Educomp big money-maker is Smart class, a range of interactive digital lessons with animation and graphics that's marketed mainly to private schools as they have deeper pockets than public schools. It witnessed strong demand across this segment with no pricing pressure. Smart Class growth is on track as they added 2457 schools and 19,144 classrooms over the past three quarters on the back of a very successful TV advertising campaign. Smart Class currently contributes approx. 70% to the topline.

Educomp has demonstrated strong execution in the K-12 space which is the largest annuity stream in the Education sector. It has deployed 60% of its total capital employed towards the K-12 segment at Rs. 1560cr. Educomp is demonstrating the ability to leverage on the sticky nature of the education space. It has increased its stake in the K-12 subsidiary – EISML – from 69.4% in FY10 to 80.4% now. Educomp is adopting an aggressive strategy in expanding its K-12 network and expects to reach 150 schools by FY13 from 50 schools as of now.

Indian education services sector is estimated to grow at 6.3% CAGR to Rs 3,700 by 2013. With a student base of 232 million in schools and 15.5 million in college, the company has ample opportunity helped with Government's annual spending of USD 30bn per annum in the sector. The wide presence in the number of schools present strong opportunity for Educomp while reducing its customer concentration risk.    

Valuations:

We maintain positive outlook towards Educomp due to strong earnings momentum, enhanced visibility in the business and significant improvement in disclosures across financial parameters. Stock trades at just 13.1x and 9.04x multiple of our estimated FY11E & FY12E EPS of Rs. 30.9 and Rs. 44.8. Hence, we recommend BUY on Educomp Solutions Ltd.