JONY 2008 India Education Sector Report

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Executive Summary Industry Human Resources - Powering Indias competitiveness in Global Economy Government initiatives to raise literacy rates in India School Infrastructure Not up to the mark Public Private Partnership (PPP) The way ahead The role of private companies and educators Indian IT Training Industry Tracking the IT Industry with a lag Corporate Training Market Conclusion Companies Educomp Solutions Everonn Systems India NIIT Limited 26 46 60 2 4 5 6 10 15 16 18 23 24
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Executive Summary
"We don't need no education", sang the band Pink Floyd way back in the 70's in the famous super-hit album, "The Wall". While this may sound all right for idealistic rebels, it certainly does not apply to the current Indian scenario. India's GDP has grown at a compounded rate (CAGR) of around 8.5% over FY2003-08, growing at over 8% in four of the five fiscals. GDP growth in FY2007 accelerated and came in at an impressive 9.6%. Even for FY2008, India logged in GDP growth of 9%, commendable by any standards. This makes it a hat-trick for India's GDP, which has now recorded in excess of 9% GDP growth in each of the last three fiscals. A robust performance by the Services Sector, which has been clocking strong double-digit growth rates over the past few years, has been primarily responsible for the high GDP growth rates recorded. The Manufacturing Sector has also grown at a decent rate in excess of 6-7% annually. This fantastic growth rate has been achieved due to the humongous talent pool available in India, which is a subset of its entire population. The biggest asset of any country is its people. India has a population if 108cr, the second-largest in the world. However, India's literacy rate is just 61% and it ranks a disappointing 172nd in the world on this front. Thus, there is a short supply of educated manpower in India. In fact, there is a huge requirement of talent in the fields of Hospitality, IT Services, Retail, Financial Services and Aviation, to name a few. We believe India will have to significantly gear up its educational infrastructure to meet this demand. Education is primarily handled by the government through its school infrastructure and large Union Budget outlays. The Indian Government targets to guarantee elementary education to every child between the age of 6 and 14 years and for this purpose, it expects to increase access to education as well as improve the quality of education being provided. It has been laying greater emphasis on the quality of education imparted in the country since the Eleventh Five-Year Plan. The quality of education has assumed importance in light of the poor academic achievement by the students. We believe poor academic performance by students and lack of proper training in soft skills would reduce their employability post passing out of the education system. In line with this, to improve access to and taking care of the quality aspect of education, the government has introduced programs like the Sarva Shiksha Abhiyan (SSA), Mid-day meal schemes and Kasturba Gandhi Balika Vidyalayas. These schemes stress on the following:
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Increase the number of schools to provide access to a larger population, Improve infrastructure of existing and new schools by building more classrooms and amenities, Increase enrolment rates and reduce dropout rates, Reduce gender inequality, Recruit more teachers and train them to impart education more effectively, and Improve the content and quality of education.
z z z z
The government is also looking at the private sector in its quest to further improve the quality of education through Public-Private Partnership (PPP). The government targets to provide IT-based education to a majority of Indias student population through its PPP initiative. Private companies
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are working on providing infrastructure in the form of computer labs and content at government schools apart from training teachers to use their content and infrastructure. Training is also being provided to the teachers to enhance their education imparting capabilities. Employability of manpower also depends a lot on soft skills like communication skills, IT skills, computer proficiency and so on. This requirement is currently satisfied, to a large extent, by private mentoring institutions and industries themselves by providing short and medium-term courses and induction trainings. However, there needs to be a more intimate linkage between academia and industry to solve this problem. Private companies like Everonn and NIIT are competing for a piece of this business through their innovative products. As per NASSCOM, going ahead, there will be a requirement for 2.3mn IT professionals by 2010 and a shortage of 5,00,000 personnel required. It is the quality of personnel that needs to be focused on rather than the absolute numbers. This reflects the strong growth potential that the IT Training Industry has and its ever-increasing relevance for the IT Sector. A large part of a students time is spent at post-school mentoring institutions, as large class sizes in private schools hamper teachers from giving individual attention to students. This consumes a lot of time, effort and money. Companies like Educomp and Everonn have introduced innovative products to get a slice of this market. These products enjoy a distinct advantage over the current ones on account of being available 24/7 and the student not being required to travel to the location where the classes are held. On the flip side, most of these products require broadband connectivity, the availability of which is very poor in India. The total number of broadband subscribers stood at a mere 4.01mn at the end of April 2008, implying penetration of a fairly pathetic 0.35%. Hence, for these products to gain greater acceptability, India's broadband penetration will have to improve substantially. India has approximately 50,000 private schools, present generally in urban clusters. These schools share a sizable load of educating the Indian student population and satisfy the demand for quality of education and infrastructure by the Indian middle and elite class. To provide quality education, these schools are on always on the look-out for better content, which is also provided by the afore-mentioned education companies. The Union Budget 2008-09 has chalked out a higher allocation for the Education System, up 20% to Rs34,400cr during FY2009. The allocation is expected to continue to increase in the foreseeable future as well. The government is also intent on improving the levels and quality of education in India. As for Indias middle class households, we believe this segment of society would continue to spend a large part of its income to fund the education (with an eye on quality) of its children. Overall, we believe Budget allocations and high spending by the Indian middle class on education are expected to fuel growth of private education companies in India.
Comparative Valuations
Price Company Educomp NIIT* Everonn Recos Buy Accumulate Neutral (Rs) 3,496 109 624 MCap Target FY08 103.9 25.0 61.5 P/E (x) FY09E 53.4 17.4 56.3 FY10E 32.1 12.5 43.7 FY08 49.9 20.4 25.8 EV/EBITDA (x) FY09E 26.7 13.5 17.6 FY10E 15.9 9.2 11.8 FY08 21.8 21.3 27.9 RoE (%) FY09E 27.0 25.9 8.4 FY10E 31.2 29.6 9.8 FY08 21.9 9.9 20.6 RoCE(%) FY09E 26.1 14.7 8.9 FY10E 30.4 19.7 10.1 (Rs cr) Price (Rs) 6,041 1,797 865 4,051 123 -
Source: Company, Angel Research; * For NIIT Limited, FY08 results have not yet been declared.
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Human Resources - Powering Indias competitiveness in Global Economy

India's GDP has been on a strong growth trajectory in the past couple of years. The country's GDP has clocked a compounded rate (CAGR) GDP growth of around 8.5% over FY2003-08, growing at over 8% in four of the five fiscals. In FY2007, India's GDP registered accelerated growth in at an impressive 9.6%. In FY2008 also, GDP growth came in at 9%, which though slightly slower on a yoy basis, still signals strong economic expansion.
Exhibit 1: India's GDP - On a strong growth trajectory

(%) 10 9 8 7 6 5 FY04
Source: Angel Research
FY05
FY06
FY07
FY08
The Services Sector has been the key component of this strong growth clocking robust double-digit growth rates over the past few years. The Manufacturing Sector has also managed to register decent growth rates in excess of 6-7% annually. But clearly, it has been the Services Sector that has contributed the maximum to Indias economic growth and currently accounts for over 55% of GDP. Sectors like IT-ITES, Hospitality, Tourism, Retail and Aviation have also clocked robust growth and are expected to maintain the tempo going ahead as well. The human resource-intensive Services Sector, as mentioned earlier, has been responsible for such growth. It has been due mainly to its human resource base that India is getting its rightful place in the sun in the global economy. The Services Sector has led the way forward, with bright engineers, chartered accountants, architects and MBAs all contributing their share to the strong growth being clocked by India. However, it should be noted that all is not hunky-dory with all segments of the Indian economy. Beneath the good growth numbers, lies a harsh and potentially lethal truth the dismal condition of the countrys education system. Even as young Indians today are enjoying prosperity of an unprecedented magnitude, leading to increased consumerism, buying everything from FMCG products, consumer durables, cars, mobile services to financial services, it is the sustainability of this prosperity for future generations that is under a cloud.
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A strong grassroots-level educational infrastructure, which helps in the creation of a well-rounded human resource base, is important to sustain strong GDP growth rates going ahead. A resilient education system would facilitate a steady supply of high quality personnel who would join the workforce in future years. Thus, the educational system acts as the creator of a strong pipeline of talent, enabling sustainable and inclusive economic growth.
Educating India's population - A humungous task

India has the largest student population in the world with over 13.5cr pupils in primary education followed by China at over 12.1cr pupils at this level. India has the second-largest population in the world of over 110cr people (1.1bn), with a literacy rate of 61% and ranks a disappointing 172nd on this front. Educating such a large population is not only an expensive task but also a very difficult one. This task is being handled primarily by the government through its school infrastructure and large Budgetary outlays. In the last five years, the government has been focusing on the Education Sector through increased fund allocations. In the current year also, the government has increased the allocation by 20% from Rs28,674cr to Rs34,400cr. This amount would be spent under various schemes like the Sarva Shiksha Abhiyan (SSA), the Mid-day meal scheme, Kasturba Gandhi Balika Vidyalaya and teacher's education. The allocation for SSA is Rs13,100cr, the Mid-day meal scheme would be provided Rs8,000cr and Rs4,554cr would be allocated to secondary education. In the current Five-Year Plan period, the focus of SSA would shift from access and infrastructure to enhancing retention and improving the quality of learning. (Source: Statistics from Nationmaster and Union Budget 2008-09)
Intent/focus of the Government

The government intends to raise the general literacy rate in India in line with which, it introduced the Right to Education Bill 2005. This Bill seeks to guarantee elementary education to every child between the age of 6 and 14 years. It also states that every child in the specified age gets enrolment in a school in the vicinity of their domicile. The Bill promotes the usage of regional language as the medium of education by stating that as far as possible, a child should be instructed in his/her mother tongue at least for the first five years of the elementary stage.
Government initiatives to raise literacy rates in India

Sarva Shiksha Abhiyan (SSA)
The SSA (education for all) is the prime initiative undertaken by the Central Government of India to improve the overall literacy levels and quality of education in the country. SSA was undertaken in the Eleventh Five-year Plan. SSA is an action plan whereby the government would incorporate the following:
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z z z z
Increase the availability of schools (capacity creation) through opening of new schools and construction of new classes; Improve the standards of education (quality of learning) by enhancing the skill levels of teachers, recruiting more teachers, providing better courseware and syllabus; Attract more students to schools by implementation of the Mid-day meal scheme, which will help provide better nutrition levels to children, and Create an environment more conducive to imparting better education to every one who needs to be educated.
SSA - Progress against key targets

The government has set aggressive targets for enhancing the resources available to provide education. The targets include setting up new schools, increasing the number of classes and teachers, and providing training to the existing teachers. The performance against the targets can be gauged from Exhibit 2.
Exhibit 2: SSA - Performance round-up

Item Opening of New Schools Teachers appointed Construction of a. School Buildings b. Additional classrooms Enrolment in EGS/AIE Centers Children receiving free textbooks Block level Cluster level Teachers trained 1,20,629 3,29,690 87,00,000 6.14cr 7,422 70,735 30,53,285 Target 1,57,967 7,72,345 Comp* 71,143 1,55,814 Achievement upto 1,29,893 5,87,388 IP* 31,587 1,70,225 5.35cr 7,201 66,140 23,47,017 % Achievement 82% 76% Comp* 58% 47% 71% 87% 97% 94% 77% IP* 85% 99%
63,00,000
Functional Academic Resource Centers
Source: Ministry of Human Resource Development (MHRD); * Completed and In-Progress
There has been significant growth in infrastructure, but the implementation process has been slow and a huge gap still remains. The very nature of this mission is to complete the task of improving the literacy levels of India in a time-bound manner. SSA has succeeded in helping the states in largely achieving the basic task of providing infrastructure and creating systems and processes for improved educational attainments. As quality and equity are two main thrust areas of SSA, the process improvements effected by SSA need to be maintained in the future to continue the improvement process of education in India. As per SSA estimates, there is a shortfall of approximately 1.25lakh upper primary schools in India. The demand for upper primary school would be greater than the demand for primary schools.
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Kasturba Gandhi Balika Vidyalayas

India faces discrimination in the field of education based on the gender of the child. The parents are more interested in getting their male children educated rather than the female children. This has led to a lower literacy rate among females compared to males. In a country where we have a dismal literacy rate vis-a-vis world standards, this discrimination based on the gender paints an even worse picture. The gender disparity at the primary levels is reasonably low and has been decreasing consistently. It is quite high at the upper primary level. Such disparity at the higher level has been declining but at a slower pace. The government is trying to reduce this anomaly and has set up approximately 800 Kasturba Gandhi Balika Vidyalayas. Also, as part of the SSA, an additional 410 such vidyalayas are to be set up in educationally backward areas. This move should help in improving the educational levels for females in India.
Exhibit 3: Gender disparity in Education (%)

Level Primary (Grades I-IV) Upper Primary (Grades V-VIII) Elementary (Grades I-VIII)
Source: DISE
2002-03 5.5 10.7 6.8
2003-04 5.1 9.4 6.2
2004-05 5.1 8.9 6.1
2005-06 4.2 8.8 5.4
Mid-day meal scheme

As per certain responses from the teachers at schools in Rajasthan, the Scheme has boosted levels enrolments and enhanced school attendance The Mid-day meal scheme was introduced in India in 1925 by the Madras Municipal Corporation for disadvantaged children. It was later undertaken by the states of Gujarat, Kerala and Tamil Nadu and the union territory of Pondicherry. The Scheme states that a hungry child will not be able to cope up with studies and would subsequently drop out of the school. Even if the child continues with school, he/she would lag behind. Hence, to improve the standard of education, to attract more children to schools and reduce the drop out rates, the government started the Mid-day meal scheme in India for children of class I-IV in the government-run schools. To support this scheme, the government provides free food grains to the schools along with transportation in the form of subsidy, cost of cooking and provision of essential infrastructure for cooking. As per certain responses from the teachers at schools in Rajasthan, the Scheme has boosted enrolments and enhanced school attendance levels. In the recent Budget speech, the Finance Minister proposed to increase the coverage of the Mid-day meal scheme to the upper primary classes (V-VIII) in the government schools across the country. This step would cover additional 2.5cr children taking the total children under its coverage to 13.9cr.
Funding of education schemes Implementation of Education Cess

A significant 44% of the total allocation of Rs34,400cr for the Education Sector The government has imposed an Education cess on income tax to fund its various programs, which target to improve the quality and reach of education in India. This cess is used to fund programs like the SSA. Through the collection of Education cess, Rs8,500-9,000cr was raised in FY2007. We estimate Rs14,000-15,000cr to be collected during FY2008, a significant 44% of the
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total allocation of Rs34,400cr for the Education Sector. This will go a long way in improving literacy levels in India and enhancing the implementation and execution of various schemes undertaken by the government to increase the reach and improve the quality of education in India. Collection of Education cess will also help in keeping the cost of education in India low at all levels including schools and colleges, as subsidies and aids are provided to a large number of these institutions to improve accessibility for the lower and middle class families to educate their children.
Access to Education
In terms of habitations, nearly 87% had access to primary schooling facilities within a vicinity of one kilometer The first step towards building the base for a well-rounded human resource pool is undoubtedly the creation of infrastructure for providing access to elementary education. In this regard, the governments performance has been reasonable. As per the All-India School Education Survey conducted by the government (Ministry of Human Resource Development) through the National Council of Educational Research and Training (NCERT), 98.5% of the rural population was served by primary schools (Grades I-IV) and had access to primary schools / sections within one kilometer from their habitations in 2002-03. In terms of habitations, nearly 87% had access to primary schooling facilities within a vicinity of one kilometer. During the Tenth Plan, over 0.13mn primary schools were sanctioned and it is estimated that over 96% of habitations have a primary school within a vicinity of one km.
Exhibit 4: Access to Primary education - Good coverage

1986 Rural population Population served by primary schools* Percentage (%) Rural habitations Habitations served by primary schools* Percentage (%) 593.6mn 560.6mn 94.5 0.98mn 0.82mn 83.8 1993 659.7mn 618.5mn 93.8 1.06mn 0.88mn 83.4 2002-03 742.5mn 731.6mn 98.5 1.23mn 1.07mn 87.0
Source: MHRD, Angel Research; * Population / habitations having access to primary schools within a vicinity of one kilometer
Evidently, over the years, the percentage of rural population having access to primary schooling facilities has increased, reflecting good progress. However, it should be noted that the progress on providing facilities in the upper primary grades (Grades V-VIII) has not been quite as satisfactory. Just 78% of total habitations had access to such facilities within a vicinity of three km in 2002-03. Even though this figure has improved over the years, it is still far from satisfactory. In terms of population coverage also, even as the percentage population having access to these facilities within a range of three km stood at over 86% in 2002-03, it was still much lower than the percentage of population having access to primary schooling facilities.
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Exhibit 5: Access to Upper Primary education - Not satisfactory

1986 Rural population Population served by upper primary schools* Percentage (%) Rural habitations Habitations served by upper primary schools* Percentage (%) 593.6mn 498.4mn 84.0 0.98mn 0.73mn 74.0 1993 659.7mn 560.8mn 85.0 1.06mn 0.81mn 76.2 2002-03 742.5mn 639.6mn 86.1 1.23mn 0.96mn 78.1
Source: MHRD, Angel Research; * Population / habitations having access to upper primary schools within a vicinity of 3 kilometers
Therefore, in terms of access to primary and upper primary educational facilities, the progress on the upper primary front has not been satisfactory, even as access to primary education in terms of percentage population coverage seems to be satisfactory. Going ahead, there is a need to add more upper primary schools to bring down the ratio of primary to upper primary schools. This ratio stood at 2.5:1 at the end of 2005-06, vis--vis the 2:1 norm specified in the SSA.
Exhibit 6: Primary-Upper Primary ratio - Work yet to be done

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
Source: MHRD, Angel Research
Primary schools (P) 6,41,695 6,38,738 6,64,041 6,51,382 7,10,471 7,67,520
Upper primary schools (UP) 1,98,004 2,06,269 2,19,626 2,45,274 2,62,649 2,74,731
P:UP 3.2 3.1 3.0 2.7 2.7 2.8
School Infrastructure Not up to the mark

There was a shortage of over 6lakh class rooms during 2006-07 Information collected through the District Information System for Educaion (DISE) suggests that 3% of the primary schools and 2.4% of upper primary schools did not have any building in 2005-06. Further, there is a severe shortage of classrooms in schools where the school building is present. There was a shortage of over 6lakh class rooms during 2006-07. In 2005-06, a significant 44.6% of primary schools and 15.3% of upper primary schools did not have any toilet at all. Similar proportion of schools, both in the primary and upper primary stages, did not have any boundary wall. Drinking water facilities were not available in 15.1% primary and 4.8% upper primary schools. These are very important issues and call for adequate attention to ensure availability of the required physical infrastructure in the schooling system. Such lack of facilities would consequently hamper both enrolments as well as the quality of education.
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Exhibit 7: Schools without basic facilities

% schools without facilities like Building Toilets Boundary walls Drinking water
Source: DISE data
Primary 2004-05 3.5 51.4 50.4 16.3 2005-06 3.0 44.6 50.8 15.1
Upper Primary 2004-05 2.8 16.8 15.7 4.7 2005-06 2.4 15.3 16.5 4.8
Enrolments Good growth

While capacity creation is the first step needed to drive the process of development of quality human resources, the actual enrolment of students and consequent effective utilisation of that infrastructure is a reflection of the actual coverage of the education system. Student enrolments have grown at a good rate of 3.2% CAGR over 1999-2000 to 2004-05 for primary enrolments, and 3.9% for upper primary enrolments.
Exhibit 8: Student enrolments

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
Primary enrolments (Mn) 113.6 113.8 113.9 122.4 128.3 131.7
Upper primary enrolments (Mn) 42.1 42.8 44.8 46.9 48.7 51.7
Enrolment ratios Rapidly on the rise

GERs for the total elementary system have been on the rise, hitting nearly 95% in 2004-05 A key ratio for assessing the actual extent of access of children is the enrolment ratio. The Gross Enrolment Ratio (GER) is defined as the ratio of gross enrolment of students to the proportion of total children in the relevant age group. It is over 100% in some cases on account of cases of repeaters and some children being either over-aged or under-aged. It is clear that the GER for upper primary grades is far less satisfactory than that for primary grades, reflecting yet again the pressing need for capacity creation in the upper primary segment. Overall GERs for the total elementary system have been on the rise, hitting nearly 95% in 2004-05.
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Exhibit 9: GERs - Scope for significant improvement at the Upper Primary level
Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
Primary GER (%) 94.9 96.8 93.0 95.6 98.3 108.6
Upper Primary GER (%) 58.8 65.3 69.6 56.3 62.5 70.5
Elementary (Grades I-VIII) 81.3 86.8 85.6 81.1 84.9 94.2
Out-of-school children have fallen significantly from 44mn in 2000-01 to 7mn in 2006-07
Net Enrolment Ratio (NER) is calculated as a percentage of net enrolment of children of the right age group to the total children in the relevant age group, implying the extent of access of children in the target age group. In 2003-04, 16% of the children in the Primary grades were under or over-aged, whereas the figure for Upper Primary stood at 23%. This improved slightly to 14% and 20% respectively in 2004-05. Thus, adjusting for these figures, the NER stood at 82.5% in 2003-04 for the Primary section, whereas for the Upper Primary section, the figure stood at less than 40%, an extremely disappointing performance. In 2004-05, the respective figures improved to 94.3% and 50.7%. This clearly reflects the urgency with which the government needs to take focused measures to improve these metrics at the Upper Primary level. However, a bright spot here is the fact that the total number of out-of-school children has fallen significantly from 44mn in 2000-01 to 7mn in 2006-07, which we believe is partly a result of focused efforts taken by the government to provide increased access to education and higher enrolments.
Dropout rates A measure of the real effectiveness of the system

