IPO Note
Everonn Systems India Ltd
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July 5, 2007
Issue Snapshot: Issue period: July 5th – July 11th 2007 Price band: Rs 125 – Rs 140 per share Issue Size: Rs 5000 lakhs Issue Size: 35.7-40.0 lakhs equity shares QIB: upto 50% of net issue Non-institutional:: atleast 15% of net issue Retail: atleast 35% of net issue Face Value: Rs 10 Book value: Rs 42.41 (Mar 31, 2007) Bid size: 50 shares and in multiples thereof 100% book building process Capital Structure: Pre Issue Equity: Rs 1027.8 lakhs Post issue Equity: Rs 1384 – 1428 lakhs Listing: BSE & NSE Lead Managers: Centrum Capital Limited Shareholding Pattern: Pre Post Issue % Issue % 33.70 8.18 58.05 0.0 25.06 6.08 59.84 9.02
Company Background:
Everonn Systems India Ltd (ESIL) is a fully integrated Knowledge Management, Education and Training Company offering a range of services that include • Creating Educational and Training Content that is globally relevant • Designing and executing large learning initiatives • Setting up the needed infrastructure for learning and training ESIL was set up in 1987 to promote IT education in schools and later ventured into distance management education. They are one of the lead players in setting up Virtual and Interactive Learning classroom networks across India to deliver quality and affordable education. The company develops and integrates content for Indian and global audience at schools, colleges, corporates and retail segments. ESIL was the first to initiate computer education at schools and colleges and has partnered with various State Governments to bridge the digital divide. They provide with good Computer Lab infrastructure within the Schools and Colleges and IT Education is imparted through well-trained Everonn faculty. Their partnership with Hughes Net (Direcway) Global Education (HNGE) enables them to bring management courses from premier management institutes to working executives. The company has two major SBUs
! Institutional Education and IT Infrastructure Services ! Virtual & Technology Enabled Learning Solutions
They mainly provide education services for several State Governments in India , for their computer education, computer literacy, computer aided learning and teachers training projects. It has presence across 8 States, over 1,900 Computer Labs and has trained 1.2 million students. This has built a good brand image with key policy makers for Computer Education in Schools and colleges. ESIL creates real value for their shareholders and investors. Their performance has improved with each passing year. And ESIL continue to practice good corporate governance principles, applying high standards of prudence. ESIL have been investing judiciously, based on in-depth analysis of risk and profitability and seeking growth on a sustainable basis. Mr P.Kishore is one of the promoters and also the Managing Director of ESIL. He is the one who sets the company’s business mission and strategic vision and is also responsible for corporate communications and Government relations.
Shareholding pattern
Promoters Promoter Group Others (Incl Inst & HNI) Public - Retail
Total 100.0 100.0 Assuming cut-off price at higher end of the band.
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Products and Services
1. Education services are offered in the contracted school space and is sub-divided into two areas of business viz., a) Post School Education Business(PSB) - courses offered after school hours range from simple awareness courses to specialized job oriented diploma courses.
b) New Business Development (NBD) - partnered with Companies like Microsoft Corporation, Sikkim Manipal University, Tally Solutions Inc.
etc in several educational and training projects. It has also partnered with Microsoft to train close to 5000 School teachers & 500 IT teachers across South India. 2. Educational Aids Tools and other products like course material, content, consumables, hardware and software are marketed in the various schools acroos the country. 3. Web enabled learning solutions includes building content and courses in the areas of the curriculum, non-curriculum, skill enhancers, etc., so that coursework can be made available to students Live across real, virtual and e-learning platforms. 4. Zebra Kross – ESIL’s business model which uses satellite based technology redefines the concept of classroom education retaining all its benefits and improving its reach. It basically consists of three sub-divisions i.e. the groups to which this facility is made available. These include a) Institutional Initiatives - covers schools and colleges where programmes and courses are in the areas of curriculum support, noncurriculum speciality programmes, job oriented courses, preparatory and entrance exam coaching b) Retail Initiatives - covers franchisee and own centers where the coursework includes self and personality development, preparatory, entrance and professional coaching, lifelong learning, anguages, diplomas, certification courses, etc. c) Corporate Initiatives include two departments – Training and Placement. Programmes include training in corporate products, diplomas, Management Development Programmes (MDPs) etc.
Objects of Issue, Means of Finance and Implementation Schedule:
ESIL has embarked on expansion project to be funded by IPO proceeds and internal accruals. The company has budgeted an outlay of Rs 3000 lakh for IT Infrastructure Services. ESIL plans to expand its operations close to 1000 schools every year. The company will allocate Rs 1725 lakh from their IPO proceeds towards capital expenditure for Virtual and Tech Enabled Learning Solutions. ESIL would also utilize the funds raised from the IPO towards brand building; funding for proposed mergers & acquisitions and to invest in the proposed subsidiary.
