Education Sector JM Fin - Jan 10

Analysts:
Diviya Nagarajan
JM FINANCIAL
Diviya.Nagarajan@jmfinancial.in
Tel: (91 22) 6646 0020
Subhashini Gurumurthy
Subhashini.Gurumurthy@jmfinancial.in
Tel: (91 22) 6646 0021
Indian Education
Buy the Book
JM Financial Institutional Securities Private Limited

Indian Education
Contents
Indian Education: Buy the Book 3
Aptech: All priced in 5
Career Launcher: A great launch pad 15
Core Projects: Future potential 19
Educomp Solutions: ‘Smart Class’ for the new ‘Millennium’ 21
Everonn Systems India: Not private enough 57
KidZee: Preschool play 73
Mahesh Tutorials: Breaking regional shackles 75
NIIT: Transforming into an all-rounder 77
10 August 2008 JM Financial Institutional Securities Private Limited Page 2

Country: India 20 August 2008 Initiating Coverage
Sector: Education Indian Education

Diviya Nagarajan
Tel: (91 22) 6646 0020
Subhashini Gurumurthy Buy the book
Subhashini.Gurumurthy@jmfinancial.in The last few years have seen increased private participation in the Indian
Tel: (91 22) 6646 0021 education sector – both in government-led areas of spending as well as private
schooling and vocational training. We estimate Indian private education
(schools and vocational training) to be a US$50 bn opportunity. The Indian
education sector stands at an inflexion point, with activity levels expected to
reach a crescendo over the next few years. We initiate with a Buy on Educomp
and NIIT and a Hold on Aptech and Everonn.
All priced in: Over CY04-06, Aptech has restructured its businesses by
rationalising the franchisee network for IT training and exiting the
government schools business. While profitability is expected to be
steadier, slower revenue growth in India and China, and slower than
expected take off in air hostess training could dampen the revival. We
estimate revenue CAGR of 30.1% and profit CAGR of 50.4% over CY07E-
09E. Hold with a target price of Rs240, an upside of 6.3% from CMP.
‘Smart Class’ for the new ‘Millennium’: Educomp is fast becoming
the leader in the Indian education sector with offerings straddling multiple
segments. Its foray into K-12 schools and faster penetration of curriculum
based content is set to improve profitability and cash generation. We
expect revenue CAGR of 94.2% and profit CAGR of 108.2% over FY08-
10E. Buy with a target price of Rs3,910, an upside of 19.1% from CMP.
Not private enough: Everonn is amongst the Top three players in the
government school (ICT) business. While we expect growth to remain
high, greater dependence on capex-heavy, lower margin ICT business
would continue to weigh down valuations vis-à-vis Educomp. We expect
Everonn to report CAGR of 93% in revenue and profit CAGR over FY08-
10E. Hold with a target price of Rs560, an upside of 5.3% from CMP.
Transforming into an all-rounder: NIIT, the leader in the IT training
space, is trying to transform itself into a full fledged education company.
Its ventures into high potential areas such as financial services (IFBI),
management (Imperia), ITES (NIPE), professional life skills (Evolv), and
schools are expected to boost the growth momentum. We expect revenue
CAGR of 19.7% and core profit CAGR of 42.4% over FY08-10E. Buy with a
target price of Rs110, an upside of 20.8% from CMP.
Exhibit 1: Recommendation snapshot

Educomp Everonn NIIT Aptech
Recommendation Buy Hold Buy Hold
Target price (Rs) 3,910 560 110 240
Upside (%) 19.1 5.3 20.8 6.3
Revenue FY10E (Rs mn) 10,788 3,412 14,433 3,801
EBITDA margin FY10E (%) 52.1 46.2 12.5 26.1
Net Profit margin (%) 26.3 15.0 8.7 18.0
PE FY10E (x) 21.7 17.1 12.1 15.3
EV / EBITDA FY10E (x) 11.4 6.3 8.9 8.4
EV / Sales FY10E (x) 6.0 2.9 1.1 2.2
EPS CAGR (FY08-10E) (%) 106.7 76.7 28.7 46.0
PEG (x) 0.4 0.4 0.6 0.5
Source: Company data, JM Financial. Note: Valuations as of 20 August 2008

Please see important disclosure at the end of the report.
Indian Education
Exhibit 2: Valuation comparison
Education companies Revenue (mn) * EPS* P/E(x) EV/EBITDA(x) EV/Sales(x) Price/Book Value(x)
FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10 FY08 FY09 FY10
CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY08 CY09 CY07 CY08 CY09
Global peers
Blackboard 239 314 384 0.7 0.8 1.3 57.2 50.8 29.0 24.5 21.8 13.5 5.4 4.1 3.4 4.9 5.0 5.6
K12 217 279 348 0.2 0.4 0.7 109.2 58.8 37.6 22.1 14.6 10.2 2.3 1.8 1.4 5.4 5.4 1.2
Noah Education Holdings 91 114 146 0.5 0.5 0.6 11.7 11.4 8.8 5.2 3.0 2.4 0.7 0.6 0.5 1.2 1.0 0.9
Nobel Learning Communities 205 233 251 0.7 0.8 1.0 21.1 18.3 15.1 1.6 1.5 1.3 0.2 0.1 0.1 - - -
Megastudy Co 156 204 247 6.9 8.7 10.7 32.2 25.7 21.0 26.7 20.3 16.3 10.1 7.7 6.4 9.3 6.8 5.1
New Oriental Education 275 380 530 1.7 2.7 3.9 41.5 27.0 18.6 22.3 14.9 10.2 6.5 4.7 3.4 6.6 4.9 3.8
Raffles Education 133 188 262 0.03 0.04 0.05 26.8 18.9 14.0 27.3 18.3 13.7 14.4 10.2 7.3 0.1 0.1 0.1
Learning tree international 189 197 - 0.9 0.9 - 17.3 15.9 - 8.2 7.5 - 1.1 1.1 - 2.8 2.4 -
SkillSoft-NetG 281 336 368 0.5 0.4 0.5 21.7 28.6 21.6 15.3 12.4 10.1 4.0 3.3 3.1 4.8 - -
SumTotal 122 136 151 28.3 12.5 9.8 0.2 0.4 0.5 20.0 7.4 6.3 0.9 0.8 0.7 1.3 - -
Indian peers
Educomp Solutions 2,861 5,821 10,788 35.4 75.2 151.3 92.7 43.7 21.7 44.6 20.5 11.4 19.7 10.4 6.0 19.3 13.5 8.3
Everonn Systems 916 1,888 3,412 10.0 18.2 31.1 53.4 29.2 17.1 22.0 10.2 6.3 8.0 4.5 2.9 7.8 3.8 2.6
NIIT 10,068 11,900 14,433 4.6 5.1 7.5 20.0 17.9 12.1 15.7 12.2 8.9 1.6 1.4 1.1 3.7 3.3 2.8
Aptech 2,245 2,927 3,801 6.9 9.8 14.7 32.7 23.0 15.3 17.6 12.9 8.4 4.0 3.1 2.2 6.0 4.6 3.6
Source: Company, JM Financial, Note: * Amount expressed in US$ for global peers and in Rs for Indian peers

JM Financial Institutional Securities Private Limited Page 4
Country: India
20 August 2008 Initiating Coverage
Sector: Education Aptech

Diviya Nagarajan
Diviya.Nagarajan@jmfinancial.in Bloomberg: APTR IB
Tel: (91 22) 6646 0020
Subhashini Gurumurthy Hold
Tel: (91 22) 6646 0021 Price: Rs226 Target Price (Aug 09): Rs240
Key Data All priced in

Market cap Rs10 bn/US$ 226 mn
Over CY04-CY06, Aptech has restructured its businesses by rationalising the
Shares in issue (mn) 43.8
franchisee network for IT training solutions and exiting the government
Diluted share (mn) 46.4
3-mon avg daily val (mn) Rs242.8/US$5.6
schools business. While profitability is expected to be steadier, slower revenue
52-week range Rs449/139 growth in India and China, and slower than expected take off in air hostess
BSE sensex (20/08/08) 14,678 training could dampen revival going forward.
Nifty (20/08/08) 4,416
Uncertain environment to slow revival in IT training: With the
Rs/US$ 43.7
completion of restructuring in CY06, revenue growth in India IT training
improved to 4.3% in CY07E versus -6.3% CAGR over CY05-07E. While we
Shareholding Pattern (%) expect growth rates to remain positive, we have factored a slower revival
2Q CY08 2Q CY07 due to the current slowdown in the Indian IT services sector.
Promoters 32.3 27.8
China to contribute more, but grow slower: We believe that although
FIIs 29.5 33.7
China will contribute increasingly to revenue, growth within China would
MFs/FIs/Banks 4.5 5.5
Others 33.7 33.0 taper off given the high market penetration (32% market share). We
expect China to grow at 37.5% CAGR over CY07E-09E versus 50% over
CY04-CY07.
Price Performance (%)
1M 3M 12M
Macro environment could delay new ventures: Over the last few
Absolute 17.0 (7.6) (24.1)
quarters, Aptech has entered into several new ventures, including Avalon
Aviation Academy (Airhostess training), Attest (Testing services) and
Relative* 9.3 7.2 (25.9)
* To the BSE Sensex
nPower (Hardware training). While we believe revenue contribution from
these segments would improve (11.1% in CY07E to 19.5% in CY09E), a
sluggish macro environment is unlikely to aid strong takeoff.
Daily Performance
25,000
Sensex Aptech
500
Initiate with a Hold and target price of Rs240: We initiate coverage
on Aptech with a Hold recommendation and a target price of Rs240. This is
20,000
400 based on a target PE multiple of 16x on CY09E EPS and implies an upside
15,000
potential of 6.3%.
300
10,000 Exhibit 1: Financial summary (Rs mn)
5,000
200 Y/E December CY06 CY07E CY08E CY09E
Net sales 1,741 2,245 2,927 3,801
- 100
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Sales growth (%) 12.8 28.9 30.3 29.9
EBITDA 361 510 702 993
(As of 20 August 2008) EBITDA (%) 20.7 22.7 24.0 26.1
Adjusted net profit 162 302 455 684
EPS (Rs) 4.3 6.9 9.8 14.7
EPS growth (%) 134.1 61.8 41.9 50.2
ROCE (%) 14.5 20.8 24.1 28.8
ROE (%) 17.1 18.4 19.9 23.8
PE (x) 52.9 32.7 23.0 15.3
Price/Book value (x) 9.0 6.0 4.6 3.6
EV/EBITDA (x) 23.3 17.6 12.9 8.4
Source: Company data, JM Financial. Note: Valuations as of 20 August 2008.

Aptech
I. IT training revival to be slowed down

Over CY04-CY06, Aptech restructured its businesses, which included
rationalising the franchisee network for its IT training solutions as well as an
exit from the government schools business. Today, Aptech is the second
largest IT training organisation in India with a network of close to 300 centres.
We believe that Aptech stands at the beginning of a steadier profit growth in
IT training in India, driven by stable margins. However, slower revenue growth
in India and China, and slower than expected take off in Avalon Aviation (air
hostess training) could dampen revival going forward.
I.1. Uncertain environment to slow revival

Restructuring in India based IT training from CY04-06: Aptech
derives 10.7% of revenue from India based IT training at present, down
from over 20.1% in CY04. Revenue from India based IT training solutions
declined steadily over CY04-CY06 as the company exited unprofitable
franchises. Aptech reduced the number of franchises from over 950 in
CY04 to 200 in CY06, which resulted in a write off of over Rs1 bn.
Exhibit 2: Aptech heavily pruned its network over CY04-06

Aptech Training Centres (Nos) NIIT Training Centres (Nos)
951
859
661
459
391 421
280
200
CY04 CY05 CY06 CY07E
Source: Company data, JM Financial
Exhibit 3: Stronger franchisee network to sustain steadier growth

Aptech Training Centres (Nos) Aptech's Revenue/Centre (Rs mn)
1000 1.3
750 1.0
500 0.8
250 0.5
0 0.3
CY04 CY05 CY06 CY07E CY08E CY09E

Aptech
Revival in India based IT training to be dampened by sluggish

demand in IT Services: With the completion of the restructuring exercise
in CY06, revenue growth in India based IT training bounced back in CY07E
with a positive growth of 4.3% YoY as against -6.3% CAGR over CY05-
07E. Going forward, we expect steadier growth in revenues (20.5% CAGR
over CY07E-09E) driven by a stronger franchisee network. We expect the
growth rates over CY07E-CY09E to be lower than the management’s
expectations of nearly 30% CAGR due to the current slowdown in demand
for the Indian IT services sector.
International IT training to grow faster: Aptech has presence in new

and emerging markets such as Vietnam, Turkey, Nigeria, Fiji, Yemen,
Sudan, South Africa, Malaysia and Philippines. International IT training is
expected to post steady revenue growth with increased penetration into
existing geographies as well as entry into new markets. Today Aptech has
over 100 centres outside India, and is expected to invest in more centres
in emerging geographies. By CY09, we expect faster revenue growth from
International IT training (27.5% CAGR over CY07E-09E as against 12.5%
CAGR over CY04-07E), which would also contribute to higher margin
profile for the company.
Exhibit 4: Aptech has widespread geographic presence

Geography Centres (Nos)
Asia Pacific 37
Middle East 26
Africa 17
South Asia 16
Common Wealth of Independent States (CIS) 6
Latin America 4
Total 106
Source: Company data

Aptech
II. China to grow slower

IT training in China is the single largest revenue driver for Aptech, contributing
close to 41% of consolidated revenue. Aptech’s JV with the Beijing University
is the largest IT training network in China with a 32% market share, according
to IDC estimates. NIIT, its biggest competitor, is a distant second with market
share of just 8%. Revenue from China has grown at a healthy CAGR of 50%
over CY04-07E, driven by deeper penetration into China. Profitability remains
higher than India (40% EBITDA versus 30% in India), driven by higher
enrolment fees.
Exhibit 5: Aptech in China – A snapshot

China - Business details
Started in January 2000 as a 50-50 JV between Aptech and Beida Jadebird IT Co. Ltd. (Affiliate of Beijing Univ)
Market leader with over 32% market share, nearest competitor NIIT at 8% (IDC data)
Over 250 centres in 23 provinces
Offers ACCP, BNET, BTEST
Arena Multimedia to be launched in CY2008
Incremental market penetration in China to be a challenge: We

believe that although China will contribute increasingly to revenue, growth
within China would taper off given the high market penetration. We expect
revenue from China IT training to grow at 37.5% CAGR over CY07E-09E
versus 50% over CY04-CY07E. This is also reflected in growth from China
tapering off over the last few quarters. That said, we believe that the
launch of multimedia courses (which currently operate under the Arena
brand in India) through its Beida Jadebird alliance, could help sustain
growth rates over CY07E-CY09E.
Exhibit 6: China to grow at a slower clip

2000 Revenue (Rs mn) Growth rate (%) 80
1500 60
1000 40
500 20
0 0
CY05 CY06 CY07E CY08E CY09E

Aptech
III. New ventures could take more time

New business will contribute to revenue growth: Over the last few
quarters, Aptech has entered into several new ventures, including Avalon
Aviation Academy (Airhostess training), Attest (Testing services) and
nPower (Hardware training). These are high growth ventures that are
expected to contribute incremental proportions to revenue over CY07E-09E
(11.1% in CY07E to 19.5% in CY09E). The company has been investing in
these businesses through CY07E.
Exhibit 7: Aptech’s new ventures are in high potential segments

Revenue Rvenue
New ventures Description Market dynamics Competitors contribution contribution
CY2007E (%) CY2009E (%)
Career oriented cabin crew and
Avalon Aviation ground staff training programmes. 40 Demand for 21,500 cabin crew and ground staff Frankfinn, Kingfisher,
2.2 3.7
Academy centres in CY07, of which 30 were over the next two years AirHostess Academy
added during the year.
US$94 mn market in 2009. CAT (MBA entrance
Technology based Testing and exam) expected to go online in 2009, which is Brainware, Euphony
Attest 8.9 12.6
Assessment solutions likely to trigger mass adoption. Employee testing HR, MeritTrac
market is expected to be increasingly outsourced
Domestic hardware market of US$11.5 bn, NIIT Network Labs,
nPower Hardware training courses growing at 24% CAGR to drive training market up JetKing, CMS NA 3.2
to US$1 bn by 2015 at 28% CAGR Institute
Source: IDC, World Bank, NASSCOM, JM Financial estimates
Slowdown in aviation to dampen growth over near term: We believe

revenue contribution from all newer segments would improve despite a
sluggish macro environment as these market spaces being at a nascent
stage. However, we have been conservative in revenue growth
expectations for these segments given the slowdown expected in the
economy. With Aptech having completed initial investments in these
ventures, incremental revenue would flow to the bottom-line from CY08E
onwards. However, this would be lower than our initial expectation (as well
as the management’s) due to the sluggish macro environment.
Exhibit 8: Impact of turnaround to be marginal over CY07E-CY09E

Revenue (Rs mn) Old businesses New businesses EBITDA (Rs mn) Old businesses New businesses
29 74
310 562 807
698 879 1,151

1,935 2,365 2,994
-32
CY07E CY08E CY09E CY07E CY08E CY09E

Aptech
IV. Financials
30% CAGR in revenue over CY07E-CY09E: We expect Aptech to report
revenue CAGR of 30.1% over CY07E-09E, driven by 37.5% growth in
China and 27.5% growth in International IT training. While India based
IT/multimedia training is likely to grow faster than CY05-07E levels, it
would be weighed down by sluggishness in the Indian IT services sector.
Exhibit 9: Growth rates in key businesses

CAGR over CAGR over
Revenue (Rs mn) CY07E CY08E CY09E
CY07E-09E (%) CY05-07E (%)
India IT training 240 283 348 20.5 (6.3)
ROW IT training 229 286 372 27.5 22.2
China IT training 915 1,235 1,729 37.5 44.4
Arena 252 276 345 17.2 58.9
Source: JM Financial
50% profit CAGR over CY07E-09E: We expect profit CAGR over CY07E-
09E of 50.4% to outpace revenue growth, driven by higher revenue
contribution from China, as well as increased contribution from Avalon,
nPower and Attest, which are expected to turn profitable in CY08E.
Further, reducing contribution from government schools would also
contribute to better profitability.
Exhibit 10: China, new business to drive growth

Revenue contribution (%) CY07E CY08E CY09E
Retail businesses 75.1 77.2 80.4
India IT training 10.7 9.7 9.2
ROW IT training 10.2 9.8 9.8
China IT training 40.7 42.2 45.5
Arena 11.2 9.4 9.1
Avalon 2.2 3.4 3.7
nPower - 2.7 3.2
Institutional businesses 24.9 22.8 19.6
Govt schools 6.7 4.1 0.3
Learning solutions 6.7 5.6 5.0
Synergetics (corporate IT training) 2.7 2.1 1.8
Attest 8.9 10.9 12.6

Aptech
V. Valuation and risks

Initiate with a Hold and target price of Rs240: We initiate coverage on
Aptech with a Hold recommendation and a target price of Rs240. Our target
price implies PE of 16.0x on FY10E EPS, which is a 15% discount to the target
PE multiple assigned to NIIT’s core business of 19x. Our target price implies an
upside potential of 6.3% from the CMP. Assumptions in our estimates include
revenue CAGR of 30.1% and profit CAGR of 50.4% over CY07E-09E.
Key risks, which might prevent the target price being met, are listed below:
Company specific risks include: 1) better scale up in profitable franchises
Industry specific risks include: 1) faster than expected revival in IT/ITES

industry, 2) quicker pick up in aviation business given lower oil prices and
3) faster than anticipated scaling up in new businesses.
Exhibit 11: Comparison with consensus

Consensus estimates (Rs mn) CY08E CY09E
Revenue 3,057 3,786
EBITDA 780 1,111
Net Profit 542 638
EPS (Rs) 12.2 14.4
EPS (Rs)- JM Financial estimates 9.8 14.7
Source: Bloomberg data, JM Financial
Exhibit 12: PE Band Chart

700
600 45x
500 40x
35x
400 30x
25x
300
20x
200 15x
100
0
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: Bloomberg data, Company data, JM Financial

Aptech
VI. Company background

VI.1. History
1986 - Started operations with an IT Training Centre in Mumbai
1986 - Started operations with an IT Training Centre in Mumbai
1996 - Launched Arena Multimedia
2000 - Forayed into software development
2003 - Merged with SSI Education.

