On A Learning Curve

Ali On Content / 12 Apr 2010

While the education sector is now the biggest sunrise industry, Usha Martin Education & Solutions leaves much to be desired due to its overvaluation and some other factors

These are the days of a boom in the education space and everyone is eying that sector with an intention to foray into it and make a big impact. And why not, what with the government focusing on this sector in earnest and allocating higher budget each time. As such, the rush for getting some space in the education business is obvious. Further, with the kind of valuations these new business models are pro-viding on the bourses, the attraction is understandable enough. Therefore, the subject matter of our analysis this time is Usha Martin Education and Solutions (UMESL), which was earlier known as Usha Martin Infotech. The management recently changed the name in order to reflect its new line of business.
Since entering into this new domain, the financial performance of the company has improved and investors were quick to take this into their reckoning. The scrip sharply moved northwards and is trading at an all time high. But apart from this, what has guided us to take up the company for analysis is the sudden strong upward movement in the counter since the last one month.
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The counter has appreciated by more than 170 per cent to Rs 66.35. The second factor is that the promoters have bought a good chunk of shares from the open market and further, the company has announced good expansion plans. This has attracted a good pool of retail investors to the counter. As stated earlier, the education sector is now buzzing and hence with the company planning for expansion, investors are watching with bated breath.

The Company
If we have a look at from where UMESL has emerged, then one cannot doubt the credentials of the management. UMESL was a part of the Usha Martin Group. Usha Martin’s IT division was de-merged into a new company named as Usha Martin Infotech (UMITL). In accordance with the scheme, UMITL issued and allotted one equity share of Rs 5 each to all the shareholders of the company in the ratio of one equity share of Rs 10 each held by them in Usha Martin. But the financial performance of the company remained stagnant for almost four years as it only served the telecom sec-tor where it faced severe competition. Further, it only got in-house orders which put constraints on its growth.
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While most of the Indian IT companies witnessed good growth, UMITL could not show any kind of upward spiral. After a dismal performance in the IT sector, it took a good look at the potential in the education sector during the last quarter of FY08 and then re-launched its education initiative. We are saying ‘re-launched’ as it had a similar line of business in 2001-02 but had ceased to offer those services after its inability to garner a good response.
Learning Division
In Q4FY08 UMESL started its first centre in Kolkata and as part of its portfolio of educational offerings the company started conducting trainings for formal degree courses like MBA, MCA, BBA and BCA, affiliated to the Punjab University. Further, in Q1FY09 it started an additional centre at Kolkata and one centre at Ranchi. These initiatives yielded good returns and the FY09 results saw a strong upsurge in the topline as well as bottomline. Here it posted topline of Rs 2.83 crore and bottomline of Rs 0.44 crore as com-pared to just Rs 0.38 crore and Rs 0.19 crore respectively in FY08.

In Q1FY10 it added another centre at Patna and the impact of the same was visible in the 9MFY10 results. It is now opening another centre at Dhanbad and is expanding the Ranchi facility. As regards its capex plans, the company wants to invest Rs 1.25 crore which will be incurred through internal accruals. Presently all the revenues are from its degree courses where it has showed a good amount of growth. We enquired about the number of students, total capacity and the fees charged but our efforts to get any answers from the management could not yield any result.
As regards the company’s profitability, the performance has been good in its Learning Division with net margins in the range of 11-12 per cent. One should note that the school enabling services in the initial phases is capital extensive. Hence the bottomline may be a bit lower in the initial phases. Further, the sustainability of the revenues is still an issue as we are only in the initial phases. Also, the company’s failure in its previous attempts raises some doubts.
Another Initiative
Apart from the degree courses, the management has also perceived potential in affordable school enabling services and has entered this business by tying up with Pearson Education India. Here, the management has announced about affordable schooling where it charges a monthly fee of Rs 750-1,250. Currently it has 12 schools under operation and revenues have also started flowing in but the clarity will emerge only when we get a full year’s revenues in FY11. Till
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date the revenue contribution is on the lower side. Even the management has not been able to comment on the ratio of revenues they in expectation of.
As regards the expansion project, the management has stated that it has conducted a survey and thereby identified schools in non-metro towns in eastern India that will provide larger opportunities. It has also made a mention about its ambitious plans to enable around 200 schools in the next seven years. But again no numbers have been provided on the capex front.


 Good Operational Performance
As regards the company’s operational performance, UMESL has been showing significant growth in numbers. While While we have already mentioned about FY09, in 9MFY10 the growth has been very good. Here the topline stood at Rs 4.45 crore and bottomline was Rs 0.46 crore as compared to Rs 1.27 crore and net loss of Rs 0.13 crore respectively in 9MFY09. But one should note that its results for the different quarters can be highly fluctuating. It might even show a loss in some quarter of the year. This is because of the company’s revenue recognition policy. They record revenues in their income statement only when the classes commence, while the expenditure is recognised as and when it is incurred. Hence, heavy fluctuation is expected. But usually the Q2 and Q4 results are comparatively better.
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Investments - An Issue
UMESL has unquoted investment in group companies amounting to Rs 54 crore. It has Rs 20 crore in Usha Communication Technologies and Rs 34.12 crore in Bonsai Network India. The management has stated that it will keep the investment in these group companies. While Usha Communication Technologies pro-vides software services to telecom companies, Bonsai is into wireless and broadband communication. But as the management suggests, some amount of re-stating (on the lower side) in the value is expected to happen in FY10. As both the companies are not doing up to the mark some amount of reduction in value is expected. Further, the management has declared reduction in securities premium account and capital redemption reserve. This we feel augurs negative for the investors.

Valuation
If we take a look at the valuation, the scrip’s CMP of Rs 65.20 discounts its trailing four quarter earnings by 210x. The other parameters like EV/EBITDA of more than 100x makes the counter too over-valued. It is true that the company is expanding and the earning capacity will increase further but the CMP seems to have discounted the earnings. Even the leaders in the business of school enabling services like Educomp Solutions (P/E of 54.82x) and Edserve Systems (71x) are trading at lower valuations. Hence, considering these factors, we feel it will be good for the investors to avoid any investment in the counter.

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