India Ratings downgrades Educomp on declining profits and revenue

Once the darling of the Indian stock markets, India’s biggest education tools provider Educomp Solutions Limited has been downgraded by ratings agency India Ratings & Research on account of declining revenue and profits.

“Educomp has reduced the pace of its growth in the hitherto upfront capital intensive smartclass business (multimedia education to private schools) as reflected in lower additions in classrooms. However, during 2012-13, the company had shifted focus on cash collections from the smart class business,” India Ratings said.

Educomp provides learning materials, such as electronic white-boards, software and learning content to schools through its ‘SmartClass’ program and others.

As a result of falling revenue and profit, Educomp’s debt levels have risen in comparison to its profit. India Ratings said Educomp’s net adjusted leverage has been higher than 4 times on a sustained basis, and stood at 6.4x as of March 2013.

The company’s consolidated operating EBITDA, a form of earnings, declined to Rs 157.9 crore for the first 9 months of the last financial year from Rs 272.8 crore in the year before. Revenue fell nearly 11%.

“The company’s inability to securitise receivables amid a tough credit environment, high debt obligations and higher cost of debt resulted in liquidity pressure in FY13,” it said.

“The company is likely to report significantly lower revenue in FY14 on account of both relatively lesser new business and return to the BOOT accounting treatment. However, this will improve transparency in financial reporting and be more aligned with its actual cash flow,” India Ratings said..

On the positive side are Educomp’s initiatives towards reorganising its business, launch of asset-light products in the smartclass business, funding the smart class business with long-term vendor facilitated financing thus reducing dependence on securitization, working capital reduction and asset monetisation to improve liquidity position, the ratings agency said.

“Although these efforts will translate into actual cash flow improvement over the medium term, the company remains exposed to execution and new products acceptance risks.”

India Ratings downgrade Educomp Solutions Limited’s (Educomp) Long-Term Issuer Rating to ‘IND BBB’ from ‘IND A’, and said continued stress on earnings and liquidity, and inability to raise adequate funding for supporting business operations, debt obligations and growth could lead to a further rating downgrade.