year. We have factored in 2,000 schools each year in the ICT segment from FY09E to FY11E and the company has
won a major 900 school contract in FY09 from the governments’ of Maharashtra and Bihar.
School learning solutions
Government school (Nos) 3,006 4,652 6,452 8,452 10,652
Average revenues per school per month (Rs) 16,920 13,536 10,829 8,663 6,930
Revenue - govn schools (Rs MM) 610 756 838 879 886
Private school segment
Number of schools (Nos) 806 981 1,181 1,406 1,656
Annual fees per student per month (Rs) 360 360 360 360 360
Number of students per school 815 725 725 725 725
Revenues - private schools (Rs MM) 236 256 308 367 432
Total school revenues (Rs MM) 847 1,012 1,147 1,246 1,318
EBITDA (Rs MM) 99 131 147 180 216
EBITDA margin (%) 11.7 12.9 12.9 14.4 16.4
EDUCATION SECTOR 60
PRIME BROKING
Corporate learning solutions - Could be the weak link: Here, NIIT provides training to technology companies as well as non
technology companies and its service offerings include platform technology, learning content and learning delivery. In simple words,
corporate learning solutions is outsourcing of in-house
training of employees of a company. This service
contributes little over 50% of NIIT's total
revenues and 90% of this comes from US.
Of the total revenues from the corporate learning
solutions, 70% is contributed by Technology companies
and balance 30% from Non-Technology companies.
While the spending on training from technology
companies is not expected to be curtailed, we believe
that about 15% to 20% of the spending on training from
non technology companies could suffer. But even then,
this works out to about 6% of the total corporate
training revenues. We believe that NIIT is well
positioned to manage this.
After the individual learning solutions, this is the second
segment where the company feels its future growth
will come from, bolstered by the acquisition of Element K in August 2006. The acquisition of Element K has been EPS accretive right
from the beginning mainly because post acquisition, the cost of maintaining the learning platforms has reduced and the company has
managed to increase its global presence by marketing the content library of Element K.
The main concern over for this segment is threat of currency appreciation, as remaining segments earn mostly in rupees. This
concern, however, is being alleviated owing to rupee’s recent depreciating moves. Secondly, this is the only segment, which is experiencing
deceleration owing to rise in e-learning.
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Corporate revenues growth assumptions...
Total revenues (incl. Element K) (Rs MM) 4,560 5,507 5,913 6,328 6,753
YoY growth (%) 20.8 7.4 7.0 6.7
EBITDA (Rs MM) 355 266 213 213 213
YoY growth (%) -25.1 -20.0 0.0 0.0
EBITDA margin (%) 7.8 4.8 3.6 3.4 3.2
New business initiatives - In the fast lane

The company has stated two new initiatives, namely - IFBI and NIIT Imperia. IFBI stands for the Institute of Finance, Banking &
Insurance. It is an independent subsidiary of NIIT named NIIT Institute of Finance, Banking and Training and ICICI Bank has 19% stake
in the company. IFBI currently offers training in finance, banking and insurance operations. These programmes are targeted at private
sector banks like ICICI Bank, HDFC Bank, IndusInd, Axis Bank, etc., as these banks are technology-driven.
NIIT Imperia will provide executive management education. The company has tied up with IIMs (Ahmedabad, Calcutta and Indore).
Under Imperia, IIM professors sitting in the campus, in studios set up by NIIT and will be training students dispersed across India at
NIIT centres through videoconferencing.
These businesses were launched only in October 2006 and currently contribute to just about 1% of total revenues. The company is
ramping up this activity very fast and this is evident from the growth in the number of centres. These were initially started with 6
centres and currently have 22 centres. The company plans to take it to 30 centres by FY09 and 40 centres by FY10. The contribution
of both services together to the total revenues is expected to touch 10% by FY10.
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New businesses contd...

Number of centres 6 22 30 40 50
Revenue (Rs MM) 73 377 601 933 1,354
EBITDA (Rs MM) (91) (26) 50 80 130
EBITDA Margins(%) -125 -7 8 9 10
Risks and Concerns

Concentrated towards IT Training: Right from the inception, NIIT's core business has been IT Training. The company derives
over 80% of revenues from IT Retail and Corporate Training. While there is a big supply crunch for IT professionals in the Industry,
any slowdown in the technology sector will reduce demand, which in turn will negatively impact revenues of NIIT. The IT sector has
been the preferred choice of the employees mainly due to lucrative pay packages being offered, any slowdown in the major markets
like US and continental Europe, will ultimately reduce the demand environment, which in turn will impact the supply side vehicles
like NIIT.
US is revenue heavy: NIIT acquired Element K in Nov. 2006, which is a leader in US corporate training market. Post the acquisition
of Element K, the company dervies 57% of its revenues from this segment, with EBITDA margins of around 28%. This segment is
expected to grow at around 6% to 7% over the next two years. This segment exposes the company to currency risk. Also, if over half
of NIIT’s business is growing at 7%, then to record 20% overall growth, the remaining 43% of the business has to record an yearly
growth rate of 35%. We believe that if the slowdown continues in US, then the corporate training segment will be a drag on the
consolidated financials of NIIT.
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We expect NIIT to achieve revenue and net profit CAGR of 17.5% and 24.4% respectively over FY08 to FY11E. The net profit
growth is inclusive of NIIT’s 25% stake in NIIT Technologies. At the CMP of Rs87, the stock is tading at a P/E of 15.4x and 12.3x on
our estimated FY09 and FY10 EPS of Rs5.6 and Rs7.1 respectively.
NIIT is on high growth trajectory post the acquisition of Element K and its new business initiatives. NIIT's new business initiatives
have met with good response and the company has set an ambitious revenue target of Rs1,500 MM by FY10 from these. The
resurgence in company's core IT Training business will also provide further growth momentum. Also, the government school business,
which was sluggish in FY07, is also witnessing good traction and NIIT has very recently won a 900 government schools contract from
Bihar and Maharashtra worth Rs710 MM.
Our DCF value translates to a target price of Rs106 thus giving 19.6% upside over CMP of Rs87. At our target
price, the stock is trading at a P/E of 18.9x and 14.9x on our estimated EPS of Rs5.6 and Rs7.1 for FY09 and
FY10 respectively. We thus initiate coverage on NIIT with “BUY” rating based on our DCF target price of Rs106
from September 09 perspective.
PV of cashflows 8,233 FCF in terminal year (Rs m) 2,295

