CMP Rs714, Target Price Rs817, Upside 14.4%
Educomp Solutions has grown rapidly to become India’s largest education company with presence across all segments of educational system, both formal and informal, from pre-schools to professional and vocational education. In most segments, Educomp is the market leader with no serious competition. Over the past 3-4 years, company has aggressively added scale in incumbent segments and acquired scale in new segments thereby substantially increasing its addressable market opportunity.
After recording exceptional 125% revenue CAGR over FY06-09, Educomp is estimated to witness a robust 44% CAGR in revenues (on a higher base) over FY09-12. Company’s operating margin is expected to improve by 300-400bps over FY10-12 on account of profitability improvement in various business segments. Resultantly, earnings are expected to record a higher-than-revenue CAGR of 60% over FY09-12.
We expect Educomp to become FCF positive from FY11 as the new securitization model in Smart Class business would lead to higher cash profits generation, contraction in working capital cycle and reduction in capex intensity. This would eliminate the risk of further equity dilution to fund growth. Based on estimated strong earnings growth and dearth of other similar investment options in education space, we recommend BUY on Educomp with 1-year target price of Rs817 (15x FY12E EPS). However, low independence and small size of the Board is a key concern.