- SSI Ltd. buys promoter Atul Nishar’s stake.
- ALS & Attest launched
2005 - SSI stake sold to Rakesh Jhunjhunwala & associates
2006 - Acquired Avalon Aviation Academy, Synergetics
2007 - launched N-Power, the hardware training division
VI.2. Share captial history

Exhibit 13: Share capital details
mn CY05 CY06 CY07E
Shares outstanding at the beginning of the year 33.5 37.6 37.9
Dilution during the year 4.1 0.3 5.9
Shares outstanding at the end of the year 37.6 37.9 43.8
Options exercised 0.2 0.3 0.2
Conversion of warrants to promoters @Rs113 2.1
Conversion of warrants to M/S Aptech investments @ Rs56 3.6
Source: Company data, Note: Assumption

Aptech
VII. Market size estimates

Exhibit 14: IT/ITES training market
Graduates turnout by FY08E (Nos) 2,962,900
Target market @ 40% 1,185,160
Average realization per student (p.a) 35,000
Market size in FY08 (US$ bn @ US$/INR of 40) 1.0
Graduates turnout in FY15E (Nos) 5,132,340
Target market @ 50% 2,566,170
Average realization per student p.a (Rs) 50,000
Market size in FY15E (US$ bn @ US$/INR of 40) 3.2
CAGR over FY08-15E (%) 17.5
Source: NASSCOM, JM Financial
Exhibit 15: Avalon Aviation Academy

Total Indian Fleet 2008 (Nos) 472
Average cabin crew per aircraft (Nos) 50
Total cabin crew 2008 (Nos) 23,499
Ground staff per aircraft (Nos) 75
Total Engineers/Technicians 2008 (Nos) 35,198
Total Cabin Crew/Ground Staff 2008 (Nos) 58,697
Training cost/ person (Rs) 125,000
Market size 2008 (Rs mn) 746
New orders placed til 2010 (Nos) 173
Total Indian Fleet by 2010 (Nos) 645
Total Cabin Crew/Ground Staff 2010 (Nos) 80,210
Requirement over next 2 years (Nos) 21,514
Potential market 2010 (Rs mn) 2,689
CAGR 2008-2010 (%) 89.8
Avalon's Current market share (%) 20.1
Projected market share 2010 (%) 23.5
Source: World Bank, Industry data, JM Financial
Exhibit 16: nPower

Market Size estimation FY07 FY15E CAGR over FY07-15E (%)
IT/ITES Training Market (US$ bn) 0.7 3.2 21.0
Hardware as % of overall training market (%) 30.0 35.0
Hardware Training Market (US$ bn) 0.2 1.1 23.3
Source: NASSCOM, IDC, JM Financial

Aptech
VIII. Financial Tables

Profit & loss statement (Rs mn) Balance sheet (Rs mn)
Y/E March CY06 CY07E CY08E CY09E Y/E March CY06 CY07E CY08E CY09E
Net sales 1,741 2,245 2,927 3,801 Share capital 379 438 464 464
Growth (%) 12.8 28.9 30.3 29.9 Reserves & surplus 776 1,168 1,829 2,411
Other operational income 0 0 0 0 Warrants 81 35 0 0
EBITDA 361 510 702 993 Networth 1,236 1,640 2,293 2,875
EBITDA (%) 20.7 22.7 24.0 26.1 Minority Interest 2 2 2 2
Growth (%) 11.9 41.2 37.5 41.5 Total loans 227 161 111 77
Other non-operational income 18 22 29 38 Sources of funds 1,466 1,803 2,407 2,954
Depreciation & amortisation 149 170 194 221 Intangible assets 30 30 30 30
EBIT 230 363 537 811 Fixed assets 1,528 1,738 1,988 2,258
Interest (income)/expense
(net) 29 17 17 15 Less: Depreciation/amortisation 992 1,162 1,356 1,577
Pre tax profit 201 346 520 795 Net block 535 575 632 681
Taxes 38 43 65 111 CWIP 2 2 2 2
Extraordinary Investments 0 0 0 0
(income)/expense (net) 1 0 0 0
Deferred tax assets/(liability) 0 0 0 0
Current assets 1,044 1,874 2,636 3,510
Margin (%) 9.3 13.5 15.6 18.0
Inventories 29 38 50 65
Diluted shares (mn) 37.9 43.8 46.4 46.4
Sundry debtors 477 603 762 937
EPS (Rs) 4.3 6.9 9.8 14.7
Cash & bank balance 345 1,031 1,561 2,166
Growth (%) 134.1 61.8 41.9 50.2
Loans & advances 192 202 263 342
Source: Company, JM Financial.
Current liabilities & provisions 435 679 894 1,269
Current liabilities 411 597 704 986
Provisions and others 24 82 189 284
Net current assets 609 1,195 1,743 2,241
Others (net) 320 30 30 30
Application of funds 1,466 1,803 2,407 2,954
Source: Company, JM Financial
Cash flow statement (Rs mn) Key ratios

Y/E March CY06 CY07E CY08E CY09E Y/E March CY06 CY07E CY08E CY09E
Net profit 199 346 520 795 ROCE (%) 14.5 20.8 24.1 28.8
Depreciation/amortisation 149 170 194 221 ROE (%) 17.1 18.4 19.9 23.8
(Inc)/dec in working capital -76 45 -120 17 Debt-equity ratio (x) 0.2 0.1 0.0 0.0
Others -12 10 -42 -79 Valuation ratios (x)
Net cash from operations (a) 260 570 552 954 PER 52.9 32.7 23.0 15.3
(Inc)/dec in investments 0 0 0 0 PBV 9.0 6.0 4.6 3.6
Capex -117 -212 -250 -270 EV/EBITDA 23.3 17.6 12.9 8.4
Others -41 22 29 38 EV/Sales 4.8 4.0 3.1 2.2
Cash flow from inv. (b) -158 -190 -221 -232 Turnover ratios (no.)
Inc/(dec) in capital 14 435 301 0 Debtor days 104 88 85 82
Proceeds from issue of Inventory days 12 11 11 11
warrants 61 -47 -35 0
Creditor days 76 75 75 75
Dividends paid + dividend tax 0 0 0 -68 Source: Company, JM Financial
Inc/dec in loans -235 -66 -50 -34
Others 147 -17 -17 -15
Financial cash flow ( c ) -13 305 200 -117
Net inc/dec in cash (a+b+c) 89 686 530 605
Opening cash balance 256 345 1,031 1,561
Closing cash balance 345 1,031 1,561 2,166

Country: India 20 August 2008
Sector: Education Career Launcher

Diviya Nagarajan
Diviya.Nagarajan@jmfinancial.in Not Rated
Tel: (91 22) 6646 0020
Subhashini.Gurumurthy@jmfinancial.in A great launch pad
Tel: (91 22) 6646 0021 Career Launcher (CL) is one of the leading players in the test prep segment
with revenues of ~Rs900 mn in FY08. CL’s vision is to be a one-stop shop for
best-in-class career advice and training straddling school & college test prep,
employability training and core capacity in K12, pre-school and higher
education.
Leader in test prep

Test prep market size to grow to US$2.5 bn in 2015: CL has
trained ~50,000 students in the test prep segment in FY08, and expects
to train ~75,000 students in FY09. The company currently has around
135 centres in 105 cities. This is expected to grow to 175 cities with
about 250+ centres in India and overseas over the next 12-18 months.
While CL is present in all school and college test prep segments, except
UG medical and a few other niche areas, MBA test prep (30% market
share) remains the largest segment (75% of revenues in FY08).
According to industry sources, the test prep market opportunity is
currently at US$0.7 bn and is expected to grow at 19.8% CAGR to
US$2.5 bn over 2008-2015E.
Exhibit 1: CAT aspirants have nearly doubled over 2003-2007

2003 2005 2004 2006 2007 2015E
CAT aspirants (Nos) 130,000 170,000 NA 206,612 250,000 924,556
CAGR over FY03-07 (%) 18%
Source: Industry data, JM Financial
Exhibit 2: Test prep market potential of US$2.5 bn in 2015

Test prep
Test prep Average fees Revenues Average fees Revenues
takers in
takers in p.a in 2008E in 2008E p.a in 2015E in 2015E
2015E
2008E (Nos) (Rs) (Rs bn) (Rs) (Rs bn)
(Nos)
Engg. Entrance Tests 459,480 33,000 15.2 1,212,570 48,000 58.2
MBA entrance tests 137,500 15,000 2.1 600,960 30,000 18.0
BBA /HMEntrance
21,690 9,500 0.2 38,260 27,000 1.0
Tests
Law Entrance Tests 8,540 21,000 0.2 100,840 30,000 3.0
Fashion Entrance
4,020 22,000 0.1 31,340 40,000 1.3
Tests
Medical Entrance Tests 267,400 40,000 10.7 428,300 45,000 19.3
Total test prep market
28.4 100.8
size (Rs bn)
Total test prep market
size (US$ bn @ 0.7 2.5
USDINR of 40)

Career Launcher
Emerging leader in employability training

Employability training is currently a small market and the management
expects it to grow rapidly to US$2 bn in the next five years. CL will
leverage its current expertise in test prep and national reach in over 105
cities to source and train students for jobs in financial services, IT/ITES
and other mushrooming sectors. CL plans to have around 25 finishing
schools by CY08. With the vocational training market in India just
opening up, we believe that there is immense growth potential for early
players like CL.
K-12 schools to add to growth potential

Like Educomp, CL has also ventured into mainstream school education
(K-12) by setting up brick and mortar schools. While test prep is
expected to remain the primary revenue contributor in the near term, CL
is betting on K-12 to be the future growth driver.
150 K-12 schools and 125 pre-schools in the next five years: CL
currently has five operational schools with a target of 12 schools by
FY09. The company plans to roll out 150 K-12 schools and 125 pre-
schools in the next five years under the brand of Indus World Schools
and Ananda Pre-schools.
Exhibit 3: Current operational schools

Location Standard
Hyderabad Preschool to 8th
Indore 1st to 7th
Bhiwani LKG to 4th
Mandi LKG to 2nd
Raipur LKG to 2nd
CL’s K-12 business model is expected to have a mix of owned, managed

and franchisee schools. Amongst the current operational schools, three
are owned while the rest are on franchisee model.
Exhibit 4: K-12 mode of operation
Mode of operation
Ow ned Franchisee Managed

Ow ned and run by CL Ow ned and manged by Ow ned by developer and managed
franchisee by CL
Targeted at mainstream middle class households: CL’s schools,

with average tuition fees of Rs1,400-2,000 per student p.m., intend to
target middle class households. We believe its K-12 venture will be
successful given:

Career Launcher
o Burgeoning middle class spend on education in India:

According to MGI estimates, the share of urban middle and upper
class households is expected to increase from 13.0% in 2005 to 60%
by 2015. These households will also assume a significant proportion
of spend on education at 89% by 2015, up from 58% in 2005.
o Demand for 20,000 urban schools by FY15: With over 14 mn
children expected to be added to the urban academic system by
2015, we believe over 20,000 urban schools will be required.
Exhibit 5: Holistic learning at CL schools
Sadhana
(Std 8th-10th Std)
Focus on application
Jigyasa
(Std 3rd-8th Std)
Focus on understanding
Ananda
(Pre school- 3rd Std)
Focus on joy of learning
Exhibit 6: CL’s Indus school, Hyderabad

Career Launcher
Expansion into higher education

CL is working on creating a pan-India footprint in higher education and has
started its first business school program with 120 enrolments in Noida (Indus
World School of Business).
Exhibit 7: CL’s B-school has association with distinguished personalities

Commencement
Name Location Degrees offered Associated members
of operations
Indus World School Greater PGPM (Post Graduate
June 2008 Mr. Philip Anderson - INSEAD Alumni Fund Professor of Entrepreneurship
of Business Noida Program in Management)
UGPM (Under Graduate
Sridhar Iyengar - Board Member of Infosys, ICICI Bank, Career Launcher, Rediff.com
Program in Management)
Ishwar Dayal - Founding Director, IIM Lucknow; Former Faculty at IIM Ahmedabad, IIM
Calcutta
Prof Mirza Saiyadain - Former Faculty at IIM Ahmedabad
Prof K K Mehta - Founder Member of Indian Society of Applied Behavioral Scientists
and Indian Society for Individual and Social Development
Sanjeev Bikhchandani - Founder and CEO of Infoedge
Vishwadeep Bajaj - Founder and CEO, ValueFirst
Shantanu Prakash - Founder Educomp Solutions
New businesses to drive future growth: While we expect CL to

continue to lead the MBA test prep market, expansion into high growth
areas such as K-12, vocational training and higher education will put the
company in a high growth trajectory in the next few years.

Country: India
20 August 2008
Sector: Education Core Projects

Diviya Nagarajan
Diviya.Nagarajan@jmfinancial.in Bloomberg: CPTL IB
Tel: (91 22) 6646 0020
Not Rated
Subhashini.Gurumurthy@jmfinancial.in Price: Rs277
Tel: (91 22) 6646 0021
Key Data Future potential

Market cap Rs23 bn/US$523 mn Acquisition led entry into education: Core Projects (Core) entered the
Shares in issue (mn) 82.4 education domain with the acquisition of US-based ECS Inc, and UK-based
Diluted share (mn) 82.4 Azzuri and KC Management in 2007. Following the acquisitions, Core’s
3-mon avg daily val (mn) Rs158.8/US$3.6 offerings include solutions in the areas of School Management Systems,
52-week range Rs464/119 Assessment Systems, Accountability Systems and IT Infrastructure
BSE sensex (20/08/08) 14,678 Systems. Revenue from education currently forms 65% of consolidated
Nifty (20/08/08) 4,416 revenue, with primary exposure to the US and UK.
Rs/US$ 43.7
Virtual reality led visualisation labs have met with early success:
Core has developed a virtual reality based visualisation application in
Shareholding Pattern (%) collaboration with NASA, which is used to simulate experiments in
1QFY 09 1Q FY08 colleges. This has met early success with the Indira Gandhi National Open
Promoters 47.6 54.7 University (IGNOU), which is expected to spend US$750 mn over the next
FIIs 6.8 2.0 five years. The company expects to set up labs in 100 IGNOU centres by
MFs/FIs/Banks 4.3 2.9 2010, with an average fee of Rs500 per student for a 45 minute lesson.
Others 41.4 40.4
Funds administration is an undiscovered market in India: Through
the ECS and Hamlet acquisitions, Core has gained entry into the fund
Price Performance (%) administration and assessment segment in the US and UK. It is currently
1M 3M 12M implementing a pilot project with Jharkhand state government for the
Absolute 57.4 27.4 100.3 same. However, we believe that this is an undiscovered market in India,
Relative* 49.8 42.2 98.6 which lacks the maturity levels necessary for Core’s product.
* To the BSE Sensex
IETS JV to tackle the PPP opportunity: Core has formed a JV with
IL&FS Education and Technology Services (IETS) for a PPP school model.
Daily Performance
The JV is running a pilot with Jharkhand for 400 schools, but without
25,000
Sensex Core Projects & Technologies
500 meaningful revenue contribution.
20,000 400
Management guides for >100% revenue growth: Core’s management
15,000 300
has guided for revenue of Rs9.5 bn in FY09, driven by Rs3.5 bn revenue
from India, led by revenue accretion from IGNOU and Jharkhand.
10,000 200
Exhibit 1: Financial summary (Rs mn)
5,000 100 Y/E March FY06 FY07 FY08
- 0
Net sales 867 1,956 4,460
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Sales growth (%) - 125.5 128.0
EBITDA 125.0 392.0 979.0
(As of 20 August 2008) EBITDA (%) 14.4 20.0 22.0
Adjusted net profit 106 334 845
EPS (Rs) 2.8 4.8 9.4
EPS growth (%) - 71.9 96.7
ROCE (%) 54.2 27.0 18.3
ROE (%) 53.0 21.4 21.5
PE (x) 99.7 58.0 29.5
Price/Book value (x) 64.4 18.2 5.9
EV/EBITDA (x) 193.1 48.7 15.5

Indian Education
This page has been intentionally left blank

Country: India
Sector: Education Educomp Solutions

Diviya Nagarajan
Diviya.Nagarajan@jmfinancial.in Bloomberg: EDSL IB
Tel: (91 22) 6646 0020
Subhashini Gurumurthy Buy
Tel: (91 22) 6646 0021 Price: Rs3,283 Target Price (Aug 09): Rs3,910
Key Data ‘Smart Class’ for the new ‘Millennium’

Market cap Rs57 bn/US$1,295 mn
Shares in issue (mn) 17.2 Educomp is fast becoming the leader in the Indian education sector with
Diluted share (mn) 18.8 offerings straddling multiple segments. Its foray into K-12 schools and faster
3-mon avg daily val (mn) Rs652.2/US$14.9 penetration of curriculum based content is set to improve profitability and cash
52-week range Rs5,650/2,225 generation. We expect Educomp to gain market share in its focus segments,
BSE sensex (20/08/08) 14,678 paving way for sustained long term growth.
Nifty (20/08/08) 4,416
K-12 - cash cow in the making: Educomp plans to set up to 150 K-12
Rs/US$ 43.7
schools, aimed at a demand of over 20,000 new urban schools by 2015.
Schools can be extremely profitable, with ~62% steady state EBIT
Shareholding Pattern (%) margins. We believe that Educomp can leverage its expertise in school
1QFY 09 1Q FY08
content and teacher training to succeed in the K-12 segment. We expect
Promoters 55.0 60.1 K-12 to contribute 10.5% of revenues and 18.0% of EBITDA in FY10E.
FIIs 33.0 24.8
Content set for increased adoption: Educomp is an early entrant in the
Others 9.2 14.0
school content space with its product – ‘Smart Class’. With over 1,000
schools in its portfolio, we believe that Educomp has reached critical mass
for faster growth ahead. We expect SmartClass to contribute 48.8% of
Price Performance (%) revenues and 56.2% of EBITDA in FY10E.
1M 3M 12M
Absolute 15.1 (18.6) 36.3
Leadership in the ICT space: Educomp is the largest player in the
government schools with 6,004 schools in FY08. We believe Educomp will
Relative* 7.5 (3.8) 34.6
continue to lead this market with strong wins in FY09E and FY10E. We
* To the BSE Sensex
expect contribution of 24.6% in revenues and 13.2% in EBITDA by FY10E.
Daily Performance Initiate with a Buy: We initiate coverage on Educomp with a Buy
25,000
Sensex Educomp
7,000
recommendation. Our target price of Rs3,910 implies: (1) 20x FY10E PER
for the core business, and (2) 25x FY12E PER for the K-12 business. Our
20,000 target price offers an upside potential of 19.1%.
5,000
15,000
10,000
3,000
Y/E March FY07 FY08 FY09E FY10E
5,000 Net sales 1,101 2,861 5,821 10,788
Sales growth (%) 98.3 159.9 103.5 85.3
- 1,000
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 EBITDA 506 1,266 2,957 5,623
EBITDA (%) 46.0 44.2 50.8 52.1
(As of 20 August 2008) Adjusted net profit 287 706 1,412 2,841
EPS (Rs) 17.3 35.4 75.2 151.3
EPS growth (%) 54.6 104.4 112.3 101.2
ROCE (%) 22.7 19.4 23.2 29.8
ROE (%) 28.1 35.0 40.0 51.8
PE (x) 189.5 92.7 43.7 21.7
EV/EBITDA (x) 103.9 44.6 20.5 11.4

Educomp Solutions
I. K-12 - cash cow in the making

Educomp has ventured into the business of setting up state-of–the-art brick
and mortar schools offering classes to children from kindergarten to standard
12 (K-12 schools). The company currently has eight operational schools and
intends to ramp it up to 150 schools over the next three to four years. Our
analysis indicates that over 20,000 additional urban schools would be required
by 2015, which offers potential for emerging players such as Educomp to
establish branded school chains across India.
We believe that running schools can be extremely profitable, with a well

managed school making ~62% EBIT margins on a steady state basis. Further,
we believe that Educomp can successfully leverage its expertise in the school
content and teacher training businesses to emerge successful in the newly
launched K-12 segment as well. We expect the K-12 segment to contribute
10.5% of revenues and 18.0% of EBITDA in FY10E.
Exhibit 2: K-12 business – A snapshot

Estimated built up Estimated operational Average fees
Real estate for schools Mode of operation
schools (Nos) schools (Nos) per month (Rs)
Total finalized Tie-ups for real Royalty based Standalone
FY09E FY10E FY09E FY10E Acquisition
sites (Nos) estate model branding
Co-branding with
Acquisition
top schools such
The Millennium of existing
24 50 8 24 3,000 70 Ansals, DLF as PSBB , Don
schools operational
Bosco and
schools
Raffles
Exhibit 3: Current operational schools

School Location
PSBB Millennium Chennai
PSBB Learning Leadership Academy Hulimavu, Bangalore
PSBB Learning Leadership Academy Lakshmipura Village, Bangalore
Millennium school Noida
Millennium school Mohali
Chiranjeev Bharati School Palam Vihar,Gurgoan
Chiranjeev Bharati School Sushant Lok, Gurgoan
Not announced (Residential school) Mussoorie

