The crazy Indian market is ignoring expensive valuations and high risks in Educomp’s business model and aggressive accounting policy, in our view. We see 20% downside for the stock. Citi forecasts 102% revenue CAGR and 95% EPS CAGR over FY07-10 as Educomp penetrates beyond tier 1 & 2 cities. Stable margins as pressure in school ventures and the ICT business is countered by leverage in Smart_Class and MathGuru. There is high execution and regulatory risks in Edu-Infra and Edu-Manage.
Investors should note High valuations paid to acquire start-ups Edu-Infra and Edu-Manage; b) Reasons for exit taken by private equity firm just before IPO; and c) High regulatory risk in the K-12 business.
SELL with a target price of Rs 2,380, which is based on 35x FY09E fully diluted EPS, derived using the stock’s historical trading band. Target multiple of 35x is at 20% premium to the stock’s average historical valuation to factor in the company’s stronger growth prospects. It is supported by valuation multiples of other educational services companies in the Asia Pacific region. Target multiple of 35x is at a premium to the average valuation for Indian IT companies.