A significant 50% of children exit the mainstream educational system over time While the importance of capacity creation and student intake as the building blocks for sustainable development is clearly evident, the true test of the effectiveness of the Education System lies in the student dropout rates. Dropout rate is defined as the proportion of children that cease to remain enrolled in the schooling system. Even as the overall dropout rates have been consistently witnessing a declining trend over the years, the overall level is still very high over 28% in 2004-05 for primary and a high 50% for the entire elementary education system, indicating that a significant number of children exit the mainstream educational system over time after enrolment in Grade I. This, we believe, is a matter of serious concern and can be a major reason for the government failing to achieve inclusive growth, leading to increasing social unrest, given the exclusion of these people from the economic prosperity of the country.
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Exhibit 10: Dropout rates

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
Class I-V (%) 40.3 40.7 39.0 34.9 31.5 28.5
Class I-VIII (%) 54.5 53.7 54.6 52.8 52.3 50.4
Performance of students A metric to gauge quality of education imparted

The quality of education provided also needs to be gauged, especially for a country like India where literacy rates are far from satisfactory. Pertinently, quality is a highly subjective term and therefore, generally difficult to assess, unlike access to education, where the coverage of schools can be used as a parameter to judge this metric. We have used the NCERTs periodical survey (every 2-3 years) to explain the quality of education in India.
Exhibit 11: Average marks achieved by students (%)

Class Class III Class V Class VII Class VIII
Sample survey: NCERT
States covered Mathematics 29 27 10 17 58.3 46.5 29.9 38.5
Language 63.1 58.6 53.0 52.5
Science NA NA 36.0 40.5
Social science NA 50.3 33.0 45.0
Education companies like Educomp, Everonn and NIIT have an opportunity to improve the total quality of education in India through Public-Private Partnerships
It can be observed that the achievement levels of students are low across subjects. Clearly, this is the reason that the government is taking initiatives to improve the quality of education. The initiatives include recruitment of new teachers, re-skilling the existing teachers to be more effective in imparting education, providing better infrastructure to schools and providing better content for education. This is where education companies like Educomp, Everonn and NIIT have an opportunity to improve the total quality of education in India through Public Private Partnerships by providing content and IT infrastructure for its effective delivery.
Teacher capacity
Along with the creation of capacity, the number of teachers also has to keep pace, ensuring the delivery of education to students. The total number of teachers rose from 1.9mn in 1999-2000 to 2.3mn in 2004-05 for the Primary section, while for Upper Primary, the respective figures stood at 1.3mn and 1.4mn.
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Exhibit 12: Number of Teachers

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
Primary ('000) 1,919 1,896 1,928 1,913 2,093 2,310
Upper Primary ('000) 1,298 1,308 1,468 1,581 1,602 1,439
Teacher-Student ratio Not satisfactory

Pertinently, just the number of teachers and educational institutions do not necessarily mean much by themselves. These figures need to be looked at in totality, in conjunction with the number of students. Hence, the student-teacher ratio can be used to judge the adequacy of capacity. The national teacher-student ratio for Primary education has increased from 1:43 in 1999-2000 to 1:46 in 2004-2005 The national teacher-student ratio for Primary education has increased from 1:43 in 1999-2000 to 1:46 in 2004-2005. This ratio for the Upper Primary reduced from 1:38 in 1999-2000 to 1:35 in 2004-2005. Though these figures are at a national level and hide regional disparities, it is apparent that the increase at the Primary level is not a factor to be enthusiastic about, as this would lead to less attention of a teacher per student. In the opposite case, the decrease of students per teacher in the Upper Primary grades is a positive.
Exhibit 13: Teacher-Student ratio

1:49
Primary Upper Primary
1:46 1:43 1:40 1:37 1:35 1:32 1:29 1:26 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
Source: SES, MHRD
The teacher-student ratio for Secondary education in India is higher than that in countries like China, the UK, US, Germany and France (Refer Exhibit 14). This typically impacts the quality of teaching, as each teacher would have less time to devote to a student.
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Exhibit 14: Teacher-Student ratio - Secondary schools

Country India Bangladesh Pakistan United Kingdom China Germany Sweden US Japan Argentina France Switzerland
Source: Nationmaster, Angel Research
Teacher-Student ratio 1:18 1:43 1:28 1:17 1:16 1:15 1:15 1:15 1:14 1:14 1:12 1:11
Hence, there exists significant scope for improvement in the Teacher-Student ratio across the Primary, Upper Primary and Secondary schools, given its importance and key role in leading to sustained, equitable and inclusive growth going ahead.
Public Private Partnership (PPP) The way ahead

In view of huge requirements of infrastructure and manpower in the field of Education and backlogs in the implementation of the SSA, the government is exploring new ways to achieve its targets, such as the public-private partnership (PPP) route. The first step is to improve the quality of education by getting content and certain school infrastructure designed and implemented by private companies. These private companies also undertake training of teachers so that the teachers are better equipped to understand the learning requirements of the students and improve on the delivery of instructions. Thus, the companies that provide an end-to-end solution including setting up the infrastructure, systems integration, teacher training, content development and learning delivery are likely to be beneficiaries of these partnerships. India faces a backlog of 2,00,000 schools to accommodate students and provide easy access to education for all children The ownership of private schools is not allowed except under a trust format. Currently, India faces a backlog of approximately 2,00,000 schools to accommodate students and provide easy access to education for all children. This shortage of schools may lead to the government opening up owning of schools to private players, thereby enabling them to make profits by legitimate means. In such a scenario, the ownership of schools would become easier and may lead to more schools being opened up, thereby improving access to education. It should be noted that we have not built in the outcome of this scenario into the businesses of any of the companies covered in this report viz., Educomp, Everonn or NIIT.
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The role of private companies and educators

Private schools Meeting the demand for quality and access to a great extent
There are approximately 50,000 private schools in India. A majority of these schools are present in the urban pockets and cater to more affluent classes. The parents whose children are studying at these schools expect a higher standard of education and have comparatively higher expectations from these schools in terms of infrastructure, facilities and courseware. Similarly, they expect better academic achievements from their children. These schools are constantly trying to upgrade their facilities and courseware to improve the standard of education provided by them and to match up to the expectations of the students and their parents. Thus, the new products using multimedia-based platforms to enhance the quality of education and equip the educators to a better extent are being sought.
Quality education requires teacher training

Most of the governments teacher training programs have been designed for mono-grade teaching situations In India, as many as 54% of the Primary schools (4.17lakh) have only one or two teachers. The number of primary schools with three or less teachers is a staggering 71.5% (5.49lakh). Most of the governments teacher training programs have been designed for mono-grade teaching situations. Wherever training programs on multi-grade issues have been held, they provide some learning organisation ideas, but not a comprehensive guideline for teachers who have to teach the entire curriculum to five classes. A significant 31% of Primary schools in the country have enrolments less than 60. These schools would have actual student attendance of 40-50 students only, spread over five classes. The key to effective teaching-learning practice in such schools is multi-level teaching using group and self-learning materials. There have been several experiments in the country for such school situations. What is required is systematic work for appropriate materials and teacher training for small school situations. The issues of teachers competence, teaching at Upper Primary levels in subjects like Mathematics, Science and English needs to be addressed. For the Upper Primary stage, linkage with Secondary/Higher Secondary schools and good subject teachers could prove useful for upgrading skills of Upper Primary teachers. In several states and union territories, as part of the initiatives of the respective governments, a 20 days training program is being implemented in a routine manner. Most teachers do not have a pre-service and training begin qualification any orientation There is a large backlog of teachers who have been recruited, but have not received induction training. This means that teachers, most of whom do not have a pre-service training qualification begin teaching in schools without any orientation. In some states, 7-15 days training is imparted to these new teachers along with regular in-service training of teachers. This is not adequate, as the new teachers need a different orientation with an overview of the Primary curriculum, textbooks and teaching methods. This aspect needs greater attention, since large teacher recruitments are taking place in several states.
teaching in schools without
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Thus, the need for teacher training stems from the significant impact it has on the overall quality of education imparted to students. Not only does capacity need to be created (ie., the sheer number of teachers needs to be adequate), but the quality of education imparted also has to be monitored, through teacher training, apart from providing better quality courseware and material and implementing IT-based education. Apart from the governmentprovided training, companies like Educomp also provide professional training to these teachers as a part of their joint ventures There are approximately five million teachers in India. There is also a requirement of a substantial number of additional teachers to sustain the growth level in the field of education. All the fresh recruits would have to be imparted induction training and the existing teachers would have to be provided with orientation to upgrade their teaching techniques or re-skill them to impart better quality education. Apart from the government-provided training, companies like Educomp also provide professional training to these teachers as a part of their joint ventures.
Demand for education in regional language

As per the Right to Education Bill 2005, it is the intent of the government to provide education to children in their mother tongue or the appropriate regional languages. The motivation of the government is due to the fact that the child would understand instructions easily in his/her mother tongue and thus, the quality of education would be better. In the computer literacy initiative that is being undertaken by the state governments, there is a clear mandate to the education companies to develop and provide the education content in regional languages. This leads to strong demand for content in regional languages and companies with strong content development teams with the ability to modify the content as per regional requirements stand to benefit.
Need for Multimedia-based education in schools

Companies like Educomp and Everonn provide various products that enhance the capabilities of teachers One of the innovative ways to teach students is through the use of multimedia. Multimedia helps the child to understand the instructions and courseware better thereby enhancing the quality of instructions by explaining the content graphically wherever needed. Companies like Educomp and Everonn provide various products that enhance the capabilities of teachers and help students understand the courseware better, leading to a significant improvement in the quality of education imparted. Out of the 50,000 private schools in India, 10-12,000 charge a fee of over Rs1,000 per month per student. These schools are the immediately addressable market for such courseware.
Demand for Post-school mentoring - Hampered by low broadband penetration

Individual children do not get sufficient attention from the school teachers due to the large class sizes, more specifically in urban areas A lot of students to get better quality of education take the help of Post-school mentoring. This need also arises from the fact that individual children do not get sufficient attention from the school teachers due to the large class sizes, more specifically in urban areas. The demand for post-school mentoring has led to the development of several innovative products such as virtual class rooms and coaching through broadband connections. These products are currently not very popular, as India has very low penetration of broadband services (a mere 0.32%), which are necessary to access these products. With the increase of broadband connectivity, the popularity
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of these products is expected to increase. These products are expected to directly compete with the existing providers of such services, which forms approximately two-thirds of the education budgets of regular Indian middle class families, according to our interactions with the managements of companies operating in this space.
Indian Broadband Market Poor penetration hinders growth of IT-enabled education

The total number of broadband subscribers at the end of April 2008 stood at a mere 4.01mn, implying a broadband penetration of a miserable and pitiable 0.35% The story of the phenomenal growth of India's Mobile Telecommunications Sector is well-known. Mobile subscribers at the end of April 2008 stood at over 264mn, with monthly net additions crossing the 8mn-mark for the last six months in succession. Heightened competition, expansion of coverage area, a continuous fall in minimum subscription costs and ever-increasing affordability have been the key factors driving this phenomenal growth. However, in complete contrast to the Mobile Telephony Sector is the Broadband Sector. The growth of broadband internet access connections (access speeds in excess of 256kbps) has been pathetic, to say the least. The total number of broadband subscribers at the end of April 2008 stood at a mere 4.01mn, implying a broadband penetration of a miserable and pitiable 0.35%. This poor growth has been on account of a number of reasons including the slow growth of personal computers (PCs) in the country leading to low PC penetration, greater affordability issues as compared with mobile phones and the reluctance of state-owned telcos to un-bundle their last-mile access infrastructure and share it with private telcos. To get an idea about how much India is lagging on the broadband front, it should be noted that the targeted number of broadband subscribers by the end of 2007 was nine million, and the figure achieved at the end of April 2008 was not even half of this target. The target for 2010 is 20mn, implying monthly net adds of around 0.5mn from May 2008 till end-2010. However, rather than achieving these figures on a monthly basis, the current quarterly rate of broadband net adds is barely higher than this figure. Thus, the current monthly net adds will need to increase by a factor of nearly three to achieve the government's ambitious target of 20mn broadband subscribers. Poor broadband penetration will prove to be a hindrance to the development of various internet-based products The poor broadband penetration will prove to be a challenge to the development of various internet-based products of companies like Educomp like Mathguru.com. The focus of these products is to bring quality education products at home and being accessible at any time.
Indian IT Training Industry Tracking the IT Industry with a lag

One of the major reasons for the ever-increasing visibility and recognition of India on the global map has been the outstanding success of its Software Industry. Major Indian software companies like TCS and Infosys were the pioneers of the now-famed Global Delivery Model (GDM), which emphasises execution excellence from any part of the globe 24/7, along with a strong focus on process excellence. The GDM is one of the major process innovations that has been discovered in recent times and has literally changed the entire business dynamics of the Software Services Sector, forcing incumbents like IBM, Accenture, EDS and CSC to change their business strategies and move towards this model, or offshoring as it is called in popular parlance.
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Industry Overview
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The Indian IT-ITES Export Sector has grown at a CAGR of 32% during FY2002-08
The Indian IT-ITES Export Sector has grown at a rapid rate over the past few years, hitting a size of US $40.3bn in FY2008, up from just US $7.7bn in FY2002, recording a CAGR of around 32% in this period. This has been driven by ever-increasing acceptance of offshoring by global corporations looking to cut costs and add value to their businesses. In terms of employment, the Sector employed over 1.6mn personnel in FY2007, up from just 0.52mn in FY2002, recording a CAGR of over 25%. In FY2008, the Sector is expected to have directly employed nearly two million personnel, a growth of 23% (3,75,000) over FY2007.
Exhibit 15: Indian IT-ITES revenues and employment - Strong growth

(US$ bn) 45 IT-ITES Exports Direct employment (RHS) (Mn) 2.0
36
1.6
27
1.2
18
0.8
0.4
0 FY02 FY03 FY04 FY05 FY06 FY07 FY08
0.0
Source: NASSCOM, Angel Research
The Indian IT Training Sector plays the role of a supplier of critical raw materials to the IT Sector
As is well-known, the Software and BPO Sectors are highly people-intensive. Human resources are the major raw materials that drive growth in these Sectors. Therefore, to grow on a sustainable basis, quality manpower is critical for the industry. Thus, it follows that a business that trains personnel for IT careers is also likely to do well if the IT Sector does well. The Indian IT Training Sector plays the role of a supplier of critical raw materials (read human resources) to the IT Sector. The training industry provides computer literacy to school students, trains college students for IT careers and also provides re-skilling to industry professionals looking to move higher up the corporate ladder through refining their IT skills.
Indian IT Training Industry revenues hit Rs2,135cr in FY2007, up 46% from Rs1,453cr in FY2006
Latest figures show that Indian IT Training Industry revenues hit Rs2,135cr in FY2007, up 46% from Rs1,453cr in FY2006 (Source: Dataquest). The growth rate of 46% was also much higher than the growth of around 14% recorded in FY2006. Thus, growth has accelerated in the industry, aided by the strong growth of the Indian IT Industry. It should be noted that post the dot com bust, industry revenues collapsed dramatically, de-growing at a CAGR of nearly 24% over FY2001-04, with revenues in FY2004 under 45% of FY2001 revenues. However, FY2005 onwards, industry revenues started picking up again, as the Indian offshoring story started to play out in full measure.
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Exhibit 16: Indian IT Training Industry - Back on a strong growth path

(Rs cr) 3,000
A collapse in industry revenues following the dot com bust Start of the recovery after the dot com bust, with growth accelerating significantly in FY07
2,400
1,800
1,200
600
0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
Source: Dataquest, Angel Research
In terms of revenues, it was NIIT that maintained its position at the top, posting Rs795cr in revenues in FY2007. This was considerably higher than the second-ranked player, Aptech, which posted revenues of Rs190cr. However, it should also be noted that NIIT is a diversified company having a presence in several segments apart from retail, such as government institutional business, corporate training and newer initiatives like financial services training and management education. If we take only the revenues pertaining to retail training, the company recorded Rs247cr, which is still nearly double that of Aptech, which recorded Rs125cr as retail revenues. Even in this, China and rest of the world revenues are included for both companies. However, given that Aptechs marketshare in China stood at over 32%, more than 4x that of NIITs marketshare (7.6%), if we exclude China, NIITs retail training revenues are over double those of Aptech. These two players clearly dominate the market, with the players following them recording much lower revenues.
Exhibit 17: Indian IT Training Market - Dominated by NIIT and Aptech

Company NIIT Aptech Jetking Infotrain Siemens CMS Computers SQL Star MAAC New Horizon Educomp
Source: Dataquest, Angel Research
(Rs cr)
795 190 87 44 23 15 19 16 28
FY2006 revenues 450 121 63 34 15 16 5 -
FY2007 revenues
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As per NASSCOM, there will be a requirement for 2.3mn IT professionals by 2010. There will be a shortage of quality trained personnel required by the IT Industry of 5,00,000 by that year. This is even as the country enrolls nearly 10mn students annually in its colleges and institutes of higher education. A total of 4,95,000 technical graduates, 2.3mn other graduates and over 3,00,000 post-graduates are produced each year from the system. The total number of Given that the annual requirement of the IT Industry stands in the region of 4,00,000 and that the industry can also recruit science, commerce, arts and other graduates who are certified in IT courses provided by companies like NIIT and Aptech, it is clear that the total number of graduates passing out from the system is not a constraint to growth. It is the quality of personnel that requires attention. Around 25% of the total graduates passing out of the system are actually industry-ready, reflecting the urgent need to create more intimate linkages between academia and industry. This reflects strong growth potential ahead for the IT Training Industry, given its ever-increasing relevance for the IT Sector.
graduates passing out from the system is not a constraint to growth - it is the quality of personnel attention that requires
Substantial manpower requirements of varied sectors Significant opportunity

