1. ANALYSIS OF FINANCIAL HEALTH OF EDUCOMP
SOLUTIONS AND ONLINE EDUCATION INDUSTRY
A PROJECT REPORT
2. Letter of transmittal
Ms Zenith,
Senior analyst
ABC Corporation
Dear Madam,
Please find here an enclosed copy of final report on “Financial health of Educomp”. The
main purpose of report is to study the financial condition of educomp.
The report provided here compares the different financial ratio for Educomp. Educomp has
higher Debt to Equity ratio then all of its competitors. This is because Educomp is funding its
projects from external borrowing i.e. long and short term borrowing. Educomp has higher
quick ratio then NIIT and Aptech but lower in comparison to Everonn. Educomp has higher
cash ratio then NIIT and Aptech but lower in comparison to Everonn. Interest coverage ratio
is highest in case of Educomp. Though interest expense in high case of Educomp. But in
proportion of EBIT interest expense is small.
For any further clarification feel free to call us. It was a pleasure working on the project. If
you have any other such nice and insightful project we would be delighted to work on that.
Sincerely,
Group C5
Enclosure: Final report
3. Acknowledgement
First of all we express our gratitude to the almighty God for making us capable enough to
avail this opportunity. We are immensely thankful to Dr. Payal Mehra and Dr. R.L Raina for
their insights in the field of communication both oral and written that provided us with
enough knowledge to present this report. We also pay our gratitude to Dr. Prakash Singh for
his lessons of financial reporting from which we drew our knowledge of financial ratios.
4. TABLE OF CONTENTS
Letter of transmittal................................................................................................................ 2
Acknowledgement ................................................................................................................. 3
I. Executive Summary ........................................................................................................ 5
II. Terms of Reference ..................................................................................................... 6
1. INTRODUCTION .......................................................................................................... 7
2. BACKGROUND INDUSTRY ANALYSIS .................................................................. 7
3. ANALYSIS OF RATIOS ............................................................................................... 8
3.1. Liquidity Ratios ........................................................................................................... 8
3.1.1. Current Ratio ........................................................................................................... 8
3.1.2. Quick Ratio .............................................................................................................. 9
3.2. Solvency Ratios ......................................................................................................... 10
3.2.1. Debt to equity ratio ................................................................................................ 11
3.2.2. Interest Coverage ................................................................................................... 12
3.3. Efficiency or Turnover Ratios ................................................................................... 12
3.3.1. Fixed Asset Turnover Ratio ................................................................................... 12
3.4. Profitability Ratios .................................................................................................... 14
3.4.1. Operating Profit Margin ........................................................................................ 14
3.4.2. Net Profit Margin................................................................................................... 15
4. ANALYSIS OF FINANCIAL STATEMENTS ........................................................... 16
5. MARKET VALUATION ............................................................................................. 17
6. Conclusion .................................................................................................................... 17
7. Our Decision ................................................................................................................. 18
APPENDIX .......................................................................................................................... 19
A1 MIND MAP ........................................................................................................... 19
Bibliography ........................................................................................................................ 20
5. I. Executive Summary
Educomp Solutions Limited, founded in 1994 is a globally diversified education solutions
provider and the largest education company in India. Educomp Group reaches out to over
26,000 schools and 15 million learners and educators across the world.
Educomp is now India’s number one education company. For many years, Educomp has
been at the forefront of various pioneering initiatives in the e-education space. The
objective of my report is to discuss the financial performance of the company and to assess
its future prospects.
The factors that require to be analysed are the industry growth and trends for the past few
years. Then there is the macroeconomic environment prevalent in the country which can be
analysed on the basis of the current interest rates, inflation rates, increasing income levels,
government policies and literacy levels. A comparative analysis is required of Educomps
performance with respect to its competitors which are Everonn, Aptech and NIIT. This is to
be done on the basis of financial ratios with data of last 4 years.
The report provided here compares the different financial ratio for Educomp. Educomp has
higher Debt to Equity ratio then all of its competitors. This is because Educomp is funding its
projects from external borrowing i.e. long and short term borrowing. Educomp has higher
quick ratio then NIIT and Aptech but lower in comparison to Everonn. Educomp has higher
cash ratio then NIIT and Aptech but lower in comparison to Everonn. Interest coverage ratio
is highest in case of Educomp. Though interest expense in high case of Educomp. But in
proportion of EBIT interest expense is small.
