everonn systems

25 November 2008 Everonn Systems India Limited Page 1 Price: INR 243.40 Market Cap: INR 3,668 m Industry: Computer Education NSE: EVERONN BSE: 532876 Key management Name Designation P Kishore Managing Director R Kannan Director Susha John Whole-time Director R Sankaran Director V K Vijayaraghavan Director Joe Thomas Director K M Marimuthu Director Vijayanand Company Secretary Comparable Business Educomp Solutions* 2008 LTM P/E 63.1x P/BV 21.0x P/CEPS 41.2x EV/EBIDTA 30.8x Market Cap/Sales 16.4x * Educomp is the only peer publically traded Business Overview Recent News Incorporated in 2000, Everonn Systems India is promoted by P Kishore, who was closely involved in implementing computer literacy projects in the Nilgiri district of Tamil Nadu since 1987. The company won its first contract for computer education in 332 schools in Tamil Nadu in 2000. Everonn is now a fully integrated knowledge management, education and training company offering a range of services including creating knowledge resources, designing and delivering learning and training programs and setting up infrastructure and delivery platform. One of the two strategic business units (SBUs) of Everonn is institutional education. The SBU sets up IT education infrastructure in institutions (schools and colleges), delivers IT education under the build-own-operate-and-transfer (BOOT) model and offers turnkey education and software solutions. The second SBU is a virtual-and-technology-enabled learning solution (Vitels) SBU. It provides specialised content through an interactive remote delivery mechanism to institutions, specially colleges and schools and working professionals. The company has built its virtual learning brand, Zebra Cross, V-Schools, V-Colleges and VPlacement. 7 October 2008: Everonn has secured an order worth of INR6.85 crore from the Nagpur Municipal Corporation. As per the contract, ESI will have to implement computer education in 84 schools of the Nagpur Municipal Corporation over a period of five years 7 Jul 2008: Everonn entered into an agreement with the Director of Higher Education, Himachal Pradesh to implement IT education in 793 senior secondary schools. It will implement the project based on BOOT (Build, Own, Operate and Transfer) model for a period of four years 12 June 2008: Everonn has received Letter of Intent (LoI) from Andhra Pradesh government for implementation of computer aided learning in 405 high schools of the state 10 May 2008: Everonn is issuing equity shares and warrants to New Vernon India of Blackstone Group and Deutsche Securities Mauritius to raise INR176 crore. The company plans to raise INR92 crore from private equity and rest from warrants 11 February 2008: Everonn Systems signed a share purchase agreement with promoters of M/s. Toppers Tutorial Pvt Ltd, a provider of training for IIT JEE & AIEEE exams based in Bihar, to acquire 100% stake in the Company 1 Year -Price Volume Chart Revenue & Operating Margin 0 200 400 600 800 1,000 1,200 1,400 11-Oct-07 1-Jan-08 23-Mar-08 13-Jun-08 3-Sep-08 24-Nov -08 Price (INR) 0500 1,000 1,500 2,000 2,500 3,000 volume (000s) Volume Price 39% 112% 50% 10% 18% 26% 28% 21% 9% 15% 17% 13% 0% 20% 40% 60% 80% 100% 120% FY 03/07 (A) FY 03/08 (A) FY 03/09 (E) FY 03/10 (E) Rev enue Growth EBIT Margin Net Income Margin25 November 2008 Everonn Systems India Limited Page 2 SWOT Analysis Strength Weakness Unique business model one of the first of its kind in India Long term contracts with 11 state governments will ensure that the company won't be affected by the Global recession that is happening now Technical infrastructure is very strong to support their ancillary business of providing online educations to colleges and working professionals Tie ups with esteemed educational institutes like IIM, XLRI, IIFT, IIT Delhi, MICA, NMIMS, etc would enhance their success in future for secondary business in addition to their core business Technology -VSAT and other technologies used by company created new way of learning -this has got good future that can replace traditional teaching methods Smaller in size (in terms of revenue) than their immediate peer "Educomp" Poor work capital management in FY 03/08 half of the sales is locked in sundry debtors. This may be due to delay in Government payments from State Government treasury No dividend policy -Company didn’t pay dividend after their IPO. Recent insider selling of their stake in the company -In Sept & Oct 08, some of the directors sold their stake in the company -this is not a good sign. There may be some signaling effect about the possible downfall in the performance of the underlying business. But this is just a guess -may be the notion of sale be different Opportunities Threats Overseas opportunities -Expansion in Singapore and Dubai where abundant potential is there for such education service Online education service for working professionals can be an area of rapid development as there is a demand for such professional qualifications. Corporates can avail this service for their employees. Indian service industry like Software, BPO, KPO, Call centres etc would be needing this service. Good prospects in this business can be expected Possible M & As: With estimated excess cash balance, the company is in a position of picking up some possible/viable acquisitions in overseas market Competiton in future years from potential peers like Aptech Ltd, & NIIT Ltd is possible. NIIT imperia is already in competition with Everonn in the business of providing online eduction service for working professionals Political risk -Any change in the Government's policy would have major effects on the topline of the company 25 November 2008 Everonn Systems India Limited Page 3 Porter’s Five Forces Analysis 25 November 2008 Everonn Systems India Limited Page 4 Financials – Historical & Forecast 25 November 2008 Everonn Systems India Limited Page 5 Financials – Historical & Forecast (Continued….) 25 November 2008 Everonn Systems India Limited Page 6 Financials – Historical & Forecast (Continued….) 25 November 2008 Everonn Systems India Limited Page 7 Conclusion Rationale behind forecasts Revenue for the company flows mainly from two streams of business. ICT and ViTELS. Both contribute equally to the top line. ICT is a fixed contract based business – mostly all Government contracts. ViTELS is an emerging business with focus on providing quality education to students who could not afford to go to premier institutes like IIM and IIT. The business model used in these two businesses is entirely different. Former requires lot of upfront capital expenditure and the later requires one time growth capital expenditure – the Capex is not recurring here. Though Government payments on contracts are delayed substantially, but default is completely ruled out. But in later case, there is lot of competition risk as well as the recent global economic meltdown cannot be undermined. Forecasting conservatively, not carried away by the last fiscal year sale growth rate of 106%, we believe that the company can grow maximum by 20% and minimum by 10%. Also with minimum of 10% growth rate, EBITDA margin is expected to go down by 30%. Let’s face it – we are facing global recession. So we got to be conservative and expect the worst to happen. So we expect the operating margin to go down in future years. Current and forward valuation Currently the company is trading at 19.1x price to earnings and 27.6x price to FCF1 (free cash flow before working capital investment). With our estimates of minimum growth rate of 10%, stock is trading at forward P/E of 13.7x and P/FCF1 of 18.9x. Existing price – overvalued or undervalued? The valuation ratios as such are not attractive to invest. Though it is fairly valued given the potential of the underlying business, we believe that the stock would be interesting if the price goes further down to INR125.00 to 150.00. Conclusion We suggest the price to invest at this level because we believe that the capital invested at this point would have margin of safety for the downside risk. As per Benjamin Graham’s principle, we are suggesting buying a stock nearly 1/3rd of its value. At this price level (Rs. 125 to 150) investor’s downside is protected.