Indias working population would reach a huge 700mn by 2030 and account for almost half of Indias total population As per United Nations (UN) population statistics, Indias population is estimated to touch 1.5bn by 2030, making it the worlds most populous country. Indias working population, defined as people aged between 25 - 59 years, would reach a huge 700mn by 2030 and account for almost half of Indias total population. The number of middle and high income households is forecast to increase from 70mn to over 100mn by 2010 as a result of rising income levels and the breakdown of family ties, resulting in a greater number of smaller nuclear families. These statistics reflect the likely strong GDP growth rates expected going ahead. The phenomenal success story of Indias Software Sector is well-known. To sustain this growth, as mentioned earlier, there will be a significant requirement for quality manpower at various levels, from entry-level programmers/coders, middle management level personnel and project managers right up to senior-level management personnel. Thus, there is a strong growth opportunity in this space. However, the Indian IT Sector is currently facing several challenges, which are likely to persist for some time to come. These include wage inflation, higher attrition rates, a shortage of quality trained personnel, Rupee appreciation (in spite of the current depreciation on account of record crude prices), a likely end to the tax holiday under the Software Technology Parks of India (STPI) scheme post-FY2010 and above all, the current turmoil in the US economy, given as it forms by far the largest part of most IT companies' businesses. With the recent stunning collapse of Bear Stearns, the fifth-largest investment bank in the US, comes the clearest sign yet that the US economy is in trouble and that this pain is unlikely to subside in a hurry. It seems likely at the moment that more companies may report such losses on their sub-prime exposure, with total losses estimated in a wide range, from US $285bn (S&P) to US $600bn (UBS). Therefore, going ahead, uncertainty lurks in the US and this could spell trouble for the Indian IT Industry, leading to possible slower growth also for the IT Training Industry.
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Industry Overview
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Manpower including
needs BFSI,
across Retail,
Companies like NIIT, in an effort to make a transition from being just IT training companies, are beginning to leverage their knowledge base in IT to expand into talent development in other sectors also. Given likely strong GDP growth expected over the next few years, manpower needs across sectors are fairly substantial. These include Banking, Financial Services and Insurance (BFSI), Retail, Aviation, Hospitality, Research and Development (R&D) in sectors like Pharmaceutical and Bio-technology and Telecom, apart from IT. Consequently, to sustain higher GDP growth rates, these sectors, which are part of the broader Services Sector that has been the cornerstone of Indias growth over the past few years, require significant numbers of quality personnel. A shortage of manpower in these sectors, apart from IT, could have serious repercussions on the countrys economic growth and this is a very real threat that, if not effectively addressed, has the potential to derail the economy.
sectors are fairly substantial, Aviation, Hospitality, Research and Development (R&D) and Telecom
There is a strong opportunity for companies involved in training and developing talent for Indias Services Sector
Thus, there is a strong opportunity for companies involved in training and developing talent for these industries. Take the Indian BFSI sector for example. There are around 321mn citizens in the paid work force category in India (Source: IFBI). Out of this, a mere 2.5% are active investors in equity, either directly or through mutual funds. Majority of the investible surplus goes into banks and post office deposits. There is huge potential for growth here. Only 32.8% of them hold at least one insurance policy. Thus, insurance policy penetration is very low. Also, most of the insurance policies taken are more for tax savings rather than for any scientific evaluation of needs versus financial situations. Thus, there is significant scope for growth in these industries.
The domestic Retail Banking Market is expected to hit a significant US $16.5bn by 2010
Driven by strong economic growth, ever-increasing affluence, greater savings, investments and spending power, the need for financial intermediation has never been more pronounced. The domestic Retail Banking Market is expanding at a rapid rate, with annual revenues expected to hit a significant US $16.5bn by 2010 (Source: McKinsey study). While the overall Banking industry is growing at 20%, New Private Sector banks like ICICI Bank, HDFC Bank and Axis Bank are growing even faster. India's Banking Sector could potentially generate 7.5% of GDP and employ as many as 1.5mn people going ahead (Source: IFBI), leading to significant manpower needs. The Insurance Sector is another high growth area. With the entry of private players into the life insurance business a few years ago, breaking the monopoly of the Life Insurance Corporation of India (LIC), the market opened up and has since expanded more rapidly. Private players like ICICI Prudential have grabbed a significant chunk of the incremental marketshare, leading to LICs share rapidly declining. Going ahead, private players are expected to continue to gain marketshare. The continuous launch of newer and innovative products like unit-linked insurance plans (ULIPs) has helped faster growth of the industry and greater penetration into the market. Given that the penetration levels of the sector are very low in India, there is significant scope for growth. The General Insurance Sector also has many private players like ICICI Lombard and Bajaj Allianz. This segment is slated to grow to a size of US $7.3bn (Rs29,000cr) this year, an annual growth rate of 15%. Private Sector players have clocked a strong premium growth of 27%. This growth coincides with the growing affluence of the Indian middle class and an expansion phase of Indian
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corporations. A growing consumer class, rising insurance awareness, increased investments and enlarged infrastructure spending provide a strong platform for premium expansion. Foreign insurance majors are also making a beeline for the Indian insurance market. That is because India is turning into one of the top markets in Asia. Thus, this sector will also need quality personnel in several functions like finance, sales, actuaries, customer service, and middle and senior management, leading to a strong opportunity in training of professionals in this field. Over the longer-term, India is expected to continue on a high growth trajectory, leading to strong manpower demand for financial market professionals and for Financial Planners Further, the growth and development of the Indian financial markets is well-known. Along with strong economic growth, the financial markets have also kept pace, with the introduction of a number of new and innovative products like mutual funds, ULIPs, commodities, art and so on. This has significantly increased the choice of options for investors. Over the longer-term, India is expected to continue on a high growth trajectory, leading to greater affluence and the need for proper financial planning and advice. Given this scenario, there is likely to be strong manpower demand for financial market professionals and for Financial Planners. Industries like Hospitality, Aviation and Retail are also likely to witness significant manpower demand going ahead. Therefore, the opportunity for businesses providing critical raw materials to Indias Services Sector is fairly immense, given the criticality of scarce human resources to the Indian economy in general and these industries in particular.
Corporate Training Market

The current Education System does not address the needs of many industries The current Education System does not address the needs of many industries. Many kinds of soft skills (ie., English speaking, computer literacy, financial knowledge and skills) are lacking in the pass out from these institutions. For this reason, companies in many industries prefer to train people at the time of induction, get them trained through specialised training institutions or absorb candidates from institutions that provide such specialised training. NIIT and Everonn provide such specialised courses to candidates through their short and medium-term courses. In several cases, the companies use the platform provided by these education companies to provide training to their fresh recruits as well as existing employees. Spending on corporate On the other hand, the estimated size of the North American corporate training market is in the region of US $45.9bn, of which delivery services account for the maximum share of the pie of US $21.6bn, while content development accounts for US $16.3bn. Going ahead, spending on corporate training is expected to rise by around 7% per annum until 2010 (Source: IDC), with training outsourcing expected to grow by a considerably faster rate of nearly 25% per annum over the same period. Thus, there exists good scope for growth in this business, which is relevant for NIIT, given that it derives most of its corporate business revenues from the US.
training is expected to rise by 7% until 2010, with training outsourcing expected to grow by nearly 25% over the same period
English Language Training Need to integrate with the Global Economy

With the rapid growth of the Indian economy and increasing globalisation of Indian corporates given their burgeoning ambitions, there is an ever-increasing need for skilled, English-speaking human resources. India has one of the largest English-speaking workforces. However, it should
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The estimated market size for English language training is around 10.5mn students and in revenue terms, this is expected to hit Rs800cr in three years
be noted that often, fluency in English is an issue. This is particularly a problem in industries like BPO, which require extensive interaction with customers of foreign corporations. Consequently, as is the case in industries like IT, the problem is not of quantity but of quality. This has led to a significant addressable market for English language training. The estimated market size is around 10.5mn students. Companies like NIIT and Everonn are attempting to tap this growing market through their innovative products. NIIT has estimated a market size of around Rs800cr in three years and expects to capture around 10% of the market.
Conclusion
With the strong growth expected in the Indian economy going ahead, it is clear that human resources will be the key competitive advantage that the country has to sustain this robust growth. Thus, a strong foundation in the form of a robust education system will be the cornerstone to leading India's growth over the next many years. With the Government showing a clear willingness to engage the private sector in accomplishing the daunting task of educating India's 13.5cr students, there are thus significant opportunities to tap for companies like Educomp Solutions, Everonn Systems India and NIIT Limited, both in the Government schools and Private schools businesses. With burgeoning demand for skilled human resources also in sectors like Financial Services, there exist significant opportunities for growth in the Corporate Training business as well. We remain positive on the Indian Education Sector and believe it is a multi-year growth story that will play out over the next many years and thus, are enthused about the growth prospects of companies serving this space.
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JainSolutions Irrigation Educomp

Initiating Coverage
BUY
Price Target Price Investment Period Rs3,496 Rs4,051 12 Months
The Star at Pole Position

Educomp Solutions, the fastest-growing education solutions company in India, is a leader in providing end-to end solutions to government and private schools. The company now has plans to venture into new businesses of education, organically as well as inorganically in its attempt to increase its addressable market and have a presence in new geographies. On the back of these initiatives we estimate the company's Top-line and Bottom-line to grow at CAGRs of 76% and 67% over FY2008-10E, respectively. We Initiate Coverage on the stock, with a Buy recommendation and DCF-based Target Price of Rs4,051.
Stock Info
Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Education 6,041 1.05 5,650/1,706 79481 10
BSE Sensex Nifty
15,770 4,677
Leader in SmartClass, ICT Segments: Educomp has embarked on strong growth path owing to its leadership position and bright prospects of its key business segments. At the end of FY2008, Educomp had 933 private schools under its coverage, with an addressable market of 12,000 schools for its SmartClass business. We expect Educomp's SmartClass revenues to grow at a CAGR of 70% over FY2008-10E. The Instruction and Computing Technologies (ICT) segment is the second-largest contributor to its overall revenues. Around 6,000 government schools were serviced by the company's ICT business at the end of FY2008, which is the largest count in this segment v/s competitors . With an addressable market of 9,50,000 schools, the growth potential is substantial for Educomp and its peers. Well-developed content: Strong content development is the backbone of Educomp's product offerings. The company currently has a team of 400 professionals working on the development and improvement of content. Apart from this, the company also has entered into a tie-up with Discovery and Eureka for providing multimedia content for education. It currently has a library of content for children from grade 6-12 mostly for Mathematics and Sciences. Educomp has over 16,000 modules of content, in over 1,00,000 pages and 10 languages. Strong sales team: Educomp has a strong sales team of 120 people and is planning to increase it to 170 people by the end of FY2009. A strong sales team results in good conversion of prospective clients. Educomp has so far achieved it sales targets due to its aggressive sales team apart from its strong content development capabilities. This will enable the company to achieve 70% CAGR in its SmartClass business. Key Financials
Y/E March (Rs cr) Net Sales % chg EBITDA Margin (%) Net Profit % chg Diluted EPS (Rs) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY2007 106.6 103.8 47.0 28.7 105.8 17.9 204 25.0 22.7 54.9 58.4 124.2 FY2008 262.1 145.9 47.6 70.1 144.5 35.2 103.9 21.8 21.9 19.6 23.7 49.9 FY2009E 483.8 84.6 48.1 117.9 68.3 68.4 53.4 27.0 26.1 14.4 12.9 26.7 FY2010E 811.2 67.7 48.3 196.5 66.7 113.9 32.1 31.2 30.4 10.0 7.7 15.9
BSE Code NSE Code Reuters Code Bloomberg Code
532696 EDUCOMP EDSO.BO EDSL IN
Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 56.0 2.6 33.0 8.4
Abs. Sensex (%) Educomp (%)
3m (4.7) (9.9)
1yr 8.5
3yr* 68.2
88.7 1,125.1
* Since listing on January 13, 2006
Sulabh Agrawal
Tel: 022 - 4040 3800 Ext: 346
E-mail: sulabh.agrawal@angeltrade.com
Source: Company, Angel Research
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Company Background
Educomp Solutions, incorporated in 1994, has grown to become one of the largest technology-driven innovative education companies in India. With an employee base of over 3,000 professionals, Educomp currently serves approximately 6mn learners and educators across India, USA and Singapore. Educomp has 11 offices in India, 1 each in the US, Canada, Sri Lanka and Singapore. The company has a sales presence in over 57 locations. Educomp works closely with schools to implement innovative models to create and deliver content to enhance student learning experience. The company went public on January 13, 2006, with an Issue price of Rs125 per share and a total Issue size of 40lakh shares. Educomp is Indias leading K-12 Education Company Educomp is India's leading Kindergarten to class 12 (K-12) Education Company and has, over the years, pioneered various initiatives in the e-education space. Notable among them are the 'teacher-led' content system called SmartClass that has dramatically improved learning effectiveness in classrooms, development of India's largest K-12 content library, with over 15,000 modules of rich 3D content that is aligned to Indian as well as international learning standards, India's first structured pre-school learning system, Roots 2 Wings, online learning initiatives like mathguru.com and pioneering Education Process Outsourcing in India through the Learning Hour platform, which has emerged as a benchmark for many similar initiatives. The current client base of PPP projects is over 6,000 schools including large projects from state governments Educomp has a track record of implementing large-scale Public-Private-Partnership (PPP) projects. The company works closely with various State and Central Government agencies, the IT and HRD Ministries and the governments of other countries. These educational programs also involve across-the-board education infrastructure implementation, teacher training and content development projects. The current client base of PPP projects is over 6,000 schools including large projects from the governments of Assam, Chattisgarh, Orissa, Karnataka, Uttar Pradesh, Tripura, Gujarat, and West Bengal. Educomp today works with over 7,000 schools across India, the US and Singapore. In the US, the company's presence is via its fully owned subsidiary, Edumatics Corporation, based in Ventura, California.
Business Overview
SmartClass (Private schools)
SmartClass, a private schools initiative, accounts for the largest part of Educomp's revenue pie, with approximately half the of revenues during FY2008 coming from this business. Educomp is the leader in this segment. This business entails providing multimedia-based education (primarily for Mathematics and Sciences) and infrastructure to children of the contracted private schools. Educomp provides the schools computers, LAN networking and Plasma screens for the classrooms, with the intent of replacing the blackboard to a large extent. After the hardware is installed, the content for teaching the children is provided to the schools and teachers are trained to use the hardware and content. Educomp has managed to create one of the largest content libraries in this field, with approximately 400 content developers currently working on developing this content and around
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16,000 modules of content being available. This content is available in a variety of regional languages as well. Around 10-12,000 schools charge fees of over Rs1,000 per month per student, which make up the immediate addressable market for Educomp Currently, there are approximately 50,000 private schools in India. Out of these, about 10-12,000 charge fees of over Rs1,000 per month per student. Such schools make up the immediate addressable market for Educomp. At the end of FY2008, Educomp was providing services to 933 private schools. All the company's contracts with the schools are unique and normally operate under the Build-Own-Operate-Transfer (BOOT) method over an average period of five years. The infrastructure is either purchased by the school directly or provided by Educomp, which amortises it over the period of the contract as per the terms of the contract. At the end of the contract, the infrastructure is transferred to the schools and the content is withdrawn as Educomp holds the copyrights for the same. However, the school has the option to renew the contract and continue to use the content. Educomp provides content on subjects like Mathematics, Science, English, History and Geography to schools from primary to secondary levels (K-12). The students move through the various classes and learn new topics in various subjects across the grades. This has been visually presented below in Exhibit 1.
Exhibit 1: Progress through the grades
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The students used to these methods of studying would appreciate the ease of learning that they provide. It can thus be seen that Educomp's revenues have strong visibility, stability and predictability, given their recurring nature. We believe that going ahead, even after the expiry of the contracts with the schools, given the execution excellence shown by Educomp and its strong content library, the contracts are more likely than not to be renewed.
Exhibit 2: SmartClass - Revenue Profile

FY2007 Number of SmartClass schools YoY Growth (%) Students per class Classes per school Revenue per student (Rs per month) Revenue per class (Rs per month) Revenue per school (Rs per month) Annual revenue per school Total SmartClass Revenue (Rs cr) YoY Growth (%) As % of total revenue EBIT Margin (%) EBIT (Rs cr)
FY2008 933 182 45 19 150 8,868 1,68,489 20,21,867 127.8 174 49 58 74.1
FY2009E 1,700 82 45 24 145 6,525 1,56,600 18,79,200 247.4 94 51 50 123.7
FY2010E 2,700 59 45 27 140 6,300 1,70,100 20,41,200 449.1 82 55 50 224.5
331 264 45 15 175 12,265 1,83,976 22,07,716 46.6 126 49
SmartClass
revenues
Educomp had tie-ups with 933 private schools in its SmartClass business at the end of FY2008. With approximately 45 students per class and an average of 19 classes per school, SmartClass revenues for FY2007 stood at Rs127.8cr. SmartClass revenues during FY2008 stood at Rs127.8cr and accounted for 49% of total revenues. The average number of classes per school is increasing, as programs are being implemented in larger schools. This is expected to increase the revenue per school going ahead. Educomp currently charges Rs150 per student per month for providing its services. We estimate SmartClass revenues to hit Rs247cr in FY2009E. We expect Educomp to grow its SmartClass revenues at an outstanding CAGR of 87% over FY2008-10E. The SmartClass business would be primarily driven by strong sales initiatives, superior quality of content and a huge addressable market. As per the schools using this product there has been a remarkable increase in the marks of their students in the examinations which speaks about the quality of the content. It clearly reflects the good quality of education being imparted by SmartClass.
accounted for 49% of total revenues in the period FY2008
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The SmartClass business clocks EBIT Margins of approximately 58%
The SmartClass business clocks EBIT Margins of approximately 58%. A large part of the expenses are towards content development. Pertinently, with content being homogenous across schools, content development costs per school would reduce as more schools get added. Such operating leverage we believe will improve Margins going ahead. However, we have been conservative and have modeled for a fall in EBIT Margins apart from factoring in a reduction in fees charged per student every year.
Exhibit 3: Growth of SmartClass business

Nos.
Number of Smart class schools Growth (RHS)
(%) 300
3,200
240 2,400 180 1,600 120 800 60
0 FY2007 FY2008 FY2009E FY2010E
ICT (Government schools)

ICT is Educomp's initiative at getting government schools under its fold. The state governments typically float tenders for a certain number of schools to provide infrastructure and content to the students of those schools. These contracts are procured through competitive bidding and are on a BOOT basis. Post bagging the contract, it normally takes 40-45 days to set up the infrastructure and start providing the training at these schools. At the end of the contract, the ownership of infrastructure shifts to the respective school. Thereafter, the state government has the option to renew the contract for providing the remaining education services to the schools. Educomp currently has Educomp currently has partnerships with 10 state governments and provides content in ten different regional languages. The company has developed extensive content for this business and provides instructions and content in regional languages wherever stipulated by the contract. It also provides IT education and infrastructure to the government schools along with providing full-time instructors at the school. Educomp provides multi-media education software and courseware to the students in regional languages.
partnerships with 10 state governments and provides content in ten different regional languages
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This business segment is the second-largest contributor to the company's overall revenues. ICT accounted for 36% of Educomp's FY2008 revenues. Educomp provided services to over 6,000 government schools at the end of FY2008 and the business is expected to grow at a robust rate over the next few years with the government expected to offer 29,000 schools for tendering in FY2009. Further, with 9,50,000 existing government schools in India, we believe the growth potential of this segment is substantial and state governments are expected to increasingly deploy resources to improve education in their schools.
Exhibit 4: ICT - Revenue Profile

FY2007 Number of ICT schools YoY Growth (%) Revenue per school (Rs per month) Revenue per school (Rs per year) Total ICT Revenue (Rs cr) YoY Growth (%) As % of total revenue EBIT Margin (%) EBIT (Rs cr)
FY2008 6,004 114 17,651 2,11,813 93.3 209 36 29 27.3
FY2009E 12,000 100 16,500 1,98,000 178.2 91 37 28 49.9
FY2010E 18,500 54 15,500 1,86,000 283.7 59 35 28 79.4
2,808 358 14,699 1,76,390 30.2 90 32
There are 9.5lakh government schools in India, of which just 3% have included ICT and equivalent programs in their curriculum
At the end of FY2008, Educomp was providing services to 6004 government schools. The average revenue realisation per school was Rs2,11,813 per year. However, we believe going ahead, the average realisation per school per annum would decline as this business is procured through competitive bidding via tenders and the lowest-cost bidder generally wins the contract. Nonetheless, going ahead we believe that a greater number of schools would be receptive to such concepts owing to the Central Government's intent to improve the quality and reach of education and to increase the overall literacy levels in India. Till date, approximately 30,000 schools have been included in the ICT comparative programs. The total number of government schools in India are approximately 9,50,000, of which a mere 3% have included ICT and equivalent programs in their curriculum. As for Educomp, it is the leader in ICT and education, has considerable experience in the competitive bidding process and has developed regional content as required by state governments. Thus, we expect it to achieve high growth over the next few years. On a conservative basis, we estimate this business to record a CAGR of 74% in Top-line over FY2008-10E. EBIT Margins stood at 29% in FY2008. We expect Educomp to maintain its Margins in this business, given that the market potential is substantial and the players would not need to undercut each other to increase their business. Further, with Educomp being the largest player, it enjoys a competitive edge apart from being the most profitable player in the business.
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Exhibit 5: Growth of ICT business

Nos.
Number of ICT schools Growth (RHS)
(%) 400
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY2007 FY2008 FY2009E FY2010E
320
240
160
80
Professional Development (Teacher Training)

Educomp has tied up with three companies (computer manufacturer, software and chip) namely Intel, Microsoft and Wipro. These tie-ups are towards providing training and upgrading the skills of the teachers in India. There are approximately five million teachers in India and a majority of them lack the training to teach. Hence, Educomp, through its Teacher Training initiative, provides the required training to the teachers apart from refurbishing their skills. The teachers have to undergo training over a two-week period. Educomp's partners in the business compensate it for providing this service. Educomp is currently the largest teachers' trainer in India having trained over 3,00,000 teachers during FY2008. This business contributed around 10% to the company's total revenues during FY2008.
Exhibit 6: Professional Development

FY2007 Total number of teachers trained YoY Growth (%) Revenue for training each teacher (Rs) Total Prof. Development Revenue (Rs cr) YoY Growth (%) As % of total revenue EBIT Margin (%) EBIT (Rs cr)
FY2008 3,05,570 178 839 25.6 46 10 61 15.7
FY2009E 3,81,963 25 800 30.6 19 6 58 17.7
FY2010E 4,58,355 20 800 36.7 20 5 57 20.9
1,10,000 47 1595 17.5 43 19
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We believe that the potential for growth in this field is also immense given the paucity of teachers having pre-service training and the growing emphasis on improving the quality of education imparted to students. Teachers' training earns approximately 61% EBIT Margins for Educomp. We estimate revenues from Professional training to grow at a CAGR of 20% over FY2008-10E.
Retail Tutoring and websites - Limited by low broadband penetration

Mathguru.com is an online portal for mathematics and guides on NCERT books study for grade 6 to 12 students A major part of the expense connected to education for a middle class Indian family is money spent on individual coaching of children. To tap this market, Educomp has set up two websites viz., 'mathguru.com' and 'learninghour.com', which caters to the students' needs after school. Mathguru.com is an online portal for Mathematics and guides on NCERT books study for grade 6 to 12 students. Learninghour.com provides retail online tutoring to children in India, the US and the Middle East on all curricular subjects and tests preps with services. The websites can be accessed by subscribing to them. The charges for mathguru.com are approximately Rs1,800 per student per annum. Broadband web connection is a vital and limiting factor to access these web-sites. Currently, broadband penetration is very low (0.35%) in the country. However, in Budget 2008-09, customs duty on import of equipment for providing broadband services has been lifted, which we believe will lower the costs of setting up infrastructure for providing these services. This would in turn help increase the penetration of internet services and lend a boost to subscriptions of web-based learning portals.
Exhibit 7: Web-based Retail Tutoring and Subscriptions