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Fiscal Year 2008(A) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 10,068 11,832 13,869 16,312 18,859 21,427 23,915 26,215 28,211 30,076 31,765
% Growth 26.6% 17.5% 17.2% 17.6% 15.6% 13.6% 11.6% 9.6% 7.6% 6.6% 5.6%
EBITDA 1,035 1,207 1,429 1,696 1,961 2,228 2,487 2,661 2,793 2,902 2,986
% Margin 10.3% 10.2% 10.3% 10.4% 10.4% 10.4% 10.4% 10.2% 9.9% 9.6% 9.4%
EBIT 506 575 736 964 1,184 1,405 1,619 1,747 1,834 1,898 1,936
% Margin 5.0% 4.9% 5.3% 5.9% 6.3% 6.6% 6.8% 6.7% 6.5% 6.3% 6.1%
Tax rate -5.0% 10.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
NOPAT 531 517 670 877 1,077 1,279 1,473 1,590 1,669 1,727 1,762
Depreciation and amortization 529 632 692 732 778 823 868 914 959 1005 1,050
% margin 5.3% 5.3% 5.0% 4.5% 4.1% 3.8% 3.6% 3.5% 3.4% 3.3% 3.3%
% GFA 9.1% 9.3% 9.2% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
Working capital (excl cash) 168 115 47 (70) 189 214 239 262 282 301 318
% of sales 1.7% 1.0% 0.3% (0.4%) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Change in working capital 404 53 68 117 (258) (26) (25) (23) (20) (19) (17)
Operating Cash Flows 1464 1,202 1,430 1,727 1,597 2,076 2,317 2,481 2,608 2,713 2,795
Capex 1120 1,000 750 500 500 500 500 500 500 500 500
Capex to sales 1.1% 8.5% 5.4% 3.1% 2.7% 2.3% 2.1% 1.9% 1.8% 1.7% 1.6%
GFA 5,818 6,814 7,564 8,064 8,564 9,064 9,564 10,064 10,564 11,064 11,564
Sales/GFA 1.7 1.7 1.8 2.0 2.2 2.4 2.5 2.6 2.7 2.7 2.7
Unlevered FCF 1.352 202 680 1,227 1,097 1,576 1,817 1,981 2,108 2,213 2,295
Projection Year 0.0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5
Discount Factor 1.0000 0.9385 0.8266 0.7281 0.6413 0.5648 0.4975 0.4382 0.3859 0.3399
FCF 202 638 1,014 798 1,011 1,026 985 924 854 780
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Sensitivity of NIIT’s Share price to the WACC and growth rates

9.5% 10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5%
0% 130 117 106 97 89 82 77 72
1% 138 123 111 101 92 85 79 73
Growth Rates
2% 149 131 117 105 96 88 81 75

3% 163 141 124 111 100 91 84 78
4% 183 154 134 118 106 95 87 80
5% 210 172 146 127 112 100 91 83
6% 254 198 163 138 120 107 96 87
7% 322 239 187 154 131 114 101 91
8% 511 312 225 177 146 124 109 97
9% 1,358 479 293 212 167 138 118 103
Our DCF value of Rs106 is based on 13.5% WACC and 4% terminal growth rate. The company has a debt
to equity ratio of 0.6x. We expect the target debt to equity ratio for the company will be around 20:80,
thus giving an overall WACC of 13.5% comprising of 15% cost of equity and 8% post tax cost of debt.
We have discounted NIIT’s FCF with same cost of capital when compared with Educomp (13.5%) and
Everonn (13.5%) even though NIIT is a matured business, when compared to relatively newer business
players like Educomp and Everonn. Though, we believe that the overall risk with NIIT’s business is lower
than that of Educomp and Everonn, we have applied the same WACC. Were we to lower this, the upside
from NIIT will be higher.
EDUCATION SECTOR 66
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Particulars FY05(A) FY06(A) FY07(A) FY08(A) FY09(E) FY10(E) FY11(E)
Income from operations 3,984 4,507 7,951 10,068 11,832 13,869 16,312
Total operating expenditure 3,509 3,933 7,188 9,033 10,625 12,441 14,616
EBITDA 474 574 763 1,035 1,207 1,429 1,696
Depreciation 345 374 473 529 632 692 732
Interest Charges - - 124 - - - -
Other Income 88 65 79 (104) 59 111 130
Pre-Tax 217 266 246 402 634 847 1,095
Tax 10 29 4 (20) 63 76 88
Net Profit 207 236 242 422 570 771 1,007
Minority Interest - 1 7 7 7 7 7
Share of profits from NIIT Technologies 149 164 324 341 375 412 454
Net Profit 356 400 560 756 939 1,177 1,454
Diluted EPS (Rs) 2.1 2.4 3.4 4.5 5.6 7.1 8.7
Adjusted EPS (Rs) 2.1 2.4 3.4 4.5 5.6 7.1 8.7
Extraordinary - 14 - - - - -
Dividend- Ordinary 106 116 143 214 282 353 436
Addition to Reserves 235 281 406 506 621 778 962
Shares (MM) 166.2 166.2 166.2 166.2 166.2 166.2 166.2
Avg Shares (MM) 166.2 166.2 166.2 166.2 166.2 166.2 166.2
Div. Per share (Rs) 0.6 0.7 0.9 1.3 1.7 2.1 2.6
EDUCATION SECTOR 67
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Annexure II: Balance Sheet

Assets
Gross Fixed Assets 2,557 2,735 5,702 5,814 6,814 7,564 8,064
Less: Acc. Depreciation 1,334 1,605 1,989 2,309 2,941 3,633 4,365
Net Block 1,223 1,131 3,713 3,505 3,873 3,931 3,699
Deferred Tax Asset - 20 81 250 250 250 250
CWIP 15 256 134 476 476 476 476
Investments 424 400 611 892 1,115 1,339 1,740
Cash & cash in kind 358 650 736 799 722 1,108 1,858
Current Assets (Exc. Cash) 1,792 2,648 3,775 3,779 4,365 5,024 5,777
Miscellaneous expenses 0 0 1 1 1 1 1
Total Assets 3,813 5,105 9,050 9,702 10,802 12,128 13,800
Liabilities
Share Capital 193 193 198 329 329 329 329
Reserves and surplus 2,156 2,475 2,948 3,691 4,350 5,128 6,090
Total Networth 2,349 2,669 3,145 4,020 4,679 5,458 6,419
13.5% CPS of a sub. held outside the group 56 56 - - - - -
Minority Interest - 1 4 15 21 28 35
Debt 412 1,090 2,698 2,057 1,852 1,666 1,500
Current Liabilities 995 1,289 3,203 3,611 4,250 4,976 5,846
Total Liabilities 3,813 5,105 9,050 9,702 10,802 12,128 13,800
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PBT 217 266 246 402 634 847 1,095
Add: Depreciation as per P&L 345 374 473 529 632 692 732
Add: Share of profits in associates - - - 375 412 454
Add: Others 100 118 207 196 - - -
Opr. C/F before working capital changes 662 757 925 1,127 1,641 1,952 2,281
Changes in current assets 3 907 2,270 299 586 659 753
Changes in current liabilities (427) 294 1,914 407 639 726 870
Tax paid 10 29 4 (20) 63 76 88
Cash flow from operating activities (A) 221 114 566 1,255 1,631 1,943 2,310
Cash consumed for investing in fixed assets 696 419 2,844 454 1,000 750 500
Cash consumed for making invesment (431) (25) 212 281 223 223 402
Others 0 (47) (1,819) 69 - - -
Cash flow from investing activities (B) 265 348 1,237 804 1,223 973 902
Cash flow from fresh equity issue 22 38 (37) 65 38 - -
Cash flow from debt issue 148 678 1,608 (641) (206) (185) (167)
Cash used for paying dividend (121) (132) (167) (251) (318) (398) (492)
Interest (19) - 164 - - - -
Exchange differences (31) 8 146 133 - - -
Others 12 (67) (958) 305 - - -
Cash flow from financing activities (C) 10 525 757 (388) (485) (583) (659)
Net cash generated (A-B+C) (34) 292 86 63 (78) 387 750
Opening cash balance 392 358 650 736 799 722 1,108
Closing cash balance 358 650 736 799 722 1,108 1,858
EDUCATION SECTOR 69
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Annexure IV: Ratios

