Educomp Solutions Ltd announced it's biggest ever quarterly loss at about Rs.344 crores in Q1-FY'15 result. Upfront it's a massively disappointing result. But if one digs deeper, there are clear signs of recovery in Educomp's business and things will be confirmed in Q2 result. Now one will question: What are positive signals? I would say that the answer is in the Segmentwise reporting of it's consolidated numbers. Will you be surprised if I tell you that despite a Total Income figure of Rs.147 crores & a huge reported loss as mentioned above, for the Jun'14 quarter, Educomp Solutions Ltd did have a Net Cash Inflow (i.e. Total Cash Income - Total Cash Expenditure) of Rs.185 crores during the quarter. Read on for all the details.
The School Learning segment is Educomp's most important business, which includes SmartClass, EduReach and new launches like English Mentor. Over the last couple of months, Educomp has been aggressively marketing a new product called Educomp SmartSchool, which I think packages all it's School Learning products like SmartClass, English Mentor, Assessment & School Management system. If one is following Educomp on Twitter, one will know that Educomp has conducted Roadshows in about 20 or more different cities, where they invited principals of private schools for a demonstration of it's SmartSchool product. We could see start of the contracts for the same being signed from the Q2 onwards. For it's existing SmartClass business, Educomp had announced shifting to the BOOT model about 3 or 4 quarters back. Under this model, the revenue recognition from every contract will be spread over the entire contract period. So the numbers will start small & gradually build-up with each passing quarter.
As can be seen, Educomp's revenues from School Learning segment dropped sharply to lows of about Rs.36 crores in Dec'13 quarter, but have started building up over the last 2 quarters. For Jun'14 quarter, the figure stood at Rs.58 crores. Remember that these are revenues that are recognised by the company as per it's accounting policy. But sometimes the Cash Flows from a certain business segment are not commensurate with the revenue recognition numbers. For FY'11, FY'12 & FY'13, Educomp had recognised total revenues of little over Rs.2700 crores from it's School Learning solutions business, but at the same time the company had piled up receivables of nearly Rs.1000 crores, i.e. this is the amount the company had recognised, but did not receive. Some of this gets reflected in Capital Employed numbers, which the company announces segmentwise at the end of each quarter. Capital Employed in a business is the difference between the total Cash Invested/Spent in the business & the total Cash Flows received from the business. The Capital Employed in the School Learning segment for Educomp went up from under Rs.600 crores at the start of FY'11 to nearly Rs.1400 crores at the end of FY'13. This is precisely the biggest reason why Educomp got into Debt trouble.
An analysis of the Capital Employed numbers for the different segments of Educomp's business gives us a better idea of the kind of Cash Flows the company is receiving & helps us understand the fluctuations in the company's quarterly Interest Cost numbers. The following 3 charts shows the Quarterly progress of the Capital Employed numbers for Educomp's 3 important business segments: School Learning, K-12 Schools & Online Supplemental.
As you can see, the Capital Employed number for School Learning segment has dropped for 3 out of the last 4 quarters. From levels of Rs.1460 crores in Jun'13, the number dropped to Rs.1377 crores at Dec'13. This was not a significant drop in 2 quarters, but it was a clear sign that Educomp had started receiving some of it's long pending receivables. During the March'14 quarter, Educomp seems to have spent substantial sum of nearly Rs.600 crores in acquiring hardware & other equipment, which led to the jump in Capital Employed number. This led to a jump in the company's Interest Cost for Jun'14 quarter. For the Jun'14 quarter, the Capital Employed number has dropped by a substantial Rs.108 crores, which is extremely positive and I am hoping that the number continues to drop by more than Rs.50 or 75 crores every quarter. Any significant drop in Capital Employed number helps in reducing the Net Debt of the company, which impacts the Interest Cost of the company in the following quarters. I am hoping to see the Capital Employed number closer to or under Rs.1500 crores by the end of FY'15.
Now lets look at the next most important business segment of Educomp, which is the K-12 schools business. Even for this business, Educomp does have some receivables from certain trusts, with whom Educomp has School-management contracts. Most of the Capital in this business is locked in the Schools that Educomp has started on it's own or is in the process of doing. The Land cost is the biggest cost & substantial capital in locked in it. The company might look at selling a few land parcels, where it has not started any construction of the school. We will know about it in the coming quarters. At the end of Sept'13, the Capital employed was Rs.2126 crores. Since then, over the last 3 quarters, the number has dropped to Rs.1961 crores. That means there has been a Net Cash Received of about Rs.165 crores for Educomp, from this business segment. I am expecting only a gradual drop in the Capital Employed number for this business for this fiscal. The pace of drop will increase in the following fiscals as more & more schools reach the maturity stage.
The Online Supplemental business is one where the company has not had to put in large Capital & the Cash flows have been decent. This is clearly evident from the Capital Employed numbers, which stood at about Rs.204 crores in Jun'12. It saw a big drop in Mar'13 quarter when Educomp sold off it's stake in IndiaCan to Pearson. Since then the numbers have been fluctuating based on the fee payment schedule of the various courses being conducted under this business segment. Educomp has already announced that it has signed a deal to sell it's stake in GateForum to a PE fund. Once this deal is closed there will be some more Cash Inflow and might make this business segment Net Cash positive.
