Pricey lessons

The sorry state of the country’s education system presents immense opportunity for educational service providers. The government has identified education as a focus area and it could well turn out to be the next hot sector. The potential for private sector participants in education is thus huge, though valuations remain a concern.

Educomp is a prominent name in this sector, engaged in building education infrastructure, imparting training to teachers and developing content in collaboration with central and state government agencies. Incorporated in 1994, the company provides end-to-end solutions in the technology-driven education domain.

Presently, it develops and provides digital content to over 6,500 schools across India and the US.

The company recently acquired a 70% stake in Toronto-based e-learning company Sawica and a 51% strategic stake in AuthorGen Technologies.

It has also launched Millenium Learning System, an integrated learning delivery system for schools and has entered into a long-term lease agreement with Ansal Properties to set up schools in 15-16 different sites.

Educomp’s Q3FY08 consolidated revenue grew by 55% YoY, while net income grew by 51%, riding on the increased penetration of its smart card and ICT businesses, which together accounted for 82%.

The current order book position stands at Rs383 crore, up 31% QoQ. The management guidance for FY08 suggests revenue of Rs230-240 crore with a PAT of Rs65-70 core.

However, though the initiatives are in the right direction, the stock valuations are less than attractive. With a market cap of over Rs7,000 crore, the company is valued at 35x its FY08 estimated sales and at almost 68x its estimated Ebidta. At the current market price of Rs4,171 the stock is available at 149xits FY08 annualised earnings, a steep valuation.

Time on its side

Leading watch and jewellery maker Titan Industries trades at 24.2 times its estimated earnings for 2009 at the current price of Rs1,162.80. Valuations at these levels are on the higher side. But, while some analysts maintain that the stock is fully factored at present, others say it does not factor in all the growth prospects. Now, where does that leave the investor?

Titan enjoys around 65-70% market share in the space in which it operates. Three-fourths of its watch sales currently comprise of watches below Rs1,000.

Experts say the watches business has a penetration of about 30% in India and the rural regions are largely untapped. This presents a huge opportunity for Titan.

Also, the company is looking to increase the share of Rs5,000-plus watches in its portfolio. This is a positive move, given that demand for Rs5,000-plus watches is likely to go up, going forward.

In its jewellery business, Titan plans to capitalise on the potential in the organised jewellery market, which currently accounts for a meagre 3-4% of the Rs65,000 crore jewellery market.

The favourable macro environment in the country, with per capita income expected to grow at a CAGR of 10%, augurs well for a company like Titan. Rising incomes allow people to shift to more luxurious products.

However, concerns like competition from foreign players and dependence on changing consumer preferences remain.

In the December quarter (Q3), Titan’s revenues rose 52% YoY to Rs802.4 crore, while net profit rose at a much slower 12% to Rs30.84 crore. This was mainly due to higher raw material costs experienced during the quarter on account of the surge in gold prices and higher share of lower-margin jewellery in the sales mix. Raw material costs as a percentage of revenues shot up to 74.6% in Q3 against 65.4% in Q3 last year.

Going forward, Titan plans to increase the share of high-margin studded jewellery, which will reflect positively in the numbers. The company will also benefit from the fast rising jewellery prices. Additionally, to cater to the mass market, it has launched the Gold Plus brand and has 20 Gold Plus outlets at present.

Given all this, the company may be a good long-term bet.

Sunder Subramanian & Pallavi Pengonda (p_pallavi@dnaindia.net)