Adjusted P/E 40.6 36.2 25.8 19.1 15.4 12.3 9.9
Price/Book Value 6.2 5.4 4.6 3.6 3.1 2.6 2.3
EV/EBITDA 31.3 27.1 22.5 16.0 13.5 11.3 9.4
EV/Sales 3.7 3.5 2.2 1.6 1.4 1.2 1.0
Market Cap/Sales 3.6 3.2 1.8 1.4 1.2 1.0 0.9
Earnings 2.1 2.4 3.4 4.5 5.6 7.1 8.7
Cash Earnings 4.2 4.7 6.2 7.7 9.5 11.2 13.2
Dividend 0.6 0.7 0.9 1.1 1.4 1.8 2.2
Book Value 14.1 16.1 18.9 22.8 26.9 32.0 38.2
Operating Margin 11.9 12.7 9.6 10.3 10.2 10.3 10.4
EBIT Margin 5.4 5.9 4.7 4.0 5.4 6.1 6.7
PAT Margin 8.9 8.9 7.0 7.5 7.9 8.5 8.9
Turnover Ratios (x)
Debtors Turnover Ratio 3.2 2.4 3.6 3.2 3.3 3.3 3.3
Fixed Asset Turnover Ratio 1.6 1.6 1.4 1.5 1.5 1.6 1.8
Solvency Ratios (x)
Current Ratio 2.2 2.6 1.4 1.2 1.2 1.2 1.3
Debt Equity Ratio 0.2 0.4 0.9 0.6 0.5 0.4 0.3
Interest Coverage Ratio - - 3.0 - - - -
Return on Capital Employed 7.9 7.1 6.3 6.6 9.7 11.9 13.8
Return on Net Worth 15.2 15.0 17.8 18.8 20.1 21.6 22.7
EDUCATION SECTOR 70
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Core Projects (CPTL): Lacking visibility CMP:284;Target:222 SELL