FY2008 Subscriptions YoY Growth (%) Revenue per subscription (Rs) Total Subscription Revenues (Rs cr) YoY Growth (%) As % of total revenue EBIT Margin (%) EBIT (Rs cr)
FY2009E 1,53,610 80 1,800 27.6 80 6 45 12.4
FY2010E 2,61,137 70 1,600 41.8 51 5 36 15.0
85,339 0 1,800 15.4 0 6 56 8.7
Approximately 33% of the monthly income of the 300mn-strong Indian middle class is spent on the education of their children
Approximately 33% of the monthly income of the 300mn-strong Indian middle class is spent on the education of their children. One-third of this amount is spent on school education while the balance two-thirds is spent outside the school for private tutoring. Educomp is accessing this market through its retail tutoring initiatives. This product would have an advantage over private coaching, as it would be available 24 hours a day as per the convenience of the individual student. The student would not have to leave his/her home as well and travel to receive the coaching. Educomp has a strong content development team that designs content for these websites. We believe that with higher internet and broadband access and penetration in India, the market for portals like mathguru.com would increase. We estimate that revenues from this product would grow at a strong 65% CAGR over FY2008-10E even as EBIT Margins decline marginally.
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New Business prospects

The Budget for FY2008-09 has provided Rs650cr for setting up of 6,000 high-tech government schools. Details are awaited, but we believe that companies like Educomp would be the prime service providers to these high-tech schools. Also, the modernisation contracts of 22 Sainik Schools at the cost of Rs2cr per school will likely be competed for by Educomp and peers Everonn and NIIT. Educomp provides consultancy to schools with respect to general management and designing and providing courseware. It has developed 40 books, which provide better understanding to children about their courseware and helps them in improving their academic performance. Educomp is also in the process of setting up 100 new schools in the next 2-3 years. It has already set 3 schools and admissions are in progress in 2 more schools. These schools have a total student population of 6,000 students. These schools would either be owned by Educomp or by joint venture (JV) partners and would be entirely managed by Educomp. Own School business ('Roots 2 Wings', 'Millennium Schools') In this business format, Educomp owns and manages the schools. Roots 2 Wings are neighborhood schools for kindergarten-aged children. Millennium Schools are brick-and-mortar schools that educate children right from kindergarten to Grade 12 (K-12) at the school level. The company expects to have (own or manage) 25 schools by the end of FY2009 and 100 such schools by FY2010. These schools would be managed and/or owned by two subsidiaries viz., Educomp Infrastructure (EI) and Educomp School Management Limited (ESML). Educomp holds 75% stake in both the companies. EI would own the building and infrastructure of the schools while ESML will provide the services to the schools. Educomp has entered into tie-ups with DLF, Ansal and several other smaller builders for setting up 60 schools in the Millennium School format, where the land and building would be owned by the respective builders in their townships and provided to the school on a renewable lease of 30 years. Management and maintenance would be handled by Educomp. In these cases, EI would not come into the picture. The schools would be set up and expanded in three phases. In the first phase, school classes from Kindergarten to Grade 7 would be set up. In the second phase, classes would be extended upto Grade 10, and upto Grade 12 in the third phase. Full strength of these schools is expected to be 2,500 students per school post completion of all the three phases. The schools would be charging fees of approximately Rs35-40,000 per student per year and a one-time admission fee of about Rs35,000. We have currently not built in revenues and profits from this business into our projections. JV with China-based Raffles Educomp has entered into a 50:50 JV with Raffles which is a leading education services provider in China. China is world's second largest education market by number of school aged student after
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India. The JV would be used to sell entire range of Educomp's products to K12 students. Through this JV, Educomp would be able to reach over one million Chinese schools, thus enhancing the addressable market size tremendously. Further the JV would bring to India the entire range of Raffles professional development programs and courses. This would provide a meaningful education alternative to student graduating from high schools in India. Under the terms of the JV, the existing Raffles Design Institute in Mumbai will be merged into the JV operations. We have not factored in the revenue and profit resulting from this JV as it is in a very nascent stage of development. Export of services and content Exports account 10% for of Under the SmartClass business, Educomp also sells content and services to schools in foreign countries (mainly in the US and Middle East). This segment accounts for approximately 10% of Educomp's overall revenue and profits. Educomp is also on the look-out for opportunities in other geographies to expand its market. Generally, education content is similar across countries and has to be modified slightly to make it adaptable to the respective students. Thus, Educomp incurs marginal costs to modify/adapt the content for geographical diversification though this requires recruitment of new content developers with the requisite geographical orientation. Educomp has considerable expertise in the development of content and selling to new customers across various regions. We believe the company has strong potential for growth for export of its content to existing and new destinations. Tutoring Business Educomp is planning to launch tutoring business through ThreeBrix. In this business, Educomp would be providing its SmartClass content to students through its leased centers. Educomp would be able to further leverage upon its strong content library through this business and increase its penetration to students who do study at SmartClass schools. The estimated market size for this product is Rs530cr. As this business would be run through leased centers, the capex requirement would be low. Currently Educomp is testing this product and we have not factored this business into our model. Strategic acquisitions Educomp is making several strategic acquisitions to broaden its product offerings and geographical reach thereby increasing its addressable market size. The company has acquired four companies in the recent past. Educomp acquired 76% stake in ThreeBrix, which is a domestic company home tutoring Educomp acquired 76% stake in ThreeBrix, which is a domestic home tutoring company. It owns the online tutoring portal called The Learning Hour and Threebrix.com, which is expected to strengthen the company's online tutoring platform. The Learning Hour is India's first tutoring web-site to have full audio-video conferencing along with standard tutoring whiteboard functionality. The portal is used by school students in the Middle East and helps school students with test preparation and application assistance.
approximately and profits
Educomps overall revenues
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Educomp also acquired a 51% strategic stake in AuthorGen Technologies Pvt. Ltd, which has helped consolidate its position in online tutoring with access to key technology competence, student-teacher marketplace models, and Web 2.0 platforms for online learning. Their leading portal wiziq.com connects students and teachers from around the world with capabilities to run on any web browser and on any operating system. Educomp has also acquired a 70% stake in Toronto-based Savvica, which owns the website savvica.com. Savvica is an education technology company that aims to improve education through lowering barriers to entry into online teaching and learning. In the Asia-Pacific (APAC) region, Educomp recently acquired the Singapore-based ASKnLearn Inc. ASKnLearn is a premier pan-Asian provider of education solutions and services that caters to over 120 educational institutions in Singapore, China, Thailand, Japan and Brunei. It has also recently acquired 51% stake in Learning.com for which it has paid US $24.5mn. Learning.com currently has access to 2 million students spread across 800 school districts in US. This acquisition gives Educomp a presence in US, which is the largest education market in the world by value. While we have not factored these acquisitions into our assumptions, we believe these acquisitions will help Educomp increase its addressable market size, apart from expanding its geographical presence and client base.
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Investment Arguments
Leadership position in the SmartClass and ICT businesses
Educomp enjoys leadership position in its flagship business, SmartClass. It extended its services to 933 private schools at the end of FY2008 under this business segment and has an addressable market of approximately 12,000 schools. Educomp is also a leader in the ICT business and provides services to 6,000 government schools, which is the largest count in this segment vis--vis competitors like Everonn and NIIT. With an addressable market of 9,50,000 schools, business prospects of this segment are strong. Educomp also leads in the Professional development for teachers, which has a potential market size of 5mn teachers. This leadership position and abundant availability of new business in the target segments point to strong growth prospects for Educomp.
Well-developed content and initiatives to develop it further

Educomp lays stress on good quality content development. The company currently has a team of 400 professionals working on development and improvement of content. It also has a library of content for children from grades 6 - 12 mostly for Mathematics and Sciences. Educomp has over 16,000 modules of content or over 1,00,000 pages in 10 languages. Remarkably, children of the SmartClass program have shown an improvement in marks achieved in examinations, which adequately justifies the good quality of education imparted. This is homogenous content and can be used for teaching children anywhere in the world, with minor modifications. we believe that developing such comprehensive and quality content would be quite difficult for competition and would act as an entry barrier. Thus, well-developed content development is the backbone of Educomp's product offerings.
New business of Internet-based education expected to record robust growth

The new business of retailing through the internet has strong business potential, as almost two-thirds of the education spending by an average Indian middle class family is in the space of post-school mentoring, with which this product is competing. We believe that acceptability of this product would increase as penetration of broadband services increase in India. This product has advantages over conventional coaching as access to websites is available through the day and night as per the convenience of the student and the student does not have to leave his or her home to receive the instructions. Customs duty on broadband service providing equipment has been removed. This would result in broadband becoming cheaper and thus increase access to these products. Thus, there exists immense potential for Educomp to increase the subscriber base of its education portals in turn recording strong growth in revenues and profitability.
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Strong sales team

Educomp has a large sales team that is regularly beefed up by fresh recruitments. Its strong sales team has been successful in achieving high levels of conversion of prospective clients. Growth through organic as well as inorganic routes: Educomp is taking several initiatives to expand its product offerings. The company recently launched its websites for retail tutoring of children. It is also planning to open brick-and-mortar schools through joint ventures. Apart from this, it is also making acquisitions to gain access to new businesses and customer bases. Thus, Educomp is taking several strategic initiatives to increase its business opportunities in the space of Education. Strategic acquisitions: Educomp is making several strategic acquisitions to broaden its product offerings and geographical reach thereby increasing its addressable market size. The company has acquired stake in four companies and entered into a JV with Raffles in the recent past.
Strong growth aided by government initiatives, middle class spending on education

The strong growth in Educomp's Top-line and Bottom-line of 76% and 67% CAGR during FY2007-10E, respectively will be aided by government initiatives to increase literacy, and higher spending by the Indian middle class on education. On its part, the government is laying emphasis on improving literacy levels by enhancing the reach and quality of education. It has been constantly increasing its Budget allocation on Education apart from imposing a cess on Income Tax to provide for such increased allocations. Increased allocation by the Central Government and higher spending on education by the growing Indian middle class are generally spent on products similar to the ones offered by Educomp in a large way. Thus, assuming that the government continues to increase its allocation on education and Indians strive to provide better education to their children, Educomp's revenues are expected to continue to grow at a strong pace going ahead.
Exhibit 8: Revenue and Revenue Growth

(Rs cr) 960
Revenue Growth (RHS)
(%) 150
720
125
480
100
240
75
0 FY2007 FY2008 FY2009E FY2010E
50
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Concerns
Execution risks: Educomp is in a phase of exponential growth. However, any delays in implementation of its contracts would result in loss of revenue, profitability and the faith enjoyed by its customers. This would have consequences on the future growth and profitability of the company, leading to a possible downgrade in the premium valuations currently being enjoyed by it on the bourses. Risk in completion of contracts: Educomp has entered into BOOT contracts with the government for the ICT business and Private schools for the SmartClass business. We have assumed that these contracts would be renewed as and when they expire for providing services to these schools. Non-renewal of these contracts would erode future revenues and profits and consequently, reduce revenue and profit growth. High debtor days: Educomp generally raises its bills to Government schools at the end of each quarter. Bills to Private schools are also raised on a quarterly basis. The bills raised for Government schools take a longer time to be cleared. Hence, the total number of debtor days was high at approximately 160 days at the end of FY2008. We expect the number of debtor days to reduce due to a change in product mix, along with a fall in the proportion of revenues from the Government schools business. Change in governments outlook towards Education: We have assumed future growth based on current growth patterns and visibility of addressable markets. A large part of Educomp's r evenue is derived from government schools. Any change in the Government's policies towards education in India may have serious repercussions on Educomp's business. Lack of growth in broadband connectivity: India has low broadband penetration (a mere 0.35%). We expect it to grow faster going ahead due to removal of customs duty on import of equipment for providing internet services. We believe that failure to increase broadband penetration would have negative consequences for Educomp, leading to slower growth. Inability to raise requisite funds to meet capital requirements: Educomp is growing at an exponential pace and requires significant amount of funds to maintain its growth rate. If the company is unable to raise these funds to meet its capital requirements, it may impact its expansion plans adversely.
Financials
Robust Top-line growth: In FY2008, Educomp recorded a robust Top-line growth of 146% to Rs262.1cr (Rs106.6cr). Going ahead, we estimate Educomp to clock a strong CAGR growth of 76% in Revenues over FY2008-10E. This growth will be driven primarily by strong sales, large addressable market, strong existing product line and innovative new products. The reduction in our estimated growth rate is primarily due to the base effect. We believe the company's acquisitions strategy to increase its target market will also go a long way in enhancing its Top-line.
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Pertinently, we have not factored in Revenues and Earnings from the company's Millennium Schools, Roots 2 Wings, ThreeBrix and Raffles initiatives. However the success of these products and JV's would provide an additional upside to our estimates. Margins sustainable over long-term: Educomp has a healthy revenue mix in terms of the proportion of its various products in total revenue. Its SmartClass business enjoys 58% EBIT, Professional Development has 61% EBIT and Retail (Tutoring and subscription) has 56% EBIT. Compared to this, its ICT business enjoys 29% Margin, which though relatively low compared to its other products, is still quite good. Educomp has a mild shift in product mix towards its Smart class from its ICT business. We believe that with the shift in product mix towards SmartClass, the company's Margins would sustain going ahead. New products and the retail initiatives are also expected to have high Margins and would support growth. The blended EBIT margin of the company after factoring in the unallocated expenses is 41%. However, we have conservatively estimated EBIT Margins to reduce to around 36% over FY2008-10E.
Exhibit 9: EBIT Margins

(Rs cr) 360
EBIT EBIT Margin (RHS)
(%) 50.0
270
45.0
180
40.0
90
35.0
0 FY2007 FY2008 FY2009E FY2010E
30.0
Bottom-line to grow at a scorching pace: Educomp registered a strong 106% and 144% yoy growth in Bottom-line amounting to Rs28.7cr. and Rs70.1cr. FY2008, during FY2007 and FY2008, respectively. We have conservatively estimated Educomp's bottom-line to grow at a CAGR of 67% over FY2008-10E. The strong growth in Bottomline would be primarily supported by an impressive growth in Top-line which would be further supported by innovative new products which are currently in nascent stages of development.
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Exhibit 10: Net profit and Profit growth

(Rs cr) 240
Net profit Profit growth (RHS)
(%) 180
144 160 108
72 80 36
0 FY2007 FY2008 FY2009E FY2010E
Capital Raising Initiatives

FCCB Issue: Educomp issued FCCBs amounting to US $80mn in FY2008. We expect the conversion option to be fully exercised. The Bonds would mature and would be fully convertible upto July 2012. The conversion ratio is 13.8076 shares for every US $1,000 amounting to a total dilution of 1.1lakh shares and conversion value is approximately Rs2,900 per share assuming US $1 = Rs40. We are assuming full conversion of the issue and are building it into our model as fully converted FY2009 onwards. GDR issue: Educomp recently announced that it would be raising US$250mn through GDR issue. This amounts to Rs1,000cr assuming US$1 = Rs40. Information on pricing, usage of proceeds and other details of the issue are still awaited. This would provide Educomp with cash to manage its capital need for new products like Millennium Schools and Roots 2 Wings, apart from expansion of its SmartClass and ICT products. We have not factored in the proceeds of this issue and its subsequent usage into our model as we await further clarity on the same.
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Outlook and Valuation

India has a population of over 110cr, with a student population of a massive 13.5cr, the largest in the world. The total population grows by 1% (1cr) every year and as a result, the student population is also increasing by the same amount. India has a poor literacy rate and to counter this, the Government has embarked upon an ambitious drive to improve quality and accessibility through the Public-Private Partnership route. Educomp, with its SmartClass, ICT and Professional Development for Teachers products is the front-runner in the education industry, well-positioned to leverage the growth opportunity and would remain the fastest-growing company in this space. Given the likelihood of Educomp generating strong free cash flows going ahead, we believe that DCF is the best way of capturing this growth. Our model captures most of the concerns present in the market. We have arrived at a DCF-based fair value for the company of Rs4,051. Thus, we Initiate Coverage on Educomp Solutions with a Buy recommendation. We have applied a weighted average cost of capital (WACC) of 13% and assumed a Terminal growth rate of 6%. The 6% growth rate is deserved by Educomp due to the high growth orbit in which the company is present.
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Exhibit 11: Discounted Cash Flow Model

Projected Cash Flow (Rs cr) Y/ E March (Rs cr) EBIT Growth rate Less: Tax % tax rate Operating Cashflow Add: Depreciation Gross Cashflow Less: Change in Net wkg. cap. % chg Less: Capex % chg FY08 107 132 (33) (30.8) 74 32 107 (62) 199 (69) 6 FY09E 176 65 (58) (32.9) 118 71 190 (87) 41.4 (190) 173.8 (87) 1 (77) FY10E 294 66 (97) (32.9) 197 113 310 (101) 15.5 (207) 9.0 2 2 2 FY11E 459 56 (151) (32.9) 308 170 478 (131) 29.6 (213) 3.3 133 3 91 FY12E 619 35 (204) (32.9) 415 211 626 (120) (8.6) (204) (4.2) 301 4 182 FY13E 805 30 (265) (32.9) 539 215 754 (126) 5.0 (209) 2.0 420 5 223 FY14E 1,014 26 (334) (32.9) 680 239 919 (131) 4.0 (213) 2.0 575 6 269 FY15E 1,237 22 (407) (32.9) 829 260 1,089 (136) 4.0 (217) 2.0 736 7 304 FY16E 1,472 19 (485) (32.9) 987 277 1,263 (141) 4.0 (221) 2.0 901 8 328 FY17E 1,707 16 (562) (32.9) 1,145 310 1,455 (146) 3.0 (226) 2.0 1,084 9 347 FY18E Terminal 1,878 10 (619) (32.9) 1,259 345 1,604 (148) 2.0 (230) 2.0 1,226 10 346 4,909 8.25 5.00 1.05 13.5 10.0 18 6,300 6.0
Free cashflow to the firm (FCFF) (25) 0 Discounted FCFF Terminal value Risk-free rate Risk Premium Beta for the stock Cost of Equity Cost of Debt Debt Equity Tax rate WACC Enterprise Value Less: Debt Add: Cash DCF value of equity No. of equity shares DCF value/ share Source: Company; Angel Research (25)
Sensitivity Analysis WACC 4,051 10.5 11.5 12.5 13.5 14.5 3.0 5,077 4,284 3,669 3,180 2,784 2,458 2,186 4.0 5,675 4,705 3,976 3,409 2,959 2,594 2,292 Terminal Growth Rate 5.0 6,491 5,256 4,364 3,692 3,170 2,755 2,418 6.0 7,671 6,008 4,873 4,051 3,432 2,951 2,567 7.0 9,531 7,097 5,567 4,521 3,763 3,193 2,748 8.0 12,893 8,812 6,571 5,162 4,197 3,499 2,972 9.0 20,814 11,912 8,153 6,089 4,790 3,900 3,256
0.3 13.5 6,925 18 96 7,003 1.73 4,051
15.5 16.5
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Profit and Loss Account

Y/E March Net sales % chg Total Expenditure EBITDA (% of Net Sales) Depreciation & Amortization Interest Other Income PBT (% of Net Sales) Tax (% of PBT) PAT % chg FY2007 106.6 103.8 56.5 50.1 47.0 9.4 1.3 5.6 45.0 42.2 16.3 36.3 28.7 105.8 FY2008 FY2009E 262.1 145.9 137.3 124.8 47.6 32.3 4.2 14.8 103.1 39.3 33.0 32.0 70.1 144.5 483.8 84.6 251.1 232.7 48.1 71.2 0.5 15.0 176.0 36.4 58.1 33.0 117.9 68.3
Rs crore
FY2010E 811.2 67.7 419.7 391.5 48.3 112.6 0.5 15.0 293.3 36.2 96.8 33.0 196.5 66.7
Balance Sheet
Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deffered Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Current liabilities Net Current Assets Miscellaneous Exp. Total Assets 93.6 21.8 71.8 7.6 28.1 160.3 17.7 142.7 0.1 250.2 170.4 54.1 116.3 0.0 28.1 239.8 34.7 205.2 0.0 349.6 360.0 125.4 234.6 0.0 28.1 247.6 45.6 202.0 0.0 464.8 16.0 103.9 119.9 17.5 5.7 143.1 17.3 309.0 326.4 17.5 5.7 349.6 17.3 424.2 441.5 17.5 5.7 464.8 FY2007 FY2008E FY2009E
Rs crore
FY2010E
17.3 618.0 635.3 17.5 5.7 658.5
566.5 238.0 328.5 0.0 28.1 381.4 79.5 301.9 0.0 658.5
Cash Flow Statement

