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Keep adding on Dips | Everonn Education – Multibagger without a doubt

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Education space is big. India’s problems aren’t exactly same as in other countries. Poverty, poor village schools, illiteracy, so we will not find companies in exactly same space. Also in rich cities of India its very common to see students opting for private coaching classes for science, maths, accounts etc, this trend also is not seen here. It will be hard to find 100 students going for private classes outside school in New Zealand for example. So problems of India are quite unique. Long before I heard of educomp and everonn and invested in stocks, I had been following Microsoft in its education endeavours and its a about 80 billion $ market in India alone growing over 15% per annum. 

There are many multi billion $ private players in education, they have extended beyond curriculum material to full fledged university campus, online degrees etc. Devry is 6 billion $, Apollo Group is 8.5 billion $, Brigdepoint 2.5 billion $, career point, Pearson is 12 billion $ and many more. 

There is nothing great so far that both these companies have done. Its like billions of mp3s are sitting on computers and you come out with iPod, logical hit product. 

So far study material has been digitised and delivered by satellite to remote places, assisting teachers. There is little or no entry barrier, so its commodity play. Educomp did aggressive revenue recognition so sentiments have turned against, Everonn also recognises 35-40% revenue in first year due to sale of computer, equipment and 15% in remaining four years for a 5 year contract. 
Another negative has been capex requirement to expand, 1-2 lacs per school. 

Actually I am willing to play this huge opportunity even if these were cement companies. But any innovation like partnership with University, Land owners for building schools, franchise of kindergarten, online coaching etc etc above that is icing on cake. 

So far Indian Govt. has been silly in terms of not allowing for-profit education in K-12 segment.

Lets start with negatives of education sector. Expected equity dilution of 5% each year for next 3-4 years because they are cash flow negative for next 2-3 years and need to expand. But we should worry about receivables as there are no bad debts, money is received by Govt eventually after 6 months or private schools which are always sound. 

So, when they do more revenues, their debtors will increase. They may have 1000 crore debtors in three years and eventually they will reach cash flow break even. 

Lets assume they make normal returns on investment i.e. 15% on investment, consider borrowing cost from bank at 10%. So, 5% is margin ! Because nobody will do this commodity business on negative margin, normal profit has to be made. Size of opportunity in Govt. schools is huge, 6-7 Lacs schools to open up in this commodity business from just 30,000 schools today. 

Second interesting part, 150 million primary students are out of school out of 270 million. 

Also, India is short of 2 lac primary schools. Somebody has to construct, someone has to manage. There lies an opportunity. 

Although unsure of how much equity dilution may happen, within 5 years I expect both Educomp and Everonn to show 5 times rise in sales. My premise is they will evolve into school companies and not just burning discs and churning out websites from books coz latter will become commodity for sure. 

Next step is establishing school as brand like Amity Schools. They have done equity for advertisement deal with HT Media, DB Corp and talks are on with Benett Coleman. So we will see 50 Crore media splash for their private initiatives. K-12 is biggest market in education in India, 25-30 Billion $ out of 80 Billion $ and long way to go before it gets saturated, both in cities and villages. 

They have entered pre-school too, this may grow to a decent size: 

So, in a nutshell, this may appear as commodity business but interesting part will happen when these companies will do complete school management, bathroom cleaning to administration, teacher recruitment, training, educating to exam results – Holiday Inn of schools, and capex heavy investments are made by HNIs, land owners, infra companies to construct physical campus. Educomp is already into it and Everonn will be by next year. The market is so damn big that concern isn’t finding opportunity to sink 1000s of crores of investment required but concern is making a couple 100 basis points above borrowing rate. Eventually they will be hale and cash flow positive too. Its very much like retail business, heavy investments initially but year after year intrinsic business value growth. Isn’t Shoppers Stop too back from the dumps…. 

So, yes, there is hope but even without hope of improvement commodity space is pretty big too before it saturates. There isnt much to lose, but extra ordinary profits can be made if we are right about growth. NIIT and Aptech look so silly, opportunity right there under the nose but they could not sniff it. Just as Microsoft and Yahoo used to outsource stuff to Google and Google offered to sell itself for 1/10,000th the market cap it is today but both Yahoo and Microsoft refused. 

BTW, Everonn started long before Educomp although P Kishore wasn’t as street smart and smarmy. He is a passionate man though. 

If a company grows @ 25% and makes 25% ROCE without debt, then challenge is to find opportunity coz its not easy to find business maintaining that high margin and at the same time re-invest back into business coz competition will eat into super normal profit margin or size of opportunity isn’t there. But if a company can grow @ 50%+ for several years and makes only 15 % ROCE result will be superior in latter if it does not pay back anything to shareholders and re-invests everything into business to grow. Its the latter that Everonn is. 

Its a myth that money cant be made through low PE or commodity business. Shree Cements returned 40 bags in a decade.

Written by amitdipsite

May 22, 2010 at 1:22 am

Posted in Uncategorized

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