First lets discuss Educomp's upfront Q3 numbers, then we will go to finer details. Educomp's Q3 results are mixed upfront. Sales revenue is down from Rs.130 crores to Rs.124 crores Q-o-Q, but Total Income has increased from Rs.151 crores to Rs.154 crores, mainly because of higher Other Income at Rs.30 crores compared to Rs.21 crores in Q2. The Sales revenue is lower mainly because of School Learning segment's contribution dropping from Rs.56 crores to Rs.42 crores, partially compensated by higher contribution from Online Supplemental segment where revenues increased from Rs.54 crores to Rs.62 crores, despite absence of Gateforum from Educomp's fold. That means Online Supplemental business has pleasantly surprised me, while School Learning segment has disappointed.
My guess is that Educomp has started billing most of it's SmartClass customers only for the Content, while the hardware is being paid for by the Schools upfront. What makes my guess stronger is the sharp drop in Educomp's Total Expenses (excluding Interest & Depreciation) from Rs.161 crores to Rs.128 crores. This is fabulous and I hope going forward Educomp moves towards 100% additions on this model of billing only for Content and Schools pay for hardware upfront, possibly through a third-party vendor. This will boost profitability going forward. Earlier Educomp used to charge around Rs.5000-5500 per classroom per month under a 5-year contract for Hardware+Content deal. I am estimating that under Only Content contract, Educomp could be charging about Rs.3000-3500 per classroom per month for a Contract of same duration, valuing each contract at about Rs. 2 lakhs per classroom over a 5-year term. That means an addition of every 1000 classrooms adds about Rs.20 crores to Educomp's Topline, but it is currently recognised in 20 quarterly installments.
Coming to the Other Income part, it generally comprises of Income from investments or Profit from sale of assets, etc. But incase of Educomp, some portion of the Other Income is possibly coming from recoveries of receivables which the company had previously written-off. This will get confirmed if the trend of healthy Other Income figure continues in the coming quarters. Educomp has written-off around Rs.1200 crores worth of receivables or assets in the last 3 quarters. Even if Educomp manages to recover 20% to 30% of this amount over the next 2 years will be very good for the company's results in future quarters. As at March'2014, Educomp's Capital Reserves figure stood at around Rs.2200 crores. In the first 3 quarters of this fiscal, Educomp's Total Net Loss is close to Rs.1500 crores. If we see another good chunck of write-offs in Q4 as well (hopefully the last one), then Educomp will end this fiscal with negligible Capital Reserves figure. So as and when the write-offs are over and the company starts moving towards Net Profit, the various analytical ratios like RoCE will start looking very very strong. Watch out for this sometime in the second half of next fiscal.
Coming to the most important part of my analysis. I have been studying the Capital Employed figure, which the company declares in the Segmentwise data every quarter, and co-relating it with the Write-offs that the company is doing every quarter. In the chart above I have compared Educomp's Cash Loss against the change in Educomp's Consolidated Capital Employed figure. Cash Loss comprises of company's Net Loss reduced to the extent of Depreciation, but including the Write-off amounts. This Analysis clearly shows that Educomp has got Net Cash Inflow over the last 7 quarters. The Cash Inflow amount are not very big, but positive nevertheless. The inflows clearly suggest that Educomp is managing to cover all it's Operating and Other expenses & Interest payments. Some credit for the Net Cash Inflow goes to the company's efforts in aggressively going after receivables. There has been consistent positive development on this front. Hopefully it will continue in the coming quarters.
My guess is that Educomp has started billing most of it's SmartClass customers only for the Content, while the hardware is being paid for by the Schools upfront. What makes my guess stronger is the sharp drop in Educomp's Total Expenses (excluding Interest & Depreciation) from Rs.161 crores to Rs.128 crores. This is fabulous and I hope going forward Educomp moves towards 100% additions on this model of billing only for Content and Schools pay for hardware upfront, possibly through a third-party vendor. This will boost profitability going forward. Earlier Educomp used to charge around Rs.5000-5500 per classroom per month under a 5-year contract for Hardware+Content deal. I am estimating that under Only Content contract, Educomp could be charging about Rs.3000-3500 per classroom per month for a Contract of same duration, valuing each contract at about Rs. 2 lakhs per classroom over a 5-year term. That means an addition of every 1000 classrooms adds about Rs.20 crores to Educomp's Topline, but it is currently recognised in 20 quarterly installments.
Coming to the Other Income part, it generally comprises of Income from investments or Profit from sale of assets, etc. But incase of Educomp, some portion of the Other Income is possibly coming from recoveries of receivables which the company had previously written-off. This will get confirmed if the trend of healthy Other Income figure continues in the coming quarters. Educomp has written-off around Rs.1200 crores worth of receivables or assets in the last 3 quarters. Even if Educomp manages to recover 20% to 30% of this amount over the next 2 years will be very good for the company's results in future quarters. As at March'2014, Educomp's Capital Reserves figure stood at around Rs.2200 crores. In the first 3 quarters of this fiscal, Educomp's Total Net Loss is close to Rs.1500 crores. If we see another good chunck of write-offs in Q4 as well (hopefully the last one), then Educomp will end this fiscal with negligible Capital Reserves figure. So as and when the write-offs are over and the company starts moving towards Net Profit, the various analytical ratios like RoCE will start looking very very strong. Watch out for this sometime in the second half of next fiscal.
Coming to the most important part of my analysis. I have been studying the Capital Employed figure, which the company declares in the Segmentwise data every quarter, and co-relating it with the Write-offs that the company is doing every quarter. In the chart above I have compared Educomp's Cash Loss against the change in Educomp's Consolidated Capital Employed figure. Cash Loss comprises of company's Net Loss reduced to the extent of Depreciation, but including the Write-off amounts. This Analysis clearly shows that Educomp has got Net Cash Inflow over the last 7 quarters. The Cash Inflow amount are not very big, but positive nevertheless. The inflows clearly suggest that Educomp is managing to cover all it's Operating and Other expenses & Interest payments. Some credit for the Net Cash Inflow goes to the company's efforts in aggressively going after receivables. There has been consistent positive development on this front. Hopefully it will continue in the coming quarters.
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