Projected spending:
Sr.No 1 2 3 4 5 6 7 Particulars Institutional Education and IT Infrastructure Service(CAPEX) Virtual & Tech Enabled Learning Solutions (CAPEX) Working Capital* Mergers & Acquisitions Investment in Subsidiary Brand Building Issue Expenses Amt (Rs. In Lakhs) 3,000.00 1,725.00 500.00 800.00 100.00 100.00 381.00
Total 6,606.00 * The proceeds from the IPO will not be utilised for Working Capital requirement as the same has already been utilised from the proceeds of India China Pre IPO Equity (Mauritius) Ltd.
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Means of Finance:
Implementation Schedule:
Highlights of the issue:
IT infrastructure services ESIL is an established education service provider for several State Governments in India. ESIL offers them with Computer Education, Computer Literacy, Computer Aided Learning and Teachers Training projects. The company has a strong presence in eight states, has over 1300 computer labs and trained 1.2 million students. ESIL has a good reputation among key policy makers for computer education in schools and colleges. Geographical Spread With the use of the latest technology ESIL is able to tap a wide market. It can have communication with students across geographic locations. ESIL is well equipped to allow the transfer of data, voice and video via satellite to a number of remote learning centres.
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Quality Education ESIL is an an ISO 9000-2001 company ensuring quality in the education it imparts. Quality education is made available to people with the use of latest technology. First Mover Advantage ESIL being a pioneer in the field of online educations has enabled it to successfully create a niche in the sunrise education technology field. Due to this advantage the company’s products and services have found wide acceptance and have been tested and proven on the ground. Technology Flow ESIL’s virtual learning platform seamlessly integrates the strengths and advantages of the traditional method of education with the latest in technology. With a powerful interface, a student can have access to highly interactive sessions with students & instructors all over the country, using video, voice and data. Strong In-House Marketing Team ESIL has a strong in-house marketing team who maintain cordial relations with the Departments of Education, Information Technology and other procurement agencies across various states. This has made them a trusted partner among the Governments in implementation of policies for ensuring computer literacy across the nation. Business Strategy ESIL has plans to provide quality IT driven Technical and Management in Schools. Its strategy also involves brand building, funding for proposed mergers & acquisitions. Investment in a subsidiary is being made which will set up exclusive retail outlets at schools and colleges where ESIL has a presence. These retail outlets would sell Educational content in the form of CD/DVDs, books etc to the student community. It also plans to provide curriculum, non-curriculum, supplemental education and preparatory & training courses to colleges, schools, corporate and retail segment. ESIL has partnered with companies like Microsoft Corporation, Sikkim Manipal University, Tally Solutions Inc. etc., in several educational and training projects. Both ESIL & Microsoft are working as “Partners in Learning” under “Project Shiksha” with an aim: • To deliver affordable software solutions & overall comprehensive training to school teachers & students. • To enable the Government school students get access to computer skills. • To use this as an opportunity or a tool to penetrate into Government schools and thereafter offer other curriculum support programs. • To use this as a bigger brand building platform & recall
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Pricing Model In case of IT Infrastructure Services ESIL opts for a BOOT model and hence the Annual Maintenance Contract of the Infrastructure (AMC) and instructor services are charged and paid in equal monthly / quarterly /half-yearly installments spread over the tenure of the contract or charged after the completion of installation of the infrastructure. We work with a range of pricing models that could include - Per school per month basis payable quarterly / half yearly etc, - Per student per month basis payable quarterly / half yearly etc. Virtual and Tech Enabled Learning Solutions –ViTELS products are priced on per course per student basis. ESIL’s products are priced according to the the cost of running the programmes and the competitive products price in the market New Contracts ESIL has bagged a contract worth Rs 30 crore from the Gujarat Government to set up IT labs in State-run schools. It will implement the computer literacy project in 1,256 schools in southern districts of Gujarat and will operate through the build-own-operate-transfer (BOOT) model. Content ESIL develops content for schools/colleges. The content module includes courses for skill enhancement such as effective english communication and soft skill enhancement. Besides this, it has other career oriented programs which includes courses on Banking, Financial, Services and Insurance (BFSI), and other IT courses. This content is distributed through satellite based technology to various Educational Institutions.