Educomp Solutions
I.1. Why is Educomp well-placed in K-12?
I.1.1. Demand for 20,000 urban schools by 2015
Huge demand-supply gap: According to NCERT (2001), there are

78,290 schools in urban areas with an average enrolment of 660 students
per school. With over 14 mn children expected to be added to the
academic system by 2015, this translates into a huge demand of over
20,000 schools. Educomp intends to set up 150 schools over the next four
years to cash in on the huge demand-supply gap.
Exhibit 4: 20,000 urban schools need to be added by 2015

Demand calculation 2001 2015 2025
School going urban children (mn) 59.8 73.9 82.7
Urban schools (Nos) 78,290 98,433 111,351
Additional schools required (Nos) NA 20,143 12,918
Source: NCERT, JM Financial
I.1.2. Rising affluence to spur education spending

We believe that expansion in middle/upper class population, which have
greater aspirations through education, coupled with increasing spending will
fuel growth in private education.
The middle/upper class population have greater aspirations through education.
We believe expansion in this class of population coupled with increasing
spending will fuel growth in private education.
Boom in the middle/upper class will drive spending: According to

McKinsey Global Institute (MGI) estimates, the Indian middle and upper
classes will touch 614 mn people, representing 43% of India’s population
by 2025. Further, share of urban middle and upper class households is
expected to increase from 13.0% in 2005 to 60% by 2015, moving up to a
whopping 83% by 2025. These households will also assume a significant
proportion of spend on education at 89% by 2015, up from 58% in 2005.
Private spending has tilted more in favour of education: Currently,

Indian households spend over 56% of disposable income on food and
beverages. Expenditure on education at <5% is low (12%-US, 15%-
China), but has grown at a CAGR of 8.6% versus consumption growth of
3.2% over 1995-2005. However, private spending in education has grown
faster, at a CAGR of 15.8% over the same period. Considering a longer
period of the last 20 years, this has grown at a CAGR of 16.4% versus
disposable income growth of 5.9%

Educomp Solutions
Exhibit 5: Private spending on education has grown at 16.4% CAGR

Food, beverages & tobacco Clothing & footwear Rent, fuel & power
Furniture,appliances Medical services Transport & comm.
Recreation & other Education Misc
100%
80%
60%
40%
20%
0%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: CMIE
Per child spending is set to increase sharply: According to the

government’s data, per child expenditure on education was Rs609 per
month in 2001. This is expected to be Rs1,547 per month by 2015,
increasing sharply to Rs4,606 by 2025. Over 2001 levels of Rs609, this
marks a rise of 6.9% CAGR by 2015, after which it is expected to grow
faster at 11.5% CAGR till 2025.
We believe that significant market exists for schools such as Educomp that
charge up to Rs3,000 per month as fees. This belief is strengthened by the
high average spend by upper and middle classes, who spent an average of
Rs4,066 in 2001.
Our spending survey (refer page 53) indicates that parents at JM Financial
spend an average of over Rs5,000 per month (excluding textbooks,
uniforms, lab fees etc.) on education, with the percentage of children
paying higher fees increasing over the last few years. This leads us to
believe that there is opportunity for a player like Educomp to offer high
quality education at a slight premium.
Exhibit 6: Upper/middle classes expected to spend more per child

Per child spend p.m. (Rs) Per child spend p.m. (Rs) -Upper/Middle classes
6,157
Dip is due to bulge in
lower middle class
4,606
4,066
3,306
1,547
609
2001 2015 2025
Source: CMIE, MGI, JM Financial

Educomp Solutions
I.1.3. India lacks significant pan-Indian non-missionary chains
School chains in India are still mission-led: Currently, India does not
have many non-missionary private school chains with a pan-India
presence, the Delhi Public School (DPS) being a notable exception. We
believe that this scenario offers opportunity for a player like Educomp to
establish itself as a high quality school chain in India.
Exhibit 7: Current schools chains in India

Vidya Bharti (RSS) 14,055
Dayanand Anglo-Vedic Schools (D.A.V ) 667*
Nasik District Maratha Vidya Prasarak Samaj (NDMPS) 186
Bharti Vidya Bhavan 86
Viishwa Hindu Parishad (VHP) 821
Chinamaya Vidyalaya 76
Delhi Public School (DPS) 110
Source: Industry data, Trust statistics, *includes schools and colleges
I.1.4. Educomp’s 3-tier system suits regulatory requirements

Indian schools need to be governed by a “trust”: Most Indian States
do not allow K-12 schools to operate on a ‘for profit’ basis. Historically,
schools have been managed by charitable trusts/societies, which are non-
profit entities. Central Board of Secondary Education (CBSE) bye-laws
state that ‘in case of private unaided schools there should be a properly
constituted Registered Society/Trust’. Hence, each individual school has to
be governed by an independent trust. However, profits from the trust can
be taken out for paying the suppliers of various goods and services to the
school - lease rentals, school management fees, content fees, etc.
Educomp conforms to the regulatory guidelines: All of Educomp’s

schools will be governed by an Independent Trust/Society. Educomp
Infrastructure Pvt Ltd (69.4% stake) will hold all the real estate and lease
it out to the trust for a period of 30 years. Educomp School Management
Ltd (68.0% stake) will provide intellectual property (IP) content, other
school management services and in turn get licensing and service fees.
Educomp will provide the content and content-related services to Educomp
School Management Ltd (Edu Manage) for a 10% revenue share.

Educomp Solutions
Exhibit 8: Educomp’s school structure conforms to regulatory guidelines
School
Tution fees Admission fees
Trust
Owns & runs the school
Salaries (13% of revenues) Other operating costs (13% of revenues)
Balance 74% operating surplus
Edu Infra (69.4% stake) Edu Manage

Owns the real estate and (68% stake)
leases out to school Provides IP/content
i) 14.5% of development costs Average fees of

ii) 4.5% of school revenue Rs850 per student
iii) one-time fee of Rs5 mn per month
69.4% 68.0%
Educomp
I.1.5. Comprehensive model to ensure quick scale up

We like Educomp’s comprehensive strategy, which encompasses all the
alternatives required to scale up its K-12 initiative. Apart from setting its own
branded school chains under the ‘Millennium brand’, it has a three-pronged
strategy to ensure a faster scale up.

Educomp Solutions
Exhibit 9: Three pronged strategy for faster scale up in K-12
Tie-ups with real estate Tie-ups with established

players - Ansals, DLF schools - PSBB, Don
Bosco, Raffles
Educomp's K-12
model
Acquisition of existing schools

- Ansals Chiranjeev Bharti,
Mussorie
Co-branding with established schools to ensure initial ramp ups:

Educomp has forged tie-ups with established brands in the K-12 segment
such as Padma Seshadri Bal Bhavan (PSBB), Don Bosco and Raffles
International to set up co-branded schools. Such schools will be
established and managed by Educomp and run in line with the culture
followed by the respective schools. The company currently has two co-
branded schools under the ‘PSBB Millennium’ brand in Chennai (see PSBB
Millennium School, Chennai – our impressions on page 40) and Bangalore.
We believe that the co-branding strategy would benefit both Educomp and
the licensing school due to the following reasons:
o Strong brand equity enjoyed by the leading schools will ensure
faster capacity utilisation.
o Schools would receive royalties from Educomp for lending their
brand.
Exhibit 10: Existing co-branded schools
PSBB Millenium school PSBB Learning Leadership Academy

Chennai Bangalore
Standard: Pre KG to 9th Std Standard: Pre KG to 5th Std
Number of students: 1,950 Number of students: 1,026 (FY08)
Year of establishment: June 2005 Year of establishment: June 2006

Educomp Solutions
Acquisition/management of existing schools: Educomp also plans to

acquire existing schools and refurbish them. This will save the initial set up
time required to build a school (~9-10 months) and give it a captive
audience as well. Educomp recently acquired a well-established residential
school in Mussoorie, in addition to two schools from Ansals. We believe
that the acquisition route would prove to be a more expensive and less
lucrative avenue for investment for Educomp. Alternately, Educomp also
plans to manage existing schools wherein it would not own the school
infrastructure, which would eliminate high start-up costs.
I.1.6. Well-placed to address teacher requirements
While there are concerns over the lack of good quality teachers in the system,
we believe that Educomp is well placed to deal with these issues given its in-
house training facilities and innovative HR strategies.
Large in-house teacher training institute: Educomp has the largest

teacher training institute in India and has trained over 1 mn teachers till
date. Educomp derived 9.0% of revenues from Professional Development
(teacher training) in FY08. We believe that such a captive talent pool
places the company in a better position to recruit teachers for its schools
Exhibit 11: Educomp has trained over 1 mn teachers till date

1,135,295
960,570
655,000
440,000
280,000
FY05 FY06 FY07 FY08 1Q FY09
Innovative HR strategy: Educomp plans to recruit star teachers from

popular local schools and offer them a better career graph by placing them
in higher positions (Principal, Vice Principal, Head of Department, etc)
within its schools. These star teachers would then drive teacher
recruitment and quality within individual schools, thereby ensuring high
quality teaching.

Educomp Solutions
Exhibit 12: Innovative HR practices to offer better career path

Educomp Solutions
I.2. Schools can be highly profitable

I.2. 1. Schools are high margin businesses
We believe that running schools can be extremely profitable, with a well

managed school making ~62% EBIT margins on a steady state basis. An
abridged version of the school P&L has been presented in exhibit 13 below. We
have built in lower utilization (both ramp up and peak) as well as lower fee
structure in our model versus management estimates.
Exhibit 13: Financials – Standalone school

Trust (Rs mn)
Year 1 2 3 4 5 6 7 8 9 10 11 12
Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG- Pre KG-
Standard
6th 8th 10th 12th 12th 12th 12th 12th 12th 12th 12th 12th
Students(Nos) 392 792 1,144 1,560 1,768 1,768 1,768 1,768 1,768 1,768 1,768 1,768
Utilization (%) 35.0% 55.0% 65.0% 75.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0% 85.0%
Tuition fees p.m (Rs) 2,750 2,888 3,032 3,183 3,343 3,510 3,685 3,870 4,063 4,266 4,479 4,703
Admission fees p.a (Rs) 30,000 31,500 33,075 34,729 36,465 38,288 40,203 42,213 44,324 46,540 48,867 51,310
Revenue from tuition fees-

recurring 12.9 27.4 41.6 59.6 70.9 74.5 78.2 82.1 86.2 90.5 95.0 99.8
Revenue from admission

fees-one time 11.8 12.6 11.6 14.4 7.6 6.8 7.1 7.5 7.8 8.2 8.6 9.1
Total revenues from tuition

and admission fees 24.7 40.0 53.3 74.0 78.5 81.2 85.3 89.6 94.0 98.7 103.7 108.9
Ancillary revenue 3.6 7.4 10.8 15.0 17.2 17.4 17.7 18.0 18.2 18.5 18.8 19.1
Total revenue 28.3 47.4 64.1 89.0 95.7 98.7 103.0 107.5 112.3 117.3 122.5 128.0
Teacher salaries 2.3 4.7 7.1 10.5 10.9 11.4 11.8 12.3 12.8 13.3 13.9 14.4
% of revenue 8.0% 10.0% 11.1% 11.8% 11.4% 11.5% 11.5% 11.5% 11.4% 11.4% 11.3% 11.3%
Support staff salaries 0.3 0.7 1.0 1.4 1.5 1.5 1.6 1.6 1.6 1.7 1.7 1.8
% of revenue 1.1% 1.4% 1.5% 1.6% 1.5% 1.5% 1.5% 1.5% 1.5% 1.4% 1.4% 1.4%
Electricity charges 0.8 1.1 1.4 1.7 1.8 1.9 2.0 2.0 2.2 2.3 2.4 2.5
% of revenue 2.8% 2.2% 2.1% 1.9% 1.8% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9%
Ancillary costs 2.5 5.2 7.6 10.5 12.0 12.2 12.4 12.6 12.8 13.0 13.2 13.4
% of revenue 8.9% 10.9% 11.8% 11.8% 12.6% 12.4% 12.0% 11.7% 11.4% 11.1% 10.8% 10.5%
Other overheads 1.4 1.9 1.9 2.7 2.9 3.0 3.1 3.2 2.2 2.3 2.4 2.6
% of revenue 5.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% 2.0%
Total operating costs 7.3 13.5 19.0 26.8 29.1 29.9 30.8 31.8 31.6 32.6 33.6 34.6
% of revenue 25.8% 28.5% 29.6% 30.1% 30.4% 30.3% 29.9% 29.5% 28.2% 27.8% 27.4% 27.1%
EBITDA 21.0 33.9 45.1 62.2 66.6 68.8 72.2 75.8 80.7 84.7 88.9 93.3
% of revenue 74.2% 71.5% 70.4% 69.9% 69.6% 69.7% 70.1% 70.5% 71.8% 72.2% 72.6% 72.9%
Depreciation 5.3 6.9 7.1 7.1 7.1 7.3 7.3 7.3 7.6 7.6 7.6 7.8
EBIT 15.7 27.1 38.0 55.1 59.5 61.4 64.9 68.4 73.1 77.1 81.3 85.6
% of revenue 55.6% 57.0% 59.4% 62.0% 62.2% 62.3% 63.0% 63.6% 65.1% 65.8% 66.4% 66.8%
IRR (%) 27.0%

Educomp Solutions
Conservatism built into our estimates: We have been conservative

about our school P&L estimates to allow for the execution risks inherent in
this business. Some of the main assumptions, which have gone into our
school P&L are:
o Full capacity: 1,770 students versus the management’s estimate of
2,300.
o Capacity utilisation: 35% in Year 1, 55% in Year 2, 65% in Year 3,
75% in Year 4 and 85% from Year 5 onwards. The management
estimates 100% capacity utilisation in Year 3.
o Number of grades: Pre KG to 6th grade in Year 1, Pre KG to 8th
grade in Year 2, Pre KG to 10th grade in Year 3, Pre KG to 12th grade
from Year 4 onwards. The management estimates it would be able to
offer 12th grade in Year 3.
o School fees: Rs2,750 in Year 1 with 5.0% YoY inflation for successive
years versus current range of Rs2,500 – 4,500.
o Admission fees: Rs30,000 in Year 1 with 5.0% YoY inflation for
successive years. PSBB Millennium in Bangalore charges Rs40,000 at
present.
o Number of schools: We expect 150 schools to come up over a period
of six years versus the management’s current expectations of three –
four years.

Educomp Solutions
I.3. Cost control is key to profitability

We believe that cost control would be extremely crucial for profitability in the
K-12 business. Our analysis indicates that while land costs can be kept under
check through a mix of reserved zones and revenue share agreements with
land owners, construction costs will be tougher to control. Constructed area
would be a critical element if Educomp wants to keep costs under control.
I.3.1. Land costs can be kept in check

Reserved zones to help keep land costs in check: Educomp plans to
acquire land in zones reserved for schools, which would help keep land
costs reasonable. Such land pockets would be available for school
development at lower rates than for commercial development.
Exhibit 14: Reserved zones to keep land cost reasonable

Particulars Rs mn
Average cost of land per acre 29.0
Average number of acres per school 1.7
Average land cost per school 50.2
Source: Company data, JM Financial, for details refer to Annexure on page 51
Exhibit 15: Land cost – Sensitivity analysis

Acres per school
Cost per acre (Rs mn) 1.25 1.70 3.00
15 19 26 45
29 36 50 87
45 56 78 135
JV with real estate players in expensive areas: Educomp has forged

tie-ups with leading real estate players such as Ansals, wherein the real
estate developer would own the land and provide it on a 60 year lease to
Educomp. In areas where land costs are higher than current plans,
Educomp would adopt a JV strategy wherein Educomp would construct the
campus on land owned by the real estate developer in exchange for a fixed
revenue share. Such tie-ups work would help reduce the upfront
investment required for setting up these schools.
I.3.2. Construction costs will depend on area per student

CBSE norms stipulate ~25 square feet per student: The affiliation
bye-laws of the Central Board of Secondary Education (CBSE), to which
Educomp plans to affiliate its schools (except Raffles, which will be
affiliated to the International Board), stipulates a minimum of 25 square
feet per student per school. We have factored 50 square feet per student
to allow for larger classrooms, auditoriums and assembly halls.

Educomp Solutions
Exhibit 16: CBSE bye-laws stipulate 25 square feet per student

Built up area Number
Feature Area (sq.ft.) Total (sq.ft.)
(sq.ft.) (for Educomp)
Classroom 516 671 52 34,914
Science Lab 581 755 2 1,511
Library 1,205 1,567 1 1,567
Computer Lab 1,205 1,567 1 1,567
Math Lab 516 671 1 671
Other (not specified by CBSE) 10,000 13,988 1 13,988
Total - 19,220 - 54,217
Average students - Mgmt estimate (Nos) 2,200
Area per student (sq.ft.) 25
Source: CBSE, JM Financial
Area of construction will be key to cost control: Based on industry

inputs, we have assumed a construction cost of Rs1,200 per square foot
(excluding furniture and other fixtures) and an average constructed area
of 50 square feet per student (versus CBSE minimum of 25 sq.ft.).
Educomp is also currently planning an average of 50 square feet per
student of constructed area. We believe that this offers margin of safety
for Educomp to keep construction costs in control. However, if it continues
to build capacity as per current plans in an escalating cost scenario, it will
impact profitability of the school.
Exhibit 17: Square foot per student is critical to construction cost

Construction cost (Rs mn)
Cost per sq.ft. (Rs) / Area per student (sq.ft.) 70 50 30
1,000 124 89 53
1,200 149 106 64
1,500 186 133 80

Educomp Solutions
I.4. Edu Infra and Edu Manage – the fine print

Educomp Infrastructure Management (Edu Infra) and Educomp School
Management (Edu Manage) are the primary revenue sources for Educomp
from the K-12 schools business. We expect Edu Infra and Edu Manage to
contribute Rs1.14 bn in revenue and Rs84 mn in profit in FY10E.
Exhibit 18: Edu Infra/Edu Manage - A snapshot

Entity Educomp Promoter Business Profile Revenue Streams Net margin
Educomp Infrastructure Owns assets and leases out to i) 14.5% of development costs, ii) 4.5% of school
69.4% 30.6% ~17%
Management - Edu Infra schools. revenue, iii) one-time fee of Rs5 mn
Educomp School Provides educational content and Balance after paying out teacher salaries, Edu Infra
68.0% 32.0% ~62%
Management -Edu Manage Intellectual Property fees and 1% to trust
Exhibit 19: Edu Infra/Edu Manage – Financial Snapshot

FY09E FY10E FY11E
Built up schools (Nos) 24 50 80
Operational schools (Nos) 8 24 50
Year 0 (Nos) 16 26 30
Year 1 (Nos) 3 16 26
Year 2 (Nos) 1 3 16
Year 3 (Nos) 3 1 3
Year 4 (Nos) 1 3 1
Year 5 (Nos) 1 3
Year 6 (Nos) 1
Total students (Nos) 6,960 16,240 34,928
Edu Infra
Revenue (Rs mn) – (A) 391 910 1,640
PAT (Rs mn) (11) 7 53
PAT margin (%) -2.7% 0.7% 3.2%
Edu Manage
Revenue (Rs mn) – (B) 94 207 398
PAT (Rs mn) 53 117 227
PAT margin (%) 56.6% 56.3% 57.0%
Edu Manage royalty to Educomp @10% (Rs mn) – (C) 9 21 40
Total revenue to Educomp (Rs mn) – (A+B+C) 494 1,138 2,077
PAT (Rs mn) 43 123 279
Minority Interest (Rs mn) 14 39 89
PAT contribution to Educomp (Rs mn) 29 84 191

Educomp Solutions
I.4.1. Edu Infra will have steady revenue
Three revenue streams: Edu Infra, which will own and lease assets to
each school, will receive three streams of revenue as detailed below:
o One-time fee of Rs5 mn: Edu Infra will charge a one-time fee of Rs5
mn from each school as advance payment.
o Rental revenue of 14.5% of cost plus escalation: Edu Infra will
charge 14.5% of development cost as fee in Year 1 of operations of
the school. Management expects to set an escalation fee of 15% per
annum over the first year fee. We have factored an escalation of 5%
per annum.
o Revenue share of 4.5%: In addition to the lease rental, Edu Infra
will receive a revenue share of 4.5% of the school’s revenue every
year.
The yearly escalation in lease rental, combined with the 4.5% revenue share
will ensure that Edu Infra breaks even in the second year of operations, with
profitability increasing as school revenues pick up, averaging 17% net margins
in steady state.
1.4.2. Edu Manage will ramp up in proportion to school revenue
Exhibit 20: Edu Infra/Edu Manage – revenue streams

School
Tution fees Admission fees
Trust
Owns & runs the School
Salaries (13% of revenues) Other operating costs (13% of revenues)
Balance 74% operating surplus
Lease rental & revenue

share to Edu Infra
(41% of revenue)
School management services

Millenium Learning system
Remainder to Edu
Multimedia content
Manage
Recruitment of teachers/ staff
(33% of revenue)
Textbooks
Examinations

Educomp Solutions
Edu Manage revenue to be directly proportional to school revenue:

Edu Manage will be paid the remainder after paying out salaries and other
costs as well as Edu Infra revenue. Unlike Edu Infra, which will start
receiving steady revenue from Year 1 onwards, Edu Manage revenue will
scale up in proportion to school revenue (refer exhibit below).
Exhibit 21: Edu Manage and Edu Infra revenue
12,000 Schools (Rs mn) EduInfra (Rs mn) EduManage (Rs mn)
9,000
6,000
3,000
0
FY09E FY10E FY11E FY12E FY13E FY14E FY15E
Edu Manage will be highly profitable from the first year: The primary
cost to Edu Manage would be the 10% royalty paid to Educomp for the
educational content/ Intellectual property. We expect high margins in Edu
Manage from the first year of operations, averaging 62% net margins in
steady state.
1.4.3. Holding in Edu Infra to increase
Exhibit 22: Edu Infra/Edu Manage – Financial snapshot

(Rs mn) Issued share capital Reserves and Surplus Loans
FY07 FY08 FY07 FY08 FY07 FY08
Edu Infra 0.4 0.3 251.8 508.0 0.0 92.9
Edu Manage 0.5 0.5 12.5 74.2 0.0 0.0
Holding in Edu Infra likely to increase over the near term: Edu Infra
was incorporated by Educomp promoters with seed capital of Rs1.8 mn in
FY07. In the same year, Educomp invested Rs500 mn for 69.4% stake in
Edu Infra. Currently, Educomp has infused an additional Rs500 mn equity
into Edu Infra. This is expected to increase the stake holding by Educomp
in Edu Infra from current levels of 69.4%. We expect Educomp’s stake to
increase to 76%, assuming valuation of US$180 mn for Edu Infra.
Stake in high margin Edu Manage likely to remain at 68%: Edu

Manage was incorporated by Educomp promoters with seed capital of Rs
0.2 mn in FY07. Educomp invested Rs50 mn for 68% stake in Edu Manage
in FY07. We expect stake in high margin, asset light Edu Manage to remain
at current levels.