6. II. Terms of Reference
The report is submitted to Ms Anita Zenith, Senior Analyst in partial fulfillment of the
requirement of the interim project.
This proposed study compares the financial status of Educomp Solutions Ltd. with three of
its most prominent competitors in the market. The report evaluates the financial health by
evaluating various relevant financial ratios based on the financial report of these companies.
The objective of the study is to
Assess the financial and institutional dimensions of educational services
management in their relevant segments
To develop institutional, commercialization and financial arrangements to improve
the current outlook of the company
Depending upon the financial outlook of the company recommend whether summer
interns should accept final offers from the company
The report gives an idea of the performance and status of Educomp as of today. Our
recommendations about Educomp will be based on this analysis. This report will help
management students doing their internship with the company judge the future prospect of
the company and decide whether to accept their offers from Educomp.
Educomp services Ltd is analysed based on the following parameters: size and potential for
growth in the educational service sector in India. It analyses the current macroeconomic
environment on the basis of the prevalent interest rates, increasing income levels,
government policies, inflation levels and literacy levels. This project compares the
performance of Educomp Solutions Ltd with its nearest competitors namely Aptech, NIIT
and Everonn. The comparative analysis of the financial performance of these 4 companies
provides a snapshot of the relevant accounting practices of this sector. The finances of these
companies is analysed on the basis of their financial ratios that in brief covers the relevant
financial performance of the sector on the whole.
7. 1. INTRODUCTION
The report aims at financial statement analysis of companies in the education sector. While
analysing the education sector we have focussed on companies providing e-educational
services. Four companies i.e. Educomp, Everonn, NIIT and Aptech are selected as a broad
representative of the education sector.
Using ratio analysis, common size financial statements and cash flow statements we have
analysed performance of Educomp over the past five years. The key financial ratios we have
used are Liquidity Ratios, Solvency Ratios, Profitability Ratios, Turnover Ratios, and Market
Ratios.
All the quantitatively analysis has been done supported with adequate interpretation and
conclusion. Time series and competitor analysis has been done.
2. BACKGROUND INDUSTRY ANALYSIS
Indian Education Sector is by far the largest capitalized space in India with $30 billion of
government spends (3.7% of GDP) and large network of ~1 million schools and more than
18,000 higher education institutes. Yet, the public education system is ‘insufficient’ and
‘inefficient’. Affluent Indians are expected to spend around $50 billion on private education
(14% CAGR over FY08-12E).
The statistics are very impressive, but a closer look will reveal that these spends are not only
‘insufficient’ but also ‘inefficient’. Considering global distribution patterns of public
education expenditure (international PPP$) and population, India’s expenditure on
education is highly disproportionate! While countries in North America and Western Europe
8. account for more than half of the global expenditure on public education and less than 10%
of the world’s school going population (5-25 years of age; from primary to tertiary levels)
lives in these countries. USA’s assigned public expenditure amounts to 25% of the
cumulative expenditure on just 4% of the target population group. In sharp contrast, India’s
public expenditure on education amounts to ~5.2% of the world’s cumulative public
expenditure, but the country is home to 20% of the population in the target population
group.
Given the dismal state of Indian Education Sector i.e. government-run schools/ institutions,
consumers are increasingly veering towards private institutions, typically perceived as
hallmarks of quality educations (even though quality comes at a price). In this backdrop, the
market for private formal education has grown to $40bn in size over the past few decades.
Not only that, a $10bn market has evolved around the formal education sector.
3. ANALYSIS OF RATIOS
3.1. Liquidity Ratios
Liquidity ratios provide information about a firm’s ability to meet its short-term,
immediate financial obligations using the asset that are most readily converted into the
cash. Assets that may be converted into the cash in a short period of time are referred
as liquid asset; they are listed in financial statement as current asset.
In general, the greater the value of liquid ratio signify that a company can pay its debts
that are coming due in the near future and still fund its ongoing operations. On the
other hand, a company with a low coverage rate raise a red flag for investors as it may
be a sign that the company will have difficulty meeting running its operations, as well as
meeting its obligations. We will be seeing here two of the liquidity ratios for the
Education Industry companies and analyzing them.