Y/E March Core PBT Other income Depreciation & Amortization Change in Working Capital Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Free Cash Flow Inc./ (Dec.) in Investments Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others/Extra ordinary items Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2007 FY2008E FY2009E 39.4 5.6 9.4 (19.3) (16.9) 18.1 65.4 (47.3) 27.2 0.0 117.1 (2.7) (1.1) 86.0 38.7 59.8 98.6 88.3 14.8 32.3 (61.9) (33.0) 40.5 69.2 (28.8) 0.0 32.0 0.0 (2.7) 0 29.3 0.5 98.6 99.1 161.0 15.0 71.2 (87.5) (58.1) 101.6 189.6 (87.9) 0.0 0.0 0.0 (2.7) 0 (2.7) (90.6) 99.1 8.4
Rs crore
FY2010E 278.3 15.0 112.6 (101.0) (96.8) 208.1 206.5 1.6 0.0 0.0 0.0 (2.7) 0 (2.7) (1.1) 8.4 7.3
Key Ratios
Y/E March Per Share Data (Rs) Diluted EPS Diluted Cash EPS DPS Book Value Operating Ratios Inventory (days) Debtors (days) Creditor (days) Debt / Equity (x) Return Ratios (%) RoE RoCE RoIC (Pre tax) Dividend Payout (%) Valuation Ratios (x) P/E P/BV EV / Sales EV / EBITDA 203.8 54.9 58.4 124.2 103.9 19.6 23.7 49.9 53.4 14.4 12.9 26.7 32.1 10.0 7.7 15.9 25.0 22.7 35.0 9.5 21.8 21.9 43.0 3.9 27.0 26.1 38.4 2.3 31.2 30.4 45.3 1.4 21.0 160.6 46.3 1.1 25.7 160.6 64.2 0.1 19.9 158.2 51.1 0.0 22.0 150.0 60.0 0.0 17.9 23.8 1.7 71.8 35.2 51.4 1.6 161.2 68.4 109.7 1.6 253.0 113.9 179.3 1.6 365.4 FY2007 FY2008 FY2009E FY2010E
Note: All figures are given on a standalone basis; The Balance Sheet and Cash Flow data is estimated.
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Education
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Jain Irrigation Everonn Systems

Initiating Coverage
NEUTRAL
Price Target Price Investment Period Rs624 -
Vitel innovations
Everonn Systems is a pioneer in the Government Schools business and has several innovative products in its ViTELS business. It has a strong focus on developing partnerships with corporate and educational institutions for providing solutions in the field of training and short courses with the intent of enhancing the skill sets of students and employees. The company is set to grow at a CAGR of 52% and 28% in Top-line and Bottom-line respectively during FY2008-10E. Our DCF-based value for the stock is Rs623. Thus, even as we are positive on the company's growth prospects going ahead, we Initiate Coverage on the stock, with a 'Neutral' recommendation.
Stock Info
Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Education 865 0.80 1,236/245 422926 10
IEIS- Highly scalable business: Everonn is a pioneer in the Institutional Education and IT Infrastructure Services (IEIS) business. It has the ability to bid for and win large Government contracts. Currently, Everonn caters to over 3,000 Government schools and can tap a huge addressable market size of 950,000 Government schools, 29,000 of which are expected to be opened for tendering over the next year. Focus on content development a key to maintaining competitive edge: Everonn has 50 professionals working on development and improvement of content for products to be offered across the Virtual & Technology Enables Learning Solutions (ViTELS) platform. Content forms the backbone of its initiatives to provide education services to various institutions and it is constantly developing new products and content to remain competitive.
BSE Sensex Nifty
15,770 4,677
BSE Code NSE Code Reuters Code Bloomberg Code 532876 EVERONN EVSI.BO ESIL IN
Less prone to economic cyclicality: The Education Sector in India is currently dependent on government spending and spending by the 300mn-strong Indian middle class. We believe that the spending on education would remain inelastic in India and Everonn would not face any economic downturn. Thus we estimate Everonn's revenues to increase at a 52% CAGR over the period FY2008-10E. High dependence on Government business and High debtor days: The IEIS business contributes a substantial 59% of Everonn's Topline. Any shift in government's focus on Education sector could have a negative impact on Everonn. Due to the high focus on this product Everonn has very high debtors at 170 days of revenue. This position is not likely to improve substantially in future if high focus on IEIS business is maintained. Key Financials
Y/E March (Rs cr) Net Sales % chg Net Profit % chg FY2007 43.0 39.2 4.1 0.9 4.0 41.5 157.3 11.2 10.7 23.7 20.5 49.5 FY2008 92.1 113.9 14.1 244.7 10.1 37.2 61.5 27.9 20.6 17.2 9.6 25.8 FY2009E 139.7 51.8 17.9 27.6 11.1 36.0 56.3 8.4 8.9 4.1 6.3 17.6 FY2010E 213.5 52.8 23.1 28.9 14.3 35.0 43.7 9.8 10.1 3.7 4.1 11.8
Abs. Sensex (%) Everonn (%)
3m (4.7) (11.4)
1yr* 5.6 30.5
3yr -
Diluted EPS (Rs) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
* Since listing on August 1, 2007
Sulabh Agrawal
Tel: 022 - 4040 3800 Ext: 346
E-mail: sulabh.agrawal@angeltrade.com
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Angel Broking
TM
Everonn Systems
Education
Company background
Everonn has set up Virtual and Interactive Learning classroom networks delivering across quality India, and Everonn, incorporated in 1987, is one of the pioneers in computer education at schools and colleges, and has partnered various state governments to bridge the 'digital divide'. The company has set up Virtual and Interactive Learning classroom networks across India, delivering quality and affordable education. Everonn is a fully integrated Knowledge Management, Education and Training Company offering a range of services, including:
z Creating educational and training content that is globally relevant, z Designing and executing large learning initiatives, and z Setting up the needed infrastructure for learning and training.
affordable education
Everonn develops integrated content for the Indian and global audience for schools, colleges, corporate and retail segments. It sets up the Computer Lab infrastructure in schools and colleges, and IT Education is imparted through well-trained Everonn faculty. Everonn has experience in bringing management programs from premier institutions like the IIMs, XLRI, IIT, LIBA, MICS and MAHE to working professionals and students all over the country through its well-developed and unique platform that uses V-SAT technology. In FY2007, the company accessed the capital markets with an IPO of Rs50cr.
Business Overview
IEIS business
IEIS contracts are mostly entered into with the state governments in the Build-OwnOperate-Transfer years (BOOT) format, with a tenure of 3-5 Everonn's Institutional Education and IT Infrastructure Services (IEIS) business includes imparting computer literacy to students at government schools. In this business, companies participate in competitive bidding through tenders and the contracts are awarded to the lowest bidder. The contracts are mostly entered into with the state governments in the Build-Own-Operate-Transfer (BOOT) format, with a tenure of 3-5 years. Depending on the contracts, Everonn provides infrastructure in the form of a computer lab and networking along with the content and teachers to the schools covered under the contract. The infrastructure is transferred to the schools at the end of the contract period. Thereafter, both parties have the option to renew the contract. Till date, only one contract of Everonn has expired with the state government of Andhra Pradesh. This contract has been renewed for a period of one year. We believe that the state governments would renew the contracts as and when they expire or open them for fresh tenders to provide services to these schools. Currently, Everonn provides services to 3,164 government schools spread across nine states, with Gujarat having the largest concentration at 1,256 schools. Given Everonn's pioneer status and experience in this business and with an addressable market of 9,50,000 government schools in India, we believe that the company will not face major problems in winning more orders in this space. While inviting tenders from parties, state governments set criteria including eligibility of bidders, which deals with past experience, financial
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Everonn Systems
Education
strength, execution and experience in content development. This acts as an entry barrier for Everonn's competitors who are pitching for a share of the pie. We estimate the IEIS business to clock a CAGR growth of over 53% in Revenues We believe this business would continue to grow at a strong pace, primarily due to increased spending by the government and the entry barriers in the business. We estimate the IEIS business to clock a CAGR growth of 53% in Revenues to Rs125cr in FY2010E from Rs53.6cr in FY2008. This strong growth would be achieved on the back of an increase in the number of government schools under coverage. However, the increase in the number of schools is expected to be partially offset by a decline in realisations per school, as the bidding for these contracts is very competitive. Everonn's IEIS business clocked EBITDA Margins of 33% in FY2008. We estimate that as revenues from the business increase, profitability would also increase due to the economies of scale. However, we have conservatively estimated EBITDA Margins of the business to decline by 100bp annually over FY2008-10E.
Management estimates that bids for 29,000 schools would be invited for availing the services of this product
The computer lab set up in government schools to impart IT-based education currently costs approximately Rs2.4 - 2.5lakh. Management estimates that bids for 29,000 schools would be invited for availing the services of this product and Everonn would be able to win bids for 4,000 schools translating into a capital requirement of Rs100cr for setting up the infrastructure at the schools. On a conservative basis, we have estimated Everonn to add 2,057 schools under this business at an estimated capital requirement of Rs2.5lakh per school.
Exhibit 1: IEIS Business Profile

FY2007 Government Schools YoY growth (%) Revenue per school (Rs per month) Revenue per school (Rs per year) Total IEIS Revenue (Rs cr) As % of total revenue YoY growth (%) EBITDA margin (%) EBITDA (Rs cr)
FY2008 3,164 65 17,575 2,10,899 53.6 59 83 33 17.7
FY2009E 5,221 65 17,000 2,04,000 85.5 62 60 32 27.4
FY2010E 7,831 50 16,000 1,92,000 125.3 59 47 31 38.8
1,919 83 16,448 1,97,373 29.3 68 45 13.2
ViTELS business Very innovative product lines

Everonn's ViTELS business concentrates on providing the best possible professional and personal growth to geographically dispersed students by creating virtual classrooms at remote locations with the help of VSAT terminals. This is achieved by providing education and instructions using VSAT technology. Everonn has developed this unique product by tying up with some of the best educators and instructors for each course.
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Everonn Systems
Education
The company has four studios at Chennai from where its instructors conduct the classes. It has set up the virtual classroom infrastructure with partner institutions at 180 schools and 230 colleges where students can receive the instructions. There are LCDs, projectors and cameras at both ends, i.e. the studios and the classrooms and the student and the teacher can see and interact with each other just as in an actual classroom environment. This leads to providing classroom-like focus and attention to students through effective real-time communication.
Exhibit 2: Visual presentation of ViTELS
Everonn has set up the virtual classroom infrastructure with 410 partner institutions and intends to raise this to 1,000 by end-FY2010
The number of students availing the programme and receiving the instructions can be increased through the use of technology and the same faculty simultaneously links up with the students at multiple locations. There is virtually no capacity constraint, as there is no limit on the number of connections that can be created. Everonn, to expand its span of providing services, is increasing the number of studios to seven from the existing three. Management also intends to raise the number of partner institutions from 410 currently to 1,000 by end-FY2010. This would increase the reach of the program tremendously. Everonn enjoys the first-mover advantage in this business and faces minimal competition from peers. There are three different initiatives that the company has taken under this business: Corporate initiative is where Everonn provides its ViTELS platform to corporates to train their employees. Instructions are either provided by the corporate staff or by an expert at Everonn depending on the need of the corporate. This includes providing induction training to fresh recruits, soft skills or refresher training to existing employees. Currently, Everonn's prime customers in this business category are Cognizant and Royal Sundaram.
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Everonn Systems
Education
Institutional initiative is where Everonn provides instructions to students at various partner institutions (schools and colleges). The courses are curriculum as well as non-curriculum based. In the curriculum-based subjects, usually instructions are given on school or college-based subjects like mathematics and sciences. The non-curriculum based subjects include English speaking, vocational training and courses related to the employability of students post getting their college degrees. However, under this initiative, the schools product has been dropped and a new product called 'I School' has been rolled out the details of which are discussed further in the report. The management intends to continue with the partners in the current format or give them an option to convert to the new format as per their desire, but we believe that further new schools would be enrolled only in the 'I School' format. Retail initiative is where Everonn coaches students at remote locations for competitive and entrance examinations like the CET, PMT and JEE. Here, the company has been constantly upgrading its product portfolio through in-house development of new course material, starting new courses and acquiring existing infrastructure. Everonn has entered into a partnership with Toppers at Patna, which used to provide coaching for JEE. Under this partnership, Everonn has gained access to the superior content developed by the coaching class and its teaching faculty. Everonn currently has 50 professional working on development and improvement of content for products to be offered across the ViTELS platform Everonn currently has 50 professionals working on development and improvement of content for products to be offered across the ViTELS platform. Everonn intends to strengthen its content development team as and when required. Apart from this, Everonn has recently added to its content library through its acquisitions and tie-ups. Content forms the backbone of its initiatives to provide education services to various institutions and the company is constantly developing new products and content to address a larger market. As product offerings increase, the addressable market increases. The programs under each initiative last between one or two weeks to six months. Similarly, the fees charged also vary from course to course from Rs1,000 to Rs25,000 per student per course. Everonn is currently working on increasing the number of partner institutions, is developing new courses, improving its current courseware and promoting sale of higher-end courses. Currently, Everonn derives 41% of its revenues from the ViTELS business Currently, Everonn derives 41% of its revenues from the ViTELS business. This business model is highly scalable and we expect the company to record strong growth in this segment going ahead. We estimate the business to record CAGR growth of 18% to hit Rs52.1cr in Topline in FY2010E v/s Rs13.7cr in FY2007. This growth is expected on the back of an increase in the number of partner institutions and higher revenue per partner institution, which would be achieved with the number of courses increasing. However this growth would be subdued compared to the past due to Everonns shift in focus to I School business. Currently, revenues from the ViTELS business are lumpy and higher revenues are recorded during non-examination quarters. Going ahead, we believe such seasonality would diminish as the company's product portfolio improves. Nonetheless, as per our conservative estimates this business would report range-bound EBITDA Margins of 45%.
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Exhibit 3: ViTELS Revenue Profile

FY2007 Partner institutions YoY growth (%) Average revenue per partner (Rs) YoY growth (%) Total ViTELS Revenue (Rs cr) As % of total revenue EBITDA Margin (%) EBITDA (Rs cr)
FY2008 410 108 915,610 31 37.5 41 47 17.6
FY2009E 512.5 25 915,610 0 42.2 31 45 19.0
FY2010E 625 22 915,610 0 52.1 25 43 22.4
197 697,701 13.7 32 34 4.7
'I School' - A Smart product line

Everonn has recently introduced a new product called 'I School', which is on similar lines as Smart class by Educomp. In this initiative, all the classes of the school would be provided with LAN connectivity and a screen. In the previous ViTELS format, only one or two class rooms were wired and the students would have to move amongst classes to these equipped rooms in order to access instructions provided by Everonn. The enrolment to this program was optional for the students and only a few students from the schools would take part in this ViTELS program. In the new 'I School' format, all the students of the member school would take part in program and all the classes would be equipped with the necessary infrastructure. The students would not have to move between classes in order to access instructions. In this new program, the students would be able to access multimedia education content in their class room assisted by the teacher. In certain core topics, a teacher from Everonn would be able to link up with the class remotely through VSAT and give specialized lectures. Further more, Everonn has plans to use the infrastructure at the schools after school hours in order to provide coaching classes. Before the onset of this program, a similar product was being provided under the ViTELS platform. The target of the same was under achieved by 100 schools. The management claims that the target was under achieved due to the change of product and platform. The company is bullish about the product and has given a guidance to ramp up the program to 650-700 schools in one year time. Everonn has content library for students in class 7 to class 12 under this program. This content comprises of 6,500 animations and bank of 50,000 questions. Apart from this, all the books of certain state boards are electronically available. The acquisition of education arm of Aban Lloyd provided Everonn with a large chunk of this content. Apart from this, one of its subsidiarys, Education Resources Pvt. Ltd. would be instrumental in providing and updating the content in future.
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Everonn Systems
Education
Everonn expects to realize revenue of Rs180 per student per month from this product and an average of 1,000 students per school. In the previous ViTELS format, the realization per student was Rs114 per month for an average of 225 students per school. Thus, this product would provide a boost to the revenue of Everonn. The operating margin for the product is currently expected to be 37% and would improve going further as the number of schools and students in the program increases. The contract for this product would be usually be for a period of four years at the end of which the equipment would get transferred to the respective school and a fresh contract can be entered into by the school and Everonn for accessing the content. The product is well accepted by the schools and the company managed to sell it to 21 schools in first 35 days after its launch. Everonn has given a target of 650-700 schools by the end of FY2009 and is confident about the success of the product. However, we prefer to be conservative about 'I School' as it is a brand new product and thus we have assumed that it would be availed of by 150 schools in the first year and a total of 375 schools by 2010E. Similarly the Revenue per student is assumed at Rs150 per student per month which is similar to the competitor's product available in the market.
Exhibit 4: 'I School' Revenue Profile

FY2009E Number of schools YoY growth (%) Students per School Total number of students Revenue per student per month (Rs) Revenue per student per year (Rs) Total I School Revenues (Rs cr) As % of total revenue EBITDA margin (%) EBITDA (Rs cr)
FY2010E 375 150 750 2,81,250 145 1,740 34.3 16 37 13
150 750 1,12,500 150 1,800 10.1 7 35 4
New Business opportunities

Everonn recently entered into a tie-up with Toppers Tutorials, which has been conducting coaching classes for the JEE examinations Everonn is currently working on expanding its product offerings in the field of providing coaching for competitive and entrance examinations. Towards this, Everonn recently entered into a tie-up with Toppers Tutorials, Patna, which had been conducting coaching classes for the JEE examinations. Toppers Tutorials has a good reputation and an excellent turnaround ratio. With this tie-up, Everonn has gained access to Toppers' content and faculty and the lectures are now delivered using ViTELS' platform at Chennai. The company is also in process of initiating a tie -up with Sonefe for providing CA coaching and medical examination coaching. Everonn recently also acquired a license to set up 15 prometric centers to conduct the GMAT, SAT, TOEFL and other similar examinations. It intends to increase the number of these centers to 29 over next one year. More clarity on this business would develop later as work on the same is still progressing.
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Everonn Systems
Education
Investment Argument
IEIS and ViTELS - Highly scalable businesses
Everonn pioneered the Institutional Education and IT Infrastructure Services (IEIS) business (government schools) in India and is one of the top players in this segment along with Educomp and NIIT. The company has the ability to bid for and win large-sized government contracts. It currently caters to over 3,164 government schools. We believe that with a substantial addressable market of 9,50,000 schools, Everonn would not face any problems in growing this business at a fast clip over the next few years. The company's management expects to add 4,000 schools to its IEIS business during FY2009E. ViTELS, Everonn's VSAT-based short and medium-duration courses provided with the help of partner institutions, is a highly scalable business as there are no capacity constraints. Everonn is constantly expanding its product offerings and entering into tie-ups with more institutions to increase its penetration and reach. Through the VSAT links, instructions can be simultaneously delivered at multiple locations, which would bring down the cost of delivering a lecture. This business earns EBITDA Margins of over 40%. Everonn is also taking steps to expand its product offerings and reach, which would in turn result in Margins of this business improving. However, on a conservative basis, we have estimated Margins of this business to rule constant going ahead.
Focus on content development - Key to maintaining competitive edge

Everonn is scouting for a strategic acquisition to enhance its content and development team in its bid to remain competitive over its peers and enhance its product range. The company currently has 50 professionals working on the development and improvement of content for the products offered through the ViTELS and 'I School' platform. It intends to strengthen its content development team. Everonn has also made a few acquisitions, which has resulted in additions to its content library and team.
Less prone to economic cyclicality

The Indian Education Sector is currently dependent on the government spending and spending by the 300mn-strong Indian middle class. The government intends to improve the overall literacy levels in India. Further, the Indian middle class spends a major portion of its earnings on the education of its children by way of school fees, supplies, uniforms and private coaching. We believe that the spending on education will remain inelastic in India and thus Everonn is unlikely to face any economic downturn.
Tie-ups and acquisitions

Everonn has acquired the education business of Aban Offshore, which is expected to provide access to content and a full team to Everonn. The division has been in operation for the last 12-13 years and brings with it a huge experience in the field of providing education and improves the prospects of the ViTELS business.
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Angel Broking
TM
Everonn Systems
Education
Concerns
Fresh capital infusion requirement: Everonn had raised Rs50cr through its IPO during FY2007, most of which has been deployed in the business for expansion purposes. Everonn, in order to grow, needs further cash infusion. In order to fund its growth, Everonn is intends to raise Rs167cr for its expansion purposes by preferential allotment of equity shares and warrants to FII's and promoters. The subscription amount of Equity shares is Rs91cr and the accruals from allotment of warrants is Rs76.5cr, 10% of which is payable on warrant allocation. The infusion of this fresh capital would help in the growth plans of Everonn, however this would also lead to near-term pressure on EPS. High dependence on the government business: The IEIS business contributes a substantial 59% the Everonn's current overall revenues. Hence, any dilution in the government's focus on the Education Sector could negatively impact Everonn. Acceptability of ViTELS platform: In this business, a virtual classroom is created with the student and faculty present at different locations. Though the entire interaction is real-time, the acceptability of the product may be hindered due to the geographical divide. High debtor days: Everonn had high debtor days of 170 at the end of FY2008. This was on account of the fact that most of Everonn's revenues are derived from its IEIS business, where state governments are the counterparties. We believe that such high debtor days will more-or-less continue for Everonn, which will inevitably keep the company requiring high levels of working capital.
Financials
Everonn posted a 115% yoy growth in Top-line to Rs92.8cr in FY2008. Going ahead, we estimate Top-line to post a CAGR growth of 52% over FY2008-10E on the back of strong growth recorded by both the IEIS and ViTELS business segments and Launch of new product, 'I School'. Blended EBITDA Margins stood at 37% in FY2008. However, going forward, we estimate EBITDA Margins to decline marginally. Net Profit stood at Rs14.1cr in FY2008, and we estimate it to grow at a strong CAGR of 28% over FY2008-10E.
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Education
Exhibit 5: Revenue and Revenue growth

