The Hindu Business Line : Everonn Systems

Investors with a high risk appetite can subscribe to the book-built Initial Public Offer of Everonn Systems India Ltd. At a price band of Rs 125-140 per share, the PE multiple works out to 36-40 times the FY07 earnings, diluted for the post-offer equity. Larger companies in the IT-based education industry enjoy much higher valuations. Everonn, being a much smaller player, may trade at a discount to the above.

However, Everonn’s reasonable growth trajectory in the past and the huge untapped market in the IT/ IT-aided education segment and increased government thrust on education through budgetary allocations make the stock an attractive investment opportunity.

Business

Everonn is a knowledge management, education and training company operating through two business units — Institutional education and IT infrastructure services and virtual and technology-enabled learning solutions (ViTELS ). Under the first unit, the company identifies IT education projects under various government initiatives. It enters into contracts with schools/colleges for providing the hardware, connectivity, content and faculty.

The second segment, under the ‘Zebra Kross’ brand, focusses on providing VSAT-enabled training and learning solutions (curricular and non-curricular) to the school, college, corporate and retail segments. Besides, the company is lead partner of Hughes Communications for providing management courses from reputed national institutions through remote learning.

Expansion plans

Of the total fund requirement of Rs 60.06 crore for expansion, the company is raising Rs 50 crore through this IPO (rest through pre-IPO placement and accruals). It plans to add 1,000 schools per year as clients under the first strategic business unit and another 250 schools and colleges under the second. Part of the offer proceeds is to be used for overseas expansion, for acquisition/joint venture, for working capital requirements, brand-building and for setting up a subsidiary for retailing.

Financials

Income has steadily risen from around Rs 16 crore in 2003 to Rs 43 crore in 2007. Profits fell marginally to Rs 4.85 crore in FY-07 after having doubled to Rs 4.90 crore last year. Operating margins have seen some pressure over the past two years — from about 51 per cent in 2005, they have dropped to 41 per cent this year. Financial and capital charges relating to expansion have had an impact on profit margins.

Prospects

India has one of the largest education systems in the world, covering more than ten lakh schools and twenty crore students. Less than 10 per cent of this market is penetrated by IT education and infrastructure services. The increased allocations in the Budget towards education and schemes such as ICT@Schools and Sarva Siksha Abhiyan are likely to widen the potential market for Everonn.

The company has 1,127 live projects and 773 projects under implementation in schools across the country and has completed projects in Tamil Nadu and Pondicherry. Besides, the company’s institutional and corporate initiative, ‘Zebra Kross’ and its plans to provide Web-based learning solutions will help it move into emerging, but more high-end and lucrative segments.

Educomp’s ‘Smart Class’ is a competitor to ‘Zebra Kross’. To have an edge over its more established peers, it is important that the company distinguish its content from others.

Players such as Educomp and NIIT already have a significant presence in this segment and are competitors to Everonn. Increased manpower, education and training expenses due to planned expansion might pressurise margins in the short term. But increased coverage in the ‘Post School Education Business’ (under which the company uses the IT infrastructure available at schools to conduct training programmes) may mitigate some of this pressure. Currently, less than 10 per cent of the schools are covered under this scheme. Also, contract models such as the one adopted in UP schools under which the company provides only the content while the infrastructure is brought in by local enterprise partners might also offer better margins as they may help save capital costs.

Risks

Any expansion in the ViTELs segment is dependent on the company’s ability to deliver good quality content to its customers. Quality content is currently among the company’s key challenges, with players such as NIIT and Educomp scoring higher on the quality of in-house content. The company is attempting to improve its content through in-house R&D efforts and possible acquisitions/joint ventures in content development.

The necessity for heavy upfront investments in infrastructure in this business and high outstandings/delays in receivables from the government, resulting in the locking up of working capital, are the other risks involved in the offer.

Offer details: The company is raising Rs 50 crore at a price band of Rs 125-140 per share. The offer is open from July 5 to July 11, 2007.

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