Education companies have withstood the recent bear onslaught on the stock markets as they have a great future ahead.
Software education companies have survived the bloodbath -- and are continuing to do so -- in a volatile stock market that is being consistently rocked by post-budget blues and global meltdowns.
While all IT stocks took a battering at the bourses during the past three weeks, three companies -- Educomp, NIIT and Aptech -- remained stable around the Rs 900, Rs 690 and Rs 200 levels.
Why was there so much confidence in these stocks? And should investors remain bullish about these companies, especially given the fact that this year's budget has been anything but kind to the IT-ITeS sector?
Besides, the fortunes of these software education companies (especially NIIT and Aptech) are directly linked to the ups and downs in the IT-ITeS sector.
Moreover, the government now proposes to impose minimum alternate tax (for those IT firms under the STPI scheme), bring ESOPs into the ambit of fringe benefits and tax dividend distribution.
Yet, software education companies remain a good bet. NIIT and Aptech are capitalising on the fact that there's a massive shortage of trained knowledge professionals in a booming IT-ITeS sector. IT firms will be hiring thousands of candidates every year as they expand and will thus need a steady flow of trained professionals.
The software, hardware and networking, multimedia and animation retail training market is estimated to be a little over Rs 500 crore (Rs 5 billion) and is expected to grow anywhere between 20-35 per cent CAGR by 2009 -- almost doubling the current figure.
This segment is highly fragmented, so having a reputed brand name like NIIT or Aptech does matter. By 2012, analysts say India will require around 5 lakh professionals in the IT exports market, 1.11 million in the domestic IT industry and around 2 million in the ITES-BPO sector. And so would countries like China, Russia, the US, Brazil, South Korea, Vietnam, the Philippines, Thailand and Mexico where Aptech and NIIT have made in-roads.
Also, the government's thrust on e-governance is also expected to give a boost to these companies since the implementation of these projects requires professionals trained in networking and the knowledge of open source software like Linux and .Net technologies to name a few.
Educomp, on the other hand, is gaining from the fact that the government has increased the allocation for education in this year's budget by 34.2 per cent to Rs 32,352 crore (Rs 323.52 billion).
It has also increased the education cess by 1 per cent (read more funds) and the teacher training allocation from Rs 160 crore (Rs 1.6 billion) to Rs 430 crore (Rs 4.3 billion). All this spells a bounty for Educomp.
In the quarter ended December 2006, NIIT's global system-wide (includes franchisees) consolidated revenues grew 111 per cent year-on-year to reach Rs 297 crore (Rs 2.97 billion), while net revenues grew 114 per cent y-o-y to Rs 225.1 crore (Rs 2.25 billion).
A major part of this growth was due to its acquisition of Element K in July 2006, while its inorganic business grew 23 per cent.
The third quarter has traditionally been weak because of the seasonal nature of the individual business and fewer working days. Its associate, NIIT Technologies (where NIIT Ltd owns 25 per cent), contributed 80 per cent (Rs 9.2 crore or Rs 92 million) of the company's profit after tax. Its existing education business, though, grew 20 per cent y-o-y.
The new businesses contributed Rs 2.5 crore (Rs 25 million) to the top line (it was their second quarter of operation and Element K). It should take NIIT another two or three quarters before it can bring synergies from Element K and reap a monetary benefit. The individual business recorded a 46 per cent decline in enrollments sequentially.
However, this is a seasonal effect, say analysts. The company introduced two new programmes during the quarter to meet the growing requirements for qualified networking professionals. It also closed down four low-revenue centers in the domestic market and adding six new centers overseas.
The corporate business along with Element K now account for 64 per cent of the company's revenues and grew 18 per cent y-o-y. Institutional business now is a small contributor (only 10 per cent). This is part of NIIT's strategy to "de-risk the institutional business and increase the size of the pipe for individual and corporate business".
