Educomp Solutions: Recommendation Review
6/28/2012 9:00 PM Thursday
Educomp Solutions, an educational service and support provider, has been one of the most beaten down stocks in the past one year. The scrip has fallen by almost 70 per cent to Rs 169 in the same period. In Dalal Street Investment Journal Vol. 27, Issue No. 5 (dated 26 February, 2012), when the scrip was trading at a price of Rs 236, we had asked investors to avoid the counter. There were many reasons for this.
Educomp has been suffering due to various company-specific issues. For one, the company has been facing serious allegations on the corporate governance front. According to a media report, Espirito Santo, the equities research arm of a Portuguese investment bank, has raised doubts about the corporate practices within the company. The firm recently raised an alarm about auditor independence and flagged the resignation of four company secretaries at EduSmart, (third-party vendor for Smart Class), an entity that contributes nearly 60-65 per cent to Educomp’s revenue and profits. Moreover, it also questioned the accounting practices of the company, with some expenses incurred by EduSmart being taken onto the books of Educomp.
Apart from these factors, Educomp has also been in the news for its swollen balance sheet and weak financial performance. It had a consolidated debt-to-equity ratio of 1.26 as on 31st March, 2012, which forced the company to reduce its capex spending from Rs 800 crore in FY11 to Rs 479 crore in FY12 in order to maintain healthy cash flows. The debtor receivables are high at 255 days for FY12. Further, the company has an FCCB redemption obligation due in July 2012. With the rupee still hovering around the 56-57 levels, this could pose a big problem.
We believe that with new entrants in the sector, the incremental growth will not be sustainable and the margins will also see some erosion. Further, any slowdown in the Smart Class additions can result in slower revenue growth for the company going forward. On the valuations front, Educomp is currently trading at a PE of 6.91x its TTM EPS of Rs 19.68, which looks decent as the counter has been beaten down heavily over the past year. However, in view of the concerns, we reiterate our ‘avoid’ call on the scrip.
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