Bloomberg Code CORE.BO JV with IL&FS - Key growth driver for the company: The JV currently has bid for Sarva
Reuters Code CPTL IN Siksha Abhiyaan (SSA) project with the government of Jharkhand (500 schools) and is in the
BSE Code 512199 process of bidding for more SSA projects. Education in India is witnessing increased government
NSE Code COREPROTEC support with budget for school education increasing by 35% to Rs213 Bn in Union Budget ‘09.
52-week H/L (Rs) 464/119
Pact with NASA’s Centre of Higher Learning (CHL): CPTL has entered into an agreement
Monthly H/L (Rs) 288/175
with CHL to provide content delivery in the global education space. The company plans to set up
100 centres by FY10. CPTL has plans to tie up with IL&FS for setting up same kind of visualisation
educational centers in near future, which will provide an additional driver for revenue growth in
M Cap (Rs MM) 28,863
near future.
M Cap (US$ MM) 664
EV (Rs MM) 30,541 Jharkhand led management goals: The management has given Rs9.5 Bn FY09 revenue guidance,
Valuation Parameters (FY11E)
which includes Rs3.5 Bn from Jharkhand schools. We have not factored in this Rs3.5 Bn in
our assumptions, as it is yet to get finalised. And even if it does, then FY10 is likely to see those
EV/EBITDA (x) 16.0
revenues. Moreover, the capex requirement envisages Rs11 Bn as debt, at the ILFS JV level, a
Mcap/EBITDA (x) 14.2
negative in current market environment.
EV/Sales (x) 2.9
P/E (x) 17.5 At the CMP of Rs285, the stock is trading at a P/E of 31.0x and 24.1x on our estimated
Shareholding Pattern FY09 and FY10 EPS of Rs9.2 and Rs11.8 respectively. We expect Core Projects to
achieve revenue and net profit CAGR of 36.0% and 25.1% over FY08 to FY11E. Our
DCF based target price of Rs222, thus translates to a “SELL” rating for Core Projects.
(%) (%) (MM) (Rs) (x)
FY07 (A) 1,943 379 19.5 322 16.6 101.3 3.2 89.5
FY08 (A) 4,460 979 21.9 845 18.9 101.3 8.3 34.2
FY09 (E) 5,711 1,151 20.2 931 16.3 101.3 9.2 31.0
FY10 (E) 7,778 1,490 19.2 1,197 15.4 101.3 11.8 24.1
FY11 (E) 11,222 2,038 18.2 1,654 14.7 101.3 16.3 17.5
(A) Audited; (E) Estimated; FV = Rs2
EDUCATION SECTOR 71
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Company Background
Core Projects was originally incorporated as Akhileshwar Texports Ltd. The company entered into IT business in FY04 by focussing
on logistics and ERP domain. In the Logistics domain, Core is focused on providing RFID and GPS based tracking solutions, asset
management and smartcard based solutions. The focus industries are retail, manufacturing, logistics, and healthcare. In the ERP domain,
Core's offerings include onsite & offshore solutions, development & production support and project staffing for SAP, Oracle, PeopleSoft,
and JD Edwards. In the IT segment, CPTL derives its revenues from product sales, implementation and maintenance. CPTL has 7
products registered with the US international patent.
In FY06, it shifted its focus to the education vertical by acquiring Enterprise Computing System (ECS) and Software Technical Services
(STS). ECS gave Core Projects access to schools in 6 states in US. The company recently acquired Azzurri Education in UK and KC
Management group in US. With KC Management Group, Core will have access to another 10 US states. Azzurri, on the other hand,
will give it access to over 1,000 schools in the UK.
In the domestic education space, it has a administration contract with the State Government of Jharkhand under the Sarva Shikhsa
Abhiyan. CORE’s offerings in the education domain include products and solutions in the areas of school management systems,
assessment systems, accountability systems and IT infrastructure systems.
By acquiring Azzurri Education and KCManagement group, Core has consolidated its position as a dominant player in the education
sector. These acquisitions bring with them complementary solutions and services, ensuring Core is well on its way to becoming an
end-to-end solutions provider in the global education space, providing school administrators with the tools needed to offer quality
education to students worldwide. Core’s education customer base is spread across the USA, UK, Africa, Sri Lanka, Bahamas, Caribbean
and India.
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Revenue Composition
EDUCATION SECTOR 73
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Joint Venture with IL&FS - Key growth driver for the company
CPTL has tied up with the IL&FS Education & Technology Services Ltd to offer comprehensive IT solutions in the education space.
The JV (ILFS Core Education) will bid for ICT projects in different states under the Sarva Shiksha Abhiyaan (SSA) and on being
awarded the contract, the company will set up complete infrastructure for schools. These projects operate on BOOT model whereby
the company will transfer the infrastructure to the schools at the end of the contract for a nominal amount.
This JV has bid for the SSA project in Jharkhand state whereby, the company would be providing complete infrastructure for schools
under BOOT model. The project would involve investment of Rs13 Bn, which will be financed through a mix of Debt and Equity.
CPTL and IL&FS will each contribute Rs1 Bn as equity and balance Rs11 Bn would be raised in the form of debt. The company
expects to derive revenue of Rs8 Bn pa (Rs1,000 per child per annum with 8 MM students across the state) with EBITDA margin of
60%.
The company expects its FY09 revenues to be around Rs9.5 Bn and 85% of that will come from the education domain. This time
round, the company feels that a major chunk of revenue will come from India, as the company is in active dialogue with approximately
9-10 states Scientific Steering Committees (SSC). However, this guidance includes Rs3.5 Bn, as CPTL’s share in the IL&FS JV for the
Jharkhand school contract. For our estimates, we have not taken this Rs3.5 bn revenues, as the company has not yet
won the contract. And even if it does, then FY10 is likely to see those revenues. Moreover, the capex requirement envisages Rs11
Bn as debt, at the ILFS JV level, a negative in current market environment.
Currently, CPTL derives a major chunk of its education revenues from US and UK education market. In these markets, there is a
seasonality in revenues because of the education spending in US and UK. It happens much more in the first half than the second half
because the school year there starts in August. So, most of the schools are spending between April and August and there is less
spending in the second half.
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Collaboration with NASA's Centre for Higher Learning: CPTL has entered into collaboration with NASA's CHL (Centre for
Higher Learning). CPTL will use CAVE (Cave Automatic Virtual Environment) technology of CHL for writing content for the global
education market. The CPTL and CHL collaboration, is exclusively confined to the Asia-Pacific region and will enable Core to
assimilate and internalize the technology, for use in developing content for the Indian and international education markets.
CAVE enables educators to take a different approach to imparting education. The immersive visualisation technology allows users to
be fully engrossed in an interactive 3D virtual environment. The deployment of this technology in classrooms will enhance the ability
of students to understand complicated topics. It will also enable them to conduct innovative experiments leading to quality research
and development
The applications will be used in areas such as physics, chemistry, molecular science, biology, computer science, mathematics, scientific
computation, etc. The company will prepare educational software titles for schools and higher education institutions for students
across US, UK and India.
To facilitate this technology in India, Core has entered into a memorandum of understanding (MoU) with the Indira Gandhi National
Open University (IGNOU) for setting up visualization learning centres at all IGNOU centres in India. Setting up of one center will
generate one time license revenue of up to Rs 30 MM and recurring revenue of Rs 28 MM per year for the company. Over the next
five years, the company expects to set up 100 centers per year, inclusive of the centers to be set up for IGNOU. The company’s first
centre will come in August 2008. However, for our estimates, we have factored in 10 centres for FY09E, 25 in FY10E and 50 in FY11E.
Under the MoU, Core will provide the physical infrastructure for housing and locating the immersive visualisation technology. In
addition, Core through its JV with IL&FS will also spearhead the development of content for teaching, as well as prepare teacher
training materials and packages. IGNOU will aid in setting up visualisation laboratories at all its centres, suggest the educational
content and provide subject matter experts in development of the educational products.
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Growing inorganically: CPTL has acquired 7 companies in last 3 years, most of which are in the education domain. This has helped
the company in growing its revenue by 5x in last 3 years (CAGR of 127%). With these acquisitions, the company has been able to
acquire new products and also cross sell its existing products to newer clients.
Azzurri has 1,000 schools under its fold in UK, while K C Management group has 2,500 schools with 1.6 MM students across 10
states in US. With these acquisitions, the company now has over 30 products in the education domain.
While these acquisitions have helped CPTL to increase its presence in the global education sector, it's the Indian education sector,
which will be the key growth driver of the company going forward. The company currently has over 30 products and we believe that
the products acquired through the acquisitions will help CPTL to increase its footprint in the domestic education segment. While,
these acquisitions currently contributes to over 50% of CPTL’s revenues, going forward, we believe that it will contribute to only
about 35% of CPTL’s revenues, as the company is increasing its presence in the domestic education segment.
Acquisitions by Core Projects

Company acquired Year US$ MM
Aarman Inc FY07 4.5
Emacs Technologies FY07 3.0
Enterprise Computing Services Inc FY06 0.9
Weda Infotech Pvt. Ltd. FY06 0.02
Azzurri Communications Ltd. FY08 12.0
Hamlet Computer Group Ltd. FY08 3.0
KC Management Group FY08 30.0
Source: Company/Media reports
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IT services revenues to record 32% CAGR over FY09 to FY11: While Core Projects move to the limelight was driven by its
entry into the educational segment, the company however, started off as an IT service provider. Till FY07, education segment contributed
to just 24% of Core’s overall revenue, while remaining 76% came from providing IT services across different verticals like BFSI,
Logistics and Healthcare.
However, Core acquired two companies in FY08, which are in the education segment and the revenue mix changed in favour of
education. Going forward, we expect 20% of overall revenues to come from IT services segment.
The growth in the IT services sector has been buoyant. The IT sector has recorded over 28% CAGR from FY04 to FY08. In FY09,
NASSCOM expects the Indian IT Industry to record growth of 24%. Core offers end to end services in this space. in ERP, the
company’s key areas of operations are Material Management, Sales & Distribution, Plant Maintenance, Finance & Controlling, Production
Planning, Human Resources, Industry Solutions, Utilities, Collections & Disbursements, Retail.
In the logistics space, Core’s RFID based tracking system is used for automated tracking of assets on real time basis, across the supply
chain. These applications are used in manufacturing as well as service industries like containers, airlines, retail, etc.
The company currently employs 825 people and has one of the lowest attrition rates in the industry (12%). Its products include GPS/
GPRS based tracking system, Radio Frequency Identification (RFID) based Asset management, Smart Card Based Solutions, BI solution,
ERP Project Management and Implementation Services. We expect Core’s IT services revenue to record CAGR of 31.6% over FY09
to FY11, forming close to 20% of overall revenues.
EDUCATION SECTOR 77
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Risks and Concerns

