Educomp Solutions Ltd's, Managing Director, Mr. Shantanu Prakash rubbishes, claims of Fudged Accounts..

Some well known so-called analysts have a very bad habit of valuing companies based only on EPS, which is simply ridiculous. The value in the shares of a company could be in the form of hidden land/buildings (assets), holding of shares in subsidiary companies/other companies (quoted and un-quoted), Goodwill (Reliance Group/Tata Group), Receivables (or order book), etc.

One of these breed of analysts is a well known face in Andheri (East), Bombay, who recently recommended a transformer company in a business daily published from Gujarat. His valuation of VBC Ferro Alloys Ltd at Rs.1400 and his praise of Communists, without understanding what communism actually stands for (simply because they refused a price hike in petroleum products, due to high inflation some months back; even if it was at the cost of hapless shareholders of OMCs) is well known.....

No one however knows when will VBC Ferro Alloys Ltd reach that historic levels....Will it reach during my life-time..??!!

With a heightened sense of alertness among investors and brokerages after the Satyam fiasco, rumours have been flying thick about various companies, the actions of their promoters, and the scale of their businesses. Educomp Solutions, a leading provider of education services has been the target of various such rumours about the company's wage bill, debtor days, promoters selling stake and pledging shares, its auditors and debt position.

Reacting to the allegations, Shantanu Prakash, Managing Director of Educomp Solutions, said many of the rumours have been floated by people, “who do not understand our business model.” Rumours about directors quitting the company and promoters pledging stake, he said, were baseless.

Prakash said the promoters of the company have not pledged any share and that just 5% of their stake has been sold over three years for personal needs. “The total number of shares sold is 8.76 lakh and it’s only 5.07% of the fully-diluted share capital company in three years.”

“On January 27, when we disclose our Q3 earnings, we are going to unveil a corporate governance roadmap and that is going to address some of the corporate governance issues very comprehensively,” Prakash said.

Here is a verbatim transcript of Shantanu Prakash’s exclusive interview in a private news channel.

Q: There have been allegations — and Educomp has issued clarifications — but we want you to talk on this issue: the salary bill of 3,955 employees is below Rs 34 crore. That doesn’t sound realistic.

A: Whoever has spread this news has totally not understood the business model of the company.

As you might be aware, we work very extensively with government and private schools as well as with private schools. Whenever we work with a government school, we post one lab assistant in each school. These employees — who are typically entry-level, just-graduated people, mostly into their first jobs — form the bulk of our workforce. We have about 3,500 employees that are deployed in various government and private schools across the country.

The typical salary of a person who is deployed in a rural government school is between Rs 3,500 to Rs 4,000 a month and a person who is deployed in a private school is Rs 7,000 to Rs 8,000 a month. To look at this and compare it to the salary of a programmer in an IT company, that’s a completely baseless comparison.

We are not an IT company but an education company. You can’t compare apples and oranges and draw a completely misleading conclusion.

Q: What is the percentage of employees who, earn under Rs 4,000 per month?

A: Over 70% of our employees and that’s the bulk of our workforce.

Q: The debtor days is an important issue that has been raised by some of the analysts earlier too. It has come down from 176 in FY06 to around 145. Could you clarify that because in the delegations report, they mentioned that it is around eight months?

A: That’s another example of how the numbers have been twisted around. It’s a well-known fact that Educomp’s business model is a build-own-operate-and-transfer model in which we charge the institution on a quarterly basis post the quarter — so that’s about 90 days. In addition, it takes about 30 days to collect [the payment], so that’s about 120 days and when we are working with government we take anywhere from 45 to 60 days to collect the payment, so the working capital cycle in that case can be as much as 150-160 days.

It’s a well-known fact about Educomp’s business model. Due to efficient collection and other lines of businesses, our debtor days have been consistently declining quarter-on-quarter since the company went public. It has come down from 179 days to 145 days now.

Q: So you are saying eight months is not right?

A: Anyone who can read our annual report and do basic arithmetic can know that this statement is false.

Q: There is one allegation that about 14 lakh shares have been sold by promoters to the extent of about Rs 250 crore since the IPO came out. Why are the promoters on a selling spree if you have so much confidence in your business?

A: The founders and promoters of the company have not sold a single share in the past approximately six months. Whenever you do, by law, you have to make a disclosure to the stock exchanges.