Industry:
School Education in India India is currently one of the largest markets for School Education in the World. India currently has over 1 million schools providing education from kindergarten – Class 12 to over 200 million students. There are over 5 million teachers across India who needs support in training in IT and delivery of Education. For this purpose companies like Everonn are working hard to deliver IT training to teachers and also quality education to students all across the country. India is one of the largest markets for School Education in the World. India currently has around 1.18 million schools in both Government and Private segment. With a population in the learning age group of 18-32 of roughly 350 million, the country’s educational infrastructure like schools, colleges, labs and even roads leading to schools have not been able to keep up. Easy, reliable and fast access to the Web with local phone calls, and thousands of cyber cafes spread all over India has made online learning possible for a person situated anywhere. Size of the Indian Education System India has a large formal education System with a target group (children and young persons in the 6-24 years age group) numbered around 411 million in 2003, or about 40% of the country’s population. Technology aided education in India has been most successful in the corporate segment where it is seen as a means of achieving business goals and motivating employees. Developments in Internet and multimedia technologies are the basic enabler of e-learning, with content, technologies, services, consulting and support sectors being identified as the key sectors of this industry. However, one of the problems in India is the lack of course content, especially outside the mainstream focus areas of IT education, English-language content, and tutorial-like courses.
Concerns:
# # The funding requirements and the deployment of the proceeds of the Issue are based on management estimates and have not been independently appraised. ESIL has had negative cash flows in certain fiscal periods Fiscal 2007 (1269.10) 775.18 Fiscal 2006 (2167.26) 1427.01 Fiscal 2005 (420.04) (41.65) Fiscal 2004 (74.78) (661.62) Fiscal 2003 (967.95) 330.65
(Rs. in mn) Net cash from (used in) investing activities Net cash from (used in) financing activities #
The new initiative relating to Online Web Tutoring an emerging segment in which ESIL has no experience, intelligence or market data is prone to the risk of failure.
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# # #
ESIL’s contingent liabilities in the form of Bank Guarantees can adversely affect its financial condition and results of operations. Venturing in new geographical areas like the Middle East & South East Asian Countries where ESIL has no prior experience is subject to business risk. The payment system with Government aided projects are exposed to delays due to the systemic procedures in making such payments. Hence, subject to the risk of payments being delayed, thereby impacting ESIL’s working capital requirements. However, its experience has shown them that there have been no defaults in payments from the Governments. ESIL has a very high level of Sundry Debtors of 7.8 months which can affect the financial condition of the company.
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Financials:
From the above table it can be said that over the last three years the company has witnessed rapid growth. This can be seen from the increase in revenues from Rs 1942.95 lakhs in FY 2005 to Rs 3093.03 lakhs in FY 2006 i.e. by 59% and futher by 39% to Rs 4304.46 lakhs in FY 2007. Also operating profits have increased by 44% in FY 2006 from Rs 996.16 lakhs in FY 2005 and by 23% in FY 2007.
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Conclusion and Recommendation:
During the nearly 60 years since independence, India's investments in human development have reduced hunger, increased literacy, and improved healthy conditions. Education investments have produced world-class scientists, engineers, and technicians. They, in turn, have fuelled the growth of Indian technology companies and attracted many global technology leaders. The technology aided education industry has seen a major boom from 2000. This industry has, more than ever before, become an exercise in branding, where players vie not for shelf space but mind space. The promises of a better tomorrow and a better-still thereafter remain, but the future is dim for those who cannot stand and deliver. The future of this industry sees growth in the corporate retail segments and spending on IT education will continue to increase. It will become a more service-oriented industry where the focus will be on delivery. This promising future of the industry can strengthen the credentials of a company like ESIL. The following table gives the comparative analysis of companies that are in businesses similar to Everonn Peer Comparison: Company Name Everonn Systems Educomp Solutions NIIT Technologies Ltd EPS (Rs.) 5.63 17.97 29.54 NAV per share (Rs) 42.41 90.11 160.68 CMP 125-140 2255.50 1060.75 P/E 22.2 -24.9 125.5 35.9
We feel that the IPO at the price band of Rs.125-140 offers an opportunity of listing gains as well as medium term gains. The area in which ESIL operates is an area with tremendous potential, although in the initial years the resource requirement would be large and net margins may not be very high. Technology aided Education companies like ESIL could command high valuations based more on their future scope/potential rather than current earnings. We recommend investors to apply at the cut-off price.
Sneha Venkatraman (HdfcsecRetailReseach@hdfcsec.com)
RETAIL RESEARCH Tel: (022) 6661 1700 Fax: (022) 2496 5066 Corporate Office
HDFC Securities Ltd. Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066 Website: www.hdfcsec.com Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This
document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document.
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