(Rs cr) 250
Revenue Growth (RHS)
(%) 128 114
200 100 150 86 72 58 50 44 0 FY2007 FY2008 FY2009E FY2010E 30
100
Exhibit 6: EBITDA Margins

(Rs cr) 100
EBITDA Margin (RHS)
(%) 44
80
42
60
40
40
38
20
36
0 FY2007 FY2008 FY2009E FY2010E
34
Everonn currently requires Rs150cr to meet its capex requirements, a part of which would be utilised to beef up its content development team. Content is the backbone of all the company's initiatives. Hence, Everonn is constantly developing new products so that its content enjoys a competitive edge over peers. We expect the company to start providing services to 2,057 new government schools in FY2009E. This would, lead to further capital requirements of approximately Rs52cr. Apart from this, the new product, 'I School', would also require capital investment. We have assumed a capex expenditure of approximately 12 lakhs per 'I School' amounting to approximately Rs17cr for 150 schools during FY2009E. The company has announced preferential allotment of Shares and Warrants to FII's and Promoter's amounting to Rs167cr. We have factored in the receipt of cash and consecutive increase of number of shares fully into our model. However, this increase in number of shares would dent the EPS growth of the company substantially.
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Everonn Systems
Education

Everonn has proved itself to be a highly innovative company with unique offerings through its ViTELS platform. The company is a dominant player in the Southern markets. However, Everonn relies very heavily on its IEIS business, which is working capital-intensive. The company would continuously need fresh capital inflows to fund its ambitious expansion plans and support its working capital requirements. We believe that DCF would be the best way to capture the growth and value of the company. Our DCF-based fair value for the company is Rs623. Thus, we Initiate Coverage on Everonn Systems with a Neutral recommendation. Our model captures most of the concerns present in the market. We have applied weighted average cost of capital (WACC) of 13% and assumed a Terminal growth rate of 6%. The WACC is on the lower side due to a healthy debt equity ratio of 0.5 and attractive rate of interest enjoyed by the company.
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Education
Exhibit 7: Discounted Cash Flow Model

Projected Cash Flow (Rs cr) Y/ E March (Rs cr) EBIT Growth rate Less: Tax % tax rate Operating Cashflow Add: Depreciation Gross Cashflow Less: Change in Net working capital % chg Less: Capex % chg Free cashflow to the firm (FCFF) FY08 25 206.1 (8) (31.2) 17 10 27 (8) (35.7) (19) 46.2 1 0 Discounted FCFF Terminal value Risk-free rate Risk Premium Beta for the stock Cost of Equity Cost of Debt Debt Equity Tax rate WACC Enterprise Value Less: Debt Add: Cash DCF value of equity No. of equity shares DCF value/ share Source: Company; Angel Research 8.25 6.00 0.80 1 FY09E 32 25.4 (10) (30.5) 22 19 41 (10) 23.7 (73) 291.5 (42) 1 (37) FY10E 40 25.2 (12) (31.4) 27 35 62 (18) 81.6 (96) 32.2 (52) 2 (40) FY11E 51 28.3 (16) (32.2) 34 50 84 (6) (65.4) (98) 1.7 (20) 3 (14) FY12E 68 32.8 (22) (32.9) 45 59 105 3 (145.2) (83) (14.6) 24 4 15 FY13E 94 38.8 (32) (33.9) 62 64 126 (8) (406.0) (70) (15.5) 47 5 25 FY14E 129 38.1 (45) (34.5) 85 66 150 (17) 100.0 (73) 3.3 61 6 29 FY15E 174 34.8 (60) (34.7) 114 67 181 (22) 31.8 (72) (0.9) 87 7 37 FY16E 216 24.0 (75) (34.7) 141 100 241 (26) 15.0 (74) 3.0 141 8 53 FY17E 253 17.0 (88) (34.7) 165 111 276 (29) 14.5 (77) 3.0 170 9 57 FY18E Terminal 276 9.0 (96) (34.7) 180 122 302 (34) 14.0 (79) 3.0 190 10 56 846 6.0
Sensitivity Analysis WACC 623 10.0 3.0 801 654 543 455 386 329 282 4.0 919 736 601 499 418 354 302 Terminal Growth Rate 5.0 1,085 845 677 553 458 384 325 6.0 1,333 998 777 623 508 421 353 7.0 1,747 1,227 918 715 573 468 387 8.0 2,575 1,609 1,130 845 658 527 430 9.0 5,058 2,372 1,482 1,040 779 606 485
13.1 11.0 24 865 0.3 13.0 1,027 24 4 1,007 1.62 623
11.0 12.0 13.0 14.0 15.0 16.0
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Profit and Loss Account

Y/E March Net sales % chg Total Expenditure EBITDA (% of Net Sales) Depreciation & Amortization Interest Other Income PBT (% of Net Sales) Tax (% of PBT) PAT % chg FY2007 43.0 39.2 25.2 17.9 41.5 9.6 2.3 0.0 5.9 13.7 1.8 31.0 4.1 0.9 FY2008 FY2009E 92.1 113.9 57.8 34.3 37.2 9.7 3.3 0.7 21.9 23.8 7.9 35.9 14.1 244.7 139.7 51.8 89.4 50.3 36.0 18.6 4.1 0.0 27.6 19.8 9.7 35.0 17.9 27.6
Rs crore
FY2010E 213.5 52.8 138.8 74.7 35.0 35.1 4.1 0.0 35.6 16.7 12.4 35.0 23.1 28.9
Balance Sheet
Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Current liabilities Net Current Assets Miscellaneous Exp. Total Assets 56.2 19.7 36.5 0.0 0.0 38.4 9.4 29.0 0.0 65.5 74.8 29.4 45.3 0.0 0.0 61.6 17.2 44.5 0.0 89.8 147.4 48.1 99.4 0.0 0.0 173.0 20.4 152.6 0.0 251.9 10.3 26.2 36.5 23.5 5.4 65.5 13.9 36.5 50.4 34.0 5.4 89.8 16.2 196.3 212.5 34.0 5.4 251.9 FY2007 FY2008E FY2009E
Rs crore
FY2010E
16.2 219.3 235.4 34.0 5.4 274.9
243.5 83.1 160.4 0.0 0.0 144.1 29.6 114.5 0.0 274.9
Cash Flow Statement

Y/E March Core PBT Other income Depreciation & Amortization Change in Working Capital Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Free Cash Flow Inc./ (Dec.) in Investments Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others/Extra ordinary items Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2007 FY2008E FY2009E 5.9 0.0 9.6 (8.6) (0.7) 6.2 12.7 (6.5) 0.0 13.7 (3.3) (0.2) (2.4) 7.8 1.3 3.0 4.2 21.2 0.7 9.7 (7.9) (7.9) 15.9 18.6 (2.7) 0.0 0.0 10.5 (0.2) 0 10.3 7.6 4.2 11.8 27.6 0.0 18.6 (9.8) (9.7) 26.8 72.6 (45.8) 0.0 144.4 0.0 (0.2) 0 144.2 98.4 11.8 110.2
Rs crore
FY2010E 35.6 0.0 35.1 (17.7) (12.4) 40.5 96.1 (55.6) 0.0 0.0 0.0 (0.2) 0 (0.2) (55.8) 110.2 54.4
Key Ratios
Y/E March Per Share Data (Rs) Diluted EPS Diluted Cash EPS DPS Book Value Operating Ratios Inventory (days) Debtors (days) Creditor (days) Debt / Equity (x) Return Ratios (%) RoE RoCE RoIC (Pre-tax) Dividend Payout Valuation Ratios (x) P/E P/BV EV/Sales EV/EBITDA 157.3 23.7 20.5 49.5 61.5 17.2 9.6 25.8 56.3 4.1 6.3 17.6 43.7 3.7 4.1 11.8 11.2 10.7 14.8 4.7 27.9 20.6 33.8 1.4 8.4 8.9 23.2 1.1 9.8 10.1 18.4 0.8 3.7 237.1 65.4 0.6 4.8 169.5 77.4 0.7 5.3 145.2 63.4 0.2 5.0 140.0 65.0 0.1 4.0 13.3 0.2 35.5 10.1 17.2 0.1 36.4 11.1 22.6 0.1 131.3 14.3 36.0 0.1 145.5 FY2007 FY2008 FY2009E FY2010E
Note: All figures are given on a standalone basis; The Balance Sheet and Cash Flow data is estimated.
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Jain Irrigation NIIT Limited

Initiating Coverage
ACCUMULATE
Price Target Price Investment Period Rs109 Rs123 12 Months
The 'globe' is its oyster!

NIIT Limited is India's largest IT training company, having a pre-eminent position in the Indian retail training segment. In recent times, the company has diversified its business model, moving into newer verticals by leveraging its strengths in IT. With a presence across the chain of IT learners as also expansion into newer verticals like financial services, the company is positioning itself as a 'Global Talent Development Corporation', serving the burgeoning manpower needs of varied sectors including IT, given the strong economic growth expected and the manpower required to sustain strong GDP growth. We expect NIIT to record CAGRs of 21.5% and 36.4% in Topline and Bottomline respectively, over FY2007-10E. At the CMP, the stock is trading at 12.5x FY2010E EPS. We Initiate Coverage on the stock, with an Accumulate recommendation and 12-month Target Price of Rs123.
Stock Info
Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) Education 1,797 0.60 172/85 290796 2
BSE Sensex Nifty
15,770 4,677
The shift to a 'Global Talent Development Corporation': NIIT has taken a slew of strategic initiatives, leading to a shift in its business mix. From being a mainly IT-focussed training company, it has now positioned itself as a 'Global Talent Development Corporation'. In line with this, NIIT has introduced new business initiatives in financial services and management education apart from re-jigging its existing business portfolio to align with market realities. As a result, the company is now in a strong position to capitalise on the huge manpower requirements of varied industries and act as a 'supplier of talent across sectors' owing to which NIIT's addressable market has also increased substantially. Scalability of new businesses: NIIT's new businesses, financial services training and technology-led management education enjoy high operating leverage. These businesses record higher Margins with higher capacity utilisation. Thus, as they gain greater acceptance, profitability is likely to improve. We have modeled for 15% Margins in FY2010E vis--vis operating losses of 125% in FY2007. Strong position in the domestic IT training market: NIIT is the market leader in the domestic IT training market. This business has grown at a CAGR of 37% over FY2005-07 and, with higher capacity utilisation, has improved Margins significantly. We expect this business to continue to grow at a decent rate along with good profitability, going ahead.
BSE Code NSE Code Reuters Code Bloomberg Code 500304 NIITLTD NIIT.BO NIIT IN
Key Financials
Y/E March (Rs cr) Net Sales % chg EBITDA Margin (%) Net Profits FY2007 795 76.4 9.7 57 38.6 3.4 31.6 5.8 19.7 6.3 2.5 25.7 FY2008E 998 25.5 9.9 73 26.6 4.4 25.0 5.0 21.3 9.9 2.0 20.4 FY2009E 1,194 19.7 12.0 104 43.8 6.3 17.4 4.1 25.9 14.7 1.6 13.5 FY2010E 1,427 19.4 14.2 146 39.6 8.8 12.5 3.3 29.6 19.7 1.3 9.2
Abs. Sensex (%) NIIT (%)
3m (4.7)
1yr
3yr
% chg Diluted EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
8.5 133.5
(3.5) (17.6) 325.0
Harit Shah
Tel: 022 - 4040 3800 Ext: 345
E-mail: harit.shah@angeltrade.com
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Company Background
NIIT is Indias largest IT training company NIIT Limited is Indias largest IT training company and has the largest network of centres (own and franchisee) across the country. The company provides IT education and training to students and professionals. Its training programmes cover the entire spectrum of learners, from youngsters learning computers for the first time, to students looking at pursuing IT as a career option to professionals looking to upgrade their IT skills to keep pace with the demands of a highly competitive working environment. NIITs business segments are fairly diverse and can be divided as follows: NIIT is the market leader in the Indian retail IT training market Individual Learning Solutions (ILS) NIIT is the market leader in the Indian Retail IT training market, recording Net Revenues of Rs247cr in FY2007. This business is segregated into two parts Careers and Non-careers. In the Careers segment, NIIT delivers IT training to graduates and under-graduates who are looking to make a career in IT. Its flagship program, GNIIT, enables students to get up-to-date on the latest technologies and skill sets in the industry. In the Non-careers, or Re-skilling segment, NIIT trains professionals currently working in the industry and enables them to upgrade their skills to become more relevant in line with market requirements. The company trains over 5,00,000 learners each year, with an alumni base exceeding 3mn. At the end of 9MFY2008, NIITs ILS net revenues hit Rs234cr, clocking a strong yoy growth of 30%. In its SLS business, NIIT caters to the computer education requirements government of and school private children studying in the schools in India School Learning Solutions (SLS) - NIITs SLS business segment caters to the computer education requirements of school children studying in government and private schools in India. There are 9,50,000 government schools and 50,000 private schools in the country catering to the education requirements of over 200mn students. Hence, the market size is fairly significant. In the government schools segment, through a tendering process the company bids for contracts and after securing a contract, it works with the concerned state governments towards setting up the infrastructure. NIIT also designs and develops the courseware and textbooks in many Indian languages. NIIT, at the end of 3QFY2008, was working with 3,828 government schools in its Government schools business. On the other hand, the estimated market size for private schools is 50,000 schools. At the end of December 2007, NIIT served around 940 private schools. In 9MFY2008, SLS net revenues hit Rs63cr. The CLS business contributed the maximum to NIITs net revenues in 9MFY2008 Corporate Learning Solutions (CLS) - NIIT provides content development, learning management solutions and training delivery services to its clients in its CLS business. The company has a strong focus on the US, which has further increased with the acquisition of Element-K, a leading provider of learning solutions in North America. Going ahead, spending on corporate training is expected to rise by around 7% per annum until 2010 as per IDC, with training outsourcing expected to grow by a considerably faster rate of nearly 25% per annum over the same period. In 9MFY2008, the CLS business clocked net revenues of Rs418cr, recording yoy growth of 43%, aided by the acquisition of Element-K. This business contributed the maximum to NIITs net revenues.
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NIIT
has
leveraged
its
New Businesses - Over the past two years, NIIT has made conscious attempts to expand and diversify its business portfolio away from purely IT training. The company has leveraged its extensive experience in IT to expand into newer verticals and business segments. NIIT has commenced training courses in the Banking, Financial Services and Insurance (BFSI) vertical through the Institute of Finance, Banking and Insurance (IFBI), a joint venture with private banking major, ICICI Bank, in which NIIT holds an 81% stake. The company offers courses like Retail Banking, Insurance and Financial Services launched in partnership with industry majors like ICICI Bank, ICICI Prudential and ICICI Securities. The company has also tied up with Infosys to offer training on its Finacle software product. NIIT has also signed up HDFC Bank and Yes Bank, reflecting the ever-increasing acceptance that IFBI is getting from the industry. NIIT has also started a technology-led management training initiative called NIIT Imperia. NIIT Imperia offers long and short-term programmes in general and functional management to working executives. NIIT provides the platform for the delivery of quality management education, while its partners, including three IIMs, provide content, teaching and certification. In the period 9MFY2008, the new businesses clocked a robust yoy growth of 416% in net revenues, which hit Rs20cr.
experience in IT to venture into newer verticals like financial services and management education
Business Overview
Individual Learning Solutions (ILS) Supplier of key raw materials to the IT Industry
NIITs key growth area has been its retail training business (ILS). With the strong growth of the Indian IT Industry, NIITs role as a supplier of raw materials to the industry has enabled it to grow at a rapid rate. It is well-known that the IT Industry is people-intensive and that human resources are the key raw material driving its growth. The total direct employment in the IT-ITES Industry was estimated at nearly 2mn in FY008. This reflects a strong CAGR growth of over 25% since FY2002. In terms of revenues, the Sector has grown from a mere US $7.7bn in exports in FY2002 to US $40.3bn in FY2008, reflecting a CAGR growth of around 32%. Thus, the strong growth of this industry has been the key enabler to NIITs own growth over the past few years. The ILS business has seen its India-based gross revenues (system-wide revenues, SWR) clock a CAGR growth of over 41% over FY2005-07. Overall ILS net revenues, which include China revenues and Rest of the World (Vietnam, Ghana, Egypt, Yemen and Sri Lanka, among others) have grown at a CAGR of 36.7% over the same period. This compares favourably with the growth of around 33% recorded by the Indian IT-ITES Export Sector over the mentioned period. The ILS business has, in fact, accounted for over 51% of NIITs incremental revenues over FY2005-07 on a gross basis and nearly 29% on a net basis, reflecting the key contribution that it has made in this time-frame. Even as the ILS Business contribution to revenues has been significant, its contribution to profitability has been even more pronounced. It should be noted that the ILS business is characterised by strong operating leverage. The proportion of fixed costs rent, electricity, staff costs is typically high. As capacity utilisation of a centre reaches a particular level, the centre
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breaks-even at the operating level. Any rise in capacity utilisation over and above the break-even level leads to strong Margin expansion, (as there are no additional costs involved to earn those higher Margins), which flows straight through to the pre-tax profits (PBT). NIIT operates its ILS business through a hub-and-spoke model. Its centres are typically a mix of its own centres and franchisee-owned centres. NIIT, at the end of December 31, 2007, had a total of 473 India retail centres, of which 52 centres were self owned (11%). However, these centres accounted for around 40% of the total capacity in terms of seat-years. Thus, all the major, high revenue-potential centres with higher capacity in major cities are typically owned by NIIT, while the other centres generally located in smaller cities and towns are franchisee centres, enabling deeper expansion into the interiors of the country. NIIT earns a revenue share in the region of 25-40% from the franchisees for use of its brand name, course material and so on. While the levels of capacity utilisation required for break-even differ for each centre, given their differing capacities, location, profitability and cost structures, average capacity utilisation required for break-even levels is around 35-36%. NIIT was able to achieve this level in FY2005, when it reported a marginally negative EBITDA Margin of 0.2%. However, as capacity utilisation levels rose, Margins for the business soared. In FY2006 and FY2007, capacity utilisation levels hit 46% and 54% respectively, leading to Margins of 7.7% and 17.6%. For 9MFY2008, Margins have already hit 20% on the back of strong enrolments and increased capacity utilisation of 55% on enhanced capacity, reflecting the strong traction being witnessed by the business. In terms of incremental EBITDA contribution, the ILS business contribution was an astonishing 116% and 159% in FY2006 and FY2007, respectively. This can be attributed to the strong improvement in profitability of the ILS business on account of operating leverage and higher capacity utilisation, and poor performance of the SLS business, which recorded lower Margins due to the restructuring of the business with a greater focus on the Private Schools business. A more subdued performance of the CLS business on the profitability front due to the acquisition of Element-K (which has much lower Margins) and Rupee appreciation (in spite of the current depreciation on account of record crude prices) also partly contributed to the increase in contribution of the ILS business EBITDA to the total EBITDA.
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Exhibit 1: ILS business - Driving growth and profitability

(Rs cr) System-wide Revenues (SWR) % chg Contribution to Total SWR (%) Contribution to Incremental SWR (%) Net Revenues % chg Contribution to Total Net Revenue (%) Contribution to Incremental Net Revenue (%) EBITDA % chg EBITDA Margins (%) Contribution to Total EBITDA (%) Contribution to Incremental EBITDA (%) Capacity utilisation (%)
FY2005 320 50.3 132 33.2 (0) (0.2) (0.6) 38
FY2006 391 22.3 58.0 184.5 167 26.3 37.1 66.5 13 7.7 21.2 115.9 46
FY2007 566 44.6 50.7 39.5 247 47.9 31.1 23.2 43 239.1 17.6 56.1 158.5 54
Exhibit 2: ILS business capacity utilisation and EBITDA Margins - Strong correlation
(%) 30 EBITDA Margins Capacity utilisation (RHS) (%) 70
24
62
18 54 12 46 6 38 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08 3QFY08 (6) 30
We expect NIITs ILS business to record strong growth going ahead. In terms of its contribution to SWR, we expect it to decline from over 50% in FY2007 to 47% in FY2010. However, it should be noted that the contribution in FY2008 is expected to fall mainly on account of full consolidation of Element-K with the company, which will lead to the contribution of CLS SWR to total SWR rising significantly. However, over FY2008-10E, we expect the contribution of ILS SWR to the total to continue to rise by over 400bp. We expect ILS SWR to clock a CAGR growth of nearly 25% over FY2007-10E, as compared to the 27.9% CAGR growth expected in total SWR over this period.
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On the other hand, we expect the contribution of ILS net revenues to the total to rise from 31.1% in FY2007 to 37.0% in FY2010, given the impressive 28.8% CAGR growth expected in these revenues over FY2007-10E, as compared with the 21.5% CAGR growth expected in total net revenues over the same period. In terms of operating profitability, we expect the total contribution of ILS EBITDA to rise from 56.1% in FY2007 to 57.4% in FY2010. However, it should be noted that in FY2008 itself, we expect the contribution of ILS EBITDA to surge to over 64% of total EBITDA, mainly on account of the impressive growth in the fiscal due to higher capacity utilisation and strong growth in enrolments. Thus, we expect contribution of ILS EBITDA to the total to actually decline over FY2008-10E due to faster growth in the EBITDA of other segments, mainly CLS and New Businesses. We expect ILS EBITDA to clock a 38.8% CAGR growth over FY2007-10E, vis--vis a total EBITDA CAGR growth of 37.7% over the same period.
Exhibit 3: ILS business projections

