Friday, May 21, 2010

Keep adding on Dips | Everonn Education - Multibagger without a doubt

Education space is big. India's problems aren't exactly same as in other countries. Poverty, poor village schools, illiteracy, so we will not find companies in exactly same space. Also in rich cities of India its very common to see students opting for private coaching classes for science, maths, accounts etc, this trend also is not seen here. It will be hard to find 100 students going for private classes outside school in New Zealand for example. So problems of India are quite unique. Long before I heard of educomp and everonn and invested in stocks, I had been following Microsoft in its education endeavours and its a about 80 billion $ market in India alone growing over 15% per annum. 


There are many multi billion $ private players in education, they have extended beyond curriculum material to full fledged university campus, online degrees etc. Devry is 6 billion $, Apollo Group is 8.5 billion $, Brigdepoint 2.5 billion $, career point, Pearson is 12 billion $ and many more. 

There is nothing great so far that both these companies have done. Its like billions of mp3s are sitting on computers and you come out with iPod, logical hit product. 

So far study material has been digitised and delivered by satellite to remote places, assisting teachers. There is little or no entry barrier, so its commodity play. Educomp did aggressive revenue recognition so sentiments have turned against, Everonn also recognises 35-40% revenue in first year due to sale of computer, equipment and 15% in remaining four years for a 5 year contract. 
Another negative has been capex requirement to expand, 1-2 lacs per school. 

Actually I am willing to play this huge opportunity even if these were cement companies. But any innovation like partnership with University, Land owners for building schools, franchise of kindergarten, online coaching etc etc above that is icing on cake. 

So far Indian Govt. has been silly in terms of not allowing for-profit education in K-12 segment.


Lets start with negatives of education sector. Expected equity dilution of 5% each year for next 3-4 years because they are cash flow negative for next 2-3 years and need to expand. But we should worry about receivables as there are no bad debts, money is received by Govt eventually after 6 months or private schools which are always sound. 

So, when they do more revenues, their debtors will increase. They may have 1000 crore debtors in three years and eventually they will reach cash flow break even. 

Lets assume they make normal returns on investment i.e. 15% on investment, consider borrowing cost from bank at 10%. So, 5% is margin ! Because nobody will do this commodity business on negative margin, normal profit has to be made. Size of opportunity in Govt. schools is huge, 6-7 Lacs schools to open up in this commodity business from just 30,000 schools today. 

Second interesting part, 150 million primary students are out of school out of 270 million. 

Also, India is short of 2 lac primary schools. Somebody has to construct, someone has to manage. There lies an opportunity. 

Although unsure of how much equity dilution may happen, within 5 years I expect both Educomp and Everonn to show 5 times rise in sales. My premise is they will evolve into school companies and not just burning discs and churning out websites from books coz latter will become commodity for sure. 

Next step is establishing school as brand like Amity Schools. They have done equity for advertisement deal with HT Media, DB Corp and talks are on with Benett Coleman. So we will see 50 Crore media splash for their private initiatives. K-12 is biggest market in education in India, 25-30 Billion $ out of 80 Billion $ and long way to go before it gets saturated, both in cities and villages. 

They have entered pre-school too, this may grow to a decent size: 

http://www.kinderstand.com/ 

So, in a nutshell, this may appear as commodity business but interesting part will happen when these companies will do complete school management, bathroom cleaning to administration, teacher recruitment, training, educating to exam results - Holiday Inn of schools, and capex heavy investments are made by HNIs, land owners, infra companies to construct physical campus. Educomp is already into it and Everonn will be by next year. The market is so damn big that concern isn't finding opportunity to sink 1000s of crores of investment required but concern is making a couple 100 basis points above borrowing rate. Eventually they will be hale and cash flow positive too. Its very much like retail business, heavy investments initially but year after year intrinsic business value growth. Isn't Shoppers Stop too back from the dumps.... 



So, yes, there is hope but even without hope of improvement commodity space is pretty big too before it saturates. There isnt much to lose, but extra ordinary profits can be made if we are right about growth. NIIT and Aptech look so silly, opportunity right there under the nose but they could not sniff it. Just as Microsoft and Yahoo used to outsource stuff to Google and Google offered to sell itself for 1/10,000th the market cap it is today but both Yahoo and Microsoft refused. 

BTW, Everonn started long before Educomp although P Kishore wasn't as street smart and smarmy. He is a passionate man though. 

If a company grows @ 25% and makes 25% ROCE without debt, then challenge is to find opportunity coz its not easy to find business maintaining that high margin and at the same time re-invest back into business coz competition will eat into super normal profit margin or size of opportunity isn't there. But if a company can grow @ 50%+ for several years and makes only 15 % ROCE result will be superior in latter if it does not pay back anything to shareholders and re-invests everything into business to grow. Its the latter that Everonn is. 

