Education is a high growth sector and this stock has been a star performer for the last couple of years. However every sector and stock idea reaches a stagnation point at some stage. Usually this happens when the valuations are very high and the view of nearly all market participants is very positive on the stock. Educomp is one such company where the valuations are very high and factor in all the positives that are likely to unfold over the next couple of years. The risk – reward ratio in this stock is very unfavourable. Though this is still a favourite of the market we believe it is better to be a contrarian now and recommend existing investors to book profits and new investors to stay away from this counter.
Moreover we view the recent change in their smart class model as a negative for investors. To improve its cash-flow management, the company plans to securitize the receivables and has in- principle approval from a consortium of banks, including SBI and PNB, for the same. It is also looking to transfer or outsource its Smart Class contracts on a non-exclusive basis enhancing operational efficiency. The net impact of these changes will be to reduce capex while its revenues can be booked upfront. We believe that this will lead to a significant downgrading of this stock as future annuity goes away and revenue growth will be linked to growth in school additions per year. This we believe is akin to ‘killing your golden goose ‘for shoring up your current performance and urge long term investors to use the current upswing to exit this counter.
No comments:
Post a Comment