Educomp Solutions
I.5. US$5.4 mn per school valuation for Educomp

School value at US$12 mn, US$5.4 mn value to accrue to Educomp:
Based on our estimates for the K-12 business, we have arrived at a DCF
based valuation of US$5.4 mn per school for Educomp versus US$12 mn
for the school. This is due to Educomp’s 69.4% stake in Edu Infra and
68% stake in Edu Manage, even though Educomp has full exposure to the
underlying risks in the business.
Exhibit 23: Fair value per school of US$5.4 mn for Educomp

Valuation per school Worst case Base case Best case
Investment per school (US$ mn) @ US$/INR 40 3.1 4.0 5.8
Fair value per school (US$ mn) @ US$/INR 40 2.3 12.0 29.4
Fair value per school for Educomp (US$ mn) * 1.0 5.4 13.2
K-12 Valuation for Educomp @ 150 schools (US$ mn) 155 810 1,976
Source: JM Financial, *68% share assuming full tax paid by Educomp.
Exhibit 24: K-12 assumptions

Assumptions Worst case Base case Best case
Students at full capacity (Nos) 1,140 1,770 2,300
School fees p.m (Rs) 2,000 2,750 3,500
One time admission fees (Rs) 20,000 30,000 40,000
Ancillary fees p.a (Rs) 5,000 5,000 5,000
Capex (Rs mn) 125 161 230
Exhibit 25: DCF Assumptions

Risk free rate of return (Rf) (%) 9.0
Beta (x) 1.2
Expected market rate of return (Rm) (%) 14.0
Cost of equity (Ke) (%) 15.0
Proportion of equity (x) 0.3
Cost of debt (%) 13.0
Proportion of debt (%) 0.7
WACC (%) 10.5
Terminal growth rate (%) 1.0
Exhibit 26: Our estimate factors in a failure rate of 30%

Number of % of Value per school Investment per
schools total (US$ mn) school (US$ mn)
Successful 25 17% 13.2 5.8
Moderately successful 80 53% 5.4 4.0
Failure 45 30% 1.0 3.1
Average value per school (US$ mn) 5.4

Educomp Solutions
I.6. Strong profit growth sustainable post FY10

We expect K-12 to generate Rs29 mn and Rs84 mn profits in FY09E and
FY10E, respectively. Going forward, we expect an 84.1% CAGR in net profit
from K-12 over FY10-15E as built up schools become operational over the
period.
Exhibit 27: All schools to be operational by FY14E

(Nos) FY08 FY09E FY10E FY11E FY12E FY13E FY14E FY15E
Built up schools 8 24 50 80 120 150 150 150
Operational schools 3 8 24 50 80 120 150 150
Exhibit 28: K-12 profit CAGR of 136% over FY09-12E

(Rs mn) FY09E FY10E FY11E FY12E CAGR FY09E-FY12E (%)
Revenue 494 1,138 2,077 3,451 91.1
PAT (after MI) 29 84 191 383 136.3
PAT margin (%) 5.9 7.4 9.2 11.1
I.6.1. Established schools will become cash cows
According to our calculations, schools would become free cash flow

positive from Year 2 of its operations. Going into Year 3 and beyond, when
incremental capex is lower, the school starts generating significant free
cash flows. We expect K-12 to start generating substantial FCF from FY14E
onwards as majority of the schools traverse into steady state operations.
Thus, existing K-12 schools will become cash cows to fund new schools.
Exhibit 29: FCF for single green field school

(Rs mn) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12
Cash surplus from operations 0.0 21.0 33.9 45.1 62.2 66.6 68.8 72.2 75.8 80.7 84.7 88.9 93.3
Change in current liabilities 2.6 2.9 2.8 3.6 2.3 0.7 0.7 0.8 0.8 0.9 0.9 1.0 0.0
Cash flow from operating activities 2.6 23.9 36.7 48.7 64.5 67.3 69.5 73.0 76.6 81.5 85.6 89.8 93.3
Capex -109.8 -25.6 -25.6 -0.7 0.0 0.0 -0.7 0.0 0.0 -0.7 0.0 0.0 -0.7
Free Cash Flow -107.2 -1.6 11.2 48.0 64.5 67.3 68.8 73.0 76.6 80.8 85.6 89.8 92.6
Source: JM Financial. Note: Assuming school does not pay any taxes

Educomp Solutions
I.7. Funds in place for K-12 expansion

Rs7.25 bn of debt funds tied up: Educomp has arranged for debt to the
extent of Rs7.25 bn, supported by Rs2.5 bn equity infusion to fund the K-
12 business expansion. Of this, Rs1 bn has already been raised on Edu
Infra’s books in the form of Non Convertible Debentures (NCDs). An
additional Rs6.25 bn will be raised over the next two years.
Equity infusion from Educomp and external investors: Educomp has

infused Rs500 mn equity into EduInfra and is seeking an external entity to
infuse another US$50 mn. However, the company believes that it can
arrange for the funds on its own in the event that it is unable to find an
external investor.
Current funds enough to set up 61 schools: The available funds are

sufficient for building 61 schools till FY10, slightly lower than company
intended 68. This is due to our assumption of higher capex (Rs161 mn
versus management estimate of Rs150 mn). However, we have assumed
only 42 additional schools by FY10E.
Exhibit 30: Edu Infra funds tie-up enough to fund 61 schools

Non convertible debenture @ 12.5% (Rs mn) 1,000
Line of credit available @13% from a nationalised bank (Rs mn) 6,250
Debt (Rs mn) 7,250
Current equity infusion from Educomp (Rs mn) 500
Further equity infusion assumed from external entity (Rs mn) 2,000
Total Equity infusion (Rs mn) 2,500
Total funds available for K-12 (Rs mn) 9,750
Average capex per school (Rs mn) 161
Schools that can be built - FY10E (Nos) 61
JM Financial assumption of new schools - FY10E (Nos) 42

Educomp Solutions
PSBB Millennium School – our impressions

We visited PSBB Millennium School in Chennai to understand the K-
12 business better. Our interactions suggest that the co-branding
strategy with PSBB has worked very well for Educomp with the
school running at full capacity. Further, modern learning aids such
as Smart Class and laptops are actively used in the school to aid
student learning outcomes.
PSBB Millennium, Chennai, was started in June 2005. The school currently
has 1,950 enrolments and has classes from junior KG to the 9th grade. The
school is currently on rented premises and is at present operating at full
capacity. It has not expanded beyond the 9th grade due to space constraint
(the school opened the 5th section per class from K-9 because of heavy
demand). If the school operates all grades from K-12, it should have
~2,500 students at full capacity.
Exhibit 31: In full capacity - PSBB Millennium School, Chennai
PSBB co-branding working in favour of Educomp: Due to the

strong brand equity for PSBB schools in Tamil Nadu, the school saw an
intake of around 900 students in the first year of its operations as
against initial expectations of 600 students. Due to the paucity of
space, the management is planning another campus at DLF OMR
property, which is expected to be operational in the next academic year
(2009-2010). The new campus will have a higher capacity of ~2,500
students.
Good review for Smart Class from both teachers and students:
Majority of the classes in PSBB Millennium are wired with Smart Class.
Our interaction with the teachers and students suggest that they see
clear benefits from the usage of Smart Class. The animation led real life
applications of theory in Smart Class seems very valuable as it explains
difficult concepts clearly.

Educomp Solutions
Exhibit 32: Smart Class in action
Explorative learning with the aid of laptops: PSBB Millennium

launched O3 or One-on-One CPMC (Classmate Personal Computer) to
aid the students to learn their lessons and do assignments and
projects. This is also in conjunction with PSBB’s explorative learning
methodology, which encourages students to explore subjects on the
internet. All students and teachers were given laptops in February
2008 to get used to the idea of using laptops in day-to-day classroom
sessions before implementing it in regular sessions beginning from the
academic year 2008-2009.
Exhibit 33: Child’s play - children using Laptops
PSBB culture retained in the school: PSBB Millennium teachers

have been trained on running the school in the ‘PSBB way’ on the PSBB
campus. PSBB teachers have also taught at PSBB Millennium for one
day per week for the first two years, which we believe is indicative of
the close relationship and brand association with PSBB.

Educomp Solutions
II. Content is set for increased adoption

Educomp is an early entrant in the school content (‘multimedia for schools’)
space with its successful product – ‘Smart Class’. Educomp’s private schools
portfolio has grown more than 10x over FY06-08, which clearly demonstrates
its increasing adoption in schools. Smart Class contributed to 44.3% of FY08
consolidated revenue, having grown at a CAGR of 151% over FY06-08.
Current penetration levels of less than 7% offer scope for growth ahead.
Strong growth expected despite new competition: Despite new

entrants such as NIIT (eGuru) entering this segment, we expect strong
sustainable growth in the medium term due to: (1) a high potential
market with low penetration, (2) Educomp’s early mover advantage and
(3) an interesting product with fully mapped content.
Exhibit 34: Scope for further penetration for Smart Class

FY08 FY15E
Existing urban schools (Nos) 87,786 98,433
Target urban private schools (Nos) 15,000 29,530
Target urban private schools (%) 17.1% 30.0%
Classes per school (Nos) 25 25
Students per class (Nos) 45 45
Fees per student per month (Rs) 150 150
Smart Class market size (US$ bn @ US$/INR of 40) 0.8 1.5
Educomp's private school portfolio (Nos) – as on 1Q FY09 1,036
Current target market penetration 6.9%
Aggressive sales focus to drive growth: While newer players will have
to work towards creating a market for their product, Educomp, with an
already proven product and virtually no established competition, can focus
on scaling up its market share with an aggressive sales strategy. The
company has nearly doubled its Smart Class sales force from 60 in FY07 to
~150 people in FY08. Plans are on to increase it to ~170 by FY09E.
Exhibit 35: Smart class is well-established

Parameter Educomp NIIT Everonn
Content Fully mapped Maths, Science 6-12 Std
Interactivity Rating sale (1-5) 4 5 3
Primarily VSAT + Hardware +
Model used
Hardware +Content Content Content
Syllabus covered CBSE/ICSE NA CBSE/ICSE
Current geographical presence pan-India pan-India Restricted to Tamil Nadu
Avg. pricing per student per month (Rs) 150/75* 60* 160
Private schools using multimedia product 1,036 25 88
Installed base of private schools with a
cross-selling opportunity NA 1,223 144
Source: Company data, JM Financial. Note:*Only content

Educomp Solutions
Smart Class revenue contribution expected to increase: We expect

Smart Class revenue contribution to increase over FY08-10E from 44.3%
to 48.8%. We expect EBITDA margins in Smart Class to rise by 232 bps
due to higher operating leverage. However, revenue and EBITDA
contribution would be overshadowed by the strong growth from the K-12
segment from FY10E.
Exhibit 36: Smart Class to add to revenue, margin growth
Revenue contribution EBITDA margins

60.0%
60% 60%
58.7%
58.1%
57.7%
40% 58%
49.4% 48.8%
20% 42.3% 44.3% 56%
0% 54%
FY07 FY08 FY09E FY10E

Educomp Solutions
III. Leadership in the ICT space

Market leader in the ICT space: Educomp displaced NIIT to become the
largest player in the ICT segment in FY08. The company’s unwavering
focus on the government schools segment saw it more than double to
6,004 schools in FY08. We believe Educomp will continue to lead this
market with strong school wins in FY09E and FY10E.
Exhibit 37: Educomp to remain the market leader in ICT segment

Everonn Educomp NIIT
21,004
12,004 11,644
9,414
7,844
6,004 5,914
4,594
2,808 3,006 3,164
1,900
Lowering dependence on ICT: Despite a strong growth in ICT, portfolio

dependence on ICT is expected to reduce going forward, given the
relatively stronger growth in other businesses. ICT is a relatively lower
margin business with 29.2% EBITDA margin in FY08 as against company
average of 44.2%. Though it remains susceptible to the vagaries of doing
business with the government, we view this as positive step towards more
profitable growth.
Exhibit 38: Reducing EBITDA contribution from ICT

ICT Smart Class Others
20% 28%
34% 32% 31%
77%
58%
44% 50% 57% 56%
4%
20% 22% 18% 22% 15% 13%
FY05 FY06 FY07 FY08 FY09E FY10E
Leasing alliances to reduce capex burden: Educomp has entered into

a leasing agreement with RentWorks, an operating lease company, to fund
the capex needs in the ICT and Smart Class segments (Rs1 bn line of
credit). This reduces the upfront investment and costs can be spread over
the lease term, which reduces the capex burden for Educomp.

Educomp Solutions
IV. New ventures embed option value

Educomp has several interesting ventures that are currently small but have
the potential to become blockbusters in the medium to long-term. While it is
too early to factor in meaningful ram ups, we believe these ventures provide a
high option value to the stock.
IV.1. JV with Raffles – opening doors to China

Win-win proposition: Educomp has entered into two joint ventures (JVs)
with Raffles Education, Singapore (FY07 revenue of US$80.9 mn, current
market capitalisation of US$1.93 bn) for pursuing strategic opportunities in
India and China. While the JV in India would focus on tapping the
vocational education space, the China JV would focus on introducing
Educomp’s entire suite of offerings in the Chinese education market.
Exhibit 39: China’s education market

Institutions (Nos) Students (mn)
Pre-school 130,495 22.6
Special schools 1,605 0.4
Primary schools 341,639 107.1
Secondary schools 76,703 84.5
Vocational secondary schools 6,100 6.8
Institutes for higher education 1,867 17.4
Source: National Bureau of Statistics of China
Raffles is strong in APAC, but has minimal presence in India: Raffles

Education is the largest player in the private education space with 28
colleges (FY07). These operate under four education brand names in
APAC, namely, Raffles University, Hartford Corporation, China Education
and Zhongfa Education. Currently, around 63% of Raffles’ revenue comes
from China, but its presence in India is currently restricted to only one
centre in Mumbai. Educomp plans to set up five new Raffles institutes
across India by the end of FY09.
Exhibit 40: Raffles’ presence in India

Institute Revenue in FY07 Course
Raffles Design International, Mumbai US$0.65 mn 3 year degree course in Bachelor of Design
We believe that Educomp-Raffles tie-up could be a winning proposition for

both the players, since this would aim to leverage Educomp’s leadership in
the Indian private education space and Raffles’ strong presence in China.
IV.2. Learning hour - expansion into offline tutoring

Educomp acquired 76% stake in online tutoring service provider, ‘ThreeBrix e-
Services’, for Rs25 mn in 2007. ThreeBrix owns the ‘Learning Hour’ brand that
provides online tutoring for 6th-12th Standard in India and the Middle East. Post
the acquisition, ‘Learning Hour’ has been using Educomp’s Smart Class
modules as a part of the course offering. It also uses the online learning
platform from AuthorGen (where Educomp holds 51% stake) for delivering
online tutoring sessions.

Educomp Solutions
Online tutoring – restricted scale given low broadband

penetration: While ‘Learning Hour’ is a well established brand in online
tutoring, the current market is small due to the low broadband penetration
in India. According to Crisil, India is estimated to have only 3 mn
household broadband subscribers in FY08, which implies a very small
target market. According to our estimates, the target market potential for
online tutoring would reach only ~US$0.5 bn by FY15. Hence, although
‘Learning Hour’ is an interesting venture, we believe its scalability remains
an issue.
Exhibit 41: Online tutoring has low market potential

Online tutoring
Assumed Target urban
Urban enrolment in Tuition fees p.a in market size (US$
penetration in population in
2015E (mn) 2015E (Rs) bn @USD/INR 40)
2015E (%) 2015E (mn)
in 2015E
36.9* 10.0% 3.7 5,262 0.5

Source: NCERT, JM Financial;*Assuming only students from V1-XII take online tuitions
Expansion into offline tutoring could be more lucrative: ‘Learning

Hour’ currently has eight centres in the National Capital Region (NCR) and
plans to set up close to 50 offline centres by FY09. We understand that the
offline tutoring market is highly fragmented and is dominated by regional
players. While we do not expect ‘Learning Hour’ to become a market
leader, entry into the US$3.3 bn offline tutoring market could boost
revenue over the medium term.
Exhibit 42: Offline tutoring market potential at US$3.3 bn

Target Target Tutoring Target Target Tutoring
Tuition
Urban urban urban Market size Urban urban urban Market size
fees p.a Tuition fees p.a
Standard enrolment in population population (US$ bn enrolment population population (US$ bn
in 2008E in 2015E (Rs)
2008E (mn) in 2008E in 2008E @USD/INR in 2015E in 2015E in 2015E @USD/INR 40)
(Rs)
(%) (mn) 40) in FY08E (%) (mn) in 2015E
I-V 33.2 10% 3.3 3,000 0.2 37.0 20% 7.4 6,000 1.1
VI-VII 18.2 30% 5.5 6,000 0.8 20.3 40% 8.1 12,000 2.4
IX-X11 14.9 50% 7.5 12,000 2.2 16.6 65% 10.8 25,000 6.3
Total 66.3 16.2 3.3 73.9 9.8
Mahesh Tutorial, Kalrashukla, Chate, Ramchanders, CAGR over
Main players 16.7%
Sinhal 2008E-2015E (%)
Source: NCERT, JM Financial
IV.3. MathGuru targets the homework help space

MathGuru (launched in July 2006) focuses on the online homework help
segment. MathGuru has a repository of step-by-step solutions for all math
problems from the NCERT Math textbooks (6th to 12th Standard). Educomp
charges Rs1,200 per student for an annual subscription. The initiative has
received good initial response with 59,360 MathGuru users as on 1Q FY09 and
we expect strong additions going forward. However, we expect revenue
contribution to remain low in the overall portfolio given the lower scalability in
online tutoring.

