Subscribe to Everonn Sys IPO for listing gains: Keynote

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Everonn Systems India, a fully integrated education and learning Solutions Company, is open for subscription with a public issue of equity shares of face value of Rs 10 each, for cash at a premium aggregating to Rs 50 crore. The issue is being made through a 100% book building process and the price band is fixed at Rs 125 to Rs 140, per equity share.

Keynote Capitals report on Everonn Systems IPO

Recommendation - Subscribe for listing gains

• Everonn Systems India is a computer education and content provider. It provides the educational contents (Curriculum and non-curriculum based) and solutions to the Government as well as private schools and other educational institutes.
• It offers services to 3,156 Government schools under the ICT@ School (Computer Aided Learning Programme) initiatives of Government. The company has also developed virtual and interactive learning solutions model for schools, college students and retail and corporate clients.
• Computer education sector is at a very nascent stage, but on a high growth trajectory. In view of major initiatives by the Government towards imparting IT education in every school of India, we believe the sector will remain a high growth path, in the foreseeable future.
• India has around 1.2mn schools with over 200mn students while only 5% of total schools have own IT infrastructure. We believe that a huge opportunity exists which can be tapped by the small number of existing players (only 5-6 companies currently operate in this industry). Everonn is well set to capitalise on this opportunity.
• Growth drivers for the industry include (i) limited competition (ii) Government's aggressive steps towards setting up of IT infrastructure and (iii) the aspiration to provide high quality education to the students by private schools.

Investment view

Business in a high growth segment; though concerns remain on sustainability of margins

Everonn operates in a high-growth segment. We expect a revenue growth CAGR of 52.4% and bottomline growth CAGR of 73.4% during FY07-09. We also believe that the company has the potential to create substantial value for shareholders over the next 2-3 years. But we are concerned about the sustainability of margins on account of the over dependence on the IEIS segment (accounts for 71% of revenues), which is seasonal and highly capital intensive in nature.

We are positive on ViTELS

ViTELS segment offers strong growth prospects, coupled with diversification of risks for the company over the long term, by virtue of its unique business model. We have a positive view on this segment and believe that it may add substantial value to the company. We believe that the revenue contribution of this segment will grow from 29% in FY07, to 45% by FY09. We estimate the ViTELS centres to increase from 197 currently to over 600 by FY09.

Going forward, pressure on cash flows to remain due to huge capex requirements

Everonn operates in the Computer aided learning programme (CAL) of the Government of India and the visual and interactive learning initiatives. Both these require huge capex for setting up IT infrastructure. We believe that growing size of operations may put Everonn's cash flows under pressure.

On the positive side, the company has entered into tie-ups with hardware providers to share costs and is also looking for other alternatives.

Comparison with Educomp Solutions

Educomp Solutions (Educomp) being a larger player in the computers education space, we believe a comparison between Educomp and Everonn is imperative. We believe Educomp's model is more diversified, with a bias toward higher margins, which would lead to premium valuations on a sustainable basis.

Valuation

The IPO is priced at 18.7x FY08 and 10.0x FY09 estimated earnings, which we believe is quite attractive, in view of the valuations enjoyed by Educomp Solutions. We therefore advise investors to subscribe for listing gains.

However, our concerns remain on the sustainability of margins, requirement of capex and long collection period due to Government centric business model.