'We will maintain 50% OPM'

SMART TALK/ Shantanu Prakash, Chairman and Managing Director, Educomp Solutions

If you think that government expenditure on education is only going to rise in the future, then Educomp Solutions could be a good pick, being one of the few education companies available in the listed space.

Its Smart Class division enables teachers to impart education effectively along with the conventional methods of teaching with the use of multimedia, graphics and animation for subjects like science,mathematics and social sciences.

The Information Computer Technology (ICT) business is targeted towards government schools, where Educomp is responsible for setting up and maintaining IT infrastructure, and providing computer education. Its professional development (PD) business trains teachers to integrate technology into the school curriculum.

The Educomp stock has given a return of over 400 per cent over its issue price with its IPO (initial public offer) in January this calendar year and trades at 76 times its annualised half yearly EPS for FY07E.

With leadership position in almost all its business segments, the company is geared up to thrive in coming years. Shantanu Prakash, chairman and managing director of the company, tells Priya Kansara about how this will happen.

What is your competitive position in each business? How much do they contribute to overall sales and profitability?

Educomp is India's number one K12 (Kindergarten to Class 12) education company and is fairly unique in terms of its business portfolio. It does not have a competitor across all the sectors.

In Professional Development and Smart Class, we are number one. In ICT, we are among the top two companies in India.

Smart Class, PD, ICT and retail/other contributed about 25 per cent, 35 per cent, 33 per cent and 6.7 per cent respectively in half year ended September 2006.

They contributed about 27.5 per cent, 45.5 per cent, 22.3 per cent and 4.7 per cent respectively to the profit before interest and tax (PBIT) in the same period. Smart Class and PD are high margin businesses with over 50 per cent PBIT margin while the other two fetch relatively low margins of about 30 per cent.

What are the major developments in each business?

At the end of the September 2006 quarter, the total number of schools (which adopted Educomp's Smart Class system) went up to 129, up 40 per cent from the beginning of the year. We are already running slightly ahead of our internal projection of 300 schools by FY07.

In FY08, we should be targeting to reach over 500 new schools thus taking the cumulative number to 800 schools. We will also be looking to introduce Smart Class in more schools in the US and Singapore this year.

On the professional development front, we finished training over 80,000 teachers by the end of Q2 FY07 alone, which is the highest number in the history of the company.

With substantial amount of funding flowing into the teacher development and education quality space, we believe that, there would be some significant new relationships besides the current relationships with Microsoft and other IT majors and our own branded programme.

In the ICT segment, where we work very closely with the government, the total number of schools has gone up to 1,833 schools as compared to 613 at the beginning of this financial year. We are confident of reaching 3,000 schools given the increasing education budgets in the country.

Our products (educational aids and CD-ROMs) are distributed through 400 retail outlets across the country. We are moving away from physical stores to focusing on increasing the use of Internet as a delivery medium.

Do you plan to concentrate more on any of your businesses?

We would like to expand each sector and grow each of our initiative. However, we do not see significant growth in our high margin businesses like Smart Class and PD since they have already shown high growth in the first two quarters.

But our retail business as a percentage to total sales are expected to increase due to the good response of our new initiative Mathguru, which is an innovative and novel way of learning mathematics in schools.

It has a repository of over 12,000 animated questions, which form a part of the NCERT textbooks. Mathguru has done surprisingly well. We have more than 4,000 registrations to the Mathguru programme.

What opportunities does ICT business offer to you when it yields lesser margins than other businesses?

It is true that in ICT business, the margin of 34 per cent appear less attractive than 60 per cent in Smart Class and PD.

However one should also look at the scale, size and opportunity that this business offers. There are 950,000 government schools, which will have to become IT-enabled over the next five to seven years.

Last year the education budget increased by 40 per cent and this is expected to continue. Also, initiatives like a special tax for education is a big positive. We estimate that the adoption of technology in schools will grow at a rate of over 500 per cent each year.

Though government payments are sometimes delayed, we haven't faced a write-off situation ever. Moreover we build in late payments when we bid for tenders.

Are you planning to enter higher education ie beyond K12?

Not in the near future. K12 is a large, relatively untapped sector with huge private and government funding. We have developed competencies in the K12 sector and have invested heavily in R&D to develop innovative products and services for enhancing efficiencies in teaching-learning process.

We would like to build our leadership further in this sector in India and make a significant mark in the global K12 sector as well.

Will the CAGR growth of 38 per cent and 65 per cent respectively over the past five years in sales and profits continue?

Our profit has grown 100 per cent in past two years and this trend is likely to continue for few more years. In the half year ended September 2006, our revenues and net profit were Rs 29 crores and Rs 7 crore respectively.

We provided revenue and net profit guidance of Rs 100 crore and about Rs 26 crore respectively for FY07, almost double of what we earned in FY06. Our business is seasonal with the second half being better than the first.

Further as our businesses grow, our salary and wages for R&D and content creation will not grow in a linear fashion.

Thus, the overall salary and wages bill as a percentage of sales should keep declining in the future. As a result, we also hope to maintain or slightly grow our operating profit margins (OPM) from the current level of around 50 per cent.

What are your international plans and strategies?

Our international strategy is to focus on markets we are already present in at present""the US and Singapore. We have partnerships in the US with some of the very large organisations in this space.

In Singapore, we have expanded the number of schools we work with and our content libraries have been approved by their ministry of education. We have also tied up with partners in Malaysia and Thailand.

Our goal is to be among the top ten K12 learning solutions companies worldwide by 2010. International business, with a growth of 50 per cent, will form about 10-12 per cent of overall sales in this year.