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May 31, 2012, 03.13 PM IST
In an interview to CNBC-TV18 Shantanu Prakash, managing director Educomp Solutions said, the company’s margins are under stress due to high interest cost and volatile currency movement.
Currently, the average interest cost paid by the company is 13-13.5%. Depreciating rupee has also hit the company's bottomline.
"The main reason for the margins being flattish was the fact that our cost of goods sold has increased because of the foreign exchange fluctuations."
Further, the company is in advanced stages of tying up funds for repayment of foreign currency convertible bonds (FCCBs) due in July 2012. FCCBs would be paid in full through accruals and external funding, he informed.
Below is the edited transcript of Prakash’s interview with CNBC-TV18. Also watch the accompanying video.
Q: Your margin performance seems to be under pressure because of high finance costs. Are you facing cash flow or funding problems which you have not been able to sort of get away by the kind of asset sell and funding that you spoke to us earlier about?
A: There is a certain way that we fund our business. In our principle business that is SmartClass, the funding is mostly by way of securitization of contracts. Interest rates have risen across the board for the entire industry. We currently pay about 13-13.5% and to the extent that higher interest cost impacts everybody else, they impact us also. We would be happier if the interest rates were less than what they are today, but we have to live with what interest rates are present in the system.
Beyond our regular securitization needs we don’t really have any additional needs for bank funding or cash flow to that extent and I think the point on margins, you would have noticed in our quarter four results that SmartClass division did a stellar performance. We sold 17,800 classrooms, historically the best ever for SmartClass. We met our guidance in terms of numbers, yet the margins between Q3 and Q4 were flattish.
The main reason for the margins being flattish was the fact that our cost of goods sold has increased because of the foreign exchange fluctuations. Educomp sells the customized proprietary equipment to schools, much of it which is imported actually from outside of India. The movement in the rupee has also impacted us, which we think hopefully will be corrected in the future.
Q: The FCCBs repayment comes up for you in as early as July this year. What is the plan there? Have you restructured? Have you figured out what you want to do in terms of funding and what’s going to be happen to the FCCBs that are due for repayment?
A: We have been saying that we will redeem the FCCBs in full. We will pay off the bondholders. Currently, the status is that we are in very advanced discussions with our bankers, probably at the last lap of tying up all the funding requirements for the FCCB. Our eyes are very focused on that and I believe that come the due date we will pay off the entire FCCB bond.
Q: You are saying the repayment will happen via fresh loans, not via any divestment or any stake sell in subsidiaries?
A: Our plan is to pay it partly from internal approvals and partly from external financing or replacement by a separate loan. Plan B is to pay it entirely off with a separate loan and there is a Plan C and D as well.
Q: What’s going on with your core business? Have prices corrected even more in the SmartClass segment, that is one concern and of course in school learning solutions where you EBIT margins have come off very significantly in the current quarter?
A: The EBIT margins in the current quarter have been flattish. With regards to pricing, in quarter 4 SmartClass pricing has actually improved compared to what was the pricing in Quarter 3. We currently sell at Rs 3.67 lakh per classroom compared to Rs 3.39 lakh per classroom. So, the pricing has actually done a reverse trend and it’s much better than before.
Q: Do you continue to see significant money coming in from securitization or do you think the opportunity is there are beginning to level out a little bit making your cash flow situation stickier given that your debtor days are significantly high even now?
A: The debtor days are as per our model. I wouldn’t say debtor days are high. They have come below what they were supposed to be in Quarter 4. We have done about a month less of debtors than as compared to Quarter 3.
Secondly, with regards to the overall securitization, I am very happy to say that in FY12 we completed securitization of every single school. In FY13 we have very, very good visibility on securitization.
This is a model that the banks love and we have a consortium of a large number of banks who fund this. It’s not just one or banks. There are eight or nine banks who have given us money on securitization.
So I don’t think there is any cause of concern. In fact banks love this model. In securitization they fund a very large portfolio or a basket of schools which literally caters to millions of students.
Q: Aside from pricing trends though, what exactly is happening in terms of augmenting your K12 system because the criticism seems to be that there hasn’t been significant improvement over 2011? Even your K12 revenues themselves are quite flat.
A: We now have 33,000 students in the schools and you have to understand that in the K12 schools business revenue jumps are going to be lumpy. So you are not going to see revenue jumps coming in QoQ, because there is a certain time of the year when schools open. Our portfolio of schools has been also significantly increasing.
We have now 69 schools in our overall portfolio. But, the big opportunity for Educomp is the fact that as schools mature the EBIT margins of the schools move up dramatically. To give you an comparison, a school that is in year one, the first year of operation has an EBIT margin of minus 73% which may get us losing money, but by year four the school’s EBIT margin goes up to 49%. So as our portfolio of schools mature you will see some completely different P&L of the schools than what you see today.
Q: You know that there has been a much talked about brokerage report criticizing corporate governance levels in Educomp. How would you choose to address those concerns, both in terms of exits that you had for high profile designations as also these concerns about auditors where you are now down to one?
A: Actually that is completely unfounded. Let me clarify that the brokerage report that you are talking about is not making a comment on Educomp at all. It is making a comment on one of Educomp’s vendors. We have extremely reputed auditors, Haribhakti & Co. is an auditor of Educomp for several years now.
We have already clarified that to our investors. Let me assure that the corporate governance standards in Educomp are extremely high. Some of these reports do tend to muddy the waters and I am really happy that I have a chance to be here and actually make the clarifications.
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