3.1.1. Current Ratio
The proportion of current assets available to cover current liabilities
In Education industry inventory is a small component of current assets.
9. Interpretation:
Time Series:
The reason for the lower liquidity leverage for the year 2009 is that company asset has
not increased in that proportion in which its liability increased for that year. Company
has taken the short term loan for the growth and expansion which have lead to the
high current liability in 2009.
Competitor:
Educomp has higher cash ratio then NIIT and Aptech but lower in comparison to
Everonn. Everonn is having higher ratio because Educomp has created a provision in
current liabilities section. This has impacted the current ratio of Educomp.
3.1.2. Quick Ratio
Quick ratio is a more conservative measure of liquidity than the current ratio as it
removes inventory from the current assets used in the ratio's formula. By excluding
inventory, the quick ratio focuses on the more-liquid assets of a company.
Quick ratio and current ratio are almost same for Education sector industry due to low
inventories.
10. Interpretation:
Time Series:
The reason for the lower liquidity leverage for the year 2009 is that company asset has
not increased in that proportion in which its liability increased for that year. Company
has taken the short term loan for the growth and expansion which have led to the high
current liability in 2009.
Competitor:
Educomp has higher quick ratio then NIIT and Aptech but lower in comparison to
Everonn. Everonn is having higher ratio because Educomp has created a provision in
current liabilities section. This has impacted the current ratio of Educomp. Moreover
Everonn is cash rich and is carrying zero inventories on its balance sheet. Educomp is
carrying inventory which is not reflected in quick ratio.
3.2. Solvency Ratios
The Solvency ratio is a way investors can measure the company’s ability to meet its long
term obligations. Solvency ratios give users a general idea of the company's overall debt
load as well as its mix of equity and debt. Debt ratios can be used to determine the
overall level of financial risk a company and its shareholders face. In general, the greater
the amount of debt held by a company the greater the financial risk of bankruptcy. A
low percentage means that the company is less dependent on leverage, i.e., money
11. borrowed from and/or owed to others. The lower the percentage, the less leverage a
company is using and the stronger its equity position.
3.2.1. Debt to equity ratio
Debt to equity used as an indicator as to what proportion of equity and debt the
company is using to fund its assets.
Interpretation
Time Series
Debt to Equity ratio increased in the 2008 and 2009 due to borrowing by the company
for its expansion projects like Pre-school, K12 etc. The ratio decreased in 2010 and 2011
because of considerable increase in the reserves of the company.
Competitor
Educomp has higher Debt to Equity ratio then all of its competitors. This is because
Educomp is funding its projects from external borrowing i.e. long and short term
borrowing. Competitors like NIIT and Aptech are using internal money i.e. retained
earnings for funding of projects.
12. 3.2.2. Interest Coverage
The interest coverage ratio is used to determine how easily a company can pay interest
expenses on outstanding debt. The ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) by the company's interest expenses for the same period.
The lower the ratio, the more the company is burdened by debt expense.
Interpretation
Time Series
Interest Coverage ratio has decreased over the period of time because of the increase in
debt to finance the expansion plans.
Competitor
Interest coverage ratio is highest in case of Educomp. Though interest expense in high
case of Educomp. But in proportion of EBIT interest expense is small. This is due to high
EBIT in comparison to competitors.
3.3. Efficiency or Turnover Ratios
3.3.1. Fixed Asset Turnover Ratio
Fixed Asset Turnover ratio is a ratio of Net sales and Average net fixed assets. The higher
the ratio, the better, because a high ratio indicates the business has less money tied up in
13. fixed assets for each unit of currency of sales revenue. A declining ratio may indicate that
the business is over-invested in plant, equipment, or other fixed assets.
Interpretation
Time Series
For Educomp, the fixed assets turnover ratio nearly doubled in 2011 because the rise in
fixed assets from 2010 to 2011 was only 2.4% while rise in Net sales was 23.06%. This
effectively increased the ratio putting company in a better position as it has less amount
capital bounded with fixed assets over its sales revenue.
Competitor
Educomp in comparison to its competitors has higher Asset turnover ratio. This is
because of higher sales in proportion to fixed assets. Educomp being market leader is
utilizing its fixed assets efficiently highlighting economies of scale.