High exposure to US: CPTL derives significant portion of its revenues from US. In FY08, US contributed to over 70% of the
company's topline. Given the recession like situation in US, the spending in technology could be curtailed and the company’s future
growth prospects could be negatively impacted. That said, the rupee has cooled off considerably after hitting the highs of Rs39 earlier
this year.
Delay in rollout of SSA projects: The company's core focus in the coming years is the education domain. While there are ample
opportunities for growth in the sector for all the active players, any non allotment/failure to win the targeted contract, would
lower the pace of the growth of the company.
The company was due to get a major contract in the ICT space in the Q4FY08, which didn't materialize. The management now feels
that the contract will come through in Q2FY09. We believe that if this contract doesn't come though then it will be a major setback
for the company in the near term. The stock has already corrected from Rs500 to Rs200 within one year.
The management has guided for Rs9.5 Bn in revenues for FY09, out of which almost Rs3.5 Bn will come from the domestic education
market. If the company does get it, only then it will able to get a premium in valuations and the topline growth would be over 110%
for FY09. But in case the JV fails to win the contract, then Core Projects will record relatively slower 35% YoY growth in topline in
FY09 (revenue of Rs6 Bn), and we believe, then, the current valuations will not sustain.
EDUCATION SECTOR 78
PRIME BROKING

Core projects historically has been an IT service provider in the logistics and ERP space. The company got premium valuations
compared to its IT peers due to its shift towards the education space. The company derives about 62% of its revenues from global
education sector, which we believe is a mature industry and shouldn't command a higher multiple. A major chunk of the company's
future growth will come from its JV with IL&FS, which taps the ICT projects being offered by the state governments. We believe that
the company gets a higher multiple largely based on this aspect.
We have valued Core Projects on DCF basis, as it allows us to factor long term assumptions. We have been conservative on revenue
growth and operating margins and net profit margins going forward. At the current market price of Rs285, the stock is
trading at a P/E of 31.0x and 24.1x of our estimated FY09 and FY10 EPS of Rs9.2 and Rs11.8 respectively. We expect
Core Projects to achieve revenue and net profit CAGR of 36.0% and 25.1% respectively over FY08 to FY11E. Our
DCF based target price of Rs222, thus translates to a “SELL” rating for Core Projects.
Though we have not factored in Rs3.5 Bn revenues from Jharkhand, we have also factored in a lower WACC of 13.5%. Had we
factored in the Jharkhand led revenues, our target price would have been marginally better at Rs243 (still a SELL). This is
because, though sales would have grown by 48.0% CAGR over FY08-FY11E, but in order to achieve these numbers, CPTL would
need to raise Rs5.5 Bn in debt (as its share in JV) and the overall debt to equity ratio would have risen to over 1x. Thus, even
assuming a target debt to equity ratio of 70:30, we would have discounted CPTL’s FCF at a WACC of 14.0% (same rationale as
considered in Everonn), thus giving a target price of Rs243 per share.
PV of cashflows 2,946 FCF in terminal year (Rs m) 5,122

EDUCATION SECTOR 79
PRIME BROKING

Fiscal Year 2008(A) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 4,460 5,711 7,778 11,222 15,629 20,987 27,131 33,718 40,219 45,961 50,225
% Growth 129.6% 28.1% 36.2% 44.3% 39.3% 34.3% 29.3% 24.3% 19.3% 14.3% 9.3%
EBITDA 979 1,151 1,490 2,038 2,799 3,706 4,724 5,786 6,801 7,658 8,242
% Margin 21.9% 20.2% 19.2% 18.2% 17.9% 17.7% 17.4% 17.2% 16.9% 16.7% 16.4%
EBIT 933 1,050 1,339 1,836 2,269 3,041 3,910 4,816 5,675 6,375 6,803
% Margin 20.9% 18.4% 17.2% 16.4% 14.5% 14.5% 14.4% 14.3% 14.1% 13.9% 13.5%
Tax rate 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6%
NOPAT 807 907 1,157 1,587 1,961 2,628 3,379 4,162 4,904 5,509 5,880
Depreciation and amortization 45 102 152 202 530 665 814 970 1,127 1,283 1,439
% margin 1.0% 1.8% 1.9% 1.8% 3.4% 3.2% 3.0% 2.9% 2.8% 2.8% 2.9%
% GFA 6.7% 7.7% 8.7% 9.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10.2% 10.2%
Working capital (excl cash) 1,937 2,612 3,650 5,078 6,916 9,077 11,463 13,909 16,188 18,040 18,709
% of sales 43.4% 45.7% 46.9% 45.3% 44.3% 43.3% 42.3% 41.3% 40.3% 39.3% 37.3%
Change in working capital (1,585) (675) (1,038) (1,428) (1,838) (2,161) (2,386) (2,446) (2,279) (1,852) (669)
Operating Cash Flows (733) 333 271 361 1,984 2,595 3,133 3,470 3,644 3,826 4,149
Capex 1,327 500 1,000 1,000 1,150 1,323 1,455 1,527 1,527 1,527 1,527
Capex to sales 29.8% 8.8% 12.9% 8.9% 7.4% 6.3% 5.4% 4.5% 3.8% 3.3% 3.0%
GFA 1,531 2,031 3,031 4,031 5,181 6,503 7,958 9,486 11,013 12,541 14,068
Sales/GFA 2.9 2.8 2.6 2.8 3.0 3.2 3.4 3.6 3.7 3.7 3.6
Unlevered FCF (2,060) (167) (729) (639) (497) (190) 352 1,159 2.224 3,413 5,122
Projection Year 0.0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5
Discount Factor 1.0000 0.9385 0.8266 0.7281 0.6413 0.5648 0.4975 0.4382 0.3859 0.3399
FCF (167) (684) (529) (362) (122) 199 577 975 1,317 1,741
EDUCATION SECTOR 80
PRIME BROKING
Sensitivity of Core Projects’ Share price to the WACC and growth rates
9.5% 10.5% 11.5% 12.5% 13.5% 14.5% 15.5% 16.5% 17.5%
0% 292 249 214 185 161 141 125 110 98
1% 324 273 232 200 173 151 132 116 103
Growth Rates
2% 363 302 254 217 186 162 141 123 109

