Educomp Solutions - Quick turnaround underway!!

Most people following Educomp Solutions Ltd had considered the company to going for History Books after seeing the Q2-FY'14 results, which were very very disappointing to say the least. Educomp posted the lowest quarterly revenues in more than 3 years and posted a Net Loss which was close to 50% of the company's Total Income for the quarter. Things were going from bad to worse. It seemed like Educomp did not even have enough cash to take care of it's everyday existing operations, forget about going for more business. There were reports that the company had not paid salaries to thousands of employees and even their Provident Fund payments were delayed for more than 4-5 months. From Q2 results, it was obvious that 3 out of Educomp's 4 business segments were struggling. The SmartClass business, which was the company's main contributor had virtually come to a standstill with revenues collapsing over 70% Y-o-Y. The Higher Learning Solutions business' contribution too had dropped nearly 75%, but it was small in any case. The K-12 Schools business, which was expected to give Educomp long term stability with steady moderate growth, too posted nearly 25-30% Y-o-Y drop for Q1 & Q2. The only business which managed to post decent 2-digit growth was the Online Supplemental segment, whose contribution increased to nearly 47% of Educomp's Total Income.

TTM Total Income Progress (Segmentwise)

As you can see from the charts above, Educomp's School Learning Solutions (SLS) business, which was contributing over Rs.1000 crores on a 12-months basis until about June'12, has seen it's revenues slide rapidly over the last 6 quarters and now stands at about Rs.350 crores. In these 6 quarters, the contribution of SLS to Educomp's consolidated Income has dropped from a whopping 69% to still reasonable 40%. But going by the last couple of quarters performance, it is expected to further drop to about 25%, before it starts picking up again on the currently underway restructuring. The business segment which has shown the biggest increase in contribution is the Online Supplemental business. It's contribution on 12-months basis has increased from 15% to 37% from June'12 to December'13 and will soon overtake SLS to become the biggest contributor to Educomp's Income, atleast temporarily.

The most important business for Educomp in terms of the biggest Capital Employment is the K-12 Schools business. The Total Capital Employed (TCE) in this business is over Rs.2000 crores, more than 50% of Educomp's TCE in all it's business segments. I have written about Educomp's K-12 business & it's ultimate importance to the company's long term future, in my report a few months back. (Click here for that report) The K-12 business, which is run via one of Educomp's subsidiary, too was struggling to meet it's debt repayment obligations & needed some restructuring in repayment terms. It's CDR proposal was approved and implemented during Q3-FY'14. Total loans worth about Rs.750 crores have been rescheduled for repayment over a 12 year duration. Plus the consortium of Banks even approved some working capital to the company to help it continue investing in it's existing operations. The revenues from K-12 business bounced back in Q3 with an 8% Y-o-Y growth after reporting a drop of between 25 to 30% in the previous 2 quarters. The revenues from this business are expected to get back to the 20%+ growth trajectory in the next fiscal, especially from the new Academic year.

TTM EBITDA progress

The EBITDA performance of Educomp's all 4 business segments will give you the true idea of the company's state of affairs. On one hand, the K-12 business' profitability has increased rapidly and is expected to remain high, thanks to the reasons I have already explained in my report. The Online Supplemental business too is rapidly getting into the black at the EBITDA level. Infact this business could get to posting small Net Profit as well in FY'15. The TCE involved in the Online Supplemental business is very small at less than Rs.100 crores and hence there is not much Debt or CAPEX associated with this business. Hence it could very easily start posting a Net Profit in the coming few quarters. The Higher Learning Solutions business, which is very insignificant for Educomp, is also trying to get into the black.

The biggest dampener to Educomp's fortunes in the last 18 months has been the SmartClass business, which is part of the SLS business. It's profitability has just collapsed since Sept'11, when the company tried to super-charge it's business growth by putting immense pressure on the company's balance-sheet and things did not go as smooth as expected. Between June'11 and June'13, the TCE in Educomp's SLS business doubled from Rs.735 crores to Rs.1460 crores, that means nearly Rs.700 crores of revenues during this period that the company had booked, did not translate into actual Cash Flows. As per my estimates, most of this money is still locked with the Banks, which were part of the tri-partite agreement during the days when Educomp was doing SmartCLass implementation via it's vendor EduSmart. I have no idea if the Banks are ever going to release those funds or else the company will atleast get the annuity revenues which are being paid by the Schools to EduSmart. There has been some beginning of recovery of Cash stuck in this business, which is reflected in the drop in Rs.83 crores of TCE from Rs.1460 crores to Rs.1377 crores. Hopefully this will continue in the coming quarters as well, which will help improve Educomp's Cash position and also help it restart it's SmartClass implementations, which are currently at a virtual standstill. Hopefully the Banks which are also looking into a CDR proposal for Educomp Solutions Ltd, will be encouraged with this development.