All these developments should help bring down the Net Debt levels of the company by about Rs.500 crores over the next 3-4 quarters. If things do move in that direction, then we could see Investor interest increasing in Educomp in the coming quarters. We will have to monitor the progress on the Quarterly basis. The Progress will happen in small steps, but the direction should be positive. At the current price of about Rs.28 per share, Educomp is trading at a Market Cap of about Rs.350 crores. I am certainly hoping to see the company's Market Cap to increase to over Rs.1000 crores in the next 2-3 quarters and it will certainly happen if things do move in the positive direction as mentioned above. And if they do happen, then FY'16 will be a lot more positive for Educomp & it's shareholders.
The School Learning segment is Educomp's most important business, which includes SmartClass, EduReach and new launches like English Mentor. Over the last couple of months, Educomp has been aggressively marketing a new product called Educomp SmartSchool, which I think packages all it's School Learning products like SmartClass, English Mentor, Assessment & School Management system. If one is following Educomp on Twitter, one will know that Educomp has conducted Roadshows in about 20 or more different cities, where they invited principals of private schools for a demonstration of it's SmartSchool product. We could see start of the contracts for the same being signed from the Q2 onwards. For it's existing SmartClass business, Educomp had announced shifting to the BOOT model about 3 or 4 quarters back. Under this model, the revenue recognition from every contract will be spread over the entire contract period. So the numbers will start small & gradually build-up with each passing quarter.
As can be seen, Educomp's revenues from School Learning segment dropped sharply to lows of about Rs.36 crores in Dec'13 quarter, but have started building up over the last 2 quarters. For Jun'14 quarter, the figure stood at Rs.58 crores. Remember that these are revenues that are recognised by the company as per it's accounting policy. But sometimes the Cash Flows from a certain business segment are not commensurate with the revenue recognition numbers. For FY'11, FY'12 & FY'13, Educomp had recognised total revenues of little over Rs.2700 crores from it's School Learning solutions business, but at the same time the company had piled up receivables of nearly Rs.1000 crores, i.e. this is the amount the company had recognised, but did not receive. Some of this gets reflected in Capital Employed numbers, which the company announces segmentwise at the end of each quarter. Capital Employed in a business is the difference between the total Cash Invested/Spent in the business & the total Cash Flows received from the business. The Capital Employed in the School Learning segment for Educomp went up from under Rs.600 crores at the start of FY'11 to nearly Rs.1400 crores at the end of FY'13. This is precisely the biggest reason why Educomp got into Debt trouble.
An analysis of the Capital Employed numbers for the different segments of Educomp's business gives us a better idea of the kind of Cash Flows the company is receiving & helps us understand the fluctuations in the company's quarterly Interest Cost numbers. The following 3 charts shows the Quarterly progress of the Capital Employed numbers for Educomp's 3 important business segments: School Learning, K-12 Schools & Online Supplemental.
As you can see, the Capital Employed number for School Learning segment has dropped for 3 out of the last 4 quarters. From levels of Rs.1460 crores in Jun'13, the number dropped to Rs.1377 crores at Dec'13. This was not a significant drop in 2 quarters, but it was a clear sign that Educomp had started receiving some of it's long pending receivables. During the March'14 quarter, Educomp seems to have spent substantial sum of nearly Rs.600 crores in acquiring hardware & other equipment, which led to the jump in Capital Employed number. This led to a jump in the company's Interest Cost for Jun'14 quarter. For the Jun'14 quarter, the Capital Employed number has dropped by a substantial Rs.108 crores, which is extremely positive and I am hoping that the number continues to drop by more than Rs.50 or 75 crores every quarter. Any significant drop in Capital Employed number helps in reducing the Net Debt of the company, which impacts the Interest Cost of the company in the following quarters. I am hoping to see the Capital Employed number closer to or under Rs.1500 crores by the end of FY'15.
Now lets look at the next most important business segment of Educomp, which is the K-12 schools business. Even for this business, Educomp does have some receivables from certain trusts, with whom Educomp has School-management contracts. Most of the Capital in this business is locked in the Schools that Educomp has started on it's own or is in the process of doing. The Land cost is the biggest cost & substantial capital in locked in it. The company might look at selling a few land parcels, where it has not started any construction of the school. We will know about it in the coming quarters. At the end of Sept'13, the Capital employed was Rs.2126 crores. Since then, over the last 3 quarters, the number has dropped to Rs.1961 crores. That means there has been a Net Cash Received of about Rs.165 crores for Educomp, from this business segment. I am expecting only a gradual drop in the Capital Employed number for this business for this fiscal. The pace of drop will increase in the following fiscals as more & more schools reach the maturity stage.
The Online Supplemental business is one where the company has not had to put in large Capital & the Cash flows have been decent. This is clearly evident from the Capital Employed numbers, which stood at about Rs.204 crores in Jun'12. It saw a big drop in Mar'13 quarter when Educomp sold off it's stake in IndiaCan to Pearson. Since then the numbers have been fluctuating based on the fee payment schedule of the various courses being conducted under this business segment. Educomp has already announced that it has signed a deal to sell it's stake in GateForum to a PE fund. Once this deal is closed there will be some more Cash Inflow and might make this business segment Net Cash positive.
All these developments should help bring down the Net Debt levels of the company by about Rs.500 crores over the next 3-4 quarters. If things do move in that direction, then we could see Investor interest increasing in Educomp in the coming quarters. We will have to monitor the progress on the Quarterly basis. The Progress will happen in small steps, but the direction should be positive. At the current price of about Rs.28 per share, Educomp is trading at a Market Cap of about Rs.350 crores. I am certainly hoping to see the company's Market Cap to increase to over Rs.1000 crores in the next 2-3 quarters and it will certainly happen if things do move in the positive direction as mentioned above. And if they do happen, then FY'16 will be a lot more positive for Educomp & it's shareholders.
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