Educomp Solutions
Exhibit 43: MathGuru additions to pick up pace

MathGuru - User additions(Nos) 75,000
50,000
36,721
15,000
IV.4. ASKnLearn – cross sell opportunity

Platform for penetrating APAC: Educomp acquired ASKnLearn, a
Singapore based educational services company (June 2007), for US$3.9
mn in cash, in addition to options worth US$0.7 mn. ASKnLearn provides
internet-based e-learning solutions, content and services to over 120
institutions in Singapore, China, Thailand, the Philippines, Japan, Brunei,
Vietnam and Kuwait and had revenues of Rs248 mn in FY08. ASKnLearn
provides a good opportunity for Educomp to cross-sell its Smart Class
products in these geographies.
IV.5. Learning.com – gaining foothold in the US

Learning.com taps into No Child Left Behind funding: Educomp
acquired a 51% stake in Portland, Ore, based web technology company,
Learning.com for US$24.5 mn. Learning.com is present in the web–
delivered curriculum and the assessment space, which targeted at
improving student learning outcomes in the US. The company caters to the
No Child Left Behind (NCLB) policy spending, which was brought into force
by the federal government in 2001. The policy rewards districts, states
and schools, which are able to improve performance in maths and reading
skills from Grade 3-8, and targets to achieve same state standards for all
the students by 2014.
Educomp gets a strong footing in the US education market:

Learning.com brings over 2 mn students to Educomp’s portfolio and has
presence in over 800 districts in the US. Educomp can leverage this wide
network to sell its own suite of offerings and also bring Learning.com’s
products to India. The management expects revenues of US$15-17 mn in
FY08E (Y/E September) and US$20-21 mn (+31.3% YoY on the higher
end) in FY09E. Net profit is expected to move up from US$3.5 mn in
FY08E to US$4-5 mn in FY09E driven by synergies from the two entities.

Educomp Solutions
IV.6. Pre-schools – aggressive ramp ups

Acquisition could give meaningful share: Educomp has presence in
the pre-schools segment under the ‘Roots to Wings’ brand. According to
industry sources, the pre-school market is expected to grow from US$300
mn at present to almost US$2 bn by 2015 (29% CAGR). Educomp
currently owns three centres and the management has aggressive ramp-
up plans through a franchisee model. It targets to have around 85-100
franchisee centres by FY09 (39 franchisees as on 1Q FY09). Further, the
management plans to acquire a leading pre-school chain, which could give
it a meaningful share of the organised pre-school market (US$625 mn by
2015). We have not built in any estimates from the inorganic growth in
our assumptions and, thus, any acquisition would be an upside to our
estimates.
Exhibit 44: Organised market to grow at 43.5% over FY08-15E

US$ bn FY08 FY15E CAGR FY08-15E (%)
Preschools market size (US$ bn) 0.3 1.8 28.7%
Organised players share (US$ bn) 0.05 0.63 43.5%
Organised players share (%) 16.7% 35.7%
Organised players in the market KidZee, Shemrock, EuroKids, Kangaroo Kids, Apple Kids, Roots-to-Wings
Source: Industry data
IV.7. Savvica – a scalable concept

Futuristic business model: Educomp acquired a 70.5% stake in Savvica,
a Canada based educational technology company in September 2007.
Savvica has developed an interesting site ‘LearnHub’, which is an evolution
of its first product, Nuvvo (free web based learning management system).
‘LearnHub’ has many features wherein users can connect with other
people, join communities and build courses in these communities and even
charge for it. While the social networking model in the education space is
still very nascent, we believe that it is a very interesting and scalable
venture.

Educomp Solutions
V. Financials
94% CAGR in revenue over FY08-10E: We expect consolidated revenue to
increase by 94.2% CAGR over FY08-10E mainly driven by a strong CAGR in K-
12 (+303.2%) and Smart Class (+103.8%) segments over the same period.
Exhibit 45: Growth rates in key business segments

Revenue (Rs mn) FY08 FY09E FY10E CAGR over FY08-10E (%)
ICT 933 1,526 2,657 68.7
Smart Class 1,268 2,876 5,267 103.8
Professional development 256 325 406 25.8
K-12 70 494 1,138 303.2
Others 333 600 1,320 99.0
Total revenue 2,861 5,821 10,788 94.2
108% CAGR in profits over FY08-10E: We expect consolidated profits to

increase by 108.2% CAGR over FY08-10E primarily due to increased revenue
contribution from high margin segments i.e. K-12 and Smart Class.
Exhibit 46: Revenue contribution in key business segments

Revenue contribution (%) FY08 FY09E FY10E
ICT 32.6 26.2 24.6
Smart Class 44.3 49.4 48.8
Professional development 9.0 5.6 3.8
K-12 2.4 8.5 10.5
Others 11.7 10.3 12.2

Educomp Solutions
VI. Valuation and risks

Initiate with a Buy and target price of Rs3,910: We initiate coverage on
Educomp with a Buy recommendation. Our target price of Rs3,910 implies a:
(1) 20x FY10E PE multiple for the core business, and (2) 25x FY12E PE
multiple for the K-12 business. This works out to a target PE multiple of 25.8x
on FY10E EPS. Our target price implies an upside potential of 19.1% from the
current levels. Assumptions in our estimates include: (1) revenue CAGR of
94.2% over FY08-10E, (2) profit CAGR of 108.2% over FY08-10E and (3) K-12
profit CAGR of 84.1% over FY10-15E.
Key risks, which might prevent the target price being met, are listed below:
Company specific risks include: (1) Changes in the existing regulations in

the K-12 business, (2) Delay in acquiring land and construction schedule
could result in slower than expected scale up, and (3) Lower number of
school wins in ICT and Smart Class (4) Management bandwidth would also
be crucial as the company embarks on a fast ramp up schedule. Educomp
has recently recruited several heads of business, which we have presented
along with the organisation chart on page 55.
Industry specific risks include: 1) Long sales cycles that could derail
growth expectations in government schools, and 2) slowdown in economic
growth affecting government spending on ICT as well as private spending
power for K-12.

Consensus estimates (Rs mn) FY09E FY10E
Revenue 5,525 9,948
EBITDA 2,989 5,952
Net Profit 1,406 2,559
EPS (Rs) 76.3 137.7
Source: Bloomberg Data, JM Financial
Exhibit 48: PE band chart

10,000
80x
7,500 70x
60x
5,000 50x
40x
30x
2,500
20x
0
Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08
Source: Bloomberg, Company data, JM Financial

Educomp Solutions
VII. Annexure
VII.1. Cost of setting up a school
Exhibit 49: Average cost of Rs142 mn per school
Particulars Rs mn
Average cost of land per school 50.2
Average cost of building per school 106.1
Average capex required for other facilities 4.7
Average capex per school 160.9
Exhibit 50: Average cost of Rs29 mn per acre of land

Cost of land (per acre) Cost (Rs mn) % of schools
Tier-1 city 40.0 60
Tier-2 city 20.0 25
Tier-3 city 10.0 15
Average cost of land (per acre) 29.0
Exhibit 51: Plot sizes to be lower in Tier I cities

Land required per school Acre % of schools
Tier-1 city 1.5 60
Tier-2 city 3.0 25
Tier-3 city 5.0 15
Average area of land 1.7
Exhibit 52: Average cost of Rs50 mn per school for land

Land cost per school
Average land required (acres) 1.7
Average cost per acre (Rs mn) 29.0
Average cost of land per school (Rs mn) 50.2
Exhibit 53: Average cost of Rs73 mn per school for construction

Building cost per school
Average space required per student (sq ft) 50
Cost per sq ft (Rs) 1,200
Students at full capacity per school (Nos) 1,768
Total sq ft per school 88,400
Average cost of building per school (Rs mn) 106.1

Educomp Solutions
Exhibit 54: Average cost of Rs19 mn per school for other facilities
Average capex required for other facilities (Rs mn) 4.7
Assumptions
Computer per school (Nos) 20
Cost per computer (Rs) 20,000
Furniture cost per student (Rs) 2,000
Science lab equipment cost per student (Rs) 1,000
Sports equipment cost per student (Rs) 1,000
Other equipment per student (Rs) 1,000
Library books (Nos) 3,000
Cost per book (Rs) 200
VII.2. Payback period in K-12

Exhibit 55: Cash flow for Educomp
Rs mn Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12
Cash flow from operations 0.0 21.0 33.9 35.4 47.9 50.1 50.7 52.0 53.3 55.4 56.8 58.1 59.4
Cash outflow -160.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net cash -160.9 21.0 33.9 35.4 47.9 50.1 50.7 52.0 53.3 55.4 56.8 58.1 59.4
Payback period 4 years 5 months

Educomp Solutions
VIII. Education spending survey

In this section, we present the findings of the Education Spending Survey
conducted on the employees of JM Financial group. The sample size of 81
represents 7.5% of the employee base of 1,095. The key findings of the
survey are depicted below:
Exhibit 56: 71% of kids who joined last year pay >Rs1,000 p.m as fees
<Rs1,000 Rs1,000-3,000 > Rs 3,000
12%
47%
41%
Exhibit 57: 75% respondents spent >Rs10,000 as admission fee over last 1 year
Last 1 year Last 2-5 years
< Rs 10,000 Rs 10,000 - Rs 30,000 > Rs 30,000 < Rs 10,000 Rs 10,000 - Rs 30,000 > Rs 30,000
25% 25% 14%
22%
65%
50%
Exhibit 58: Average spend per month is over Rs5,000

Spending (Rs p.m) School fees Tuition fees Other Spending (Rs p.m) Bus fees
<Rs1,000 47.3% 53.1% 59.2% < Rs 500 43.4%
Rs1,000-3,000 40.5% 37.5% 32.4% Rs 500 - Rs 1,000 47.2%
> Rs 3,000 12.2% 9.4% 8.5% > Rs 1,000 9.4%
Average Spend (Rs p.m.) 1,591 1,477 1,387 602
Total Spend (Rs p.m.) 5,057

Educomp Solutions
IX. Company background

IX.1. Important milestones
Exhibit 59: Educomp – prominent milestones
1994 - Started operations with setting up computer laboratories under BOOT model in
government & private schools
2000 - Strategic investment by Carlyle of US$2.1 mn for 15% stake
2002 - Entered e-learning space with its Learning Mate division, launched Learning Mate
Nhance (content management platform)
2003 - Launched Smart Class Content solutions, set up a subsidiary -

Learning Mate Solutions Pvt. Ltd.
2004 - Launched online tutoring for teaching mathematics to US students
2005 - Carlyle exited by selling stake to promoters in return for the promoters relinquishing
their stake in Learning Mate Solutions Pvt. Ltd.
- Raised Rs5 bn in IPO at an issue price of Rs125
2006 - MathGuru.com - Online 24/7 math help program launched

- Three pre schools under the brand name, ‘Roots to Wings’, launched
- Set up of Edu Infra and Edu Manage subsidiaries for K-12
2007 - Acquisition of 76% stake in ThreeBrix services; 100% in ASKnLearn;

70.05% stake in Savvica, 51% stake in AuthorGen Technologies,
- Launch of ‘Millennium’ schools
2008 - Tie-up with Ansals API for real estate for K-12
- Acquired 51% stake in Learning.com
- JV with Singapore based Raffles Education
- Tie-up with banks for funding K-12 plans to the extent of Rs7,250 mn
- To acquire 76% stake in A-Plus Education for Rs107.5 mn over the next two years

Educomp Solutions
IX.2. Equity history
Exhibit 60: Share capital details

mn FY06 FY07 FY08
Shares at the beginning of the year 12.0* 16.0 16.0
Dilution during the year 4.0 0.03 1.3
Shares at the end of the year 16.0 16.0 17.3
Conversion of US$25 mn 1% FCCB @900 per share - - 1.3
Conversion of US$O.5 mn Zero coupon FCCB - 0.03 0.02
Fresh issue of shares during IPO 4.0 - -
Source: Company data Note: * shares outstanding pre-IPO
IX.3. Organizational structure
Exhibit 61: Organizational structure
Chairman & Managing Director

Mr. Shantanu Prakash
President K 12 – Smart Class President – ICT
President – School Projects &Retail President – Pre School
President- Higher Education President – Professional Education
CEO – Edu Loans Corp. President – GDC
Sr. Vice President Operations Group CFO
Sr.Vice President – HR & Administration Program Director – Research & Development
CEO – Professional Development Director – Procurement
International Businesses – A & L, Savvica ETC Sr..Advisor & President – Infra Structure

Educomp Solutions
X. Financial Tables
Y/E March FY07 FY08 FY09E FY10E Y/E March FY07 FY08 FY09E FY10E
Growth (%) 98.3 159.9 103.5 85.3 ESOP O/S 0 83 83 83
Other operational income 0 0 0 0 Reserves & surplus 988 2,629 3,923 6,528
EBITDA 506 1,266 2,957 5,623 Networth 1,148 2,884 4,179 6,783
Growth (%) 106.7 168.1 79.5 80.4 Total loans 1,255 3,773 7,116 11,021
Other non-operational income 59 178 291 539 Sources of funds 2,532 6,851 11,512 18,071
Depreciation & amortisation 96 331 742 950 Intangible assets 137 280 280 280
EBIT 469 1,112 2,507 5,212 Fixed assets 949 2,890 7,146 13,100
(net) 14 48 332 833 Less: Depreciation/amortisation 226 548 1,290 2,239
Pre tax profit 454 1,064 2,175 4,380 Net block 723 2,342 5,856 10,861
Taxes 170 351 740 1,489 CWIP 108 372 772 1,322
Net profit (before MI) 285 713 1,436 2,891 Investments 102 36 36 36
Minority interest and others -2.1 7.2 23.9 49.4 Deferred tax assets/(liability) -59 -210 -536 -1,193
Reported Net profit (after MI) 264 655 1,412 2,841 Current assets 1,761 4,639 6,092 8,822
Net profit (%) 23.9 22.9 24.3 26.3 Inventories 33 18 29 54
Diluted shares (mn) 16.5 18.5 18.8 18.8 Sundry debtors 496 1,157 1,929 3,538
EPS (Rs) 17.3 35.4 75.2 151.3 Cash & bank balance 1,106 2,912 3,145 3,418
Growth (%) 54.6 104.4 112.3 101.2 Loans & advances 110 490 873 1,618
Source: Company, JM Financial Other current assets 16 62 116 194
Current liabilities & provisions 242 610 990 2,059
Current liabilities 185 517 778 1,636
Net current assets 1,519 4,029 5,103 6,763
Others (net) 1 1 1 1

Net profit 454 1,072 2,175 4,380 ROCE (%) 22.7 19.4 23.2 29.8
(Inc)/dec in working capital -225 -730 -943 -1,573 Debt-equity ratio (x) 1.1 1.3 1.7 1.6
Others -160 -168 -361 -522 Valuation ratios (x)
Net cash from operations (a) 165 505 1,613 3,234 PER 189.5 92.7 43.7 21.7
(Inc)/dec in investments -101 85 0 0 PBV 45.7 19.3 13.5 8.3
Capex -675 -2,224 -4,656 -6,504 EV/EBITDA 103.9 44.6 20.5 11.4
Others -44 122 291 539 EV/Sales 47.7 19.7 10.4 6.0
Cash flow from inv. (b) -719 -2,102 -4,365 -5,965 Turnover ratios (no.)
Dividends paid + dividend tax -27 -40 -51 -118 Inventory days 8 3 1 1
Inc/dec in loans 1,169 3,549 3,343 3,905 Creditor days 20 31 31 31
Others -54 -116 -308 -783
Financial cash flow ( c ) 1,088 3,393 2,985 3,004
Net inc/dec in cash (a+b+c) 534 1,796 233 273
Opening cash balance 606 1,106 2,912 3,145
Closing cash balance 1,106 2,912 3,145 3,418

Country: India Initiating Coverage
20 August 2008
Sector: Education Everonn Systems India

Diviya Nagarajan
Bloomberg: ESIL IB
Tel: (91 22) 6646 0020
Hold
Price: Rs532 Target Price (Aug 09): Rs560
Tel: (91 22) 6646 0021
Key Data Not private enough

Market cap Rs8.0 bn/US$184 mn Everonn is amongst the Top 3 players in the government schools (ICT)
Shares in issue (mn) 15.1 business. While we expect growth to remain high, greater dependence on
Diluted share (mn) 16.4 capex-heavy, lower margin ICT business would continue to weigh down
3-mon avg daily val (mn) Rs60.2/US$1.4 valuations vis-à-vis Educomp.
52-week range Rs1,236/401
Higher dependence on lower value ICT: Everonn derives a high
BSE sensex (20/08/08) 14,678
proportion (59% FY08) of revenue from government schools. Although we
Nifty (20/08/08) 4,416
expect this to decline to 45.2% in FY10E, we remain uncomfortable about
Rs/US$ 43.7
the high exposure to ICT, given the lumpiness, higher DSOs (~180 days)
and lower IRRs (~14%) inherent in the business.
Shareholding Pattern (%)
ViTELS is yet to attain critical mass: ViTELS, Everonn’s VSAT based
1QFY 09 2Q FY08
content offering is interesting, but still in nascent stage. Everonn is
Promoters 28.5 31.1
expanding outside Tamil Nadu, which will require significant investment.
FIIs 19.6 10.9
We have not built in aggressive additions as we believe that it will take 2-3
Others 49.1 55.4 years for Everonn to achieve critical mass. We expect ViTELS to contribute
54.8% of revenue (40.9% in FY08) and 61.8% of EBITDA in FY10E.
Price Performance (%) IIT-JEE training to be minimally accretive over near term: Everonn
1M 3M 12M gained entry into the IIT-JEE training space with the acquisition of Toppers
Absolute 27.3 (35.3) (8.3) Tutorial. We expect slow scale up from this venture, since the company is
Relative* 19.7 (20.5) (10.0)
yet to establish brand equity in a highly competitive and fragmented
* To the BSE Sensex
market. We expect Toppers to contribute 6.4% of revenue in FY10E.
Initiate with a Hold: We initiate coverage with a Hold recommendation

Daily Performance with a target price of Rs560. Our target price implies PE of 18x on FY10E
25,000
Sensex Everonn
1,400
EPS, a 10.0% discount to Educomp’s core business PE of 20x. This reflects
1,200
Everonn’s higher dependence on ICT and weaker presence in higher
20,000
1,000
growth segments. Our target price implies an upside potential of 5.3%.
15,000
800
600
10,000
400 Y/E March FY07 FY08 FY09E FY10E

5,000
200 Net sales 430 916 1,888 3,412
- 0
Sales growth (%) 39.2 112.9 106.0 80.7
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08
EBITDA 179 334 840 1,576

(As of 20 August 2008) EBITDA (%) 41.5 36.4 44.5 46.2
EPS (Rs) 4.7 10.0 18.2 31.1
EPS growth (%) -12.9 110.7 82.6 71.0
ROCE (%) 14.2 22.2 22.2 21.5
ROE (%) 14.8 21.0 19.4 18.6
PE (x) 112.5 53.4 29.2 17.1
EV/EBITDA (x) 26.7 22.0 10.2 6.3

Everonn Systems India
I. Higher dependence on lower value ICT

Close to 60% of Everonn’s revenue comes from the ICT segment
(government schools), which primarily involves setting up and operating
computer laboratories in government schools on a Build-Own-Operate-
Transfer (BOOT) model. It is one of the leading players in the ICT space,
with an installed base of 4,362 schools (1Q FY09). We remain
uncomfortable about the high exposure to the government business, which
has its own vagaries in terms of lumpiness, higher DSOs (~180 days) and
lower IRRs (~14%, versus 27% in K-12 and 40% in content). While ICT’s
contribution is expected to reduce over the next two years, it will still
remain high vis-à-vis peers and continue to weigh down valuations.
Exhibit 2: ICT business – A snapshot

ICT
(4,362 schools)
Setting up computer laboratories in government schools
(1) Supply of Hardware, software and other physical infrastructure

(2) Provide full time faculty - normal ratio is 2 per school
(3) Other ancillary services as mentioned in the tender
Contract specifications Revenue model

BOOT model with an average duration of Average fees of Rs20,000 per school
3-5 years per month
Source: Company data, Industry data

I.1. ICT allocation looks robust in the near term …

Five fold increase in education outlay in the 11th Five Year plan:
The Indian government has increased its thrust on education and
literacy spending over the last few years. Since 2002, the outlay on
education and literacy has grown at 30% CAGR, driven by the launch
of schemes such as the Sarva Shiksha Abhiyan (SSA).
Exhibit 3: Outlay on education has grown significantly

(Rs mn) FY02 FY03 FY04 FY05 FY06 FY07 FY08
Government spend on education 80,203 90,695 101,447 132,287 238,096 295,887 387,029
% YoY growth 13.1% 11.9% 30.4% 80.0% 24.3% 30.8%
CAGR over FY02-08 (%) 30.0%
Source: Finance Ministry
Recent announcements by the government indicate that the outlay on

education will increase from 7.7% of gross budgetary support in the
10th [Five Year]Plan, to over 19% in the 11 th Plan. This translates into
a five-fold rise in education outlay over the 10th Plan, which has jump
started interest in government led spending on education.
Exhibit 4: Outlay in the 11th 5 Year Plan to increase 500%
Education Outlay in Fiv e Year Plans (Rs bn)

2,700
438
196 165
30 77
6th plan 7th plan 8th plan 9th plan 10 th plan 11th plan
Source: Planning Commission of India
30,000 government schools expected to be tendered in FY09: As

per the scheme of ‘ICT in Schools’, the funding pattern between the
Central Government and States/Union Territories will be in the ratio of
65:35 in FY09 (60:40 in FY10; 55:45 in FY11 and 50:50 thereafter),
subject to an overall limit of Rs500,000 per school p.a. This is expected
to remove the vagaries in payment cycles for cash strapped states,
and provide an opportunity for greater participation through the BOOT
model. This has resulted in increased activity levels from various
states, with close to30,000 schools to be tendered in FY09.

