Maintain REDUCE on Educomp Solutions - Disappointment continues - ICICI Securities

Reason for report: Q2FY13 results review and earnings revision

Educomp Solutions' (Educomp) Q2FY13 consolidated revenue was down 5.5% YoY to Rs3.02bn - the first ever YoY decline and well below our estimate of Rs3.78bn. Revenue from SmartClass declined 30% YoY / 11% QoQ to Rs1.33bn (ISec: Rs1.98bn) owing to 25% YoY / 17% QoQ decline in SmartClass additions to 5,112 classrooms while EBIT margin more than halved YoY to 25%. The management indicated FY13 and FY14 to be years of consolidation and bringing in operational efficiencies, and hence refrained from commenting on FY13 guidance (the management has earlier indicated revenue growth of 25-30% with EBITDA margin improvement of 150-250bps YoY). H1FY13 revenue growth was just 2% YoY with EBITDA margin down 1100bps YoY. With lower-than-expected margins in SmartClass, we cut our FY13-14E EBITDA by ~18%.

We maintain REDUCE on Educomp but trim the target price to Rs140 (1xFY14E sales) from Rs150/share. Educomp is unlikely to turn FCF positive over the next two years. Recent cash infusion by promoters and others financial investors would limit the downside.

Source : Equity Bulls

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