Educomp Solutions Limited (ESL) BSE Code: 532696 NSE Code: EDUCOMP

EDUCATE INDIA, MAKE INDIA SHINE.

CMP (BSE): Rs. 193.20

CMP (NSE): Rs. 193.05

Industry: Education

India is blessed with a favourable demography and this demographic dividend has to be converted into a virtuous cycle of acceleration in growth and Education is one of the critical inputs to securing this demographic dividend.

Gone are the days when man had just 3 basic needs - Food, Shelter and Clothing. In today's competitive world, there is an addition to this basic needs, the 4th one being Education. Education is the backbone of any society or country. Infrastructure growth depends on efficient, effective educational system. In this era, where technology plays a vital role, Educomp Solutions Limited (ESL) is a result of efforts taken to combine technology and teaching & learning and be an integral part of it.

Educomp Solutions Limited (ESL), founded in 1994 is a globally diversified education solutions provider and the largest technology driven innovation education company in India. ESL empowers over 19.4 million learners and educators across 29000 schools (over 5.3 million students in over 10000 pvt schools and over 6 million students in over 11000 government schools) to imagine, think and create a better future. This makes ESL one of the largest education companies in the world, in terms of customer reach.

ESL today has 27 offices worldwide including an office each in Canada and Sri Lanka, two in Singapore, three in US and 20 in India. ESL runs over 840 pre-schools, 69 KG to 12th schools, seven colleges, one higher education campus, 343 vocational training centres, 74 test prep centres, and have around 4.2 million users of our online learning properties. ESL is India's leader of K-12 education, led by their competency in curriculum design and teacher education space to develop applications and products. It has always been in the forefront of creating unique innovative solutions for the Indian education market. Their presence in the education verticals is marked with technology-enabled products, high quality people, structured processes, and entrepreneurial leadership that come together to deliver unmatched value to their customers.

Educomp today reaches out to a total of ~15.5 million learners including 4.3 million in SmartClass, 5.8 million in ICT, 50,000 in pre-schools and 25,000 in the high school space. In addition to this, ESL has 339 centres for vocational and test preparation business, ~800 preschools, 56 operational high schools, 7 colleges and 2.9 million users of its various online businesses.

Certain facts about the Indian Education Sector:

• FDI inflows in the education sector during the period April 2000 to September 2011, stood at USD 464.98 million, according to the Department of Industrial Policy and Promotion (DIPP).
• According to 2011 census, the total literacy rate in India is 74.04%. The female literacy rate is 65.46% and male literacy rate is 82.14%.
• The country has 544 university level institutions, which includes 261 state universities, 73 state private institutions, 42 central universities, 130 deemed universities, 33 institutions of national importance and five institutions established under various state legislations, according to the Ministry of Human Resource Development (HRD).
• The country has around 79 centrally funded institutions, which includes 15 Indian Institutes of Technology (IIT's), 11 Indian Institutes of Management (IIM's) and 30 National Institutes of Technology (NIT's).

Investment Opportunities:

• According to a report published by Grant Thorton, the primary and secondary education in India is expected to reach USD 50 billion in 2015 from USD 24.5 billion in 2008, growing at an estimated CAGR of 14%.
• According to another report by Ernst & Young, the higher education sector in India is expected to witness a growth of 18% CAGR till 2020. At present, the sector witnesses spends of almost USD 10.4 billion.
• The vocational segment has emerged as a USD 2.6 billion market that is expected to grow rapidly at a CAGR of 25% till 2015.
• According to KPMG, the country's fastest growing education sector holds a potential to attract a USD 100 billion investment over the next 5 years driven by demand for skilled professionals and need for infrastructure development.

Initiatives by the Government:

(1) The Indian government is focusing on improvement and expanding the quality of education in the country. To this end, it has made significant budgetary allocation and has framed policies to serve the education sector in India. Government spending on education is set to increase from 7.7% of gross budgetary support in the 10th five year plan to more than 19% in the 11th five year plan. Even in this budget, emphasis had been made on education, where in the budget for Sarva Shikshya Abhiyan has increased and runs into a sizeable amount of 40 - 45000 crores. And with ESL being the largest company in the education space, a large slice of that budgeted amount seems to be enjoyed by it.