3% 415 339 282 238 202 174 151 132 115
4% 486 387 316 263 222 189 163 141 123
5% 588 453 362 296 246 207 177 152 132
6% 747 548 423 338 276 230 194 165 142
7% 1,032 697 512 396 316 258 215 181 155
8% 1,687 963 651 479 370 295 242 201 170
9% 4,790 1.576 900 609 448 346 276 226 188
Our DCF value of Rs222 is based on 13.5% WACC and 4% terminal growth rate. The company has a
current debt to equity ratio of 3.5x. However, to set up NASA’s CHL, the company will have to leverage
its balance sheet further and thus we have assumed a target debt to equity ratio for the company to be
around 65:35 thus giving an overall WACC of 13.5% comprising of 14% cost of equity and 8% post tax cost
of debt.
Since we have not factored in Rs3.5 Bn, which the company expects to come from the domestic education
segment in FY09, the overall WACC is lower. Had we factored in those numbers, our target price would
have been Rs243. This is because the sales then would have grown by 48.0% CAGR over FY08 to FY11E,
but in order to achieve those numbers, CPTL would need to raise Rs5.5 Bn in debt (as its share in JV) and
the overall debt to equity ratio would have risen to over 1x. Thus, even assuming a target debt to equity
ratio of 70:30, we would have discounted CPTL’s FCF at a WACC of 14.0% (same rationale as considered
in Everonn), thus giving a target price of Rs243 per share.
EDUCATION SECTOR 81
PRIME BROKING

Income from operations 46 88 867 1,943 4,460 5,711 7,778 11,222
Total operating expenditure 37 57 742 1,564 3,481 4,560 6,288 9,184
EBITDA 9 31 125 379 979 1,151 1,490 2,038
Depreciation 0 0 5 12 45 102 152 202
Interest Charges - - 10 17 25 114 156 224
Other Income 0 0 3 9 70 143 194 281
Pre-Tax 9 31 112 358 978 1,078 1,378 1,893
Tax 1 1 6 36 133 147 181 239
Net Profit 8 31 106 323 845 931 1,197 1,654
Minority Interest 0 0 - 0 - - - -
Net Profit 8 30 106 322 845 931 1,197 1,654
Diluted EPS (Rs) 0.1 0.3 1.0 3.2 8.3 9.2 11.8 16.3
Adjusted EPS (Rs) 0.1 0.3 1.0 3.2 8.3 9.2 11.8 16.3
Extraordinary - - - - - - - -
Dividend- Ordinary - 0 4 12 14 19 24 33
Addition to Reserves 8 30 102 310 828 909 1,169 1,615
Shares (MM) 101.3 101.3 101.3 101.3 101.3 101.3 101.3 101.3
Avg Shares (MM) 101.3 101.3 101.3 101.3 101.3 101.3 101.3 101.3
EDUCATION SECTOR 82
PRIME BROKING
Annexure II: Balance Sheet

Assets
Gross Fixed Assets 1 2 87 204 1,531 2,031 3,031 4,031
Less: Acc. Depreciation 0 0 42 49 109 211 363 564
Net Block 1 1 45 155 1,421 1,820 2,668 3,467
Goodwill - - 83 288 1,193 1,193 1,193 1,193
CWIP - 5 8 7 509 459 367 257
Investments - - 1 - - - - -
Cash & cash in kind 0 2 96 279 538 936 1,079 1,335
Current Assets (Exc. Cash) 5 36 281 761 2,865 4,133 5,692 7,991
Miscellaneous expenses 1 1 2 2 1 1 1 1
Total Assets 7 45 517 1,493 6,528 8,542 10,999 14,243
Liabilities
Share Capital 2 2 64 144 413 413 413 413
Reserves and surplus - 30 171 905 3,496 4,406 5,574 7,189
Total Networth 2 32 235 1,050 3,909 4,819 5,987 7,602
Deferred Tax Liability - 0 1 5 12 12 12 12
Minority Interest - - 3 10 - - - -
Debt 3 8 56 18 1,678 2,190 2,958 3,716
Current Liabilities 2 5 222 409 929 1,521 2,042 2,913
Total Liabilities 7 45 517 1,493 6,528 8,542 10,999 14,243
EDUCATION SECTOR 83
PRIME BROKING

PBT 9 31 112 358 978 1,078 1,373 1,879
Add: Depreciation as per P&L 0 0 5 12 45 102 152 202
Add: Interest - - 10 17 25 114 156 224
Add: Others - - - - (16) - - -
Operating cash flow before working capital changes 9 31 128 387 1,033 1,294 1,685 2,319
Changes in current assets 8 32 276 303 2,135 1,268 1.559 2,299
Changes in current liabilities - 3 219 191 526 593 521 871
Tax paid 1 1 6 36 133 147 181 239
Cash flow from operating activities (A) 0 2 64 238 (709) 472 466 651
Cash consumed for investing in fixed assets - 5 89 116 1,829 449 908 890
Cash consumed for making invesment - - 1 (1) - - - -
Others - - - - 929 - - -
Cash flow from investing activities (B) - 5 90 115 2,758 449 908 890
Cash flow from fresh equity issue - - 61 81 268 - - (0)
Cash flow from debt issue - 5 48 (37) 1,660 512 768 758
Cash used for paying dividend - - - - - 22 28 39
Interest - - (10) (17) (25) (114) (156) (224)
Others - - 21 34 1,822 - - -
Cash flow from financing activities (C) - 5 119 60 3,725 420 640 572
Net cash generated (A-B+C) 0 2 94 183 258 442 198 334
Opening cash balance 0 0 2 96 279 558 980 1,178
Closing cash balance 0 2 96 279 538 980 1,178 1,512
EDUCATION SECTOR 84
PRIME BROKING
Annexure IV: Ratios

