Friday, November 20, 2009

Educomp: Securitization?

Secutization Debate: How Educomp is turning its Financing Cash Flows into Operating Cash Flows? But isn't that a good thing?

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

Before Securitization

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


Anonymous said...

I think the predictability of earnings is severely impacted while boosting current earnings, so am not surprised investors are somewhat concerned.I am guessing the unfunded debt guarantee is on their balance sheet and counts as long-term debt in EV calculation, so the effect here is (a) lower predictability in financials, (b) more immediate cash flow and (c) higher earnings [assuming the contract sale to Edu-SPV counts as revenue and is recognized immediately].

RW said...

Agree, except that the debt guarantee resides as contingent liability (off BS liability). In valuation models, this must be included in Net Debt and must be netted off from EV to get to Equity value

Anonymous said...

I m so damn pissed off with Educomp Solutions Ltd, that now i had to use blogspot for my feedback to them. They have been so good in their performance but I know the internal information that is all unethical business going on like the way it used to be in Satyam computers and Mytas Infra. Most of the things are haywire and they have been fooling schools and educational societies for money. Infact they have been bribing big educational officials for their business from govt.

When the Satyam massacre happened they were been under questioning too, but what happend to that. All of a sudden the were out of the news and all cases withdrawn, all because of the bribing business. They spent a lot of money on bribing media and govt. officials as well to take them off the case. This is India; I believe anything can happen here.

There has been so much of lucrative business going on in this company that media can get a whole years news from them. Check their accounts its all fake, even the auditors were bribed- I know that for sure. Their best way out is bribing, they earn by bribing and that’s what they believe in. Sharad Agarwal the President is the kin pin who does it for them, probably that’s why Shantanu Prakash hired him, because of his lucrative mind in solving these issues. Shantanu likes himself clean by shooting on others shoulders. Infarct when this problem occured he was out of the country to save his ass and to avoid getting into any trouble. Their The Millennium Schools is a bogus way to convert their unethical money in white money. Recently their one of the schools was caught doing unethical jobs but again Sharad Agarwal was caught in scene bribing.

I think media and govt both should look into their business and stop these monsters spoil the future of our kids. We should all rip them apart in their unethical business.

RW said...

Agree, there needs to be more transparency and if needed an investigation.

However, you have made accusations on them which need substantiation. Writing anonymous comments does not exacly implicate them

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