(Rs cr) System-wide Revenues (SWR) % chg Contribution to Total SWR (%) Net Revenues % chg Contribution to Total Net Revenue (%) EBITDA % chg EBITDA Margins (%) Contribution to Total EBITDA (%) Number of seat-years Capacity utilisation (%) Seat-years utilised Revenues per utilised seat-year (Rs) % chg
FY2007 566 44.6 50.7 247 47.9 31.1 43 239.1 17.6 56.1 164,584 54 88,875 27,792 7.2
FY2008E 721 27.5 43.0 317 28.4 31.8 63 46.2 20.0 64.4 194,120 56 108,707 29,181 5.0
FY2009E 890 23.4 44.8 409 29.0 34.3 86 35.5 21.0 59.9 224,770 60 134,862 30,349 4.0
FY2010E 1,099 23.5 47.1 527 28.9 37.0 116 35.0 22.0 57.4 259,610 65 168,746 31,259 3.0
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School Learning Solutions - Restructuring in progress

NIIT through its SLS business segment caters to the computer education requirements of school children studying in government and private schools in India. There are 9,50,000 government schools and 50,000 private schools in the country catering to the education requirements of over 200mn students. Therefore, the market size is fairly significant. In the government schools segment, the company typically bids through a tendering process and after securing a particular contract for a certain number of schools, works with the concerned state governments towards setting up infrastructure, systems integration, managing the set-up, education delivery and teacher training. NIIT also designs and develops courseware and textbooks in many Indian languages. With the government strongly focusing on IT and IT-enabled education in the country, there is significant scope for growth in this business. NIIT, at the end of 3QFY2008, was working with 3,828 government schools in its Government schools business. After winning a contract, NIIT generally makes upfront investments in setting up the infrastructure of the school. On an average, around 30% of the total contract value is required for upfront investments. Thus, this is a highly capex-intensive business. In terms of revenues, NIIT on an average earns Rs15,000 per school per month. Going ahead, given the intense competition and the government typically awarding tenders to the lowest bidders, we expect this to taper down. The receivable days are also on the higher side in this business, given that the government machinery typically creaks along at its own pace and takes its time to pay back. From FY2007 onwards, due to a significant receivables problem, NIIT shifted its focus away from government schools towards private schools. The estimated market size for private schools is 50,000 schools. At the end of December 2007, NIIT served around 940 private schools. Thus, there exists strong scope for growth going ahead.
Exhibit 4: SLS Business revenues - In restructuring mode

(Rs cr) 100 Government schools Private schools
80
60
40
20
0 FY06 FY07
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However, with the government clear in its intentions to engage the private sector to leverage the use of IT in the Education Sector, NIIT is looking at re-focusing on this business as well. This far in 9MFY2008, SLS revenues have grown by a marginal 2% yoy compared to the substantial 28% yoy fall in FY2007, while EBITDA Margins have increased by over 200bp, reflecting the increased focus on profitability. Going ahead, NIIT expects this business segment to revert to a higher growth path, with the restructuring being more or less complete.
Exhibit 5: SLS Business - Focus on profitability

(Rs cr) 120 SLS revenues EBITDA margins (RHS) (%) 20
96
16
72
12
48
24
0 FY06 FY07 9MFY08
Nonetheless, in spite of an improved performance expected going ahead, it should be noted that at the current juncture, given the relatively subdued growth in this business, the segments contribution to overall revenues SWR and net - and EBITDA is expected to decline going ahead. We expect the contribution of SLS SWR to the total SWR to decline from 7.4% in FY2007 to 6% in FY2010, given the slower (albeit decent) 19% CAGR growth expected in SLS SWR over FY2007-10E, vis--vis a significantly higher 27.9% CAGR growth expected in total SWR in the mentioned period. On the other hand, we expect the contribution of SLS net revenues to the total to decline from 10.7% in FY2007 to 9.6% in FY2010, given the slower (albeit decent) 17.5% CAGR growth expected in these revenues over FY2007-10E compared with a 21.5% CAGR growth expected in total net revenues over the same period. In terms of operating profitability, we expect the total contribution of SLS EBITDA to fall from 12.7% in FY2007 to 8.8% in FY2010. This is on account of the expected fall in the Margins of the segment due to intense competition, leading to an EBITDA CAGR growth of 22.1% over FY2007-10E, vis--vis a considerably higher total EBITDA CAGR growth of 37.7% over the same period.
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Exhibit 6: SLS business projections

(Rs cr) System-wide Revenues (SWR) % chg Contribution to Total SWR (%) Net Revenues % chg Contribution to Total Net Revenue (%) Government schools revenues % chg Number of schools Average revenues per school per month (Rs) % chg Private schools revenues % chg Number of schools EBITDA % chg EBITDA Margins (%) Contribution to Total EBITDA (%)
FY2007 86 (27.1) 7.4 85 (27.9) 10.7 61 (37.3) 3,006 14,665 24 16.0 806 10 (54.0) 11.6 12.7
FY2008E 88 1.8 5.2 86 1.3 8.6 58 (5.0) 3,900 13,931 (5.0) 28 17.9 950 12 22.6 14.0 12.2
FY2009E 115 31.7 5.8 113 31.7 9.5 75 29.1 5,200 13,653 (2.0) 38 36.8 1,300 15 27.0 13.5 10.6
FY2010E 140 21.5 6.0 137 21.5 9.6 90 20.6 6,000 13,380 (2.0) 47 23.1 1,600 18 17.0 13.0 8.8
Corporate Learning Solutions - Acquisition of Element-K

In July 2006, NIIT acquired Element-K, a leading provider of learning solutions in North America. Element-K has the worlds second-largest content library, offers over 3,500 courses in the US and Canada and hosts a learning platform. With this acquisition, NIIT significantly increased its size and the combined entity is amongst the worlds leading global providers of comprehensive learning solutions. The companys (NIIT) global reach and complementary learning solutions provide a good fit with Element-Ks extensive content library, marquee clients in the US and Canada and well-respected brand name in that region.
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Exhibit 7: CLS Business - Inorganic push*

(Rs cr) 450 CLS revenues EBITDA margins (RHS) (%) 20
360
16
270
12
180
90
0 FY05 FY06 FY07 9MFY08
Source: Company, Angel Research; * The spike in 9MFY2008 revenues is because of the acquisition of Element-K.
NIIT offers content development, learning management solutions and training delivery services to its clients in its CLS business. The company has a strong focus on the US, which has increased further with the acquisition of Element-K. The estimated size of the North American corporate training market is US $45.9bn, of which delivery services account for the maximum pie of US $21.6bn, while content development accounts for a size of US $16.3bn. Going ahead, spending on corporate training is expected to rise by around 7% until 2010 as per IDC, with training outsourcing expected to grow at a considerably faster rate of nearly 25% over the same period.
Exhibit 8: North American Corporate Training Market
Facilities US$ 0.4bn
Consulting US$ 0.7bn
Fulfillment US$ 0.9bn
Outsourcing Services US$ 1.2bn
Segments
Assessment / Testing US$ 0.4bn
Delivery Services US$ 21.6bn
Technologies US$ 1.2bn
Colleges / Universities US$ 2.2bn
Content Development US$ 16.3bn
Source: Company presentation
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NIIT also partners with industry majors like Microsoft, Intel, IBM and Symantec to provide training to professionals on their platforms. The company provides corporate training services in several verticals such as technology, BFSI, retail and publishing. NIIT also has a Learning Management Solution (platform) called CLiKS. Along with Element-K, NIITs strategy is to grow its content library subscription-based business, provide end-to-end solutions and grow more profitably by off-shoring some of Element-Ks work to India. In fact, the company has managed to make Element-K more profitable. At the time of acquisition, Element-K recorded negative margins compared to a low-to-mid-single digit range that it is clocking currently. Post the acquisition of Element-K, the CLS business is the second-largest contributor to NIITs gross revenues (SWR) and the largest contributor to net revenues, with revenue share of around 41% and 57% respectively, in FY2007 (56.8% to net revenues in 9MFY2008). We expect the segments contribution to overall revenues SWR and net - and EBITDA to decline going ahead, due mainly to considerably higher growth being witnessed by other business segments of the company, namely ILS and New Businesses. We expect the contribution of CLS SWR to the total SWR to decline from nearly 50% in FY2008 to 41.5% in FY2010, given the considerably slower 6.6% CAGR growth expected in CLS SWR over FY2008-10E v/s the substantially higher 17.9% CAGR growth expected in total SWR over this period. It should be noted that the contribution of the CLS business to total SWR will increase significantly in FY2008 on account of full consolidation of Element-K with NIITs revenues. In FY2007, the financials of Element-K were consolidated with those of NIIT for a period of 8 months. Thus, the full consolidation of Element-K with NIIT will provide a kicker to CLS revenues in FY2008E. Pertinently, the integration of Element-K with NIIT is well on track. Over FY2007-10E, we expect CLS SWR to grow at a CAGR of 15.5% vis--vis a 27.9% CAGR growth in total SWR. On the other hand, we expect the contribution of CLS net revenues to the total to fall from 57% in FY2007 to 46.4% in FY2010, given the slower 13.2% CAGR growth expected in these revenues over FY2007-10E, as compared with a 21.5% CAGR growth expected in total net revenues over the same period. In terms of operating profitability, we expect the total contribution of CLS EBITDA to fall significantly from 45.9% in FY2007 to 26.3% in FY2010. It should be noted that EBITDA Margins in FY2008 are likely to be lower by a significant 306bp yoy due to the substantial appreciation witnessed in the Rupee and lower profitability of Element-K vis--vis organic CLS Margins. In fact, EBITDA, on an absolute basis, is expected to be lower by around 24% yoy in FY2008. However, we expect EBITDA to witness decent growth over FY2008-10E. We estimate a CLS EBITDA CAGR fall of 1.7% over FY2007-10E mainly due to the significant fall in FY2008E. However, over FY2008-10E, we expect CLS EBITDA CAGR growth of around 19%. This is compared to overall EBITDA CAGR growth of 37.7% over FY2007-10E and 43.2% over FY2008-10E.
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Exhibit 9: CLS business projections

(Rs cr) System-wide Revenues (SWR) % chg Contribution to Total SWR (%) Net Revenues % chg Contribution to Total Net Revenue (%) EBITDA % chg EBITDA Margins (%) Contribution to Total EBITDA (%)
FY2007 458 171.3 41.0 456 174.4 57.4 36 35.5 7.8 45.9
FY2008E 620 35.5 49.8 569 24.8 57.0 27 (24.2) 4.7 27.3
FY2009E 665 7.2 45.7 615 8.0 51.5 39 46.7 6.4 27.5
FY2010E 705 6.1 41.5 661 7.6 46.4 53 34.6 8.0 26.3
New Business Opportunities The acquisition of Evolv Evolving market for English Language training
NIIT in January 2008 acquired a controlling stake in Evolv Management Services (Evolv), a leading provider of English Language and Communication Training, headquartered in Noida. Evolv has a total of around 160 employees including 98 trainers, and has a presence across major cities in India such as New Delhi, Mumbai, Bangalore, Chennai, Kolkata and Chandigarh. The company also has an international presence in the Philippines and Pakistan. Evolv provides training services to marquee clients across the IT-ITES, Banking, Insurance, Telecom, Real Estate, Healthcare and Travel industry segments, among others. The company has developed over 50 specialised courses and a library of modules for providing training in the English Language and Communication domain. The courses include Accent Neutralization, Fluency and Expression, Cross Cultural Communication, Presentation Skills, Business Writing Assertive Communication and Conversational Skills, among others. Evolv counts among its clients, marquee names such as Accenture, Cognizant, Deutsche Bank, HP, Oracle, Prudential, TCS, HDFC Bank, ICICI Bank, SRL Ranbaxy, Airtel and Unitech. NIITs CLS business, which offers integrated learning solutions to companies in the IT-ITES, Banking, Insurance, Telecom and Retail sectors, will be boosted significantly through the acquisition of Evolv, whose expertise in English language training will provide greater penetration into existing and potential markets on account of a wider range of solutions. NIIT estimates that this market could touch a size of Rs800cr in three years time and expects to corner 10% of the market.
New Businesses Powering broader areas of the new economy

NIIT in September 2006 ventured into newer terrain, with the launch of two key new businesses financial services training and management education. This was yet another step towards achieving its vision of becoming a Global Talent Development Corporation, as opposed to being perceived purely as an IT training company.
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Financial Services Training

To mark its entry into training for the Financial Services Sector, NIIT launched the Institute of Finance, Banking and Insurance (IFBI) in partnership with ICICI Bank, Indias largest private sector bank, with NIIT holding 81% equity, while the balance 19% is held by ICICI Bank. This Institute caters to the needs of the exponentially-growing Banking, Financial Services and Insurance (BFSI) sectors in India and overseas markets. IFBI commenced admissions in October 2006 and has recorded cumulative enrolments of over 7,400 until December 31, 2007. Its first offering was a six-month full-time programme, the Post Graduate Diploma in Banking Operations (PGDBO), which focusses on grooming entry-level professionals for the Banking industry. The launch of IFBI leverages NIITs reach and expertise in distributed non-formal education and harnesses the domain expertise of ICICI Bank, enabling NIIT to move into growing areas of the knowledge economy. ICICI Bank has supported IFBI in designing the curriculum, developing the course content, and offering laboratory and Internship sites to students. NIITs key strength areas lie in content development and delivery of the content through its platforms, which it is looking to leverage to drive growth in these businesses. NIIT currently offers numerous courses in the BFSI domain, namely Retail Banking, under which it trains budding finance professionals in areas like core banking, technology and CRM, Insurance, which it has launched in partnership with ICICI Prudential, and Financial Services program, launched in partnership with ICICI Securities (I-Sec). NIIT has also tied up with Infosys to offer training on its Finacle software product. Thus, through in-depth broad course content, effective content delivery and partnerships, NIIT is looking to drive strong growth in this business going forward. NIIT has also signed up HDFC Bank and Yes Bank and is in talks with other banks also, reflecting the ever-increasing acceptance that IFBI is getting from the industry.
Management Education
NIIT also marked its entry into the field of technology-enabled management education, with the launch of a new institute, NIIT Imperia. The institute has set up Centres for Advanced Learning that offer programs from the Indian Institutes of Management (IIM) Ahmedabad, Kolkata and Indore, to working executives, using Synchronous Learning Technology (SLT). SLT enables remote classrooms to be connected live with the faculty teaching at institutes. The usage of broadband with two-way audio-video, and special software, replicates face-to-face teaching. NIIT Imperia offers long and short-term programs in general and functional management to working executives. While the content, teaching and certification is from one of the IIMs, the technology, synchronous classrooms across the country and management of the distributed education system is provided by NIIT. Thus, NIIT provides the platform for the delivery of quality management education. The company has integrated its Learning Management and e-learning systems with this technology, and implements and manages the overall student experience.
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NIIT Imperia Education Centers are located in New Delhi, Mumbai, Kolkata, Bangalore, Hyderabad, Chennai, Bhubaneswar, Nagpur, Chandigarh, Vizag, Ahmedabad and Pune. The advantages of such a technology-based solution are that it neither requires executives to leave their workplace while they upgrade their skills, nor does it call for the creation of additional infrastructure in the management institute. Given the strong 8-9% annual growth in Indias economy, the need for well-trained professional managers is significant and NIIT, through NIIT Imperia, is well-placed to cater to the burgeoning manpower requirements of several varied industries. NIIT Imperia offers post graduate programs in varied areas like retail management, international business, sales & marketing, and family-owned businesses and entrepreneurship. NIIT has also signed up two new partners for Imperia, that is, Indian Institute of Foreign Trade (IIFT), New Delhi and Institute of Management Technology (IMT), Ghaziabad. This is a reflection of the strong traction being witnessed by NIITs management education initiative and lends confidence that it will be able to sustain high rates of growth in future. Consequently, on account of the scorching growth in this business, the segments contribution to overall revenues SWR and net - and EBITDA is expected to increase more significantly going ahead. We expect the contribution of New Businesses SWR to the total SWR to rise from under 1% in FY2007 to 5.4% in FY2010, given the outstanding 132% CAGR growth expected in these revenues over FY2007-10E, vis--vis a 27.9% CAGR growth expected in total SWR over this period. On the other hand, we expect the contribution of New Businesses net revenues to the total to rise from under 1% in FY2007 to over 7% in FY2010, given the strong 140% CAGR growth expected in these revenues over FY2007-10E, as compared with the 21.5% CAGR growth expected in total net revenues over the same period. In terms of operating profitability, we expect the total contribution of New Businesses EBITDA to the total to rise from a negative 12% in FY2007 to 7.5% in FY2010. This is on account of the strong improvement expected in segmental Margins due to higher enrolments and operating leverage. We expect absolute EBITDA to improve from a loss of Rs9cr in FY2007 to Rs15cr in FY2010. Thus, the impressive growth in the Margins of the New Businesses is a strong lever for NIITs overall Margin expansion expected over FY2007-10E.
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Exhibit 10: New Businesses projections

(Rs cr) System-wide Revenues (SWR) % chg Contribution to Total SWR (%) Net Revenues % chg Contribution to Total Net Revenue (%) EBITDA % chg EBITDA Margins (%) Contribution to Total EBITDA (%)
FY2007 10 0.9 7 0.9 (9) (124.7) (11.8)
FY2008E 34 237.3 2.0 26 250.0 2.6 (4) (15.0) (3.9)
FY2009E 74 116.3 3.7 57 125.0 4.8 3 5.0 2.0
FY2010E 126 70.6 5.4 101 75.0 7.1 15 425.0 15.0 7.5
Investment Arguments
Shift from pure-play training to becoming a Global Talent Development Corporation NIIT has traditionally been known and perceived as an IT training company. The company is Indias largest IT training company and has the largest network of centres (own and franchisee) across the country. NIIT provides IT education and training to students and professionals. The companys training programs cover the entire spectrum of learners, from the young people learning computers for the first time, to students looking at pursuing IT as a career option to professionals looking to upgrade their IT skills to keep pace with the demands of a highly competitive working environment. However, over the past nearly two years, NIIT has made conscious attempts to change its perception from merely being an IT training company to becoming a Global Talent Development Corporation. Towards this, NIIT has taken a slew of strategic initiatives to mark a shift in its revenue mix in terms of business segments as well as verticals. It has leveraged its extensive experience in the IT vertical to expand into newer verticals and business segments.
A change in the business mix

