Subscribe to Everonn Systems IPO: Arihant Cap

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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.

Arihant Capital Markets report on Everonn Systems IPO

Investment Positive

Big Opportunities

India is one of the largest markets for school education in the world. Everonn currently has a presence in around 1900 schools across the country and India has around 1.18 million schools in both government and private segment. Thus lots of untapped opportunities available in the education system over the world may have positive impact on its revenue growth.

Expansion/Diversification

Everonn has a presence in 1900 schools in April 2007 under BOOT model to provide full range of IT & ITes services. They are now planning to venture into areas like Middle East & south East Asian countries and add around 1000 schools every year. They have also signed a MoU with the West Bengal government to take up IT education in 555 schools.

New Concept

The Vitels SBU has the first mover advantage and has plans to add another 250 virtual classrooms in FY2008. It has also tied up with PMC School of Logistics, Singapore, to tap the South-East Asian market. The revenue from the Singapore tie-up would start in FY 2009.

Concerns

High outstanding of Sundry Debtors

The company has a very high outstanding level of Sundry Debtors of around 7.8 months. Due to the payment system of the government aided projects and a systematic procedure followed by them, the company is exposed to the risk of payments being delayed. Also payments from some of their major contracts are on a half yearly payment basis resulting in increase in debtors. The company's business is seasonal in nature and maximum growth is registered in the second and fourth quarters of the financial year.

Education Curriculum Changes and exposed to Risk of Piracy

Any change in the education system requires a substantial change in the products they offer since the company is closely linked to the education curriculum. The company is also exposed to the risk of piracy since the contents provided by the company is distributed through VSAT's (very small aperture terminal) to various educational institutions. They run a risk of loss of revenue due to piracy.

Risk in accepting the virtual learning concept

The virtual class room concept is new in India and therefore there is a risk of acceptance of the course by the students. And also the company's agreement with Hughes escorts communication Ltd which helps in providing remote education and training through satellite broad band technologies has expired. The renewal of the agreement is yet to take place.

Financials

• The Operating income of the company has grown at a CAGR of 39% since last four years.
• Operating profits has grown by around 23% from Rs 14 cr in FY 06 to Rs 18 cr in FY 07. In the same period, Profit after tax has remained stable at around Rs 5 crore.
• Operating Margin has decreased from 46% in FY 06 to 41% in FY 07 & in the same period, PAT margin has decreased from 16% in FY06 to 11% in FY07.

Valuations

The issue is priced at 36 x FY07 earnings on post issue capital at floor price and at 40x at cap price.

The comparable peers are valued as follows

Company                       P/E       EPS
Educomp Solutions    74.40   17.70
NIIT Ltd                       145.30    12.40

Recommendation

Everonn Systems has good business model and has tied up with 1900 schools & colleges in India across 8 states. Besides increase in Government spending on education through increased budgetary allocation will positively drive the growth in its revenues. Company plans to add 1000 schools every year & is also planning to venture in Middle East & South East Asian Countries. It has already ties up with PMC School of Logistics, Singapore, to tap the South-East Asian market & has signed a MoU with the West Bengal government to take up IT education in 555 schools.

The issue is available at good valuation. Its business model is comparable to its peers Educom Solutions & NIIT Ltd. We recommend the investors to subscribe the issue.