Exhibit 5: 30,000 schools up for tendering in FY09

State Expected Schools (Nos)
Andhra Pradesh 5,000
Karnataka 2,279
Jharkhand 1,261
Rajasthan 2,500
Uttar Pradesh 2,500
Madhya Pradesh 4,400
Gujarat 11,051
Punjab 1,000
Total 29,991
Source: Industry, Tenders India, State Government websites
Slower GDP growth could slow down government spending: The

mounting pressure on government budget due to an increasing oil bill
and subsidies could potentially impact growth in government spending
on education. However, we do not expect significant cuts in spending
since a large part of the outlay for SSA and the Mid Day Meal scheme
(MDM) are funded through the education cess (refer exhibit 6).
Education cess funds 60% of the SSA: The government introduced

a 2% education cess on income tax, corporation tax, excise and
customs duties and service tax in July 2004 and an additional 1%
higher and secondary education cess in 2007 to be exclusively used for
funding the SSA and the MDM schemes. All proceeds of the education
cess are credited to a non-lapsable fund – ‘Prarambik Shiksha Kosh’
(PSK) in the Public Account of India. The PSK contributed 55-60% of
the total SSA allocation, with the remainder contributed by the Gross
Budgetary Support (GBS).
Exhibit 6: SSA has 40% Gross Budgetary Support

(Rs mn) 2006-2007 2007-2008 2008-2009
GBS PSK Total GBS PSK Total GBS PSK Total
SSA 51,690 58,310 110,000 36,780 69,930 106,710 54,100 76,900 131,000
% contribution to SSA 47.0% 53.0% 34.5% 65.5% 41.3% 58.7%
MDM scheme 24,330 29,150 53,480 39,240 34,000 73,240 28,730 51,270 80,000
% contribution to MDM 45.5% 54.5% 53.6% 46.4% 35.9% 64.1%
Total 76,020 87,460 163,480 76,020 103,930 179,950 82,830 128,170 211,000
Source: Education Ministry; Note: GBS: Gross Budgetary Support, PSK: Prarambik Shiksha Kosh
Near term school addition to be robust: While close to 30,000

schools are expected to come up for tendering in FY09, given the
potential slowdown in government spending, we have assumed only
12,000 school additions amongst the top three players in this space.
School additions are expected to pick up for all the players including
Everonn, as shown in Exhibit 7 below.

Exhibit 7: Absolute school additions expected to double in FY09

Ev eronn Educomp NIIT
9,000
6,000
3,800
3,500
3,196 3,250
2,750
2,195
1,400 1,264 1,588

(893)
I.2. …but Everonn is losing market share
Everonn is losing market share in ICT: Even though both Everonn and
NIIT have lost out on market shares in government schools in FY08, we
remain more concerned about Everonn’s loss. Given the higher
dependence on ICT, the loss of incremental market share will hurt Everonn
more than NIIT.
Exhibit 8: Everonn is losing market share in ICT

49.9%
46.6%
43.6%
39.0%
36.4%
33.4%
30.4%
27.7%
24.6% 23.0% 23.0% 22.4%

I.3. Portfolio remains heavily skewed towards ICT

Highest exposure to lower value ICT business: Everonn derives
the highest proportion of revenue from government schools amongst
competitors (refer exhibit 9 below). Although we expect this proportion
to trend down with ViTELS picking up from FY09 onwards, the share
still remains relatively high (45.2% of revenue in FY10E) compared to
peers. We remain uncomfortable about the high exposure to the
government business, which has its own vagaries in terms of
lumpiness, higher DSOs (~180 days) and lower IRRs (~14%).
Exhibit 9: Everonn’s portfolio has the highest exposure to ICT

67.9%
59.1%
49.9%
45.2%
31.1% 32.6%32.2% 30.9% 30.7%

27.4% 26.2% 24.6%
ICT revenue for Everonn to grow at 68.8% over FY08-10E: We

expect ICT revenue for Everonn to grow strongly at a CAGR of 68.8%
over FY08-10E to Rs1.54 bn. We believe this would be driven by the
strong increase in the number of government schools, which are
expected to come up for tendering over the next few quarters.

II. ViTELS - yet to attain critical mass
II.1. ViTELS - a differentiated content offering

Everonn offers multimedia content for private schools and colleges under
its ViTELS offering. ViTELS uses VSAT technology, in-house subject experts
and content to deliver sessions to students. ViTELS contributed to 40.9%
of revenue in FY08.
Exhibit 10: ViTELS – A snapshot
ViTELS offering
VSAT Technology used to conduct

sessions
Schools Colleges
(1) Curriculum based multimedia content for (1) Non-curriculum based courses targeted
private schools for college students
(2) Mandatory course for students
vColleges
(239 colleges)
vSchools iSchools
(144 schools) (88 schools)
Revenue model - fees per student

per course
Content only for Tamillnadu Content in accordance with CBSE
state board and ICSE syllabi
One classroom in each college

is wired
Most vSchools will upgrade to

iSchools by FY09 Revenue model - per student
Fees of ~ Rs750-14,500
per month
per student course
One classroom in each Majority classrooms in the

school is wired school are wired
Fees of ~ Rs160 per

Fees of ~ Rs40-80 per student
student p.m
p.m depending on the courses
opted by the school

II.2. School offering is still in a nascent stage

vSchools, the school content offering within ViTELS, contributed less than
5% of consolidated revenue in FY08. Everonn was focused on schools in
Tamil Nadu, primarily due to its orientation towards the Tamil Nadu state
and matriculation syllabi. The company acquired Aban Informatics (January
2008), which has given it access to 6-12th Standard content mapped for
CBSE and ICSE syllabi. With this, Everonn launched its iSchools offering,
which is expected to open doors for expansion into new regions. Everonn
has since expanded to 88 iSchools and plans to ramp up aggressively over
the next few years.
VSAT enables value addition from experts: We believe that the

iSchools offering, which uses VSAT technology, is a differentiated
product since it offers an interesting combination of multimedia content
and subject experts. These experts supplement regular teachers for
20-25% of the complicated syllabus taught for each course. Our
interaction with the school authorities where Everonn has installed its
VSAT technology suggests that school authorities find the expert
teacher offering valuable given:
(1) Shortage of good quality teachers in the market,
(2) Valuable inputs from subject matter experts help both the
students and regular teachers,
(3) Better understanding for students - school teachers mostly
try to cover the basic concepts relating to the topics to be
taught in the ViTELS session in advance during regular
classroom sessions.
Exhibit 11: Comparison of iSchools offering with competition

Parameter Everonn Educomp NIIT
Content 6-12 Std Fully mapped Maths, Science
VSAT + Hardware Content +
Model used Primarily Content
+ Content Hardware
Syllabus covered CBSE/ ICSE CBSE/ ICSE NA
Restricted mainly to
Current geographical presence pan-India pan-India
Tamil Nadu
Average pricing per student per month (Rs) 160 150/75* 60*
Provides experts for
Value added services - -
20-25% of syllabus
Private schools using multimedia product 88 1,036 25
Installed base of private schools with a
144 NA 1,223
cross-selling opportunity
Source: Company data, JM Financial, Note: *only content
Lower interactivity: Although the iSchools offering clearly has

advantages, we believe that the product lags peers in terms of
interactivity. Although the VSAT model provides interactivity in the
form of chat options and direct conversation through a satellite link, it
is still based on ‘virtual learning concept’, which lacks the physical
presence of the instructor. Moreover, as students from multiple schools
are logged on to a single session, the opportunity for the students to
get doubts cleared during the session reduces to some extent.
Product still at acceptance stage, expect critical mass in 2-3

years: While we believe that iSchools offering is interesting, achieving
critical mass is likely to take a few years. This is because: (a) VSAT in
schools is a new concept, which will take time for increased
acceptance, and (b) Everonn’s lower installed base of 144 private
schools on vSchools offer a lower conversion opportunity (versus an
installed base of 1,223 schools for NIIT). We have not built in
aggressive iSchool additions as we believe that it will take 2-3 years
before Everonn can achieve critical mass. We expect iSchools to
contribute Rs230 mn and Rs616 mn in FY09E and FY10E, respectively.

Exhibit 12: iSchools assumptions
iSchools rev enue (Rs mn) Other businesses rev enue (Rs mn)
2,796
1,658
916 616
230
FY08 FY09E FY10E
Exhibit 13: iSchool in action
II.3. vColleges - Better growth prospects
Everonn offers non-curriculum based courses through its vColleges

business, which is aimed at increasing employability of college students.
vColleges, which currently contributes to 14.2% of revenue, used to be an
optional course at colleges. However, Everonn has managed to sign up
new colleges wherein its courses are compulsory for the first year. We
believe that vColleges offer scope for growth given the significant value
addition through non curriculum based courses as well as higher adoption
in colleges through compulsory courses for the first year.
vColleges offer significant revenue potential: We believe that the

vColleges offering has some definitive features that make it more
interesting than iSchools in terms of revenue potential.
o Higher education syllabus in India has not kept in pace with the
changing industry dynamics. The vColleges offering for non
curriculum courses aims to close this gap by bringing in industry
professionals and experts to deliver specialised courses.
o The wide array of courses offered makes it convenient for the
students to attend these classes within the campus than venture
out to take up these courses with specialist training classes.

Scope for penetration in colleges: Everonn currently has vColleges

offering only in Tamil Nadu. Even in Tamil Nadu, the penetration is low
at 14.6% of total colleges in the state. Currently, the company has no
meaningful competition within the state. The company plans to expand
this offering to colleges outside Tamil Nadu as well, which we offer high
potential for growth given that there are an estimated 21,851 colleges
in India. Everonn is the only incumbent player in this space and we
believe that the potential to scale up in other regions presents a huge
opportunity.
Exhibit 14: Everonn has scope for further penetration in colleges

Nos FY06 FY07E FY08E
Colleges for General education
Tamil Nadu 693 765 844
India 12,751 13,845 15,032
Professional education
Tamil Nadu 542 632 738
India 5,179 6,008 6,971
Total colleges in Tamil Nadu 1,235 1,393 1,572
Total colleges in India 17,930 19,794 21,851
Everonn’s college portdolio 69 101 230
Everonn‘s penetration (%)
Colleges in Tamil Nadu 5.6% 7.2% 14.6%
Colleges in India 0.4% 0.5% 1.1%
Source: Finance Ministry, JM Financial
117% CAGR expected in vColleges: We expect vColleges to grow at

a CAGR of 116.7% over FY08-FY10E to Rs610 mn, driven by deeper
penetration into Tamil Nadu colleges as well as entry into other states.
Exhibit 15: vColleges expected to gain momentum
v Colleges rev enue (Rs mn) Other businesses rev enue (Rs mn)
2,802
1,590
786
610
298
130
FY08 FY09E FY10E

III. IIT training to be minimally accretive

IIT-JEE training is a lucrative market: Everonn recently acquired
Toppers Tutorial Pvt Ltd, which has a presence in the lucrative Indian
Institute of Technology – Joint Entrance Examination (IIT-JEE) training
space. Toppers has presence in Bihar with three centres and has
placed ~500 students in various IITs. The IIT-JEE training market is
estimated at US$800 mn at present, and is expected to grow at over
20% to touch US$3 bn by 2015.
Exhibit 16: IIT-JEE market to grow to US$3 bn in FY15

IIT-JEE aspirants in FY08 (Nos) 320,000
Average fees charged in FY08 (Rs) 100,000
IIT-JEE aspirants in FY15 (Nos) 844,485
Average fees charged in FY15 (Rs) * 140,000
Current market potential (US$ mn @ US$/INR 40) 0.8
Toppers market potential in FY15 (US$ mn @ US$/INR 40) 3.0
Source: Industry data, JM Financial, Note: * Assumed inflation of 5% p.a
Toppers’ contribution to FY09 revenue to be low: Everonn plans

to expand to 12 centres by FY09 with the majority in Delhi (7-8
centres). We expect a moderate scale up from this venture in the next
two years, since the company is yet to establish its brand equity in this
highly competitive and fragmented market. We expect Toppers to be a
relatively small contributor to the overall portfolio with 5.3% and 6.4%
of revenue in FY09E and FY10E.

IV. Financials
93% revenue CAGR over FY08-10E: We expect Everonn to report
revenue CAGR of 93% over FY08-10E, driven by strong growth in
ViTELS revenue. We expect ICT to grow lower than the company
average at 68.8% CAGR over FY08-10E.
Exhibit: Segment-wise revenue growth rates

ICT 541 941 1,542 68.8
ViTELS 375 947 1,870 123.3
Total revenue 916 1,888 3,412 93.0
Profit CAGR over FY08-10E in line with revenue: We expect

EBITDA margins to improve by close 10% over FY08-10E, driven by
higher revenue contribution from ViTELS, which has better margins
over ICT. However, higher depreciation and interest costs will keep
profit growth in line with revenue CAGR at 92.6%.

V. Valuation and risks

Initiate with a Hold and target price of Rs560: We initiate
coverage with a Hold recommendation on Everonn with a target price
of Rs560. Our target price implies PE of 18.0x on FY10E EPS, which is
a 10.0% discount to the target PE multiple assigned to Educomp’s core
business of 20x. This discount reflects Everonn’s higher dependence on
ICT and weaker presence in high growth segments within schools. Our
target price implies an upside potential of 5.3% from the CMP.
Key risks, which might prevent the target price being met are listed
below:
Company specific risks include: (1) better than expected school wins in
ICT, (2) better scale up iSchools offering, and (3) higher number of
students opting for vColleges.
Industry specific risks include: Better pick up in economic growth

leading to increased spending power for non curriculum courses.
Exhibit: Comparison with consensus

Revenue 1,651 2,677
EBITDA 683 1,113
Net Profit 248 451
EPS (Rs) 17.5 31.8
Source: Bloomberg data, JM Financial
Exhibit: PE band chart

1,800
74x
67x
60x
1,200
53x
46x
39x
32x
600
25x
0
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08
Source: Bloomberg, Company data, JM Financial

VI. Company Background
VI.1. History
2000 - Started operations and won contract for 332 schools in Tamil Nadu for ICT
2002 - Partnered with Hughes Net (Direcway) Global Education to deliver management Education through
Virtual classrooms
2003 – Launched “Zebra Kross’’ - branded Virtual class room network and state-of-the-art studio in Chennai.
- Created a Knowledge Research & Resource Department and content repository to cater to the college segment
2005 - Test launch of Virtual Learning at schools and corporates.
2006 - Second studio centre established.
2007 - Raised Rs500 mn through IPO at issue price of Rs140
2008 - Acquired e-learning division of Aban Informatics

- Acquired 100% stake in Toppers Tutorial Pvt Ltd
- Approved issue of equity shares on preferential basis to New Vernon India (6.67 mn), Deutsche Securities
(2.70 mn), The India fund (3.32 mn)
- Approved issue of convertible equity warrants on preferential basis to New Vernon India (0.19 mn), Deutsche
Securities (0.07 mn), The India fund (0.09 mn), promoters (0.70 mn)
VI.2. Share capital details
Exhibit: Share capital details

mn FY08
Shares at the beginning of the year 10.3*
Dilution during the year 3.6
Shares at the end of the year 13.8
Fresh issue of shares during IPO 3.6
Source: Company data, Note:*Pre-IPO

VII. Financial Tables
Net sales 430 916 1,888 3,412 Share capital 103 139 151 162
Growth (%) 39.2 112.9 106.0 80.7 Reserves & surplus 262 811 1,982 3,197
Other operational income 0 0 0 0 Networth 365 950 2,133 3,359
EBITDA 179 334 840 1,576 Warrants money 0 0 77 0
EBITDA (%) 41.5 36.4 44.5 46.2 Total loans 235 459 1,005 1,903
Growth (%) 24.3 86.9 151.5 87.6 Sources of funds 600 1,408 3,214 5,262
Other non-operational income 3 23 38 68 Intangible assets 0 0 0 0
Depreciation & amortisation 96 99 312 649 Fixed assets 562 787 2,479 4,515
EBIT 86 258 566 995 Less: Depreciation/amortisation 197 292 604 1,254
(net) 26 40 106 208 Net block 365 495 1,875 3,262
Pre tax profit 59 218 460 787 CWIP 0 126 200 300
Taxes 18 80 161 276 Deferred tax assets/(liability) -54 -60 -69 -85
Net profit 41 138 299 512 Current assets 384 1,029 1,624 2,523
Margin (%) 9.5 15.1 15.8 15.0 Inventories 3 0 0 0
Diluted shares (mn) 8.6 13.8 16.4 16.4 Sundry debtors 280 424 840 1,478
EPS (Rs) 4.7 10.0 18.2 31.1 Cash & bank balance 42 386 433 480
Growth (%) -12.9 110.7 82.6 71.0 Investments 0 87 87 87

Source: Company, JM Financial Loans & advances 59 133 264 478
Current liabilities & provisions 94 187 421 742
Current liabilities 74 117 245 444
Net current assets 290 842 1,204 1,780
Application of funds 600 1,408 3,214 5,262

Net profit 71 218 460 787 ROCE (%) 14.2 22.2 22.2 21.5
(Inc)/dec in working capital -110 -171 -419 -651 Debt-equity ratio (x) 0.6 0.5 0.5 0.6
Others 17 -12 -9 -19 Valuation ratios (x)
Net cash from operations (a) 62 133 344 767 PER 112.5 53.4 29.2 17.1
(Inc)/dec in investments 0 -87 0 0 PBV 15.0 7.8 3.8 2.6
Capex -127 -381 -1,766 -2,136 EV/EBITDA 26.7 22.0 10.2 6.3
Others 0 -52 38 68 EV/Sales 11.1 8.0 4.5 2.9
Cash flow from inv. (b) -127 -433 -1,728 -2,068 Turnover ratios (no.)
Dividends paid + dividend tax -2 0 0 -30 Inventory days 2 1 0 0
Inc/dec in loans -33 223 546 898 Creditor days 45 10 45 45
Others -24 -25 -29 -285 Source: Company, JM Financial
Financial cash flow ( c ) 78 642 1,431 1,349

Net inc/dec in cash (a+b+c) 13 342 47 48
Opening cash balance 30 44 386 433
Closing cash balance 42 386 433 480

Indian Education

Country: India
20 August 2008
Sector: Education
KidZee
Diviya Nagarajan
Tel: (91 22) 6646 0020
Subhashini.Gurumurthy@jmfinancial.in Preschool play
Tel: (91 22) 6646 0021
Preschools estimated to be US$2 bn market by 2015: According to
Zee Interactive Learning Systems (ZILS), now a part of ETC Networks, the
preschool market is expected to touch almost US$2 bn by 2015, a 30%
CAGR over the current market size of close to US$300 mn. The company’s
flagship brand, “KidZee”, operates out of 425 franchisee outlets across the
country, with over 23,000 students. ZILS has been investing in this
business since 2003, which is currently breaking even. The management
expects to see operating leverage kick in from the current year onwards,
leading to strong revenue and margin growth over the next few years.
Estimates demand for 25,000 schools by 2015: The management

estimates demand for 25,000 additional schools by 2015 (versus our
estimate of 20,000). There are very few pan-India players in this market,
the largest being Delhi Public School (DPS), which has 110 schools across
the country. This offers an excellent opportunity for multiple new entrants
such as KidZee High and Educomp.
Big plans for K-12 schools: Following its success with KidZee, the
company plans to expand into a K-12 school chain across the country over
the next 3-5 years. Branded “KidZee High”, these schools are targeted at
Tier II and III towns. The company currently operates nine schools in
Bhopal, Patna, Calcutta, Gangtok, Gandhigram and Raipur on a
management contract basis, with over 2,000 students. “KidZee High” does
not plan to own any infrastructure and will use the franchisee route in K-
12 as well.

