FY12 guidance cut due to price revision, forex: Educomp

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FY12 guidance cut due to price revision, forex: Educomp

Shantanu Prakash, managing director and chief executive officer of Educomp Solutions spoke to CNBC-TV18 about the third quarterly numbers for the company and the way ahead.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See latest News about Educomp Sol See previous management interviews See what other Experts & Brokerages are saying about Educomp Sol Educomp Sol BSE | NSE 30/05/12 Are Mutual Funds betting on Educomp Sol?

Shantanu Prakash, managing director and chief executive officer of Educomp Solutions spoke to CNBC-TV18 about the third quarterly numbers for the company and the way ahead.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: The market is disappointed with the guidance cut that you set out. What is it that you now pencil in both in terms of volume growth for Smart Class in Q4 and whether or not there will be more realisation drops in terms of pricing?

A: If you look at the results very carefully, you will notice that Smart Class as a business segment, it's a flagship business segment, has done well. We sold over 10,000 classrooms which is a new record in the history of the company and about the Q4 numbers, we reiterated that our guidance of 40,000-45,000 classrooms will be met, which means in Q4, we are looking at doing over 20,000 classrooms. So 10,000 in Q3 and going up to now 20,000 in Q4 which I would say is impressive performance.

What has happened on the side of the guidance cut is a combination of many different factors. There has been an exceptional movement as far as the exchange rate is concerned. So we have taken that into consideration. Educomp has a foreign currency loan and we are impacted by movement in foreign currency rates, we have taken that, and we have also taken the fact that we have introduced a lower price variant of Smart Class called EduClass which is to capture a whole new class of customers who is coming in and saying I want to buy 1-3 classrooms of your product, which has essentially resulted in average price realisation going down with emphasis on the word average. So while our existing products lines continue to sell at the price point that we set for them, newer products that we have introduced in Q3 come in at slightly lower price point.

Q: What this does though is to bring down your EBIT margins for the Smart Class segment quite significantly which cannot be construed positively by your investors. Do you see further drift down in the margin for Smart Class?

A: Yes, I agree with that aspect, however, we have made a very explicit statements saying that volume growth is going to take care of any near-term or temporary margin contraction. I think investors should look at the Smart Class business, indeed the overall Educomp business as being the beginning of a very long expansionary cycle. Private sector education in India is still very new, market penetration of Smart Class is still below 5% in terms of number of classrooms, less than 10% in terms of numbers of schools...
So instead of placing too much emphasis on one quarter where because of several moving parts like for e.g. introducing the new product line margins may move here and there, but the long-term growth prospects are indeed very intact. I would say the fundamentals of the business are solid as is evidenced by the sales growth. So the sales growth has absolutely kept pace with investor expectations.

Q: People have concern about your cash flows as well where the DSO for Smart Class went up to 300 days in the current quarter. When will you fix that problem?

A: We have said that that problem should be fixed by the end of Q4 and this needs a little bit of explanation. The way we manage our cash flows is we go the banks, take our school-contracts which are five year contracts, and offer them for securitisation and banks pay us cash upfront. That's how the cash flow cycle for this segment works. We have received about Rs 590 crore as securitisation sanctions on our terms, on favourable terms, for Educomp. However, by the end of Q3, we were able to avail only Rs 96 crore out of that, which we will now avail in Q4. We are currently in the midst of Q4. So we believe that by the end of Q4 that situation should be normalised.

Q: On your guidance though and on the profit line specifically, you are now guiding between Rs 140 to Rs 150 crore, that's excluding a stake sale. In the first nine months of the year you have done about Rs 74 crore even at the lower end of this guidance that means that you need to do Rs 70 crore on your profits in the Q4, does that look like a doable target for Educomp?

A: Yes it does, and a lot of careful thought has gone into coming up with this guidance number. Our biggest driver for our profit is our Smart Class business, we did 22000 classrooms in the first nine of the year based on the seasonality pattern of the product line itself, and we are hoping to do about over 20,000 in Q4 itself, therefore that is where the profits get derive from.

Q: Anything else planned in terms of money raising though. You had indicated that you would be looking to do convertibles of some sort in order to raise cash?

A: At present there is no plan to do any equity or equity-linked instruments. Our focus is very clear, we have two strategic focuses; one is to make the company free cash flow positive as soon as possible, so the entire business model of the company is now focused on asset light and so on, and the second focus was to make the business capital light. You would have noticed that in our K-12 business where we have built schools, and Educomp is the largest school-operator in the country right now, we have moved rapidly away from capital heavy model to a capital light model. So in Q1 our capital expenditure was Rs 115 crore which has come down to just Rs 40 crore in Q3, and we are heading towards Q4 and we have guided that essentially the capital post Q4 is going to be negligible at best.

Q: Of this Rs 150 crore scale down in the guidance how much of it is on account of exchange fluctuations that 150 crore gap?

A: Approximately Rs 60 crore odd is on account of exchange rate fluctuations approximately.