14. 3.4. Profitability Ratios
3.4.1. Operating Profit Margin
Operating Profit Margin is a ratio of Operating profit and Net sales. This ratio is used to find
company’s Pricing strategy and operating efficiency. Operating margin is a measurement of
what proportion of a company's revenue is left over after paying for variable costs of
production such as wages, raw materials, etc. A healthy operating margin is required for a
company to be able to pay for its fixed costs, such as interest on debt
Interpretation
Time Series
Gross profit margin has decreased in the FY 2011 due to increase in Cost of Traded Software
Packages. These are the proprietary software Educomp uses. Another important factor is a
44 % increase in the employee cost of the company during 2011.
Competitors
Educomp and Everonn are operating at very high gross operating margins in comparison to
competitors. This is because Educomp and Everonn are market leaders. Moreover, business
model for NIIT and Aptech are different than of Educomp and Everonn. NIIT and Aptech also
have training institutes which has resulted in reduced margins.
15. 3.4.2. Net Profit Margin
Net Profit Margin is a ratio of Profit after Tax (PAT) and Net sales. The profit margin tells you
how much profit a company makes for every $1 it generates in revenue or sales. Profit
margins vary by industry, but all else being equal, the higher a company's profit margin
compared to its competitors, the better.
Interpretation
Time Series
Net profit margin has increased substantially in 2011 because the tax paid reduced from
193.46 to 48.49 (in crs) in 2011. This increased their Profit after tax in 2011.
Competitor
Aptech experienced a boom in its net profit margin from 2008 to 2010 due to almost 23 fold
increase in its income from other sources. Business model for NIIT and Aptech are different
than of Educomp and Everonn. NIIT and Aptech have training institutes which has resulted
in reduced net profit margin.
16. 4. ANALYSIS OF FINANCIAL STATEMENTS
COMMON SIZE BALANCE SHEET
SOURCES OF FUND
Mar '10 Mar '09 Mar '08 Mar '07 Mar '06
Equity Share Capital 1.05% 1.88% 2.64% 6.68% 15.92%
Share Application Money 0.81% 1.57% 1.26% 0.00% 0.00%
Preference Share Capital 0.00% 0.00% 0.00% 0.00% 0.00%
Reserves 65.55% 39.75% 39.95% 41.23% 74.18%
Revaluation Reserves 0.00% 0.00% 0.00% 0.00% 0.00%
Networth 67.41% 43.20% 43.85% 47.91% 90.10%
Secured Loans 13.06% 11.17% 8.00% 7.33% 9.90%
Unsecured Loans 19.53% 45.63% 48.15% 44.76% 0.00%
Total Debt 32.59% 56.80% 56.15% 52.09% 9.90%
Total Liabilities 100.00% 100.00% 100.00% 100.00% 100.00%
APPLICATION OF FUNDS
Mar '10 Mar '09 Mar '08 Mar '07 Mar '06
Net Block 6.90% 42.97% 32.31% 29.99% 16.70%
Capital Work in Progress 0.41% 2.66% 3.07% 3.17% 6.63%
Investments 43.32% 22.46% 10.85% 11.74% 1.55%
Inventories 1.60% 3.13% 0.22% 1.36% 1.74%
Sundry Debtors 27.64% 28.92% 17.50% 20.62% 25.10%
Cash and Bank Balance 16.56% 7.14% 8.31% 12.85% 28.53%
Total Current Assets 45.79% 39.19% 26.02% 34.83% 55.37%
Loans and Advances 3.77% 14.10% 5.57% 9.16% 6.02%
Fixed Deposits 17.58% 0.78% 34.35% 26.82% 30.99%
Total CA, Loans & Advances 67.15% 54.07% 65.95% 70.80% 92.38%
Deffered Credit 0.00% 0.00% 0.00% 0.00% 0.00%
Current Liabilities 9.26% 19.51% 10.72% 9.91% 6.61%
Provisions 8.52% 2.65% 1.47% 5.82% 10.73%
Total CL & Provisions 17.78% 22.17% 12.19% 15.74% 17.34%
Net Current Assets 49.36% 31.91% 53.76% 55.07% 75.04%
Miscellaneous Expenses 0.00% 0.00% 0.01% 0.03% 0.08%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00%
A few highlights that come out from the balance sheet are:
Educomp has not issued a lot of equity shares over the past years
Reserves have constantly increased as a percentage of total balance sheet size. This
is due to the profit retained by the company over the years
It first raised debt in 2007 and paid back a substantial part in 2010
It has made large investment in 2010
Also a large part of the profits has been invested in Fixed deposit