(2) Recently significant infrastructure and technological bottlenecks in the education system has led to increasing Public - Private Partnerships (PPP) in this sector in India, similar to those in several other developed education markets outside India. The government has prepared a draft for setting up 2500 schools under PPP model with a contract of 10 yrs between government and the private schools.

(3) Government of India has taken various initiatives to increase the scalability and improve the infrastructure for primary education. It has implemented various programmes like Sarva Shiksha Abhiyan, Mid Day Meal Scheme and National Literacy Mission. To meet the growing demand for access to secondary education, some of the major initiatives taken by the government during the 11th five year plan include the schemes of Rashtriya Madhyamik Shiksha Abhiyan, setting up of 6000 model schools, National Means cum Merit Scholarship scheme, etc.

Opportunities that lie ahead of ESL:

(1) India is projected to have the world's largest population under 20 yrs - 468 million in 2015 which is 40% higher than China's population under 20 yrs at 318 million. Also India is expected to grow at 8.5% - 9.5% over 2011-12 and accelerate to a sustainable 9-10% by 2013-2015 with improvement in demographics being the key growth factor. However favourable demographics need to be converted into a virtuous cycle of acceleration in growth and education is one of the critical inputs to securing this demographic dividend.

(2) Indian Education is characterized by low enrolment rates and inefficient public spend. In the school going bracket, only 212 million of the eligible 360 million are in school. The gap is due to a combination of reasons including children not enrolled in schools, high dropout ratio at different levels and the demand supply gap. The poor quality of education in public institutions is driving the demand towards private education institutes. The number of private K-12 schools grew at double digit growth rates over the last decade. Also, the average enrolments per private schools stood at 288 as against 132 in public schools in 2009-10.

(3) India has a very poor gross enrolment ratio in higher education. Not only is India much below developed nations, it is also below the world average when it comes to sending its students for higher education. It should be noted that the high skill sets that accrue to its citizens as a result of higher education is of paramount importance for the Indian growth story to continue. Failing this, we may not reach our desired goals in developing our economy further. Thus a lot can be done to improve the overall gross enrolment ratio in higher education.

(4) Indian Education Sector is one of the largest education markets (in terms of potential number of students) in the world. The potential education market of India comprises of 464 million people (in the age group of 5-24 yrs in 2006), approximately 42% of the total population. India's $60bn education market is a large and underpenetrated industry with significant upside for future growth. While India spends 4.1% of GDP on education, literacy rates remain low at 62-63% of the adult population, compared to 90-95% in other emerging markets such as China and Brazil.

(5) Households in India spend less than 5% of their disposable income on education compared to 12% in the US, and 15% in China. However, household spending on education has grown rapidly , increasing at a CAGR of 16% in 2002-2008 to USD 15.6 billion. However with structural changes in the Indian economy such as urbanisation and rising disposable income with increasing emphasis on education by parents, the household expenditure on education is expected to grow at a faster pace in FY10-25.

(6) India is migrating towards a service driven economy with the contribution of services and industry sectors to GDP increasing year on year. In such a knowledge based environment, education has emerged as a key determinant of individual success and is driving increasing education spend.

ESL's Presence:

Exploiting all these immense opportunities, ESL is the only education company worldwide that is present across the entire education life-cycle of their customers, the students. They have

• Pre School Initiative (2-5 yrs): Euro Kids, Little Millennium
• High School Initiative (5-18 yrs): Educomp SmartClass (digital content solutions), The Millenium School, Takshila School, Universal Academy, Le Mont (high schools) and they even have professional development.
• Higher & Vocational Initiatives (18-21 yrs): Raffles Millennium International (for higher education) and IndiaCan (for vocational education).
• Online & Supplemental Initiatives (5-25 yrs): Eduignite (for assessment & counselling), LearningHour & Mathguru (for tutoring service), GATEFORUM, EducompLeap & Vidyamandir classes( for test preperation), EducompOnline WiZiQ (for e-learning platforms) and StudyPlaces.com & learnhub (for admission advisory services).