China business grew 38 per cent to contribute 15 per cent and the remaining came from the rest of the world. ICICI Direct analysts have re-rated the stock to 'Hold' and have revised the EPS estimates to Rs 27.1 and Rs 39.4 for FY07E and FY08E respectively.
Aptech CEO and MD Pramod Khera says, "We will concentrate on three segments -- training solutions, learning services, and testing and certification, to increase revenues."
Towards this end, Aptech plans to fully exit the "low-margin" government (institutional) business once its ongoing projects are completed. This will help it improve its receivables position besides increasing its return on capital employed by focusing on high-margin businesses.
Khera adds that he is planning to add 400 people by the year end and is looking at acquiring a US-based company that will help his company build client relationships there.
Aptech posted revenues of over Rs 900 crore or Rs 9 billion (system-wide revenues) this year. Its net revenues stood at Rs 175.5 crore or Rs 1.75 billion (11.65 per cent higher than the previous fiscal), net profit at Rs 16.9 crore or Rs 169 million (last fiscal, it was a loss of Rs 43.82 crore or Rs 438.2 million), with an EPS at Rs 4.5 and PE at 47.1.
However, in the last quarter, its revenue swere down by around 20 per cent sequentially and it posted a loss of Rs 1.65 crore (Rs 16.5 million).
Aptech's revenues come from two broad segments -- retail and corporate. While retail covers its global IT forays (China included) and Avalon business (aviation and now hospitality), the corporate segment includes its learning service, Synergetics (which has been 13 years into IT corporate training and was acquired by Aptech in 2006) business and training and testing activities (estimated to be a Rs 380 crore or Rs 3.8 billion market opportunity by 2009).
Aptech's domestic business too is growing since it now has SSI and Arena multimedia under its belt. Its corporate business now accounts for 17 per cent, projects have reduced their share to 16 per cent while global retail training has increased to 67 per cent.
Aptech has maintained its numero uno position in China (through a 50:50 JV with a local partner) with a 27 per cent market share. The Chinese market is estimated to be growing at 20-25 per cent every year.
The company already has tie-ups with educational institutions in the country to conduct online examinations and certifications.
Initiatives such as these are expected to triple the number of students to around 10 lakh. Its learning services with clients like Microsoft and Sun Microsystems have gross margins at 30-40 per cent levels while testing services have margins of 25-30 per cent.
A Rs 85-crore (Rs 850-million) company based on its trailing 12-month revenues, e-learning solutions provider Educomp Solutions is riding high on the budget announcements.
Besides other sops to the education sector, the government has increased the teacher-training budget from Rs 160 crore (Rs 1.6 billion) to Rs 430 crore (Rs 4.3 billion), and Educomp has an 80 per cent market share in this segment. "We will exceed the guidance provided last quarter," says Shantanu Prakash, MD, Educomp Solutions.
The company plans to reach out to around 10 million learners through its products and services by 2008. Its bullishness arises from two aspects -- its performance on the stock markets and the good prospects of the education sector.
Growing at over 60 per cent annually, Educomp partners with companies like Wipro and Microsoft and focuses on the K12 group (kindergarten to class 12 students only). For the nine months ended December 2006, Educomp's revenues stand at Rs 56.65 crore (Rs 566.5 million).
Historically, its fourth quarter results approximate 38-47 per cent of its total revenues. Educomp has been growing at 46 per cent between FY04 and FY06. Its net profit too increased at a CAGR of 151 per cent to Rs 13.91 crore (Rs 139.1 million) in FY06.
Educomp's revenue flows from three broad streams: content licensing to schools; bridging the 'digital divide' (by taking it even to rural areas) and 'professional development (of tutors)'. It is gaining from the fact that the worldwide market for education and training content and services is expected to reach $42.1 billion by 2008.
The global education content market is expected to grow to $23.7 billion by 2009 and educational content for higher education and K-12 is expected to grow at 5 per cent a year through 2009. Besides, the Indian education market is the largest in the world.