17. COMMON SIZE INCOME STATEMENT
Mar '10 Mar '09 Mar '08 Mar '07 Mar '06
Sales Turnover 96.37% 96.84% 94.66% 95.46% 98.00%
Net Sales 96.37% 96.84% 94.66% 95.46% 98.00%
Other Income 3.63% 3.16% 5.34% 4.54% 2.00%
Total Income 100.00% 100.00% 100.00% 100.00% 100.00%
Expenditure
Employee Cost 10.53% 9.88% 9.24% 9.41% 14.05%
Other Manufacturing 17.15% 19.97% 28.79% 27.25% 17.88%
Expenses
Selling and Admin 12.31% 10.82% 6.89% 10.88% 14.30%
Expenses
Miscellaneous Expenses 1.95% 3.01% 4.11% 1.97% 2.19%
Total Expenses 41.94% 43.68% 49.03% 49.52% 48.42%
Operating Profit 58.06% 56.32% 50.97% 50.48% 51.58%
Profit Before Tax Rs.) 372.74 202.06 102.99 44.96 21.49
Earning PerShare(Rs) 23.35 76.12 40.62 17.92 8.72
Inferences from the Income Statement are as follows:
Most of the Income is from sales turnover (P.S. the sales turnover in this case is
educational services provided by the firm)
It has maintained its cost within limits and not a substantial changed has been noted
from period beginning to period end. However the distribution has been affected
and the relevant subheads have gone changes in the intervening period
It maintains high Operating Profitability constantly being over 50% of sales
5. MARKET VALUATION
Total market capitalization of Educomp is Rs 2097 Crores. Price/Equity ratio is 5.3 and
Market Price/Book value ratio is 1.28. Valuations are very attractive. Market value
corroborates the findings we have got from Ratio analysis and financial statement analysis.
6. Conclusion
1) Education sector is providing huge opportunities with spending on education
increasing at a high rate. International players like pearson are trying to enter Indian
markets through joint ventures with Indian players.
18. 2) Educomp has large amount of debt financing as compared to its competitors. This
has resulted in higher interest expense for educomp. But high interest expense has
not impacted interest coverage ratio due to high EBIT.
3) Educomp is the market leader and is operating at much higher operating and net
margins in respect to other players. This can be attributed to the unique business
model of Educomp.
4) Accounting policies for the sector are in a very nascent stage. Companies like
Educomp and Everonn have been under the scanner due to allegations of fraudulent
accounting practices. They are not using standardised process for reporting policy
across sectors.
5) Educomp has a lower tax burden. It has improved as a result of Educomp’s new
revenue model where it does outright sales attracting lower taxes as compared to its
older revenue model where its offerings were considered as a service and a flat 10%
service tax
6) Educomp’sROE (Return on Equity) is among the highest, followed by Everonn. It
indicates that it may be turning its capital into profits more efficiently than its peers
and should be values at higher multiples.
7. Our Decision
Based on our assessment and analysis of the sector we have come to the conclusion that
we should accept the offer. This sector has huge growth opportunities with some huge
investment coming in and with the expanding scenario of educomp we have huge
growth chances. Also government is pitching in with expenditure of 4% GDP for
educational sector, there is even more growth chances.
20. Bibliography
Website:
Indian Stock/Share Market: Sensex, Nifty, Stock/Share Prices, Share Market Live,
Stock/Share Recommendations, Hot Stocks, Stock Market Investing, BSE, NSE,
Derivatives, Best Stocks to Buy, Penny Stocks India. (n.d.). Indian Stock Market >>
Sensex >>and securities information. Retrieved October 18, 2011, from
http://www.moneycontrol.com/stocksmarketsindia/
https://www.crisilresearch.com/CuttingEdge/
Books:
Helfert, E. A. (2001). Financial analysis tools and techniques : a guide for managers.
New York: McGraw-Hill.
Shim, J. K., & Siegel, J. G. (2000). Financial management (2nd ed.). Hauppauge:
Barron's.