Should investors opt for Everonn Education's Open Offer?

We would like to inform our readers that since an Open Offer transaction is an off-market transaction, one may have to pay long-term or short-term capital gains tax on it, instead of the usual STT. The gains for long-term holdings will be either taxed at 10% without indexation, or at 20% with indexation, whereas the short-term capital gain are taxed at 10%. Hence, the profits derived from the price differentials would be eaten away by the tax implications attached with them.Therefore, we advise investors to opt for the Open Offer, as it will provide an arbitrage opportunity, and investors can exit at a premium by tendering them in the open offer at higher prices.

One must also look at the company's fundamentals apart from speculative gains, as it will benefit the investors in the long run by finding its true value, even if the prices fall after the Open Offer.

Everonn Education, formerly known as Everonn Systems, is a Chennai-based provider of technology-based education services to schools and skill training to vocational institutes and colleges, which entered the education sector in 1999. The company has performed robustly over the past 3 years. On a consolidated basis, the sales have grown at a CAGR of 66%, with the aid of its core business VITElS, which has contributed significantly to the overall revenues and profitability.

However, after showing consistent growth till Q4 FY11, the company has reported losses of Rs 3 cr on a consolidated basis in the Sep 2011 quarter, against profits of 15 cr in same period last year. The decline in net profits was on the back of increased interest expenditure and higher depreciation charged during the quarter. The depreciation and interest expense both increased by 95% and 100% on a YoY basis respectively.

Also, in the previous quarter, the company witnessed lower addition of new schools and colleges, which impacted the sales growth.  They only added 42 schools in its ViTELS business against 70, and 35 colleges against 105 in same period last year. We, at DSIJ, believe that the company's core, growth-driving business, i.e. ViTELS, is witnessing lower additions in the last 2 quarters. Due to this, the stock has been beaten down by 58% in the last 6 months.

We believe that at the CMP, the scrip is available at a discounted value. However, we would ideally wait for the 3rd quarter results, as that will give a clear picture of where the business is heading for the fiscal year.