Adjusted P/E - - 272.1 89.5 34.2 31.0 24.1 17.5
Price/Book Value - - 124.3 27.6 7.4 6.0 4.8 3.8
EV/EBITDA - - 231.2 76.3 31.2 27.0 21.4 16.0
EV/Sales - - 33.3 14.9 6.8 5.4 4.1 2.9
Market Cap/Sales - - 33.3 14.9 6.5 5.1 3.7 2.6
Earnings 0.1 0.3 1.1 3.2 8.5 9.4 11.8 16.3
Cash Earnings 0.1 0.3 1.1 3.4 8.8 10.2 13.3 18.3
Dividend - 0.0 0.0 0.1 - - - -
Book Value 0.0 0.3 2.3 10.5 19.6 29.0 41.0 57.5
EBIT Margin 19.3 35.5 14.2 19.3 22.5 20.9 19.7 18.9
PAT Margin 18.3 34.8 12.2 16.6 18.9 16.3 15.4 14.7
Turnover Ratios (x)
Solvency Ratios (x)
Current Ratio 5.7 13.0 1.8 2.8 4.4 3.7 3.6 3.4
Interest Coverage Ratio NA NA 11.8 21.9 39.7 10.4 9.9 9.4
EDUCATION SECTOR 85
PRIME BROKING
Greycells Entertainment Limited (GEL): One step at a time... CMP: Rs326; Not Rated
Bloomberg Code GCE IN
Reuters Code CNPT.BO Greycells Entertainment is in media and entertainment space. The company has been marshalling
BSE Code 508918 its talent pool in the field of education, both in India and abroad.
NSE Code NOT LISTED In its initial operations, Greycells was confined to delivering content within the entertainment
52-week H/L (Rs) 403/125 Industry - with relevance in outsourcing of shooting, animation, graphics, and post production
Monthly H/L (Rs) 339/301 services. The company has implemented projects like:
6 Mth avg vol 8,995
• Lonely Plant • Ghoom • Dharm • Eurasia
Shares O/s (MM) 3.6
M Cap (Rs MM) 1,188 However, the company realigned its business focus in line with the current market trend. The
M Cap (US$ MM) 28 company, based in Mumbai, now runs the EMDI brand of media education in India and Middle
EV (Rs MM) 1,205 East across various campuses with focus on Event Management (EM), Radio education, Public
Valuation Parameters (FY08) Relations (PR) and other media based management programmes. The company currently offers 2
EV/EBITDA (x) 8.0 full time courses and 5 part time courses across EM, PR and radio education.
Mcap/EBITDA (x) 8.0 The vocational training methodology at EMDI is unique from traditional academic education. The
EV/Sales (x) 1.4 company plans to consolidate its existing courses and increase student intake without further
P/E (x) 9.4 requirement of space or infrastructure.
The company is also planning to come out with part-time courses in:
• Tourism and Hospitality
• Animation and Graphics
• Retail and Merchandising
• Entrepreneurship and Business Management
• Design and Architecture
EDUCATION SECTOR 86
PRIME BROKING
Courses offered by EMDI

Enrollments
Name of course Nature Duration Course Fees (Rs) FY08 FY09E FY10E
Diploma in Event Management Part Time 1 year 40,000 80 150 300
Post Graduate Diploma in Event Management Part Time 1 year 50,000 30 60 120
Post Graduate Diploma in Event Management and Public Relations Full Time 1 year 120,000 50 80 160
Diploma in Public Relations and Corporate Communications Part Time 1 year 40,000 - 60 150
Post Graduate Diploma in Advertising and Communications Full Time 2 years 210,000 30 50 120
Diploma in Advertising and Media Part Time 1 year 40,000 - 60 150
Diploma in Radio Jockeying and Programming Part Time 6 Months 40,000 50 100 200
Total 240 560 1,200
Source: Company
Apart from these, the company also coaches students in Jai Hind College under different programs mentioned above.
The company recently acquired 26% stake in Chennai based Access Atlantech Education (I) Ltd (AAT). This company provides high
end technology based courses in the field of media and entertainment. Both the institutes currently have a combined seat strength of
1,800 and have aggressive plans to increase to 10,000 levels in next couple of years.
According to FICCI PWC 2007 report (Source: Greycells), Indian Media and Entertainment Industry is growing at a CAGR of 24% and
will be Rs519 Bn by 2010. Currently, 4 out of 10 students are choosing Media and Entertainment as their career options and this
presents a great opportunity to companies like Greycells.
AAT has ambitious plan to expand its existing operations to cater to increased demand for education and training courses.
• Plans to expand its capacity at its existing four centres. This will take AAT’s current seat capacity from 580 to 3,415 by FY11E.
• Plans to open 3 additional centres at Dibrugarh, Hyderabad and Kolkata resulting in additional 1,440 seat capacity by FY11E.
• Opening of 80 franchise centres under two different franschise model in Tier II and Tier III cities by FY11E.
• Will start 9 new courses taking total courses offered to 15 (currently 6 courses are offered by AAT).
EDUCATION SECTOR 87
PRIME BROKING
To fund its expansion plans, AAT will need Rs250 MM. Greycells acquired the 26% stake in AAT for Rs125 MM. The balance Rs125
MM will be funded through private equity invesment or through debt. We believe that this strategic acquisition by Greycells will
augment revenue visibility going forward.
AAT offers wide portfolio of specialised courses focusing exclusively in media and entertainment sector. Greycells is also focussing in
Media and Entertainment sector and hence, this acquisition will bring scale into the operations of Greycells.
AAT is affiliated to UGC through Dibrugarh Univeristy. This, we believe that is a major plus point for Greycells. When we met the
company, the management stressed that they are in process of getting their courses affiliated through a university. We believe that this
acquisition will bolster its position to get its courses recognised.

We believe that there is tremendous scope for growth for Greycells going forward. However, at the same time, it should be noted
that the business is in a very nascent stage and thus valuations, pose some challenges, as it consumes more cash than it generates. If
the management does deliver on its plans, Greycells could indicatively record (on a consolidated basis) revenue and PAT CAGR of
139% and 387% over FY08 to FY11E. At the CMP of Rs326, the stock is trading at a P/E of 19.8x and 9.8x on indicative EPS of Rs16.5
and Rs33.3 for FY10E and FY11E respectively. The base is small and the company should log in bouyant growth in next few years.
26% AAT Stake Valuation
Centres (Nos) 4 7 7 7
Franchises
Platinum (Nos) - 2 5 9
Gold (Nos) - 10 30 70
Courses (Nos) 6 12 15 15
Faculty (Nos) 28 122 157 190
Revenue (Rs MM) 120 300 750 1,340
PAT (Rs MM) 1 26 168 354
Share of Greycells (Rs MM) 0 7 44 92
Source: Company
EDUCATION SECTOR 88
PRIME BROKING

Particulars FY06(A) FY07(A) FY08(A) FY09(E) FY10(E) FY11(E)
Income from operations 16 23 10 48 91 133
Total operating expenditure 16 23 12 40 75 100
EBITDA 1 (0) (2) 8 16 33
Depreciation 0 0 0 0 0 0
Interest Charges - 1 - - - -
Other Income 1 2 4 6 7 9
Pre-Tax 2 1 2 14 23 42
Tax 0 0 0 1 1 1
Net Profit 1 1 1 13 22 41
26% Stake in AAT - - - 7 44 92
Net Profit 1 1 1 20 66 133
EPS(diluted) 0.3 0.2 0.3 5.0 16.5 33.3
EPS(adjusted) 0.3 0.2 0.3 5.0 16.5 33.3
Extraordinary - - - - - -
Dividend- Ordinary - - - - - -
Addition to Reserves 1 1 1 20.0 66.0 133.0
Sh's (MM) 3.6 3.6 3.6 4.0 4.0 4.0
Avg Sh's 3.6 3.6 3.6 4.0 4.0 4.0
Net Div. Per share - - - - - -
Source: Company
EDUCATION SECTOR 89
PRIME BROKING
Annexure 1I: Balance Sheet

