SmartClass is a disruptive technology solution: Educomp

Q&A with Shantanu Prakash, CMD of Educomp Solution

When International Finance Corporation (IFC) along with Proparco, a French developmental institution, took a nine year exposure on Educomp Solution this year by giving it $70 million in external commercial borrowing financing, the company's aim to strengthen its balance sheet and correcting its asset-liability mismatch was addressed to an extent. Shantanu Prakash, CMD Educomp Solution, says the company is now talking to other development institutions for a similar long term capital support. He tells Kalpana Pathak that certain business transformation initiatives introduced in the company are well on track and will allow the company make significant transformation in the quarters ahead. Excerpts:

Q. How do you view Educomp's financial performance in the 2nd quarter?

A. Overall, the financial performance has been satisfactory. Keeping in mind our strategic priorities for this year, which are focused on balance sheet strengthening, consolidation and improvement in operational efficiencies. We had a consolidated revenue of Rs 3021 million, an EBITDA of Rs 714 million giving an EBITDA margin of 24 per cent. In our largest business SmartClass, we added 5112 new classrooms across 787 schools, taking the total reach of SmartClass to 14,292 schools. After falling for several quarters, SmartClass pricing, which is a key variable for our margins saw an improvement in prices quarter-on-quarter. In our Schools business, our revenue was Rs 332 million, an increase of 23 per cent y-o-y.

Q. But on a y-o-y basis, your margins are down?

A. That is due to the average pricing of our largest selling product-- SmartClass. SmartClass has been growing rapidly over the last few years, but due to an increase in competitive activity, the product prices have seen a marked fall over the last few quarters, from an average of Rs 4 lakh per class last year to an average of Rs 3.2 lakh in the previous quarter. In this quarter, as an industry leader, we took a strategic call to not reduce our prices even at the cost of classroom additions that affected our growth numbers. Our business has a large fixed cost base, and any reduction in revenues has a marked impact on our margins. As a result, our margins in SmartClass business have seen a significant downward movement this quarter. But we believe we have taken the right step in attempting to arrest the fall in prices. We are willing to live with a few quarters of lower additions, as we believe this is the right direction for us and will help us improve our margins in the long run.

SmartClass has over 90% headroom to grow. But you do not want to reduce its pricing. Would it still be attractive to buyers?
We believe SmartClass is a disruptive technology solution that brings about a paradigm change in the teaching learning process in classrooms. Year on year, we have seen a larger and larger number of schools adopting the program because of the high value that it adds. We will be focusing on increasing the value proposition of our product, rather than lowering its pricing. We believe customers will continue to adopt the program as the penetration rate in still in low single digits and there is a vast market opportunity that is still untapped.

Q. So how do you see Educomp performing in the next quarters?

A. As far as pricing is concerned, we are seeing signs of price stabilization in the market and trend to continue. In terms of volumes, we expect to increase the sales momentum going forward, to get good volumes in the quarters ahead as Q3 and Q4 are usually more stronger quarters. At the same time, we will continue to increase our focus on operational efficiencies and improve working capital management.

Q. You have introduced business transformation initiatives this year. What success have you had so far?

A. We are quite pleased with the progress we have made on all of our strategic initiatives in this quarter. The SmartClass price erosion seems to have stopped. Our working capital management has shown improvement which is evident from the movement in our SmartClass inventory days which are down from 64 days at the beginning of the financial year to 41 days at the end of Q2. Consolidation and asset monetization initiatives are on track. Capex continues to see a downward trend helping us to improve our free cash flow profile. Non-billable personnel expenses have decreased by 13% since the beginning of FY13. And so on. Overall, our business transformation agenda is very well on track, and we hope to make significant transformation in the quarters ahead.

Q. Has a tough credit environment been a challenge?

A. Yes. What has perhaps not worked in our favor is the tough credit environment and high interest rates. Part of our business cash flows rely on securitization funding and in the current liquidity environment, capital is getting more expensive and as a result our debtor days are high. We are a fast growing company and we require capital to fund our growth. We will continue to look for alternative sources of long term funding to fuel our business.