Educomp’s Earnings Review For June Quarter 2012

Educomp Solutions Ltd, India’s largest education company, reported subdued result for the June quarter 2012. The net sales of the company increased by 11.8 per cent on YoY basis to Rs 207.68 crore while the net profit took a strong beating and was down by 73.6 per cent to Rs 11.48 crore.  The decline in the net profit was on the back of forex loss of Rs 18 crore and increase in the employee and interest cost up by 14 per cent and 32 per cent on YoY basis.  

The EBITDA margin of the company has declined by 2000 bps to 22 per cent on a YoY basis. The margins have been impacted on the back of a fall in the pricing of its Smart Class product (contributes 50 per cent of the total revenue) which has come down from Rs 3.4 lakhs to Rs 3.2 lakhs per school against the same period last year.

On a segmental basis the smart class business revenue declined by 3 per cent on YoY basis to Rs 15 crore and EBIT margin declined to 36 per cent from 47 per cent in the same period last year. This decline in the total revenue was on account of the decline in the additions of the average number of classrooms from 8 per schools  to 7.2/schools. This was coupled with the decline in the smart class pricing from Rs 3.4 lakh to Rs 3.2 lakh per classroom. The other businesses such as higher learning and online division continue to report losses. As per the management both these business are under investment stage and will take some more time to turn these business into profitable ventures.  However its K12 business has done well during the quarter. The revenue of the division grew by 16 per cent while the EBIT has grown by 24 per cent on YOY basis.  

The company recently raised USD 155 million from International Finance Corporation to repay its FCCB obligation  of USD 78.5 million and redemption premium of approximately USD 32.25 million. The net debt after raising 155 USD and paying off the FCCB the net debt of the company during the quarter stood at Rs 1909.1 crore against that of 1723.3 crore that converts into a debt to equity of 1.29 against that of 1.14 in the March quarter 2012. The high debt is resulting into higher interest outgo thereby hurting the bottomline of the company.  

As mentioned in all our updates, we believe 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.