While the ILS business continues to remain a key part of NIITs overall business portfolio, the company has also re-jigged its strategy to drive higher growth rates along with better profitability. The companys business portfolio has seen a notable shift. While the ILS business contribution to SWR and net revenues has fallen slightly, going ahead, given the strong growth it is seeing, the contribution is expected to increase to 47.1% and 37% respectively in FY2010E from FY2008E levels of around 43% and 32%. On the other hand, the School Learning Solutions (SLS) business has witnessed a significant decline in contribution, as NIIT has re-aligned its business strategy for this segment to focus more on Private schools. The Corporate Learning Solutions (CLS) segment has seen the maximum increase in its contribution, however, aided by the acquisition of Element-K. NIIT has also commenced newer businesses in verticals like BFSI and
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technology-enabled management education, leveraging its knowledge in IT to expand to these verticals and tap the market for the requirement of skilled personnel in these businesses, given the burgeoning growth they are witnessing. Going ahead, in terms of business segments, we estimate NIITs SLS business to clock a 17.5% CAGR growth over FY2007-10E, with the Private Schools business expected to clock a CAGR of around nearly 26% in the mentioned period. Nonetheless, we have been conservative on the profitability front and expect EBITDA Margins to decline by 50bp each year over FY2008-10E. We expect NIITs CLS business to clock a 13.2% CAGR over FY2007-10E driven by the increased adoption of training outsourcing and strong growth in the content library of Element-K. In terms of EBITDA Margins, we expect these to increase over FY2007-10E after a dip in FY2008E on account of Rupee appreciation. We estimate Margins to rise by 150-160bp annually over FY2008-10E, after a 306bp yoy decline in Margins in FY2008E. NIITs New Businesses are expected to be the major growth driver going ahead. We estimate that this segment will clock a scorching 140% CAGR growth over FY2007-10E driven by increasing industry acceptance and expect the huge demand for talent across industries to lead to greater demand for these services. We have been slightly conservative on the profitability front and expect EBITDA Margins in this business to hit 15% levels by FY2010, as against management expectations of a 20-25% range. This is vis--vis operating losses of 125% in FY2007. It should be noted that this segment has already reported EBITDA break-even in 3QFY2008 and we expect continued improvement on this parameter. Thus, all the above strategic initiatives taken by NIIT have enabled it to move even further towards its vision of becoming a Global Talent Development Corporation and have consequently expanded the addressable market for the company. We are enthused by the companys vision, focussed execution of its business plans and strong positioning to leverage the burgeoning demand for skilled manpower in India going ahead and this is the key reason we are positive on the company. Strong position in the ILS business NIITs key growth driver over the past couple of years has been its retail training business - ILS. With the strong growth of the Indian IT Industry, NIITs role as a supplier of raw materials to the industry has enabled it to grow at a rapid rate. It is well-known that the IT Industry is people-intensive and that human resources are the key raw materials driving its growth. Direct employment in the IT-ITES Industry was estimated at nearly 2mn in FY008, reflecting a CAGR growth of over 25% since FY2002. In terms of revenues, the sector has grown from US $7.7bn in exports in FY2002 to US $40.3bn in FY2008, reflecting a CAGR growth of 32%. Thus, the strong growth of this industry has been the key enabler to NIITs own growth over the past few years. The ILS business has seen its India-based gross revenues (SWR) clock a CAGR growth of over 41% over FY2005-07. Overall, ILS net revenues have grown at a CAGR of 36.7% over the same period. This compares favourably with the growth of around 33% recorded by the Indian IT-ITES Export Sector over the mentioned period.
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Even as the ILS Business contribution to revenues has been significant, its contribution to profitability has been even more pronounced driven mainly by higher capacity utilisation which, given the high fixed-cost nature of the business has led to strong operating leverage, driving higher Margins. NIIT achieved EBITDA break-even in the ILS business in FY2005 at around 38% capacity utilisation. However, in FY2006 and FY2007, capacity utilisation levels hit 46% and 54% leading to Margins of 7.7% and 17.6%, respectively. During 9MFY2008, Margins have already hit 20%, reflecting the strong traction being witnessed by the business. Going ahead, we expect NIITs ILS business to clock a 29% CAGR growth over FY2007-10E. We expect strong growth in domestic revenues as also in the companys Chinese operations and ROW, aided by expansion into newer geographies. Higher capacity utilisation and fee increases are also expected to drive Top-line. On the other hand, we expect EBITDA Margins in this business to continue to expand mainly on the back of higher capacity utilisation. With capacity utilisation expected to hit 65% by FY2010E, we have modeled for a steady 100bp annual increase in Margins over FY2008-10E, after a strong 243bp yoy increase in FY2008E. Well-hedged business portfolio NIIT, through the strategic initiatives taken by it in the recent past, has been able to move closer to its vision of becoming a Global Talent Development Corporation. A positive impact of these strategic initiatives has been diversification of its business portfolio, thereby reducing the dependence purely on the IT Sector. As is well-known, the current operating environment is indeed a fairly difficult one for IT companies and they face multiple headwinds, namely a recession in the key US economy, Rupee appreciation (in spite of the current depreciation on account of record crude prices), wage inflation, high attrition rates, a highly competitive hiring environment and the likely expiry of tax benefits under the Software Technology Parks of India (STPI) scheme post-FY2010. Hence, to succeed in this challenging environment, the key for IT companies (apart from hedging and higher utilisation rates, which are short-term measures) is to improve productivity, change the business mix in favour of higher value-added services like consulting, and take long-term non-linear growth initiatives (not headcount-based growth) like platform-based BPO. These initiatives are likely to lead to a slow down in headcount addition going ahead. Consequently, such an event would have ramifications on NIITs growth, since it typically tracks growth in the Indian IT Industry with a lag effect. However, since NIITs business portfolio is more diversified, with close to 80% of net revenues in FY2008E likely to come from avenues other than the Indian IT Industry, the company is likely to be much less impacted if such a development were to take place and the IT sectors growth was to get stymied to a significant extent in future. Well-positioned to capture the opportunity due to the talent war among industries; Challenges = Opportunities On account of having built a well-diversified business portfolio over the past couple of years, NIIT is well-positioned to leverage on the opportunity for providing skilled manpower to meet the burgeoning needs of varied industries apart from IT. On account of the strong 8-9% GDP growth recorded by the Indian economy, the manpower needs across industries are quite significant.
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Sectors like Telecom, BFSI and Retail are on high growth trajectories and hence require significant manpower to sustain growth going ahead. This gives a significant growth opportunity for NIIT to leverage. Going ahead, it could also consider entering newer verticals like Retail, which will further drive growth. Thus, the significant challenges being faced by these varied industries on the manpower front equate to a significant growth opportunity for NIIT. Strong scalability of new businesses The newer businesses launched by NIIT have recorded operating-level break-even in 3QFY2008. Going ahead, there exists significant scope for strong Margin expansion, given the high operating leverage enjoyed by them. These businesses record higher Margins with higher capacity utilisation, in much the same manner as the ILS business. Thus, as IFBI and Imperia gain greater acceptance and newer enrolments flow in, profitability is likely to improve significantly. In fact, management expects EBITDA Margins to hit a range of 20-25% by FY2010, even as we have factored in a more conservative 15%.
Concerns
High US exposure NIIT has significant exposure to the US market through its CLS business. Around 57% of its revenues are expected to come from the CLS business in FY2008, most of which are derived from the US. This leaves it vulnerable to the impact of a US recession and Rupee appreciation (in spite of the current depreciation on account of record crude prices). In fact, in FY2008 this far, its CLS business has been adversely impacted by the strong Rupee, with Rs44.3cr being wiped off the Topline (as much as 15%) and Rs7.7cr being shaved off the EBITDA (119bp) during 9MFY2008. Thus, continued Rupee appreciation is likely to continue to impact NIIT adversely. Further, if the US recession was to lead to cuts in training outsourcing budgets, the company would likely be negatively impacted and growth would slow substantially. Significant exposure to the Indian retail training market While NIITs strategic initiatives over the past two years have enabled it to expand its business portfolio beyond IT training, it still derives over 50% of gross revenues from this business and nearly 34% from India-based training revenues. On a net basis, over 30% of its revenues are derived from the ILS business. Currently, the Indian IT Sector is going through a difficult period, with multiple headwinds such as a US recession, Rupee appreciation (in spite of the current depreciation on account of record crude prices), wage inflation, high attrition rates and a likely end to the STPI tax holiday post-FY2010, all impacting the performance of these companies. In case a significant slowdown was to ensue in the IT sector, it could result in a likely toning down of hiring plans by these companies. This would adversely impact NIIT, given its fairly high exposure to this segment. Considering that this business has been the star performer over the past two years for NIIT, a slowdown would likely lead to lower growth rates for the company going forward and could lead to downside risks to our projections. Growth at the cost of NIIT acquired Element-K in 2006 to expand its business portfolio in the CLS business. While this acquisition was a fairly large one and added a significant chunk of revenues to NIIT, on the profitability front, the company saw a fall. In the organic CLS business pre-acquisition of
profitability?
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Element-K, EBITDA Margins ranged between 14-16%. However, after the acquisition, consolidated segment Margins and overall Margins took a hit, since Element-K was loss-making at the time. On an organic basis, CLS Margins stood at nearly 15% in FY2007. After consolidation with Element-K, which recorded Margins of under 3%, segmental Margins stood at below 8% levels, a decline of nearly 700bp.
Exhibit 11: Acquisition impact - Growth at the cost of profitability?

(FY2007) EBITDA Margins (%)
CLS standalone 14.8
CLS consolidated 7.8
Chg (bps) (698)
Thus, it is clear that in the quest for growth, given the consolidation in this business globally, NIIT had to sacrifice Margins. It should be noted that NIIT has done a good job in increasing the Margins of the standalone Element-K since acquiring it, due in part to offshoring some of Element-Ks work to India. Nonetheless, given the steep difference in Margins, overall Margins were always likely to get adversely impacted. In FY2008, matters have worsened on account of the Rupee appreciation (in spite of the current depreciation on account of record crude prices). Going ahead, if NIIT takes similar decisions to buy growth at the cost of profitability, it may further impact profitability, which is a risk to our Margin expansion call. High debtor days, capex intensity of Government schools business The Government schools business is characterised by a high number of debtor days. This is not surprising given that the government machinery works at its own pace. This was the main reason why NIIT has shifted its focus towards the more profitable Private schools business over the past couple of years. The business is also characterised by higher capex intensity, as the company has to make upfront investments in infrastructure, systems integration and so on after winning the contract. Therefore, there would be a need for significant financial resources to execute such projects. Apart from these factors, significant execution risks also exist. Thus, these factors could lead to cash constraints going ahead along with slower growth.
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We expect the Indian economy to continue on a strong growth path over the next few years, given favourable demographics, resulting in a demographic dividend with a significant proportion of the population joining the workforce, capital investments, increasing affluence and the growth of the great Indian middle class, leading to strong growth in consumption demand and a policy of continuation being followed with respect to the reforms process. This will consequently lead to a huge requirement for talented manpower to sustain growth. In view of this, we expect the Education Sector to continue to receive priority from the Government and believe it will continue to allocate a significant amount of funds for capacity creation, improving the quality of education and retaining children in the education system to ensure that they remain in the mainstream. This is the key factor that is likely to lead to a strong pipeline of talented human resources joining the workforce in future, enabling the economy to sustain strong growth. Apart from this, manpower demand will continue to increase in sectors like IT, BFSI, Telecom, Retail, Aviation and Hospitality, leading to a significant business opportunity for training and developing talent for these sectors. Consequently, we believe there is strong visibility of growth for companies that act as suppliers of talent to the Indian Services Sector, given that it is this sector that is likely to lead the growth of the Indian economy over the next many years. The Corporate Training market is also likely to grow at a decent clip, driven by an increase in training outsourcing, strong partnerships with industry majors, growth and development of content library and strong demand for such services from major Indian and global corporates. We believe NIIT is in a strong position to tap these markets with its diversified business portfolio. There is strong visibility of growth for the company, especially in its new businesses like financial services training and management education, as well as in the SLS business, even as the other segments of the company also seem set to grow at a decent rate, along with a largely positive bias on Margins. We estimate a 21.5% CAGR growth in Top-line and 36.4% CAGR growth in Bottom-line over FY2007-10E, along with a 442bp expansion in Margins over the mentioned period. At the CMP of Rs109, the stock trades at a P/E of 12.5x FY2010E EPS. We are enthused by the strategic initiatives being taken by the management to drive strong growth in future. We Initiate Coverage on the stock, with an Accumulate recommendation and 12-month Target Price of Rs123.
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Exhibit 12: Sales Growth

(Rs cr) 1,500
1,260
1,020
780
540
300 FY05 FY06 FY07 FY08E FY09E FY10E
Exhibit 13: EBITDA Margins

(%) 17
15
13
11
Exhibit 14: Net Profits

(Rs cr) 150
126
102
78
54
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Profit and Loss Account (Consolidated)

Y/E March Net Sales % chg Total Expenditure EBITDA % of Net Sales Other Income Depreciation & Amortisation Int. and Fin. Charges (Net) PBT % of Net Sales Tax Effective Tax Rate (%) Profit in assoc. and min. int. PAT % chg FY2007 FY2008E FY2009E 795.1 76.4 717.7 77.5 9.7 6.8 47.3 12.4 24.6 3.1 0.4 1.5 33.1 57.3 38.6 997.6 25.5 899.0 98.5 9.9 15.0 52.0 25.3 36.2 3.6 0.0 0.0 36.3 72.6 26.6 1,194.5 19.7 1,050.9 143.5 12.0 14.3 58.8 23.3 75.8 6.3 11.4 15.0 39.9 104.3 43.8
Rs crore
FY2010E 1,426.6 19.4 1,224.5 202.1 14.2 14.3 68.1 21.0 127.2 8.9 25.4 20.0 43.8 145.6 39.6
Balance Sheet (Consolidated)

Y/E March SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders' Funds Loan Funds Minority Interest Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-progress Miscellaneous Expenditure Current Assets Less: Current Liabilities Net Current Assets Deferred Tax Asset (Net) Investments Total Assets 570.2 198.9 371.3 13.4 0.1 451.1 320.3 130.8 8.1 61.1 584.7 627.4 250.9 376.5 13.4 0.1 473.8 314.7 159.1 8.1 61.1 618.3 709.5 309.7 399.8 13.4 0.1 588.4 399..3 189.1 8.1 61.1 671.5 19.8 294.8 314.5 269.8 0.4 584.7 32.9 332.9 365.8 252.7 (0.3) 618.3 32.9 406.7 439.6 232.8 (1.0) 671.5 FY2007 FY2008E FY2009E
Rs crore
FY2010E
32.9 509.7 542.7 210.1 (1.7) 751.1 822.1 377.8 444.3 13.4 0.1 714.0 489.8 224.2 8.1 61.1 751.1
Cash Flow Statement

Y/E March Profit before tax Depreciation Change in working capital Income taxes paid Cash from operations Change in Fixed assets Free cash flows Change in Investments FY2007 FY2008E FY2009E 24.6 47.3 78.7 0.4 150.2 284.4 (134.2) 21.2 36.2 52.0 (61.9) 0.0 26.3 57.2 (30.9) 0.0 0.0 0.0 (17.1) 21.2 (38.3) 35.6 (33.6) 73.6 40.0 75.8 58.8 27.5 11.4 150.7 82.1 68.6 0.0 0.0 0.0 (19.9) 30.5 (50.4) 39.2 57.4 40.0 97.4
Rs crore
FY2010E 127.2 68.1 23.0 25.4 192.9 112.6 80.3 0.0 0.0 0.0 (22.7) 42.6 (65.3) 43.1 58.2 97.4 155.6
Key Ratios
Y/E March Per Share Data (Rs) Diluted EPS Cash EPS DPS Book value per share Operating Ratios (%) Sales growth EBITDA Margins Net Profit Margins Return Ratios (%) RoE RoCE Dividend payout Valuation Ratios (x) P/E P/BV Sales/GFA EV/EBITDA 31.6 5.8 1.4 25.7 25.0 5.0 1.6 20.4 17.4 4.1 1.7 13.5 12.5 3.3 1.7 9.2 19.7 6.3 24.9 21.3 9.9 25.0 25.9 14.7 25.0 29.6 19.7 25.0 76.4 9.7 7.2 25.5 9.9 7.3 19.7 12.0 8.7 19.4 14.2 10.2 3.4 6.3 1.0 18.9 4.4 7.5 1.1 22.0 6.3 9.8 1.6 26.4 8.8 12.9 2.2 32.6 FY2007 FY2008E FY2009E FY2010E
Cash from investing activities (21.2) Change in Share capital Change in Debt (0.9) 160.8
Dividend and dividend tax paid 16.7 Cash from financing activities 143.1 Other adjustments Net increase/(decrease) in cash Opening cash balance Closing cash balance 20.8 8.6 65.0 73.6
Note: All figures are given on a consolidated basis.
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Education
Fund Management & Investment Advisory P. Phani Sekhar Devang Mehta Research Team Hitesh Agrawal Sarabjit Kour Nangra Vaishali Jajoo Harit Shah Rohit Nagraj Pawan Burde Vaibhav Agrawal Girish Solanki Shailesh Kanani Anand Shah Sulabh Agrawal Puneet Bambha Amit Bagaria Akshat Vyas Jaydeep Mavani Amit Vora Richa Chandak Neha Soni Shweta Boob V Srinivasan Neha Idnany Aniruddha Mate Sandeep Wagle Ajit Joshi Milan Sanghvi Nitin Kunte Brijesh Ail Vaishnavi Jagtap Siddharth Bhamre Commodities Research Team Amar Singh Samson P Anuj Gupta Girish Patki Commodities Research Team (Fundamentals) Badruddin Mandar Pote Bharathi Shetty Bharat Patil
( 022 - 4040 3800 / 2835 9600) Fund Manager - (PMS) AVP - Invesment Advisory ( 022 - 4040 3800 / 2835 9600) Head - Research, Cement VP-Research, Pharmaceutical Automobile IT, Telecom Oil & Gas Metals & Mining Banking Mid-cap, Power Infrastructure, Real Estate FMCG , Media Mid-cap PMS PMS Research Associate (Pharmaceutical) Research Associate (Automobile) Research Associate (Oil & Gas) Research Associate (Banking) Research Associate (Infra, Real Estate) Research Associate (FMCG , Media) Research Associate (Mid-cap, Power) Research Associate - (PMS) Research Associate - (PMS) Chief Technical Analyst AVP Technical Advisory Services Sr. Technical Advisor Technical Advisor Technical Analyst Technical Analyst Fund Manager - Derivatives & Equities Research Head (Commodities) Sr. Technical Analyst Sr. Technical Analyst Sr. Technical Analyst Sr. Research Analyst (Agri) Research Analyst (Energy) Research Editor Production hitesh.agrawal@angeltrade.com sarabjit@angeltrade.com vaishali.jajoo@angeltrade.com harit.shah@angeltrade.com rohit.nagraj@angeltrade.com pawan.burde@angeltrade.com vaibhav.agrawal@angeltrade.com girish.solanki@angeltrade.com shailesh.kanani@angeltrade.com anand.shah@angeltrade.com sulabh.agrawal@angeltrade.com puneet.bambha@angeltrade.com amit.bagaria@angeltrade.com akshat.vyas@angeltrade.com jaydeep.mavani@angeltrade.com amit.vora@angeltrade.com richa.chandak@angeltrade.com neha.soni@angeltrade.com shweta.boob@angeltrade.com v.srinivasan@angeltrade.com neha.idnany@angeltrade.com aniruddha.mate@angeltrade.com sandeep@angeltrade.com ajit.joshi@angeltrade.com milan.sanghvi@angeltrade.com nitin.kunte@angeltrade.com brijesh@angeltrade.com vaishnavi.jagtap@angeltrade.com siddarth.bhamre@angeltrade.com amar.singh@angeltrade.com samsonp@angeltrade.com anuj.gupta@angeltrade.com girish.patki@angeltrade.com badruddin@angeltrade.com mandar.pote@angeltrade.com bharathi.shetty@angeltrade.com bharat.patil@angeltrade.com phani.sekhar@angeltrade.com devang.mehta@angeltrade.com
Research & Investment Advisory: Acme Plaza, 3rd Floor A wing, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059
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Ratings (Returns) :
Buy (Upside > 15%) Reduce (Downside upto 15%)
Accumulate (Upside upto 15%) Sell (Downside > 15%)
Neutral (5 to -5%)
June January 5, 2008 30, 2008
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JONY 2008 India Education Sector Report

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JONY 2008 India Education Sector Report

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Angel Broking

Service Truly Personalized

January June 5, 2008 30, 2008

For Private Circulation Only - Sebi Registration No : INB 010996539

June January 5, 2008 30, 2008

For Private Circulation Only - Sebi Registration No : INB 010996539

January June 5, 2008 30, 2008

For Private Circulation Only - Sebi Registration No : INB 010996539

June January 5, 2008 30, 2008

For Private Circulation Only - Sebi Registration No : INB 010996539

Human Resources - Powering Indias competitiveness in Global Economy

Exhibit 1: India's GDP - On a strong growth trajectory

January June 5, 2008 30, 2008

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Educating India's population - A humungous task

Intent/focus of the Government

Government initiatives to raise literacy rates in India

June January 5, 2008 30, 2008

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SSA - Progress against key targets

Exhibit 2: SSA - Performance round-up

Functional Academic Resource Centers

Source: Ministry of Human Resource Development (MHRD); * Completed and In-Progress

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Kasturba Gandhi Balika Vidyalayas

Exhibit 3: Gender disparity in Education (%)

2002-03 5.5 10.7 6.8

2003-04 5.1 9.4 6.2

2004-05 5.1 8.9 6.1

2005-06 4.2 8.8 5.4

Mid-day meal scheme

Funding of education schemes Implementation of Education Cess

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Exhibit 4: Access to Primary education - Good coverage

January June 5, 2008 30, 2008

For Private Circulation Only - Sebi Registration No : INB 010996539

Exhibit 5: Access to Upper Primary education - Not satisfactory

Exhibit 6: Primary-Upper Primary ratio - Work yet to be done

Primary schools (P) 6,41,695 6,38,738 6,64,041 6,51,382 7,10,471 7,67,520

P:UP 3.2 3.1 3.0 2.7 2.7 2.8

School Infrastructure Not up to the mark

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Exhibit 7: Schools without basic facilities

Enrolments Good growth

Exhibit 8: Student enrolments

Primary enrolments (Mn) 113.6 113.8 113.9 122.4 128.3 131.7

Enrolment ratios Rapidly on the rise

January June 5, 2008 30, 2008

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Primary GER (%) 94.9 96.8 93.0 95.6 98.3 108.6

Elementary (Grades I-VIII) 81.3 86.8 85.6 81.1 84.9 94.2

Dropout rates A measure of the real effectiveness of the system

June January 5, 2008 30, 2008

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Exhibit 10: Dropout rates

Class I-V (%) 40.3 40.7 39.0 34.9 31.5 28.5

Class I-VIII (%) 54.5 53.7 54.6 52.8 52.3 50.4

Performance of students A metric to gauge quality of education imparted

Exhibit 11: Average marks achieved by students (%)

States covered Mathematics 29 27 10 17 58.3 46.5 29.9 38.5

Language 63.1 58.6 53.0 52.5