Particulars FY06(A) FY07(A) FY08(A) FY09(E) FY10(E) FY11(E)
Assets
Gross Fixed Assets 62 62 62 72 87 107
Less: Acc. Depreciation 0 1 1 1 2 2
Net Block 62 61 61 71 85 105
Goodwill - - - - - -
CWIP - - - - - -
Investments 0 0 0 13 69 185
Cash & cash in kind 3 2 2 3 4 5
Current Assets (Exc. Cash) 20 17 19 18 17 18
Miscellaneous expenses - - - - - -
Total Assets 84 81 82 105 175 313
Liabilities
Share Capital 31 31 31 31 31 31
Reserves and surplus 27 27 28 47 113 246
Total Networth 58 57 59 78 144 277
Deferred Tax Liability - - - - - -
Minority Interest - - - - - -
Debt 12 11 11 11 11 11
Current Liabilities 14 13 13 16 20 25
Total Liabilities 84 81 82 105 175 313
EDUCATION SECTOR 90
PRIME BROKING
Research Team
Analyst Sector E-mail Tel. Extn.
Sonam Udasi Director - Research sonam@primesec.com 022-24981515 213
Ashutosh Garud Capital Goods ashutosh@primesec.com 022-24981515 208
Avni Shah Media avni@primesec.com 022-24981515 212
Bhaumik Bhatia Auto/Auto Ancillaries bhaumik@primesec.com 022-24981515 206
Chaitra Bhat Banking/NBFCs chaitra@primesec.com 022-24981515 205
Darshan Singh Bagga Textiles, Retail, Offshore darshan@primesec.com 022-24981515 207
Hansraj Singh Logistics, Shipping, Telecom hansraj@primesec.com 022-24981515 209
Harshal Ajmera Construction, Realty harshal@primesec.com 022-24981515 211
Hitesh Avachat Metals hitesh@primesec.com 022-24981515 216
Soumitra Chatterjee Information Technology soumitra@primesec.com 022-24981515 210

Equity Sales / Dealing Tel.: +91-22-24982525
Vinay Motwani Head of Sales & Distribution vinay@primesec.com
Sumit Syal VP - Equity Sales sumit@primesec.com
Sumeet Rewari VP - Equity Sales sumeetrewari@primesec.com
Amir Merchant VP - Equity Sales amir@primesec.com
Kamlesh Shroff Dealer - Equities kamy@primesec.com
Nitin Shah Dealer - Equities nitin@primesec.com
EDUCATION SECTOR 91
PRIME BROKING
STOCK OWNERSHIP / CONFLICT DISCLOSURE
Prime / Prime Subsidiaries Yes
Key Prime Management &/or Other Employees Yes*
Any Other Corporate Finance Conflict of Interest Yes*
* Only Greycells Entertainment
ANALYSTS’ RATINGS DEFINITIONS
STRONG BUY Expect ≥ 25% CAGR return

BUY Expect a CAGR return ≥ 15% and < 25%
HOLD Expect < 15% CAGR return
SELL Expect ≤ 5% CAGR return
CONTACT NUMBERS
Dealing: +91 22 24982525 Research: +91 22 24981515
This document has been prepared by Prime Broking Company (India) Limited (“Prime”). The information, analysis and estimates contained herein are
based on Prime’s assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient
only.This document, at best, represents Prime’s opinion and is meant for general information only. Prime, its Directors, Officers or Employees shall not
in any way be responsible for the contents stated herein. Prime expressly disclaims any and all liability that may arise from information, errors or omissions
in this connection. This document is not to be considered as an offer to sell, or a solicitation to buy any securities. Prime, its affiliates and their employees
may from time to time hold positions in the securities referred to herein. Prime or its affiliates may from time to time solicit from or perform investment
banking or other services for any company mentioned in this document.
EDUCATION SECTOR 92

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PRIME BROKING

Indian Education Services: Largely priced in...

Analyst: Soumitra Chatterjee

The evolution of education in India

Private Initiatives and GATS

The Constitutional Structure

Market Structure and Size

Indian Education System - Segmentation

Source: Prime Broking

Private Tutoring Company Number of classes

Private Tutoring Company Number of centres

E learning and online tutoring

Stages of IT integration in schools

Source: Educomp Website

Providing digital content in private schools

Present Situation: Why the sector is lagging?

Present Situation: Why the sector is lagging?

Macro Indicators of Indian Education

Gross enrollment ratio Drop out rates

(%) All SC ST (%) All SC ST

Source: Ministry of Human Resource Development

What could spur up the sector?

Global Comparative Valuations

EPS P/E P/BV

Indian Education Sector Valuation Snapshot

Educomp Solutions: Leading from the front CMP:3,195; Target:3,709 HOLD

Rs MM Revenue EBITDA EBITDA PAT PAT No. of shares EPS P/E

Revenue & PBIT Composition

FY08 Actuals (PBIT) FY10 Estimated (PBIT)

Revenue Model for K12 Schools

K12 Schools FY09E FY10E FY11E

Risks and Concerns

Valuations and Outlook

DCF Output Terminal Value

Equity value per share 3,709

DCF calculation details

Sensitivity of Educomp’s Share price to the WACC and growth rates

2% 5,429 4,531 3,836 3,285 2,839 2,474 2,171 1,915 1,699

Annexure 1: Profit & Loss A/c

Annexure I1: Balance Sheet

Annexure III: Cash Flow Statement

Annexure IV: Ratios

FY08 Actuals (PBIT) FY10 Estimated (PBIT)

ViTELS - Everron’s USP

Aban Informatics to help consolidate ViTELS division

Risks and Concerns

Valuations and Outlook

DCF Output Terminal Value

Equity value per share 592

DCF calculation details

Sensitivity of Everonn’s Share price to the WACC and growth rates

2% 941 759 618 507 417 344 283 233 190

Annexure 1: Profit & Loss A/c

Annexure I1: Balance Sheet

Annexure III: Cash Flow Statement

Annexure IV: Ratios

NIIT: Exploring new horizons CMP: 87; Target:106 BUY

Revenue & PBIT Composition

FY08 Actuals (PBIT) FY10 Estimated (PBIT)

New business initiatives - In the fast lane

New businesses contd...

Risks and Concerns

Valuations and Outlook

Equity value per share 106