Y/E March FY08
Net sales (ETC Networks) 7,782
Net sales (Eudcation segment) 2,524
% of contribution 32.4
EBITDA (ETC Networks) 1,484
EBITDA (Eudcation segment) 54.4
% of EBITDA contribution 3.7
EBITDA (%) (Eudcation segment) 2.2
Source: Company data JM Financial. Note: Valuations as of 20 August 2008

Indian Education

Country: India
20 August 2008
Sector: Education
Mahesh Tutorials
Diviya Nagarajan
Tel: (91 22) 6646 0020
Subhashini.Gurumurthy@jmfinancial.in Breaking regional shackles
Tel: (91 22) 6646 0021
Mahesh Tutorials (MT) is one of the leading players in the offline tutoring
segment. In addition to coaching classes for classes 9-12, MT also has
presence in the test prep segment (engineering and medical). It received
US$12 mn funding for a 30% stake from a PE investor, Helix investments,
in 2007.
Leader in offline tutoring: We believe that offline tutoring in India

has a current market potential of US$3.3 bn and is expected to grow to
US$9.8 bn (CAGR of 16.7%) by FY15. MT had revenues of ~Rs440 mn
with around 52 centres across India in FY08. The company has
aggressive plans to more than double its network to 120 centres by
FY09 with revenues of ~Rs750 mn (+70.5% YoY).
Trying to break the regional shackles: Offline tutoring in India is

highly fragmented and regional. Scalability remains the key challenge
and none of the players currently have a national presence. MT is one
the leading players in Maharashtra and is trying to create a pan-India
model by expanding into other regions. It is currently expanding into
Karnataka and Gujarat. Apart from setting up Greenfield centres, MT is
also looking at acquiring local tutorials or bundling of 4-5 teachers to
start a centre.
Highly process driven in-house teacher training programme: MT

has been able to develop a highly process driven in-house teacher
training schedule that reduces its reliance on teachers and enables
quality coaching to students. We believe that quality of coaching is
critical for the company to retain its brand equity as it expands into new
regions. We expect MT to lead the tutoring segment and believe that
established brand equity and a highly process driven approach should
help it replicate its success in new regions as well.

Indian Education

Country: India
Sector: Education NIIT

Diviya Nagarajan
Diviya.Nagarajan@jmfinancial.in Bloomberg: NIIT IB
Tel: (91 22) 6646 0020
Subhashini Gurumurthy Buy
Tel: (91 22) 6646 0021 Price: Rs91 Target Price (Aug 09): Rs110
Key Data Transforming into an all-rounder

Market cap Rs15 bn/US$343 mn NIIT, the leader in the IT training space, is trying to transform itself into a full
Shares in issue (mn) 164.7 fledged education company. Its ventures into high potential areas such as
Diluted share (mn) 166.2 financial services (IFBI), management (Imperia), ITES (NIPE) and professional
3-mon avg daily val (mn) Rs40.2/US$0.9 life skills (Evolv) and schools and are expected to boost growth momentum.
52-week range Rs172/85
Non-IT training holds high potential: NIIT has ventured into non-IT
BSE sensex (20/08/08) 14,678
training with IFBI and Imperia, both of which have witnessed aggressive
Nifty (20/08/08) 4,416
ramp-ups. It also has presence in English training with Evolv. We expect
Rs/US$ 43.7 these businesses to grow at 93.4% CAGR over FY08-FY01E.
Shareholding Pattern (%) IT training still has scope to grow: While there are concerns on near
term growth due to a downturn in the IT sector, we expect increased
1QFY 09 1Q FY08 demand for non-engineering graduates to keep enrolment numbers
Promoters 30.1 30.2
reasonable (16.0% YoY in FY09). We expect IT Training to contribute
FIIs 42.9 40.5
30.7% of revenue and 52.7% of EBITDA in FY10E.
Others 20.2 22.2 School Learning Solutions (SLS) to pick up steam: We expect faster
revenue growth in SLS due to strong wins in government schools and
Price Performance (%) launch of eGuru in private schools. We expect revenue CAGR of 54.5%
over FY08-10E versus -7.2% CAGR over FY06-08.
1M 3M 12M
Absolute (0.7) (17.7) (22.4) Corporate Learning (CLS) to lag overall growth: CLS contributed to
Relative* (8.3) (2.9) (24.2) 54.7% of revenue in FY08, and is expected to grow in single digits over
* To the BSE Sensex FY08-FY10E. However, the impact on profits will be less due to lower
EBITDA contribution (18.9% in FY10E versus 25.6% in FY08).
Daily Performance
Sensex NIIT
Initiate with a Buy: We initiate coverage with a Buy recommendation
25,000 200
and target price of Rs110. This implies a PE of 14.6x multiple on FY10E
20,000 EPS based on: (1) 19x FY10E PE for the core business, and (2) 5x PE for
150 NIIT Tech’s contribution of Rs2.4 on FY10E, a 50% discount to the midcap
15,000
IT universe. Our target price implies an upside potential of 20.8% from
10,000 CMP.
100
5,000
- 50 Y/E March FY07 FY08 FY09E FY10E
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08
Net sales 7,951 10,068 11,900 14,433
Sales growth (%) 76.4 26.6 18.2 21.3
(As of 20 August 2008)
EBITDA 7,93 1,035 1,321 1,804
EBITDA (%) 10.0 10.3 11.1 12.5
Adjusted net profit 573 756 847 1,252
EPS (Rs) 3.7 4.6 5.1 7.5
EPS growth (%) 38.6 23.8 11.9 47.9
ROCE (%) 6.6 8.5 12.1 17.4
ROE (%) 19.7 21.1 19.7 25.0
PE (x) 24.8 20.0 17.9 12.1
EV/EBITDA (x) 19.2 15.7 12.2 8.9

NIIT
I. Transforming into an all-rounder

NIIT, which is the leader in the IT training space, is trying to transform
itself into a full fledged vocational training services company. NIIT’s
endeavour is to replicate its success in the IT training space into other high
potential areas such as financial services (IFBI), management (Imperia),
ITES (NIPE –JV with Genpact) and professional life skills (Evolv).
Exhibit 2: NIIT straddles a US$ 20 bn opportunity

BFSI training IT/BPO training Management training English language training
IIM Ahmedabad, IIM Lucknow,
ICICI Bank, HDFC Bank, Kotak Intel. Microsoft, Sun
IIM Calcutta, IIM Indore, Indian
Mahindra Bank, Yes Bank, ICICI Microsystems, Oracle, Cisco, ETS, a global leader in
Positioning/tie ups Institute of Foreign Trade,
Securities, ICICI Lombard, ICICI EMC, CompTIA, SAS, Genpact assessment systems
Institute of Management
Prudential (BPO Training)
Technology, Ghaziabad
NIIT's market potential in
1.2 3.2 14.7 1.0
FY15 (US$ bn)
Competition Negligible Aptech, Jetking Hughes Direcway Veta, Vivekanda, Rapidex
US$20 bn market opportunity: NIIT currently has offerings in BFSI,

IT/ITES, Management education and English language training
segments. We estimate that these segments present a US$20 bn
opportunity by FY15E. NIIT’s revenue at US$89 mn (FY08) in these
segments is currently a small fraction of the potential market. This is
because IFBI, Imperia, and NIPE are relatively new ventures that are
yet to scale up. We expect these ventures to take the company to a
higher growth trajectory as they start to achieve critical mass.

NIIT
II. Non-IT training holds high potential

NIIT ventured into the non-IT vocational training space in 2006 with the
launch of the Institute of Finance Banking and Insurance (IFBI) and
Imperia, both of which have since witnessed aggressive ramp-ups. In
addition to the above, NIIT also has presence in the English language
training space with Evolv. We expect these businesses to grow at 93.4%
CAGR to Rs1.15 bn over the next two years.
II.1. IFBI – the first of a kind in India

IFBI- a brief description: IFBI was launched in partnership with
ICICI Bank (19% equity stake) to cater to the manpower needs in the
financial services sector. IFBI offers a six-month, full-time, job oriented
post-graduate diploma in banking operations (PGDBO), intended to
groom entry-level professionals for the banking and financial services
industry.
Strong recruitment demand to drive growth: According to our

estimates, the top seven private sector banks would have to add
around 519,077 employees by FY15E - majority of which could be
potential IFBI candidates.
Exhibit 3: Strong recruitment demand in private sector banks

Employment in banks (Nos) FY03 FY04 FY05 FY06 FY07 FY08
ICICI Bank 10,617 13,609 18,029 25,384 33,321 36,930
HDFC Bank 4,791 5,423 9,030 14,878 21,477 25,753
Axis Bank 2,338 3,447 4,761 6,553 9,980 14,739
Kotak Mahindra Bank 512 1,115 2,100 3,600 5,400 7,020
Federal Bank 6,217 6,363 6,474 6,366 6,606 6,944
DCB Bank 1,327 1,439 1,503 1,279 1,810 2,235
Yes Bank NA NA 207 627 2,443 3,150
Total employees 25,802 31,396 42,104 58,687 81,037 96,771
YoY Growth % 21.7% 34.1% 39.4% 38.1% 19.4%
Total employees - FY15E 615,848
Gross employee addition FY08-15E 519,077
Market opportunity in terms of graduate turnout at US$1.2 bn:

The annual graduate turnout in commerce courses has grown at a
CAGR of 7.5% over the last four years to touch nearly half a million
graduates by FY08, as evidenced in exhibit 4 below.
Exhibit 4: IFBI potential market opportunity of ~US$1 bn by FY15E

Commerce Graduates turnout in FY04E (Nos) 373,192
Commerce Graduates turnout in FY08E (Nos) 498,400
Total CAGR FY04-08E (%) 7.5
Target Market @ 35% (Nos) 174,440
Fees charged by IFBI (Rs) 70,000
IFBI market size in FY08 (US$ bn @ US$/INR of 40) 0.3
Commerce Graduates turnout in FY15E 826,910
Target Market @ 45% 372,109
Fees charged by IFBI (Rs) 125,000
IFBI market size in FY15E (US$ bn @ US$/INR of 40) 1.2
Source: NASSCOM, JM Financial

NIIT
NIIT has forged tie-ups with most of the leading private sector banks
such as HDFC Bank, YES Bank and Kotak Mahindra Bank and financial
services firms such as ICICI Securities, ICICI Lombard, and ICICI
Prudential. We believe that this offers a distinct competitive advantage
to IFBI and will enable it to capture significant market share over the
next few years.
II.2. Imperia targets the working populace
Imperia provides executive management programs for working

professionals. Imperia has tie-ups with most of the leading B-schools in the
country.
Exhibit 5: Imperia has tie-ups with leading B-schools
Potential market opportunity of nearly US$15 bn by FY15E: We

estimate a potential market opportunity of US$5 bn at present, which
is expected to triple over FY08-15E. We believe that the large market
size, coupled with Imperia’s strategic tie-ups offer immense potential
for growth.
Exhibit 6: Imperia - market opportunity of US$15 bn in FY15E

Graduates/Post Graduates in FY08E (mn) 3.2
Employed FY08E (mn) 19.0
Target graduate base for Imperia in FY08E (mn) 2.0
Fees per student (Rs) 100,000
Imperia market size in FY08E (US$ bn @ US$/INR of 40) 5.0
Graduates/Post Graduates in FY15E 4.5
Employed FY15E (mn) 37.1
Target graduate base for Imperia in FY15E (mn) 3.9
Fees per student (Rs) 150,000
Imperia market size in in FY15E (US$ bn @ US$/INR of 40) 14.7
Source: Industry data, NASSCOM, JM Financial

NIIT
Tie-ups with IIMs are the highlights of Imperia’s strategy: The

number of CAT aspirants has nearly doubled over 2003-2007 to 0.25
mn. We believe this is a good indicator of the brand equity enjoyed by
the Indian Instititute(s) of Management (IIM) amongst potential MBA
aspirants.
Exhibit 7: CAT aspirants have nearly doubled over 2003 -2007

2003 2005 2004 2006 2007
CAT aspirants (Nos) 130,000 170,000 NA 206,612 250,000
CAGR over 2003-07 (%) 17.8
We see Imperia contributing significantly to NIIT’s revenue over the

next few years due to the much higher market size of the segment. We
expect a strong growth in revenue and profitability over the next few
years led by the increased market penetration.
II.3. Evolv – the English language opportunity

NIIT forayed into the English training segment with the acquisition of Evolv
(47.9% stake) in January 2008. NIIT also has a tie-up with ETS, a global
player in assessment systems, for Test of English for International
Communication (TOEIC) to evaluate students for their English language
capability for employment prospects.
90% graduates are non proficient in English: According to the

National Index of Communication Skills brought out by MeritTrac in
2006, a meagre 10% of the potential job seekers can use the language
as per industry acceptable standards. The staggering 90% non
proficiency level works out to 4.6 mn candidates by FY15E, presenting
a potential market opportunity of US$1.0 bn over the same period
(CAGR of 18.1% over FY08-15E).
Exhibit 8: Evolv - market opportunity of US$1 bn by FY15E

Employability gap (%) 90%
Potential candidates for Evolv in FY08 (Nos) 2,884,330
Fees charged (Rs) 4,500
Evolv market potential in FY15E (US$bn @ US$/INR of 40) 0.3
Graduate output in FY15 (Nos) 5,132,340
Employability gap (%) 90%
Potential candidates for Evolv (Nos) 4,619,106
Fees charged (Rs) 9,000
Evolv market potential in FY15E (US$ bn @ US$/INR of 40) 1.0
Expansion into the retail segment to drive growth: NIIT plans to

extend Evolv’s offering from corporate programs to the retail segment
by making the potential job seekers TOEIC ready before they enter the
job market. We believe this could be a potentially large opportunity,
especially in Tier-II and Tier-III cities. We believe that NIIT can
successfully leverage its expertise in the franchisee model to capture
an increasing chunk of the English language training market.

NIIT
II.4. NIPE – red hot property
NIIT recently announced the launch of National Institute of Process

Excellence (NIPE) a 75:25 JV with Genpact, the largest BPO provider, for
offering training to the ITES industry. NIPE plans to invest Rs250 mn in the
first year of operations and intend to ramp up to over 250 centres by
2012.
Tie-up with Genpact places NIIT in pole position: We estimate a

huge unexplored potential for finishing schools in the BPO space given
the high manpower needs and lower graduate employability (refer
exhibit 10).
Exhibit 9: There is strong recruitment demand in the ITES sector

(Nos) FY04 FY05 FY06 FY07 FY08 FY10E
Knowledge professionals
216,000 316,000 415,000 553,000 704,000 1,100,000
employed in BPO
YoY % 20.0% 46.3% 31.3% 33.3% 27.3% 25.0%*
Source: NASSCOM Note: *CAGR over FY08-10E
Exhibit 10: BPO employability in India is low
BPO- Generalist Employ ability (%)
20-30
10
India Low Wage Country Benchmark
Source: NASSCOM
Revenue from NIPE to be an upside to estimates: We believe that

the association with Genpact adds strong brand equity to NIPE, which
could result in strong enrolment numbers. However, we have not
factored any revenue into our estimates as it a recent launch and
visibility remains low. Any revenue from NIPE would, therefore, be an
upside to our estimates.

NIIT
II.5. New ventures to grow four-fold in two years
We expect revenue from new businesses to grow to Rs1.15 bn (93.4%

CAGR) over FY08-FY10E. We expect EBITDA margins to improve from -
8.4% in FY08 to 10.0% and 15.0% in FY09E and FY10E respectively, as
these businesses achieve critical mass and breakeven.
Exhibit 11: New business contribution to improve significantly
New business rev enue contribution New business EBITDA contribution

15.0%
9.6%
8.0%
7.5%
4.8% 4.4%
3.1%
0.9%
0.0%
-2.5%
-7.5%
-11.6%
-15.0%

NIIT
III. IT training still has scope to grow

NIIT is the biggest brand in the retail IT training space with around
3,90,000 enrolments in FY08 (nearly 3x of Aptech). While there have been
concerns regarding growth in this segment due to a downturn in the IT
sector, we believe that increased demand for non- engineering graduates
seen in IT services is expected to keep enrolment numbers reasonable
over the near term (16.0% YoY in FY09), while long-term growth would be
sustained by the demand for IT professionals.
Strong long-term market potential: NIIT is expected to see

sustained demand in the IT training space given that the engineering
graduate output is growing at 19.3%, while other graduate streams
output are growing at 7.5%. At present growth rates, we expect an
annual graduate turnout of over 5 mn in FY15. We estimate the IT/BPO
training market potential at US$3.2 bn in FY15 (CAGR of 17.5% over
FY08-15E).
Exhibit 12: Annual graduate output to cross 5 mn by 2015

Graduates
Talent Pool in India (Nos)
Engg. Degree Engg. Diploma Arts Commerce Science Others Total
Cumulative – FY01 1,024,380 1,531,720 8,768,000 4,853,000 4,025,000 NA 20,202,100
Turnout FY04E 127,700 112,300 972,720 373,192 327,775 250,900 2,164,587
Turnout FY08E 258,800 133,600 1,299,200 498,400 437,800 335,100 2,962,900
Total Graduates 1,410,880 1,777,620 11,039,920 5,724,592 4,790,575 586,000 25,329,587
CAGR FY04-FY08E (%) 19.3 4.4 7.5 7.5 7.5 7.5
Total Graduate CAGR FY04-08E (%) 8.2
Turnout FY15E 5,132,340
Total Graduates FY15E 54,070,046
Source: JM Financial, NASSCOM
Exhibit 13: IT/BPO training market of US$3 bn by FY15

Graduates turnout by FY08E (Nos) 2,962,900
Target market @ 40% (Nos) 1,185,160
Average realization per student p.a. (Rs) 35,000
IT/BPO training market size in FY08 (US$ bn @ US$/INR of 40) 1.0
Target market @ 50% (Nos) 2,566,170
Average realization per student p.a (Rs) 50,000
IT/BPO training market size in FY15E (US$ bn @ US$/INR of 40) 3.2
Anticipate reasonable growth over near term: While we believe

that ILS would deliver slower growth in FY09 (13.5% YoY as against
34.8% CAGR over FY05-08), we believe that the scenario is not
comparable to the dotcom bust that resulted in a major slump in IT
training. NIIT recorded a decent +16.2% YoY enrolment growth during
1Q FY09, assuaging fears of a slowdown led by a slower IT industry.
We believe that the downturn in IT is to a certain extent compensated
by increased aspirations of non engineering graduates, who now see
an opportunity to join the IT industry.

NIIT
Exhibit 14: Strong enrolment growth in 1Q FY09

1Q FY07 2Q FY07 3Q FY07 4Q FY07 1Q FY08 2Q FY08 3Q FY08 4Q FY08 1Q FY09
Enrolments (Nos) 81,776 96,284 51,850 80,632 92,357 126,573 66,335 104,085 107,289
YoY (%) 7.3% 26.0% -15.9% 33.1% 12.9% 31.5% 27.9% 29.1% 16.2%
Rise in short term course enrolments to improve realisations:

We expect long-term career courses (GNIIT) to see some softness
during FY09E (92% of enrolments in FY08 vis-à-vis 94% in FY07),
while short term courses (which have higher realisations) should pick
up pace in FY09. NIIT introduced a number of short term courses in
the last two years such as Edgengineers (six months course for
engineers), Network Labs for training in the fast growing infrastructure
management space, and courses in Java, .Net and Oracle, in which we
expect higher enrolments during the year.
III.1. IT training expected to bounce back in FY10
We expect IT training to record at 13.5% YoY growth in FY09E due to the

slowdown in the IT services sector. We expect the growth to pick up in
FY10E (20.4% YoY) with an improvement in demand scenario for IT. We
remain convinced in our belief that Indian IT services is a sustainable
growth story (refer our IT services report - dated 25 January 2008), which
should translate into a steady growth for NIIT as well in the long-term. We
expect EBITDA margins to remain flat in FY09 while we expect an
improvement of around 100 bps in FY10E, aided by better revenue growth.
Exhibit 15: ILS growth expected to bounce back in FY10

(Rs mn) FY08 FY09E FY10E
Enrolments (Nos) 389,350 451,646 537,459
YoY % 25.4 16.0 19.0
Net Revenue 3,241 3,678 4,427
YoY% 31.2 13.5 20.4
EBITDA 663 754 952
EBITDA margin % 20.5 20.5 21.5
Source: Company data; JM Financial

NIIT
IV. Schools to pick up steam

NIIT has stepped up its efforts in the government school space, motivated
by increasing adoption of World Bank tendering norms as well as
successful collections of pending debts from certain State governments
such as Andhra Pradesh. In the private schools segment, it is increasing
focus on curriculum based content as opposed to IT laboratories. We
expect School Learning Solutions (SLS, 10.1% of revenue in FY08) to be
amongst the fastest growing businesses in FY09E (55.2% YoY) and FY10E
(53.9% YoY).
IV.1. Government Schools - back in the spotlight

Refocus on government schools to drive growth: The government
schools business is primed for growth with the management increasing
efforts in this space. NIIT was earlier reassessing this segment given
its unpredictable sales cycles, higher DSOs and lower IRRs (our
estimate is 14% in ICT as against 40% in private schools), which are
inherent to this business. However, with better tendering norms,
stricter technical and commercial norms for vendor qualification, NIIT
is refocusing on the government schools space. The company has had
early success with its new efforts; it recently won 2,005 new schools in
Andhra Pradesh, the largest order so far in FY09.
Exhibit 16: NIIT school wins expected to pick up

9,000
6,000
3,800
3,500
3,196 3,250
2,750
2,195
1,400 1,264 1,588

(893)
IV.2. Private schools to be more profitable
From IT labs to curriculum based content: NIIT’s presence in the

private schools space was till recently limited to providing IT education
(labs) and exam preparation (egurucool) for higher classes, unlike
Educomp, which has been involved in providing full fledged curriculum
based content. NIIT plans to target the more lucrative content
segment within private schools with ‘eGuru’, a space hitherto
dominated by Educomp.
NIIT faces competition from Educomp (revenue of ~US$33 mn from

Smart Class in FY08), who, we believe, has a lead of around 24
months in the multimedia space. However, we believe that the market
for interactive technological aids in schools is significantly large
(US$800 mn in FY08), and there is enough space for newer entrants.

