Anyone who has done anything in the stock market in 2007 has surely seen the meteoric rise of a hitherto little-known company called Educomp Systems. Starting from just Rs 1,000 last January, Educomp finished 2007 at Rs 4,750, a mind-boggling rise of 375% in a calendar year. And to think that all this was posted after an IPO in early 2006 at Rs 125 per share only!
For those who are complaining about the valuations of Reliance Power, Future Capital and the like, consider this: at today's price (Rs 4,980), Educomp's market cap is Rs 8,500 crore, which is about 300 times 2006-7 net profit that the company earned. Just look at the arithmetic: for every rupee of billing that this company does, it's valued at Rs 80-odd.
But before we debate the how and why of Educomp's valuations, it's perhaps pertinent to figure out the opportunity that companies in this space are addressing. Education is a business opportunity created by government negligence.
A government that has a ministry of human resources is unable to meet the basic educational needs of its citizens. With per capita income crossing $1,000, Indians are willing to pay for quality primary education, finally seeing the link with career opportunities in later life. School fees of Rs 1,000 per month are considered normal.
Educomp's Smart Class offering leverages the power of computers and multimedia to increase learning effectiveness for students and, importantly, involves teachers in the process. By putting educators at the centre of the process and promising them better results and convenience, the company has won support rather than be seen as a disintermediator. The company has created a unique digital framework that allows it to create, manage and deploy learning content flexibly for users, educators and ultimately for society at large.
Apart from operating excellence across most of its business segments, it is this unique capability that gives Educomp a virtually unassailable lead in the business. Other Indian companies in the education business have simply not succeeded in putting together such a popular, scalable and practically successful framework.
Educomp is present in the "computer-labs-for-schools" segment where it runs computer literacy labs on turnkey basis across multi-year contracts. This can also be a very large business with virtually unlimited potential, given the low penetration of computer labs in Indian schools at present.
As if these two lead segments were not enough, Educomp has forayed into web-based learning portals, pre-schools, teacher training and setting up schools. It has two schools already and plans to have 25 schools by March 2009. The target for 2009-10: another 40. Compare this with the 17 schools that the Irish Christian Brothers had set up in a hundred-something years in India.
I think this zeal is part of the reason why the company gets such ridiculously high valuations. If a recent CLSA report is to be believed, the company's revenues are slated to grow over 10 fold over the next four years. It's easy to see why this is possible (given the size of the opportunity: 10 crore-plus students spending Rs 10,000 per annum on education).
The other big reason is, of course, investing mania. And I don't think this last part is sustainable at 28-30 times 2009-10 earnings based on optimistic estimates.
By Dipen Sheth, Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