Its a myth that money cant be made through low PE or commodity business. Shree Cements returned 40 bags in a decade.

Saturday, May 15, 2010

Everonn Multibagger | Followup

Education sector is due for transformation. Govt. funding to support this endeavour is and will increase un abated year in and out. To give a sense of numbers, there are 10 Lac Govt schools in India and 75,000 private schools. At the moment Educomp is leading in private schools with SmartClass which has been replicated by Everonn with iSchool and trailing on the heels of Educomp.

Now comes an interesting revelation, 75%+ of those 10 lac schools have less than three teachers, which implies Educomp does not have interest, inclination and model to support those as yet. As a matter of fact, it does not have interest either, its interested in establishing a private chain of schools, five flavours already exist today - that in itself will be a mega market.

Coming back to figures, there are only 25,000 Govt. schools having ICT , multimedia, private participation in them. Everonn is present in 25% of them, i.e. roughly 6,000. Govt will open up 650,000 , thats right 6.5 lac schools to ICT bidding over next 5-6 years, if Everon maintains same share, I will leave the mathematics to you, to guess EPS.

After five years of contract, a majority of schools will re contract for new training material, courseware. Thus its a perpetual model and not limited to five year annuity.

Market has become pessimistic with Educomp, Everonn and education sector prematurely. Its like 2005 and Bharti Airtel is a strong buy despite 5 crore connections.

I feel that Everonn will reward better than any other stock I have mentioned. Relaxo could do equally well. The mania saw it scale over 1200 and manic depressant behavior of Mr. Market tanked it to 90 Rs, today it is available at roughly 400 Rs. I feel the fair price of Everonn is 2000 Rs given the enormous scale of opportunity and speed of scalability possible.

I expect it to grow 40%+ EPS for next five year. Depending on craze and madness in bull run PE can strech anywhere between 20 and 80 as investors fancy this in hindsight. It is due for a major PE re rating.

Have a profitable investment.

Monday, May 10, 2010

Everonn Systems | Ever On

Hi All,

Education market is a huge one, above 50 billion $ in India. I've been absorbing, assimilating, cogitating and meditating for last few days several of research reports.

The best in depth report by CLSA was published in 2008 on education sector of India. When the craze took off around 2006, Educomp being Numero Uno and undisputed champion commanded streched PE above 50. Everonn was not far, stock market witnessed 130 times over subscription of Everonn stock and commanded an even higher PE ratio than Educomp for initial two years. 

Everonn stock kissed 900 market being even at a premium to Educomp and slid to a low of 90 odd levels in 2009 carnage. With loads of new entrants, Sundaram Multi, Edserv Softsystems, Usha Martin education in this sector etc etc, the sentiments have turned sour, parallel to those in telecom industry.

However, Everonn is expected to earn 40Rs+ EPS for year ending March 2011 and expected to grow 50% + CAGR for next three years. ICT and innovation in education sector is here to stay for the long haul. Its an idea whose time has come. 

Everonn went to the extent of replacing teachers in schools, a gesture unlikely to win you many friends amongst teachers in schools, and that is what happened. It was given cold shoulder from several institutions. Having learnt from its mistakes, Everonn is now promoting technology that enables and assists teachers, rather than replace them.

The negatives in this sector tend to be long debtor days in Govt. contracts (200 approx.) and Govt. funding reduction in this sector. The latter is unlikely to happen. 

Everonn is going to setup new schools and that should lead the way as replacement for 'old school' schools, those that bury their head in sand. It is also venturing in establishing business schools, still unproven idea albiet.

There are 1.25 million schools and we have only scratched the surface. Educomp and Everonn being first two entrants have a long way to go and the sector is here to stay forever. Future direction will involve challenging existing schools by partnering with Infra and Capex heavy players by management of schools. That formula is reminiscent of Holiday Inn management of hotels which is capital light. 

As the Govt. bidding procedure increasingly returns normal profits and gets commoditised, the existing leaders will evolve into full fledged education providers rather than being enablers.  Educomp has about 15 classes per school and Everonn has only two, therefore a big upside exists in having more classes per school. Educomp does not bid for projects that involve less than 10 classes whereas Everonn is happy and makes money with even 2. Walmart vs Kmart ? While Educomp is slowing down, Everonn shows no such signs. Without capital dilution Everonn can easily do north of 35% growth in EPS for the next five years.

When the mania re-ignites, I will be listening. Even without frenzy, decent returns can be expected with just EPS growth and a moderate PE rerating.

Created a discussion thread at forum : 

http://www.theequitydesk.com/forum/forum_posts.asp?TID=2777&PID=136955

Happy Investing