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analysis of educomp organization

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    Educomp Educomp Document Transcript

    • ANALYSIS OF FINANCIAL HEALTH OF EDUCOMPSOLUTIONS AND ONLINE EDUCATION INDUSTRY A PROJECT REPORT
    • Letter of transmittalMs Zenith,Senior analystABC CorporationDear Madam,Please find here an enclosed copy of final report on “Financial health of Educomp”. Themain purpose of report is to study the financial condition of educomp.The report provided here compares the different financial ratio for Educomp. Educomp hashigher Debt to Equity ratio then all of its competitors. This is because Educomp is funding itsprojects from external borrowing i.e. long and short term borrowing. Educomp has higherquick ratio then NIIT and Aptech but lower in comparison to Everonn. Educomp has highercash ratio then NIIT and Aptech but lower in comparison to Everonn. Interest coverage ratiois highest in case of Educomp. Though interest expense in high case of Educomp. But inproportion of EBIT interest expense is small.For any further clarification feel free to call us. It was a pleasure working on the project. Ifyou have any other such nice and insightful project we would be delighted to work on that.Sincerely,Group C5Enclosure: Final report
    • AcknowledgementFirst of all we express our gratitude to the almighty God for making us capable enough toavail this opportunity. We are immensely thankful to Dr. Payal Mehra and Dr. R.L Raina fortheir insights in the field of communication both oral and written that provided us withenough knowledge to present this report. We also pay our gratitude to Dr. Prakash Singh forhis lessons of financial reporting from which we drew our knowledge of financial ratios.
    • 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
    • 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.
    • 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.
    • 1. INTRODUCTIONThe report aims at financial statement analysis of companies in the education sector. Whileanalysing the education sector we have focussed on companies providing e-educationalservices. Four companies i.e. Educomp, Everonn, NIIT and Aptech are selected as a broadrepresentative of the education sector.Using ratio analysis, common size financial statements and cash flow statements we haveanalysed performance of Educomp over the past five years. The key financial ratios we haveused are Liquidity Ratios, Solvency Ratios, Profitability Ratios, Turnover Ratios, and MarketRatios.All the quantitatively analysis has been done supported with adequate interpretation andconclusion. Time series and competitor analysis has been done.2. BACKGROUND INDUSTRY ANALYSISIndian Education Sector is by far the largest capitalized space in India with $30 billion ofgovernment spends (3.7% of GDP) and large network of ~1 million schools and more than18,000 higher education institutes. Yet, the public education system is ‘insufficient’ and‘inefficient’. Affluent Indians are expected to spend around $50 billion on private education(14% CAGR over FY08-12E).The statistics are very impressive, but a closer look will reveal that these spends are not only‘insufficient’ but also ‘inefficient’. Considering global distribution patterns of publiceducation expenditure (international PPP$) and population, India’s expenditure oneducation is highly disproportionate! While countries in North America and Western Europe
    • 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 thecumulative expenditure on just 4% of the target population group. In sharp contrast, India’spublic expenditure on education amounts to ~5.2% of the world’s cumulative publicexpenditure, but the country is home to 20% of the population in the target populationgroup.Given the dismal state of Indian Education Sector i.e. government-run schools/ institutions,consumers are increasingly veering towards private institutions, typically perceived ashallmarks of quality educations (even though quality comes at a price). In this backdrop, themarket 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.
    • Interpretation:Time Series:The reason for the lower liquidity leverage for the year 2009 is that company asset hasnot increased in that proportion in which its liability increased for that year. Companyhas taken the short term loan for the growth and expansion which have lead to thehigh current liability in 2009.Competitor:Educomp has higher cash ratio then NIIT and Aptech but lower in comparison toEveronn. Everonn is having higher ratio because Educomp has created a provision incurrent liabilities section. This has impacted the current ratio of Educomp.3.1.2. Quick RatioQuick ratio is a more conservative measure of liquidity than the current ratio as itremoves inventory from the current assets used in the ratios formula. By excludinginventory, 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 lowinventories.
