India's largest education company by market capitalization, Educomp Solutions, has been the "Darling" of investors since its IPO days. And for good reasons, many would argue. It has consistently maintained an explosive growth, the profit margins have been excellent and growing at an even faster rate and of course, more importantly, has given its investors over 30x returns since its IPO (despite falling over 25% from its high). Educomp has had a near "Dream Run" in the markets ever since it debuted, in fact rallying 100% on day 'One' of its listing.
However since its last results, Educomp has suddently lost favor with the "Investment Experts". To be fair, there were enough people who privately and not so privately expressed doubts about this company from the beginning. However, never have I seen another company being panned like this, and "rather rudely" in public. At least not a company which had a 9000 crore market cap and certainly not in India. I mean they have had had their share of controversies in the past. But which company, growing at an explosive rate, does not?
To be sure, its Q2 FY10 results were just as "stupendous" and the management upped the guidance for FY10 and FY11. So what changed, that a large swathe of investors and analysts suddenly did an about turn and are now calling it "... a very unique and strange company." or "..the only company I would short in the Indian market.."
Almost every one now blames, their newly announced securitization policy. This is what they have done
Educomp "Smart Class" Model
With a high "upfront" capex model, their operating cash flows have always been low, putting a constraint on their growth. Therefore they have had to constantly borrow or raise equity to maintain the high growth rate. Now, one of the ways to ensure scalability is to securitize your investment/receivables which privide a company with enough liquidity to fuel its growth without the need to dilute equity. Which is what Educomp did, in last quarter.
New "Securitization" arrangement
Where Edu-SPV is an "unrelated" entity, apparently floated by ex-employees of Educomp
Now, "Securitization" is not a bad thing and sure it does turn Financing CF into Operating CF and the management should have been applauded for this, but there are curious angles to this peculiar case and apparently are the source of discomfort for the investors. Can you guess, why?
Mind you, nothing is illegal here, just what some people may call "smart" and "innovative" structuring