ESL's School Learning Solutions:

Educomp smartclass: (for private schools): It is first of its kind, teacher led educational content based solution that has dramatically improved learning outcomes in private schools. Powered by India's largest digital content library of curriculum-mapped, multimedia rich, 3D content, smartclass is today a market leader in this domain. The number of Educomp smartclass enabled schools grows at almost 10 schools a day. Recently they have launched new improved version of Educomp smartclass and have raised the barriers to entry for competition even higher. The smartclass class transformation system (or CTS) and the smartclass digital teaching system (or DTS) are the biggest and the most innovative initiatives in the space of digital classroom content and digital classroom hardware respectively.

Edureach (for government schools): Edureach works closely with various state and central government agencies, ministry of IT and HRD, and government of other countries to bring a lasting transformation in education systems. We have a track record of implementing large scale Pubic-Private-Partnership projects. Cumulatively over the years Edureach has worked with over 35000 government schools impacting lives of over 17.5 million students in often hard to reach remote areas of the country. As part of this program, ESL sets up computer labs in government schools, provides multimedia content in regional language, testing and certification in computer education, full time assistants, as well as teacher training, monitoring and supervision. At present, ESL is partnering with 16 state governments covering 11000 government schools and benefiting over 6 million students. These projects give Edureach an opportunity to ignite the desire for learning in those for whom staying in school is in itself a struggle.

ESL's New Developments:

• In the international market, ESL has signed an exclusive agreement with China Distance Learning, a leading education company in China, to provide their SmartClass content in the Chinese market in the Mandarin language.
• They have become the largest company in India for CA training by using their breakthrough VSAT model technology.
• They have also received AICTE license to launch engineering and PGDM programs.

ESL's total equity base stands at Rs. 19.11 crore and has total reserves of about Rs. 2138.76 crores. Comapared to this, its total debt stands at about Rs. 1437.34 crores, which brings its debt equity ratio to about 0.67, which is quite within the safety zone of 2.

ESL's interest outgo (TTM) amounts to a total of Rs. 129.98 cr. Comparing this to its PBIT (TTM) of Rs. 554.42 cr, ESL's interest coverage ratio stands at 4.26 times, which is good enough and shows ESL's ability to pay off its debt.

Its consolidated EPS(TTM) stands at Rs. 23.67. Comparing this to its CMP, the PE comes to about 6.92 in an industry whose average PE stands at about 10.76. Its book Value (BV) stands at Rs. 167.32. Comparing the CMP to its BV, the P/BV ratio comes to about 1.15 times.

Education sector is one of the profitable sector with very high profit margins. ESL's gross profit margin stands at 45.45% and its net profit margin stands at 37.07%. In addition to being profitable, education sector also is immune to recession. It is not heavily affected in times of financial crisis. The cash flow in education is always assured and schools are not dependent on financing their working capital. This makes the education sector as one of the most promising sector.

The big dampener wrt ESL is that it is not a very good dividend payer. Its dividend yield at the CMP stands at almost 0.31%. The only reason for this poor dividend payout, it because most of the profits are reaped back into the company and is utilized to exploit the massive opportunity that lies in front of the entire Indian education sector. This current low dividend payout will definitely be rewarded by massive growth in the future.

ESL's market penetration, even in their biggest businesses is in the low single digits in each of their businesses. There is a long runway of opportunities ahead of them. Even after years of undisputed leadership in the Education sector, their innovation engine continues to churn revolutionary products to solve the key classroom problems and add value to the teaching experience where it is most needed.

Thus here is a company that is a market leader in a sector where a mammoth of opportunities lie ahead and is available at good attractive valuations. Any downside from this point will just make this investment opportunity even more attractive. So take your calls accordingly.

Happy Investing,

Purvi P. Shah