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India Education Sector Report
India Education Sector Report
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Education
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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: 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. 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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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.
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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.
63,00,000
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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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.
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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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.
Upper primary schools (UP) 1,98,004 2,06,269 2,19,626 2,45,274 2,62,649 2,74,731
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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
Upper primary enrolments (Mn) 42.1 42.8 44.8 46.9 48.7 51.7
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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
Source: MHRD, Angel Research
Upper Primary GER (%) 58.8 65.3 69.6 56.3 62.5 70.5
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.
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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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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
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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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.
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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.
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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.
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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.
36
1.6
27
1.2
18
0.8
0.4
0.0
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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2,400
1,800
1,200
600
0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
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.
(Rs cr)
795 190 87 44 23 15 19 16 28
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
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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.
training is expected to rise by 7% until 2010, with training outsourcing expected to grow by nearly 25% over the same period
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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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Price Target Price Investment Period Rs3,496 Rs4,051 12 Months
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
15,770 4,677
Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 56.0 2.6 33.0 8.4
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
3m (4.7) (9.9)
1yr 8.5
3yr* 68.2
88.7 1,125.1
Sulabh Agrawal
Tel: 022 - 4040 3800 Ext: 346
E-mail: sulabh.agrawal@angeltrade.com
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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.
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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.
FY2008 933 182 45 19 150 8,868 1,68,489 20,21,867 127.8 174 49 58 74.1
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.
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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.
(%) 300
3,200
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.
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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(%) 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
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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.
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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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.
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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.
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(%) 150
720
125
480
100
240
75
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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.
(%) 50.0
270
45.0
180
40.0
90
35.0
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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(%) 180
72 80 36
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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
15.5 16.5
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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
566.5 238.0 328.5 0.0 28.1 381.4 79.5 301.9 0.0 658.5
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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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. 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. 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
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
15,770 4,677
Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 31.1 3.3 25.7 39.9
3m (4.7) (11.4)
3yr -
Diluted EPS (Rs) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research
Sulabh Agrawal
Tel: 022 - 4040 3800 Ext: 346
E-mail: sulabh.agrawal@angeltrade.com
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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:
affordable education
Creating educational and training content that is globally relevant, Designing and executing large learning initiatives, and Setting up the needed infrastructure for learning and training.
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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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.
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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.
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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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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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.
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Everonn Systems
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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.
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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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Everonn Systems
Education
100
(%) 44
80
42
60
40
40
38
20
36
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
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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
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Everonn Systems
Education
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
243.5 83.1 160.4 0.0 0.0 144.1 29.6 114.5 0.0 274.9
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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ACCUMULATE
Price Target Price Investment Period Rs109 Rs123 12 Months
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
15,770 4,677
Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 30.1 6.3 44.3 19.3
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
3m (4.7)
1yr
3yr
% chg Diluted EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research
8.5 133.5
Harit Shah
Tel: 022 - 4040 3800 Ext: 345
E-mail: harit.shah@angeltrade.com
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NIIT Limited
Education
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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NIIT Limited
Education
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.
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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NIIT Limited
Education
80
60
40
20
0 FY06 FY07
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NIIT Limited
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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.
96
16
72
12
48
24
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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NIIT Limited
Education
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
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NIIT Limited
Education
360
16
270
12
180
90
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.
Segments
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NIIT Limited
Education
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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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.
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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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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.
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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.
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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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
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
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
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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
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Ratings (Returns) :
Neutral (5 to -5%)
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