While the education sector is now the biggest sunrise industry, Usha Martin Education & Solutions leaves much to be desired due to its overvaluation and some other factors.
The Company
If we have a look at from where UMESL has emerged, then one cannot doubt the credentials of the management. UMESL was a part of the Usha Martin Group. Usha Martin’s IF division was de-merged into a new company named as Usha Martin Infotech (UMITL). In accordance with the scheme, UMITL issued and allotted one equity share of Rs 5 each to all the shareholders of the company in the ratio of one equity share of Rs 10 each held by them in Usha Martin. But the financial performance of the company remained stagnant for almost four years as it only served the telecom sector where it faced severe competition. Further, it only got in-house orders which put constraints on its growth.
While most of the Indian IT companies witnessed good growth, UMITL could not show any kind of upward spiral. After a dismal performance in the IT sector, it took a good look at the potential in the education sector during the last quarter of FY08 and then re-launched its education initiative. We are saying ‘re-launched’ as it had a similar line of business in 2001-02 but had ceased to offer those services after its inability to garner a good response.
Learning Division
In Q4FYO8 UMESL started its first centre in Kolkata and as part of its portfolio of educational offerings the company started conducting trainings for formal degree courses like MBA, MCA, BBA and BCA, affiliated to the Punjab University. Further, in Qi FY09 it started an additional centre at Kolkata and one centre at Ranchi. These initiatives yielded good returns and the FY09 results saw a strong upsurge in the topline as well as bottomline. Here it posted topline of Rs 2.83 crore and bottomline of Rs 0.44 crore as compared to just Rs 0.38 crore and Rs 0.19 respectively in FY08.
In Q1FY1O it added another centre at Patna and the impact of the same was visible in the 9MFY1O results. It is now opening another centre at Dhanbad and is expanding the Ranchi facility. As regards its capex plans, the company wants to invest Rs 1.25 crore which will be incurred through internal accruals. Presently all the revenues are from its degree courses where it has showed a good amount of growth. We enquired about the number of students, total capacity and the fees charged but our efforts to get any answers from the management could not yield any result.
As regards the company’s profitability, the performance has been good in its Learning Division with net margins in the range of 11-12 per cent. One should note that the school enabling services in the initial phases is capital extensive. Hence the bottomline may be a bit lower in the initial phases. Further, the sustainability of the revenues is still an issue as we are only in the initial phases. Also, the company’s failure in its previous attempts raises some doubts.
Valuation
If we take a look at the valuation, the scrip’s CMP of Rs 65.20 discounts its trailing four quarter earnings by 21Ox. The other parameters like EV/EBITDA of more than lOOx makes the counter too over-valued. It is true that the company is expanding and the earning capacity will increase further but the CMP seems to have discounted the earnings. Even the leaders in the business of school enabling services like Educomp Solutions (PIE of 54.82x) and Edserve Systems (7 lx) are trading at lower valuations. Hence, considering these factors, we feel it will be good for the investors to avoid any investment in the counter.
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