Educomp Solutions - A Value Buy or a Falling Knife?


Educomp Solutions, one of the leading players among the education stocks has fallen from Rs.471 (30-May) to Rs.194 (02-Sep), indicating a return of -59% for the four month period.

From my perspective, some of the reasons for this:
1. General fall in the markets in the last few months
2. Raid on Educomp offices by the Income Tax department for alleged tax evasion
3. Lack of transparency in the education sector ( This is also affecting the other stocks in the sector - Everonn Education, Career Point, Tree House Education & Accessories, Greycells Education, NIIT and Aptech)
4. As a last straw, the arrest of MD of Everonn Education Ltd. on 02-Sep on an alleged bribery attempt (and subsequent resignation by the high profile Dr. J J Irani from the position of Everonn's non-exec Chairman) hammered all the education stocks.

If the stock is battered, why am I interested in Educomp Solutions? Reasons follow:

On a quantitative basis,
1. Across the last 10 years, sales have increased 58 times (from Rs. 18 crore to Rs. 1021); net profit has increased 309 times (from Rs. 1.24 crore to Rs. 389 crore); Earnings per share has increased 13 times (from Rs. 2.82 to Rs. 37.97) - reasonably impressive

2. Financial position seems ok - Current Ratio is at 2.82 and Debt Equity Ratio is at 0.68 - seems okay

3. There is also a Margin of Safety of 63% (vis-a-vis the 8% offered by PPF in India). I have my own way of calculating a Margin of Safety based on the Earnings Yield. I average the Margin of Safety based on the Earnings Yield of latest TTM, 3 year and 7 year values.

On a qualitative basis,
1. From the investor's presentation, I "felt" their working model is good and might work over the long term, since they have a first mover advantage

2. In a small city in India (Nellore), I saw an advertisement of one of their products on an autorickshaw about how some of the local schools are using it. My take - Educomp Solutions has percolated to the smaller parts of India as well.

Conclusion: I am taking a limited exposure to Educomp Solutions, solely on the basis of a 'sufficient Margin of Safety' and because I 'diversify adequately'.

Invictus.

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