S&P assigns B+ rating to Core Education; Outlook stable

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S&P assigns B+ rating to Core Education; Outlook stable

Standard & Poor's Ratings Services has assigned its 'B+' long-term corporate credit rating to India-based education software and solutions provider Core Education & Technologies (CORE).

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Standard & Poor's Ratings Services has assigned its 'B+' long-term corporate credit rating to India-based education software and solutions provider Core Education & Technologies (CORE).

"The rating on CORE reflects the fragmented and competitive nature of the education technology market globally and the company's customer concentration in the U.S., where clients face budgetary constraints," said Standard & Poor's credit analyst Abhishek Dangra. "The risks from CORE's entry into lower-margin, capital-intensive businesses is also a rating weakness, in our view. Further, the company generates negative free cash flows due to its high capital expenditure and low cash generation from operations as a result of a high working capital cycle."

CORE's established presence in the niche formative assessment market with high renewal rates, its wider product offerings than some education technology peers, and its reducing dependence on the U.S. market temper these weaknesses. We view CORE's business risk profile as weak. The global education technology market is fragmented. Companies must continually refresh product content and technology.

CORE's revenue is concentrated, with the U.S. accounting for more than 90% of revenues. Significant revenues come from sales to state educational institutions/authorities that are heavily dependent on government funding. Budget cuts, curtailments, delays, or changes in allocations to government programs could reduce or delay CORE's revenues and collections. In our opinion, CORE's entry into lower-margin and more capital-intensive businesses in the U.K. and India will further weaken its business risk profile until these segments stabilize.

"We consider CORE's financial risk profile to be aggressive despite our expectation that the company's ratio of debt to EBITDA will be less than 2.75x over the next two to three years," said Mr. Dangra. "CORE's working capital cycle is unlikely to improve significantly, given the nature of existing clients and the company's entry into information communication and technology (ICT) contracts."

We expect CORE to have very high receivables--at 45% of revenues--and inventories of about 15% of revenue. The ratio of cash flow from operations to debt is likely to be less than 10%. Further, we expect the company to continue to generate significant negative free operating cash flow as it increases capital expenditure and its ICT business. We forecast CORE's revenue to grow 30% per year in fiscal 2012 and 2013, driven by new businesses, organic growth, and possible acquisitions.

CORE has an established presence in the U.S. with satisfactory client relationships. Education budget cuts in the U.S. primarily centered on teachers and infrastructure; the impact on CORE's focus areas was limited. The company's wide range of products and services should also mitigate the risk from probable budget cuts. CORE's expansion into different business segments in India and the U.K. should help diversify the business risks. In our view, CORE's liquidity is "adequate," as defined in our criteria. We believe any significant lengthening of working capital cycles, need for repayment of utilized working capital facilities, large acquisitions, or inability to contain the overall capital expenditure could strain the company's liquidity.

"The stable outlook reflects our expectation that CORE will be able to scale up new and lower-margin businesses while maintaining moderate organic growth in existing businesses and a ratio of cash flow from operations to debt at a high single digit," said Mr. Dangra. We may lower the rating if: (1) working capital movements are adverse or CORE's operating performance is weaker than we expected, such that the ratio of cash flow from operations to debt falls below 5%; or (2) CORE faces challenges that weaken its liquidity and affect the company's ability to meet its growth plans. We may raise the rating if: (1) CORE's operating performance strengthens or its working capital cycles significantly improve, sustainably boosting its ratio of cash flow from operations to debt to above 15%; and (2) the company improves its business risk profile by scaling up its new businesses while sustaining modest organic growth above 10%.

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