Everonn Systems | Ever ON

[Amit Arora]

It was discussed here

multibaggersindia.blogspot.com/2010/05/everonn-systems-ever-on.html

Hi All,

Education market is a huge one, above 50 billion $ in India. I've been absorbing, assimilating, cogitating and meditating for last few days several of research reports.

The best in depth report by CLSA was published in 2008 on education sector of India. When the craze took off around 2006, Educomp being Numero Uno and undisputed champion commanded streched PE above 50. Everonn was not far, stock market witnessed 130 times over subscription of Everonn stock and commanded an even higher PE ratio than Educomp for initial two years.

Everonn stock kissed 900 market being even at a premium to Educomp and slid to a low of 90 odd levels in 2009 carnage. With loads of new entrants, Sundaram Multi, Edserv Softsystems, Usha Martin education in this sector etc etc, the sentiments have turned sour, parallel to those in telecom industry.

However, Everonn is expected to earn 40Rs+ EPS for year ending March 2011 and expected to grow 50% + CAGR for next three years. ICT and innovation in education sector is here to stay for the long haul. Its an idea whose time has come.

Everonn went to the extent of replacing teachers in schools, a gesture unlikely to win you many friends amongst teachers in schools, and that is what happened. It was given cold shoulder from several institutions. Having learnt from its mistakes, Everonn is now promoting technology that enables and assists teachers, rather than replace them.

The negatives in this sector tend to be long debtor days in Govt. contracts (200 approx.) and Govt. funding reduction in this sector. The latter is unlikely to happen.

Everonn is going to setup new schools and that should lead the way as replacement for 'old school' schools, those that bury their head in sand. It is also venturing in establishing business schools, still unproven idea albiet.

There are 1.25 million schools and we have only scratched the surface. Educomp and Everonn being first two entrants have a long way to go and the sector is here to stay forever. Future direction will involve challenging existing schools by partnering with Infra and Capex heavy players by management of schools. That formula is reminiscent of Holiday Inn management of hotels which is capital light.

As the Govt. bidding procedure increasingly returns normal profits and gets commoditised, the existing leaders will evolve into full fledged education providers rather than being enablers. Educomp has about 15 classes per school and Everonn has only two, therefore a big upside exists in having more classes per school. Educomp does not bid for projects that involve less than 10 classes whereas Everonn is happy and makes money with even 2. Walmart vs Kmart ? While Educomp is slowing down, Everonn shows no such signs. Without capital dilution Everonn can easily do north of 35% growth in EPS for the next five years.

When the mania re-ignites, I will be listening. Even without frenzy, decent returns can be expected with just EPS growth and a moderate PE rerating.

[Amit Arora]

Education sector is due for transformation. Govt. funding to support this endeavour is and will increase un abated year in and out. To give a sense of numbers, there are 10 Lac Govt schools in India and 75,000 private schools. At the moment Educomp is leading in private schools with SmartClass which has been replicated by Everonn with iSchool and trailing on the heels of Educomp.

Now comes an interesting revelation, 75%+ of those 10 lac schools have less than three teachers, which implies Educomp does not have interest, inclination and model to support those as yet. As a matter of fact, it does not have interest either, its interested in establishing a private chain of schools, five flavours already exist today - that in itself will be a mega market.

Coming back to figures, there are only 25,000 Govt. schools having ICT , multimedia, private participation in them. Everonn is present in 25% of them, i.e. roughly 6,000. Govt will open up 650,000 , thats right 6.5 lac schools to ICT bidding over next 5-6 years, if Everon maintains same share, I will leave the mathematics to you, to guess EPS.

After five years of contract, a majority of schools will re contract for new training material, courseware. Thus its a perpetual model and not limited to five year annuity.

Market has become pessimistic with Educomp, Everonn and education sector prematurely. Its like 2005 and Bharti Airtel is a strong buy despite 5 crore connections.

I feel that Everonn will reward better than any other stock I have mentioned. Relaxo could do equally well. The mania saw it scale over 1200 and manic depressant behavior of Mr. Market tanked it to 90 Rs, today it is available at roughly 400 Rs. I feel the fair price of Everonn is 2000 Rs given the enormous scale of opportunity and speed of scalability possible.

I expect it to grow 40%+ EPS for next five year. Depending on craze and madness in bull run PE can strech anywhere between 20 and 80 as investors fancy this in hindsight. It is due for a major PE re rating.