Educomp Solution, India’s foremost private education company has reported weak numbers. The net sales of the company on a consolidated basis have grown by a mere 2 per cent to Rs 365 crore and the net profits of the company has declined by 73 per cent on a YoY basis.
Educomp Solution, India’s foremost private education company, has released its December 2011 quarter numbers. After the results’ announcement the stock, over the last two days, has declined by 5 per cent to Rs 236 per share. The company during the quarter has reported weak numbers. The net sales of the company on a consolidated basis have grown by a mere 2 per cent to Rs 365 crore. The net profit of the company has declined by 73 per cent on a YoY basis and the total expenditure of the company has increased by 25 per cent on a YoY basis.
The lower net profit was largely on account of the marked to market loss of Rs 79 crore. This was due to the outstanding FCCB loan of USD 78.5 million. The EBITDA margin of the company has declined by 600 bps to 26 per cent on a YoY basis. The margins of the company have been impacted due to a fall in the pricing of its Smart Class product which has come down from Rs 3.97 lakhs to Rs 3.3 lakhs per school.
According to the management, the reduced Smart Class pricing was to be able to increase the market share by penetrating more schools with lower pricing. It has also mentioned that the pricing will reduce further in the coming quarter as well. However, to compensate the lower margins the company will look to increase the volumes.
The revenue flow out of the securitization route has come down from 54 to 45 per cent in the first year of the contract. The management has explained that this was due to high interest rate and the additional cash cover required with the banks. It expects the securitization to go back to 54 per cent as and when the interest cycles move in the reverse direction. However, although the interest rates have peaked, we don’t expect the interest cycle to move in a downward direction in the near term till march which remains a cause for concern in the coming quarter.
Going forward, given such anxiety points as higher interest cost, pressure on margins, increasing competition and lower incremental additions in the number of schools under Smart Class, the company may not be able to post the same kind of margins and growth which it has reported historically. Having already given an ‘avoid’ rating in our latest magazine (Vol XXVII, No 5 dated February 26, 2012) we continue to urge investors to stay away from the counter.