Finally, I have a feeling that all the CDR related stuff should get sorted out latest by March'2014 and Educomp should be able to restart it's growth engine, though at a much more moderate pace, from Q1 or Q2 of FY'15. Whatever be it, I am sure that Educomp's management will look at bringing down the TCE of the company from the current level of close to Rs.4000 crores to something like Rs.2000 crores over the next 3-4 years. For that to happen, Educomp's growth should be less Capital intensive and more Cash Flow generating. I think that is very much possible. Until the point I see signs of those things happenning, my fingers are crossed with lots of optimism in my mind.

Suzlon's Q3 performance - recovery has started

Suzlon Energy Ltd posted not-so-bad numbers for Q3-FY'14. It's Total Income came in at Rs.5063 crores, 24% higher Y-o-Y, while it's EBITDA Loss was Rs.126 crores, 60% lower Y-o-Y. Even though Suzlon posted a loss at EBITDA level as well as Net Level during Q3-FY'14, it's mainly due to three reasons: the clean-up that the company is undertaking of it's potentially irrecoverable bad debts, restructuring of it's operations by reducing it's workforce & working capital requirement and Foreign currency fluctuation losses. Had it not been for these 3 reasons, Suzlon would have posted EBITDA profits during Q2 & Q3 of this fiscal.

This clean-up & restructuring is expected to continue for another couple of quarters. Hence we could see the company posting some decent EBITDA numbers only in the new fiscal. What is more heartening to note is the improvement in the company's order execution, which is has just started picking up pace. It is still to get back to normal levels, but it is on the right track. On one hand the order execution has started improving, while on the other hand the flow of fresh orders has also been very good. Suzlon received fresh orders worth around Rs.8300 crores during Q3, which has further increased it's Order book position to around Rs.45,000 crores, giving it very strong visibility.

Suzlon's Trailing-Twelve-Months Results summary

As you can see, Suzlon's T-T-M Total Income chart has started showing an uptrend after Q3. The EBITDA chart had started improving after Q2. Eventhough the improvements in EBITDA & Net Loss are only marginal currently, it's mainly due to the various right-offs that the company is currently undertaking to clean-up it's operations. Things will start improving at a faster pace once all this clean-up is over.

Another positive point in Suzlon's recent results is the reduction in Total Capital Employed (TCE) of the company on the Consolidated basis. As the name suggests, Total Capital Employed is nothing but Total Money Invested or Spent in the business - Total Money recovered from the business. An increase in TCE indicates that either the company is undertaking CAPEX to increase it's capacity or it is not receiving Cash-flow commensurate to the Revenues it is booking during the period. On the other hand, a reduction in TCE means the company has received more Cash than the revenues it had booked during the period (i.e. dues from previous periods) or it has sold some assets.

At the end of December'2012, Suzlon TCE on a Consolidated basis was Rs.17,038 crores, which reduced to Rs.15,877 crores at the end of September'2013 and further reduced to Rs.15,610 crores at the end of December'2013. That means during the last one year Suzlon has received Rs.1,428 crores either via assets sale or recovery of previous dues from customers. This inflow of Capital will help the company improve it's Cash positions & also help reduce it's Net Debt position, which will ultimately help the company in controlling it's Interest Costs. Most of this Capital will come in handy as Suzlon tries to ramp up it's manufacturing to fulfill it's order book.

Suzlon's share price is currently hovering around the Rs.10-11 range, translating into a Market Cap of about Rs.2500 to 2700 crores on the Equity base at the end of December'2013. This Equity Base will expand further in the coming months as the commitments made in the CDR agreement are implemented. FY'2015 should be much more positive for Suzlon on the results front, compared to FY'2014, as most of the clean-up and restructuring costs must have been taken care of during the current fiscal. Suzlon is expected to post healthy EBITDA margins of close to 10% during FY'2015 and should be very close to break-even on the Net Level as well. Once those signs start showing, Suzlon will command much higher valuations than current level.