NIIT
Exhibit 17: Market for curriculum aids to double by FY15

eGuru market size estimation FY08 FY15E
Existing urban schools (Nos) 87,786 98,433
Target urban private schools (Nos) 15,000 29,530
Target urban private schools (%) 17.1% 30.0%
Classes per school (Nos) 25 25
Students per class (Nos) 45 45
Fees per student per month (Rs) 150 150
Smart Class market size (US$ bn @ US$/INR of 40) 0.8 1.5
Source: Industry sources, JM Financial estimates
eGuru is a best-in-class product: We had a glimpse of the content

developed by NIIT for eGuru. We believe that the product could
provide stiff competition to other market offerings given its higher
interactivity levels, which makes the learning process very lucid.
Exhibit 18: eGuru has potential to catch up

Parameter NIIT Educomp Everonn
Content Maths, Science Fully mapped 6-12 Std
VSAT+ Hardware
Model used Primarily Content Hardware + Content
+ Content
Syllabus covered NA CBSE/ICSE CBSE/ICSE
Restricted mainly to
Current geographical presence pan-India pan-India
Tamil Nadu
Average pricing per student per
60* 150/75* 160
month (Rs)
Private schools using multimedia
25 1,036 88
product
Installed base of private schools with
1,223 NA 144
a cross-selling opportunity
Source: JM Financial Note:*Only content
Exhibit 18: eGuru in action
Source: Company
Strong cross-sell opportunity within the current installed base:

NIIT had an installed base of 1,223 private schools in 1Q FY09 wherein
it provides only IT education. These schools could be potential converts
to eGuru (current installed base of 25). We expect average price
realisation in the private schools space to increase by around 3% YoY
and 5% YoY in FY09E and FY10E, respectively, given higher proportion
of revenue from eGuru.

NIIT
IV.3. Strong growth in SLS after a hiatus
We expect revenue growth in SLS to go up considerably due to strong wins

in government schools and launch of eGuru in the private schools space.
We expect revenue CAGR of 54.5% over FY08-10E as compared to
negative 7.2% CAGR over FY06-08. We further expect margins to improve
by 100 bps over FY08-FY10E due to increased realisation from private
schools and scale benefits.
Exhibit 19: SLS business taking off after a hiatus
SLS Rev enue contribution SLS EBITDA contribution

18.8%
16.2%
12.9% 12.8%
16.7%
13.2%
10.7% 10.1%

NIIT
V. Corporate Learning Solutions to drag

NIIT derived 54.7% of revenue from CLS solutions in FY08, which has been
slowing down in response to economic uncertainties in its target market –
the US (87% of CLS revenue in 4Q FY08). NIIT acquired a US-based
training outsourcing company, Element K, in August 2006 to become the
second largest corporate training delivery firm globally, next only to
Skillsoft - NETg.
Exhibit 20: CLS business split

Training Delivery and
Segment Learning Content Learning Technology
Administration
Includes Offline Content
Corporate training Hosted Learning
Offerings and Custom Content
programs Management System
development
Revenue
78% 13% 9%
contribution (%)
V.1. Slower growth segment

According to industry sources, while the market opportunity for CLS is
huge at US$59 bn, it has grown at a CAGR of 3.7% over 2003-2007.
Outsourcing growth, however, has been higher at ~18% YoY.
Exhibit 21: Pick up in training market to be hit by US slowdown
CAGR of 3.7% ov er 2003-2007

59 (US$ bn)
56
51 51 51
2003 2004 2005 2006 2007
Custom content and training delivery are slowing down: The

custom content development and training delivery segments are seeing
softness due to the slowing US economy. With HR spend budgets
under pressure, instructor-led training and custom content
development, which we believe is discretionary spending, is bound to
see a set back.
Offline content is more insulated: Offline content is largely

insulated against a slowdown as companies in cost cutting mode are
expected to opt for readymade content. Element K is the second
largest player in this space with a market share of 4% versus market
leader SkillSoft-NETg, which has an 18% share. NIIT has invested
heavily in content development and claims to have the largest content
library, which it believes will help drive growth in this space.

NIIT
CLS expected to drag overall growth: While the management is

confident of ~10% YoY growth in US$ terms in FY09, we have factored
lower growth at 6.0% YoY given the current US scenario. A higher
rupee depreciation than our assumption (41.6 US$/INR in FY09E) could
provide an upside to our estimates.
Drag on consolidated margins will be lower: While CLS

contributed to 54.7% of revenue in FY08, EBITDA contribution from
this business was much lower at 25.6%. Hence, our slower growth
expectation in FY09E and FY10E will have a lower impact on
consolidated profit growth.
Exhibit 22: CLS has lower EBITDA contribution

CLS Rev enue contribution CLS EBITDA contribution
54.7%
51.1%
44.6%
25.6%
22.2%
18.9%
FY08 FY09E FY10E

NIIT
VI. Financial analysis

19.7% revenue CAGR over FY08-10E: We expect NIIT to report
revenue CAGR of 19.7% over FY08-10E, mainly driven by strong
growth in SLS (54.5% CAGR) and new businesses (93.4% CAGR). CLS
is expected to drag at 8.1% CAGR over the same period.
Exhibit 23: Revenue growth for key segments

ILS 3,241 3,678 4,427 16.9
SLS 1,012 1,571 2,417 54.5
CLS 5,507 6,075 6,437 8.1
New business 308 576 1,152 93.4
Total 10,068 11,900 14,433 19.7
Exhibit 24: Revenue contribution from key segments

Revenue contribution (%) FY08 FY09E FY10E
ILS 32.2 30.9 30.7
SLS 10.1 13.2 16.7
CLS 54.7 51.1 44.6
New business 3.1 4.8 8.0
EBITDA margin improvement of 222 bps over FY08-10E: EBITDA

margin is expected to increase by 222 bps over FY08-10E driven by
margin improvement across segments. We expect new business to see
strong improvement in margins.
Exhibit 25: EBITDA margin change for key segments

EBITDA margin (%) FY08 FY09E FY10E Change over FY08-10E Drivers
ILS 20.5 20.5 21.5 1.0 Pick up in growth rates in FY10
Increased realization from private schools and
SLS 13.0 13.6 14.1 1.0 scale benefits.
CLS 4.8 4.8 5.3 0.5 Rupee depreciation
New business (8.4) 10.0 15.0 23.4 Scale benefits
Core profit CAGR of 42.4% over FY08-10E: We expect NIIT to

report core profit (before NIIT Tech’s share of profit/loss) CAGR of
42.4% over FY08 mainly driven by increasing revenue contribution
from new businesses. Reported profit (including NIIT Tech’s
contribution) is expected to grow at 28.7% CAGR over FY08-10E to
Rs1.25 bn over the same period.
Higher DSOs due to expected increase in government business:

DSOs are expected to increase from 74 days in FY08 to 85 and 88 in
FY09E and FY10E, respectively, due to the increasing proportion of
government business.

NIIT
Exhibit 26: Higher DSOs due to increasing government business
DSO % rev enue from Gov t. Schools

30%
150
20%
120
10%
90
60 0%
FY05 FY06 FY07 FY08 FY09E FY10E

NIIT
VII. Valuation and risks
Initiate with a Buy and target price of Rs110: We initiate coverage

with a Buy recommendation on NIIT and target price of Rs110. Our target
price implies a 14.6x multiple on FY10E EPS based on: (1) 19x FY10E
multiple for the core business, and (2) 5x PE multiple for NIIT Tech’s
contribution of Rs2.4 on FY10E, a 50% discount to the midcap IT universe.
Our target price implies an upside potential of 20.8% from the current
levels. Assumptions in our estimates include: (1) revenue CAGR of 19.7%
over FY08-10E, and (2) core profit CAGR of 42.4% over FY08-10E.
Key risks, which might prevent the target price being met, are
listed below:
Company specific risk entails: (1) slower than expected growth in CLS
due to a protracted US slowdown, (2) delay in the expected IT training
revival in FY10, (3) lower number of school wins in ICT, and (4) slower
ramp-ups in new businesses due to changes in the domestic macro
economic scenario.
Industry specific risks include long sales cycles that could derail growth
expectations in government schools, slowdown in economic growth
affecting government spending on ICT as well as private spending
power for K-12.

Revenue 11,988 13,994
EBITDA 1,519 1,979
Net Profit 1,058 1,294
EPS (Rs) 6.3 7.8
Exhibit 28: PE band chart

200
180 33x
160
140 28x
120 23x
100
18x
80
60 13x
40 8x
20
0
Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08
Source: Bloomberg data, Company data, JM Financial

NIIT
VIII. Company background
VIII.1. History
2004 - De merger of NIIT Ltd and NIIT Tech and listing as a separate entity on the bourses
2005 - Consolidation of centres in ILS, number of centres came down from 773 in 2Q FY05 to 707 in 3Q FY05
- Tamil Nadu contract ends in SLS
- Launch of ‘Edgengineers’ program, finishing school for engineering graduates.
2006 - Acquisition of ElementK to gain a significant presence in the corporate training market.
- Launch of IFBI, Imperia and Litmus
- Launch of ANIIT program for engineering students, which runs parallel to their engineering studies
- Portfolio realignment in SLS with selective pursuit of government schools
2007 - IFBI ties up with HDFC Bank, Yes Bank

- ‘Edgengineers’ crosses 90,000 in enrolments
2008 - Refocus on the government schools business. Won 2005 schools contract from the AP government
- JV with Genpact for NIPE, finishing school for BPO training
VIII.2. Share capital details
Exhibit: Share capital details

(mn) FY06 FY07 FY08
Shares at the beginning of the year 19.3 19.3 19.8
Dilution during the year - 0.4 2.2
Shares at the end of the year 19.3 19.8 164.7*
Conversion of 2.5% US$10 mn FCCB to Intel capital @ Rs200 - - 2.2
Shares issued under ESOP 2005 scheme - 0.4 0.03
Source: Company data; Note: * Bonus issue of 1:2 and share split of 1 share of Rs10 each into
5 shares of Rs2 each

NIIT
IX. Financial Tables

Profit & loss statement (Rs mn) Balance sheet Rs mn)
Growth (%) 76.4 26.6 18.2 21.3 ESOP Outstanding 6 5 5 5
Other operational income 0 0 0 0 Reserves & surplus 2,942 3,686 4,250 5,085
EBITDA 793 1,035 1,321 1,804 Net worth 3,145 4,020 4,584 5,419
Growth (%) 29.7 30.5 27.6 36.6 Preferred stock 0 0 0 0
Other non-operational income 98 105 155 188 Total loans 2,698 2,057 2,052 2,098
Depreciation & amortisation 473 529 548 568 Sources of funds 5,847 6,092 6,651 7,532
EBIT 418 611 928 1,424 Intangible assets 0 0 0 0
(net) 172 210 356 380 Fixed assets 5,702 5,814 6,632 7,573
Pre tax profit 246 401 572 1,043 Less: Depreciation/amortisation 1,989 2,309 2,856 3,425
Taxes 4 -20 86 188 Net block 3,713 3,505 3,776 4,149

Net profit before associates CWIP 134 476 576 676
profit/(loss) 242 422 486 856 Investments 611 892 892 892
Share of associates
profit/Loss 324 334 360 397 Deferred tax assets/(liability) 81 250 358 524
Adjusted net profit 573 756 847 1,252 Current assets 4,511 4,578 5,472 6,653
Margin (%) 7.2 7.5 7.1 8.7 Inventories 132 126 151 184
Diluted shares (mn) 155.9 166.2 166.2 166.2 Sundry debtors 2,204 2,048 2,756 3,496
EPS (Rs) 3.7 4.6 5.1 7.5 Cash & bank balance 736 799 861 948
Growth (%) 38.6 23.8 11.9 47.9 Other current assets 302 301 272 282
Source: Company, JM Financial Loans & advances 1,137 1,304 1,433 1,742
Current liabilities & provisions 3,203 3,611 4,425 5,364
Current liabilities 2,823 3,194 3,946 4,714
Net current assets 1,308 967 1,047 1,290

Net profit 246 401 572 1,043 ROCE (%) 6.6 8.5 12.1 17.4
(Inc)/dec in working capital -259 400 -51 -290 Debt-equity ratio (x) 0.9 0.5 0.4 0.4
Others 106 -75 7 -161 Valuation ratios (x)
Net cash from operations (a) 566 1,255 1,076 1,161 PER 24.8 20.0 17.9 12.1
(Inc)/dec in investments 61 -12 0 0 PBV 4.2 3.7 3.3 2.8
Capex -623 -848 -918 -1,041 EV/EBITDA 19.2 15.7 12.2 8.9
Others -675 55 515 584 EV/Sales 1.9 1.6 1.4 1.1
Cash flow from inv. (b) -1,237 -804 -403 -457 Turnover ratios (no.)
Inc/(dec) in capital 79 3 0 0 Average Debtor days 94 77 74 79
Dividends paid + dividend tax -133 -168 -251 -282 Inventory days 5 5 4 4
Inc/dec in loans 1,351 -195 -5 46 Creditor days 59 63 63 63
Others -851 -184 -356 -380 Source: Company, JM Financial
Financial cash flow ( c ) 446 -543 -612 -616

Net inc/dec in cash (a+b+c) -225 -92 61 88
Opening cash balance 650 736 799 860
Closing cash balance 736 799 860 948

NIIT
Contact details – Sales & Dealing Team
Sales Team
Tel: (91 22) 6646 0017
E-mail: asksales@bloomberg.net
Sales Trading & Dealing Team Derivatives Team

Tel: (91 22) 2497 5601-05 Tel: (91 22) 2497 5601-05
E-mail: askdealing@bloomberg.net E-mail: askdealing@bloomberg.net

MEMBER, BOMBAY STOCK EXCHANGE LIMITED AND NATIONAL STOCK EXCHANGE OF INDIA LIMITED
B a n d b o x H o u s e , 1s t F l o o r • 2 5 4- D D r A n n i e B e s a n t Ro a d , W o r l i • M u m b a i 4 0 0 0 25
T e l : + 91 2 2 664 6 0 00 0 • D e a l e r s : + 9 1 2 2 24 9 7 5 6 01 - 0 5 • F a x : + 9 1 22 2 4 98 5 6 66 • E m a i l : r e s e a r c h @ jm f i n a n c i a l . i n
Analyst Certification
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Analyst(s) holding in the Stock: (Nil)
Other Disclosures
This research report has been prepared by JM Financial Institutional Securities Private Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated companies solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM
Financial Institutional Securities. This report has been prepared independently of the companies covered herein. JM Financial Institutional Securities and/or its affiliated
entities are a multi-service, integrated investment banking, investment management and brokerage group. JM Financial Institutional Securities and/or its affiliated
company(ies) might have lead managed or co-managed a public offering for the company(ies) covered herein in the preceding twelve months and might have received
compensation for the same during this period for the services in respect of public offerings, corporate finance, investment banking, mergers & acquisitions or other advisory
services in a specific transaction. JM Financial Institutional Securities and/or its affiliated company(ies) may receive compensation from the company(ies) mentioned in this
report within a period of three to six months' time following the date of publication of this research report for rendering any of the above services. Research analysts and
Sales Persons of JM Financial Institutional Securities may provide important inputs into the investment banking activities of its affiliated company(ies) or any other firm or
company associated with it.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred
to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible
for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and
is not intended to be and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed herein may not be suitable for all
investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial
Institutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time.
JM Financial Institutional Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or
sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or
act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have other
potential conflict of interests with respect to any recommendation and other related information and opinions.
This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other
jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or
its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions.

Education Sector JM Fin - Jan 10

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Education Sector JM Fin - Jan 10

Caricato da

Copyright:

Formati disponibili

Analysts:

JM Financial Institutional Securities Private Limited

Indian Education: Buy the Book 3

Aptech: All priced in 5

Career Launcher: A great launch pad 15

Core Projects: Future potential 19

Educomp Solutions: ‘Smart Class’ for the new ‘Millennium’ 21

Everonn Systems India: Not private enough 57

KidZee: Preschool play 73

Mahesh Tutorials: Breaking regional shackles 75

NIIT: Transforming into an all-rounder 77

10 August 2008 JM Financial Institutional Securities Private Limited Page 2

Sector: Education Indian Education

Exhibit 1: Recommendation snapshot

JM Financial Institutional Securities Private Limited

Exhibit 2: Valuation comparison

20 August 2008 JM Financial Institutional Securities Private Limited Page 4

Sector: Education Aptech

Key Data All priced in

JM Financial Institutional Securities Private Limited

I. IT training revival to be slowed down

I.1. Uncertain environment to slow revival

Exhibit 2: Aptech heavily pruned its network over CY04-06

CY04 CY05 CY06 CY07E

Source: Company data, JM Financial

Exhibit 3: Stronger franchisee network to sustain steadier growth

Source: Company data, JM Financial

20 August 2008 JM Financial Institutional Securities Private Limited Page 6

 Revival in India based IT training to be dampened by sluggish

 International IT training to grow faster: Aptech has presence in new

Exhibit 4: Aptech has widespread geographic presence

20 August 2008 JM Financial Institutional Securities Private Limited Page 7

II. China to grow slower

Exhibit 5: Aptech in China – A snapshot

 Incremental market penetration in China to be a challenge: We

Exhibit 6: China to grow at a slower clip

Source: Company data, JM Financial

20 August 2008 JM Financial Institutional Securities Private Limited Page 8

III. New ventures could take more time

Exhibit 7: Aptech’s new ventures are in high potential segments

 Slowdown in aviation to dampen growth over near term: We believe

Exhibit 8: Impact of turnaround to be marginal over CY07E-CY09E

698 879 1,151

CY07E CY08E CY09E CY07E CY08E CY09E

Source: Company data, JM Financial

20 August 2008 JM Financial Institutional Securities Private Limited Page 9

Exhibit 9: Growth rates in key businesses

Exhibit 10: China, new business to drive growth

20 August 2008 JM Financial Institutional Securities Private Limited Page 10

V. Valuation and risks

 Company specific risks include: 1) better scale up in profitable franchises

 Industry specific risks include: 1) faster than expected revival in IT/ITES

Exhibit 11: Comparison with consensus

Exhibit 12: PE Band Chart

Source: Bloomberg data, Company data, JM Financial

20 August 2008 JM Financial Institutional Securities Private Limited Page 11

VI. Company background

1986 - Started operations with an IT Training Centre in Mumbai

1986 - Started operations with an IT Training Centre in Mumbai

1996 - Launched Arena Multimedia

2000 - Forayed into software development

2003 - Merged with SSI Education.

2005 - SSI stake sold to Rakesh Jhunjhunwala & associates

Revival in India based IT training to be dampened by sluggish

International IT training to grow faster: Aptech has presence in new

Incremental market penetration in China to be a challenge: We

Slowdown in aviation to dampen growth over near term: We believe

Company specific risks include: 1) better scale up in profitable franchises

Industry specific risks include: 1) faster than expected revival in IT/ITES

CL’s K-12 business model is expected to have a mix of owned, managed

Targeted at mainstream middle class households: CL’s schools,

New businesses to drive future growth: While we expect CL to

Huge demand-supply gap: According to NCERT (2001), there are

Boom in the middle/upper class will drive spending: According to

Private spending has tilted more in favour of education: Currently,

Per child spending is set to increase sharply: According to the

Educomp conforms to the regulatory guidelines: All of Educomp’s