Educomp Solutions Ltd reported robust performance recording 37.2% year-on-year (y-o-y) growth in revenue and a robust 92.3% y-o-y increase in profit with earnings before interest, tax, depreciation and amortization (Ebitda) margins expanding by 580 basis points (bps) to 52.4% in the third quarter of FY10.
Strong government backing pertaining to higher budgetary spending to spur growth of the education and training sector across the globe, particularly in India, is a key positive for companies in this space such as Educomp, which has been growing aggressively through strong execution capabilities.
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Educomp’s revenue surge was driven by strong growth recorded by its school learning solutions (SLS) business. The SLS business comprising Smart Class and ICT Solutions registered a robust 55.3% y-o-y growth. The company implemented 355 new schools under the Smart Class business and signed in 363 new schools in ICT during the quarter. Ebitda margins grew by a strong 580 bps y-o-y, following strong improvement in SLS margins. Strong margins and other income boosted profit by 92.3% y-o-y despite higher depreciation and interest costs.
The higher learning solutions (HLS) segment, however, fell by 12.7% y-o-y on a consolidated basis mainly on account of the 47% y-o-y fall in total teachers being trained during the quarter, which stood at 55,828 in the third quarter of FY10, and the new joint ventures Raffles and Pearson, which are under investment mode and yet not contributing strongly to revenue.
In addition to aggressive expansion plans in the Smart Class segment, the company is investing considerably in new initiatives in terms of setting up its own K-12 high schools and has embarked on expansion of its online, supplementary business.
Educomp’s Ebitda margins expanded on the back of the 1,088 bps y-o-y reduction in the cost of goods sold. However, selling, general and administrative and staff costs increased by 440 bps and 68 bps y-o-y, respectively. The company’s new initiatives in HLS and online, supplement businesses, which are currently in investment mode, affected overall margins. However, strong improvement in SLS margins cushioned the pressure on overall margins. Profit grew by a robust 92.3% y-o-y in the December quarter despite the 61% and 185% y-o-y increase in depreciation and interest costs, respectively. This was mainly due to strong operational efficiency registered during the quarter and other income of Rs13.1 crore.
Educomp has been growing aggressively, backed by strong expansion plans and execution capabilities. The company has 2,574 schools in Smart Class business. It plans to take the number to 20,000 over the next five-six years with shift in focus from tier I to tier II and III cities. This would also reduce the company’s sales cycle and improve working capital efficiency in the Smart Class business.
The company plans to continue investing in advertisements and branding, to reach out faster to customers, specifically in tier I cities, which take longer conversion time. It has also strengthened its sales team, which currently stands at around 230 personnel.
Moreover, the school business being capital intensive, the company will require funding to facilitate planned expansion. Currently, it has received loan sanctions totalling Rs415 crore.
The company is also growing operations of newly acquired subsidiaries in the online supplementary businesses, which are under investment phase (capital expenditure incurred in supplement business till now stands at Rs25 crore, while Rs40-50 crore is expected to be incurred on small acquisitions and product launches by the company over the next 12-18 months) and hence witnessing losses.
The company expects these newer initiatives particularly in the supplementary business to deliver strong revenue inflow over the next few years as it expects consumer spending in this area of education to be twice than on the school and college education.
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