Educomp shares jumped after the company announced that it had received a sanction towards purchase of its receivables worth Rs 410 crore from a leading public sector bank. While the recourse liability (in this securitisation case) will be a maximum of 20 per cent, the company said “This (the move) validates the acceptance of our securitisation program at reduced recourse, as well as high credit of school receivables.” Notably, it is also expecting to close similar deals with other banks.
This comes at a time when analysts were worried about Educomp’s rising debt and receivables. After the announcement on Monday, the stock rallied 16 per cent, though it gave up some gains later. Currently, it trades at Rs 207.35, about five times its earnings and 0.7 times its book value as per FY13 estimates. Analysts have a buy on the stock with a target of Rs 200-220, which means limited upside in the near term. Issues pertaining to business fundamentals remain.
SOME RELIEF
Earlier, analysts had raised concerns over rising debtors. The company’s working capital requirements have gone up by almost three times in last two years. Importantly, in the September quarter, debtor days (receivables from customers) moved up to 240 days, as against the 169 days in FY11.
| WEAK EARNINGS OUTLOOK | ||||
| in Rs crore | Q2’ FY12 | % chg y-o-y | FY11 | FY12E |
| Revenue | 320 | 15.5 | 1,351 | 1,514 |
| Ebitda | 106 | 1.9 | 542 | 615 |
| Net profit | 13 | -77.9 | 337 | 244 |
| EPS (Rs ) | 1.3 | -78.1 | 35.1 | 29.6 |
| PE (x) | 5.9 | 7.0 | ||
| E: Estimates Source: Edelweiss Securities | ||||
As a result of this, the company had to borrow more and incur higher interest cost leading to the erosion in profits. With the securitisation deal, analysts expect debtor days to come down to about 150. Also, they expect the debt to come down from the current Rs 1,909 crore (Rs 1,400 crore as on September 2010) to about Rs 1,500 crore at end of FY12. This, at an average rate of interest of 8.6 per cent, is an interest savings of Rs 34 crore or almost Rs 3.5 in terms of earnings per share in FY12.
BUT, CONCERNS REMAIN
Though the development is considered positive, near-term concerns remain. For instance, even after taking into account the impact of securitisation, analysts expect the company to report 15 per cent decline in earnings in FY12 to about Rs 26 per share.
Also, there are concerns over higher capex, losses by subsidiary and worries over its core business of SmartClass (65 per cent of consolidated revenues), as a result of increasing competition and pressure on the margins.
“Though SmartClass performed well during the quarter, the management’s FY12 guidance is aggressive (40,000-45,000 class room against 12,000 class rooms in first half of FY12), in our view. We are 8-13 per cent below consensus on our FY12-13 EPS estimates and expect the earnings downgrade cycle to continue,” says Manish Sarawagi, analyst at Edelweiss Securities in his note on the company.
Also, analysts believe that managing debt and capex is critical in the coming months. However, they expect the company to do similar deals and monetise its stake in some of the subsidiaries to deal with the situation, which could be a positive trigger for the stock.
