Educomp to revamp biz model to improve cashflow

Below is a verbatim transcript of her comments on CNBC-TV18. Also watch the accompanying video.

The company is changing from a BOOT model to an outright buy model in its Smart Class segment. Smart Class Model comprises of majority of revenues for Educomp and it's critical for the company in order for this change in the business model. The company added around 309 schools in Q2 FY10 within this Smart Class segment and increased the number of schools to over 2,200.

Earlier the BOOT model received revenues over a period of five years, this basically increase the capital intensity of the business or the debtor days or the receivables which a lot of analysts had concerns over. However now Educomp will securities receivables and also outsource contracts to third0 party vendors. This basically means that the company will get an outright payment versus the five year payment which it was earlier getting in terms of contracts which it had in the Smart Class segment. The company has already got in principle approval from SBI concerning this securitization. Also PNB has given it around Rs 75 crore in terms of securitization already. So this is in place and happening.

The securitization is expected to make it cashflow positive, reduce debtor days and also reduce requirements for debt as working capital is going to reduce and therefore risk of equity dilution will significantly come down. It is also expected to increase operational efficiencies for the company.

Now however the risk lies in lumpiness of revenues because they are going to come in at one point in time rather than a spread of over 5 years. So the annuity stream which it had will go away and the company will also rely on third party execution for outsourcing and operational efficiency.

In order to make it capex light also there were concerns by analyst saying that they could adopt other accounting standards. There is clarification which is required on the vendor concerns, on who the vendors are and why they are actually getting into this system of operating on a zero profit or a very negligible profit making.