    • Interpretation:Time Series:The reason for the lower liquidity leverage for the year 2009 is that company asset hasnot increased in that proportion in which its liability increased for that year. Companyhas taken the short term loan for the growth and expansion which have led to the highcurrent liability in 2009.Competitor:Educomp has higher quick ratio then NIIT and Aptech but lower in comparison toEveronn. Everonn is having higher ratio because Educomp has created a provision incurrent liabilities section. This has impacted the current ratio of Educomp. MoreoverEveronn is cash rich and is carrying zero inventories on its balance sheet. Educomp iscarrying inventory which is not reflected in quick ratio.3.2. Solvency RatiosThe Solvency ratio is a way investors can measure the company’s ability to meet its longterm obligations. Solvency ratios give users a general idea of the companys overall debtload as well as its mix of equity and debt. Debt ratios can be used to determine theoverall level of financial risk a company and its shareholders face. In general, the greaterthe amount of debt held by a company the greater the financial risk of bankruptcy. Alow percentage means that the company is less dependent on leverage, i.e., money
    • borrowed from and/or owed to others. The lower the percentage, the less leverage acompany is using and the stronger its equity position.3.2.1. Debt to equity ratioDebt to equity used as an indicator as to what proportion of equity and debt thecompany is using to fund its assets.InterpretationTime SeriesDebt to Equity ratio increased in the 2008 and 2009 due to borrowing by the companyfor its expansion projects like Pre-school, K12 etc. The ratio decreased in 2010 and 2011because of considerable increase in the reserves of the company.CompetitorEducomp has higher Debt to Equity ratio then all of its competitors. This is becauseEducomp is funding its projects from external borrowing i.e. long and short termborrowing. Competitors like NIIT and Aptech are using internal money i.e. retainedearnings for funding of projects.
    • 3.2.2. Interest CoverageThe interest coverage ratio is used to determine how easily a company can pay interestexpenses on outstanding debt. The ratio is calculated by dividing a companys earningsbefore interest and taxes (EBIT) by the companys interest expenses for the same period.The lower the ratio, the more the company is burdened by debt expense.InterpretationTime SeriesInterest Coverage ratio has decreased over the period of time because of the increase indebt to finance the expansion plans.CompetitorInterest coverage ratio is highest in case of Educomp. Though interest expense in highcase of Educomp. But in proportion of EBIT interest expense is small. This is due to highEBIT in comparison to competitors.3.3. Efficiency or Turnover Ratios3.3.1. Fixed Asset Turnover RatioFixed Asset Turnover ratio is a ratio of Net sales and Average net fixed assets. The higherthe ratio, the better, because a high ratio indicates the business has less money tied up in
    • fixed assets for each unit of currency of sales revenue. A declining ratio may indicate thatthe business is over-invested in plant, equipment, or other fixed assets.InterpretationTime SeriesFor Educomp, the fixed assets turnover ratio nearly doubled in 2011 because the rise infixed assets from 2010 to 2011 was only 2.4% while rise in Net sales was 23.06%. Thiseffectively increased the ratio putting company in a better position as it has less amountcapital bounded with fixed assets over its sales revenue.CompetitorEducomp in comparison to its competitors has higher Asset turnover ratio. This isbecause of higher sales in proportion to fixed assets. Educomp being market leader isutilizing its fixed assets efficiently highlighting economies of scale.
    • 3.4. Profitability Ratios 3.4.1. Operating Profit MarginOperating Profit Margin is a ratio of Operating profit and Net sales. This ratio is used to findcompany’s Pricing strategy and operating efficiency. Operating margin is a measurement ofwhat proportion of a companys revenue is left over after paying for variable costs ofproduction such as wages, raw materials, etc. A healthy operating margin is required for acompany to be able to pay for its fixed costs, such as interest on debtInterpretationTime SeriesGross profit margin has decreased in the FY 2011 due to increase in Cost of Traded SoftwarePackages. These are the proprietary software Educomp uses. Another important factor is a44 % increase in the employee cost of the company during 2011.CompetitorsEducomp and Everonn are operating at very high gross operating margins in comparison tocompetitors. This is because Educomp and Everonn are market leaders. Moreover, businessmodel for NIIT and Aptech are different than of Educomp and Everonn. NIIT and Aptech alsohave training institutes which has resulted in reduced margins.
    • 3.4.2. Net Profit MarginNet Profit Margin is a ratio of Profit after Tax (PAT) and Net sales. The profit margin tells youhow much profit a company makes for every $1 it generates in revenue or sales. Profitmargins vary by industry, but all else being equal, the higher a companys profit margincompared to its competitors, the better.InterpretationTime SeriesNet profit margin has increased substantially in 2011 because the tax paid reduced from193.46 to 48.49 (in crs) in 2011. This increased their Profit after tax in 2011.CompetitorAptech experienced a boom in its net profit margin from 2008 to 2010 due to almost 23 foldincrease in its income from other sources. Business model for NIIT and Aptech are differentthan of Educomp and Everonn. NIIT and Aptech have training institutes which has resultedin reduced net profit margin.
    • 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
    • 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% ExpensesMiscellaneous 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 21.49Earning PerShare(Rs) 23.35 76.12 40.62 17.92 8.72Inferences 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 sales5. MARKET VALUATIONTotal market capitalization of Educomp is Rs 2097 Crores. Price/Equity ratio is 5.3 andMarket Price/Book value ratio is 1.28. Valuations are very attractive. Market valuecorroborates 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.
    • 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.
    • APPENDIXA1 MIND MAP
    • BibliographyWebsite: 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: Barrons.