The disclosure [for whatever shares sold in the past] has been duly made. We have submitted a detailed date-by-date account of the shares sold and the total number is 8.76 lakh and that is only 5.07% of the fully-diluted share capital company in three years.

Q: Why do you need to reduce your holding from 60% to 55% within two years of coming out with an IPO. Why did you reduce your holding by 5%?

A: The promoters still own over 55% of the stock in the company.

Q: Yes but 60% in itself is not an unusually high number. There was no requirement for you per se to sell this 5% stake. So was there any specific reason to do so?

A: [The stake sale was] for personal needs and to create liquidity for the promoters. I would also like to clarify here that there have also been some other rumours about promoters having pledged their shares. We have repeatedly clarified that there is not a single share of the promoter that is pledged in any form with any financial or non-financial [institution].

Q: Have you sold any share after the price came down from Rs 5,500 to Rs 2,000 odd?

A: No. In fact, the average selling price, and it’s instructional to know, is approximately Rs 2,000 a share. So we never took advantage of the high prices. The bulk of the shares were sold at less than Rs 1,200/share.

Q: We know that the auditors of the company are Anupum Bansal & Co. There remains a question mark, but given the huge size of your company, could you shed more light on Anupam Bansal & Co — the auditors of the firm?

A: It has been our auditor for the past few years and we are quite satisfied with its service. It is a reputed local Indian firm but apart from that, we are one of the few companies that have got two sets of internal auditors to grill our financials.

On January 27, in fact, when we disclose our Q3 earnings, we are going to unveil a corporate governance roadmap and that is going to address some of the corporate governance issues very comprehensively.

It is our aspiration that Educomp should be one of the top 10 companies in India as far as corporate governance is concerned. We have always set a standard for disclosures in the education industry. If you compare Educomp’s disclosure with any of our peer company, you will see our disclosures are the most detailed ones.

Q: Coming back to the 5% share sale, was this in an open market. If that was the case, could you not have come out with a private placement offer?

A: They have been sold in very small lots. They have been sold in the open market — 20,000, 30,000, 40,000 shares at a time.

Q: That is exactly my point because in that case why couldn’t you have not come out with a private placement because I am assuming with this 5% stake sale, with the market price of Rs 2,000 you would have made more money by divesting the money in IPO in the first place, so the only question is: could there have been a private placement in place of selling 5% stake in open market?

A: You also have to note that it’s over a period of three years and there is no consistent pattern for that at all. There is not a premeditated plan to diversify because it’s been coming down over a period of time in very small increments and we still own 55% of the stock of the company.

So looking at it from an overall perspective, a 5% dilution is not a substantial dilution.

Q: Have any of your independent directors resigned in the past several weeks?

A: None in the past several weeks.

Q: Have any resigned in the past six months?

A: Not even in the past six months.

Q: One of the charges made by one of the brokerages is that you simply bought too many goods, too many computers in the ratio of 1:1?

A: It again shows that the person does not understand what the fundamental business of the company is.

The company is in the business of entering into a contract with schools, where we install computer equipment, so obviously we will buy computers. In each classroom — and it’s a five-year contract — the school pays us for five years and it’s a highly profitable business. So if we install computers worth Rs 1,00,000 in year one, we get back Rs 1,00,000 almost in the same year but we continue to earn for five years.

So if you don’t understand the business model you will come up with queries like these or it might be deliberately given information.

Q: Has the company taken loan from some of the banks, the market was talking about somewhere between Rs 800-900 crore?

A: No. That is completely wrong. All the company debts are regularly disclosed in each of our earnings calls.

The consolidated debt on the company — not including the FCCB — is approximately Rs 275 crore on a consolidated basis. For Educomp on a standalone basis, the debt is approximately Rs 40 crore and the FCCB outstanding amount is approximately about Rs 316 crore, which is due in June 2012.

How I made it??!!

A middle-class boy from Delhi, Shantanu Prakash could not bring himself to opt for campus placements at the Indian Institute of Management, Ahmedabad (IIM-A), where he had just completed his programme in business administration. The year was 1988 and he was barely 23. “I deferred my placement hoping to strike out on my own. And I am grateful that I didn’t have to return to the institute looking for a job,” he says.

Needless to say, he didn’t need to. For, over the years, Prakash has created a Rs 32-crore education technology company, Educomp Solutions Ltd,that sets up computer labs in schools, develops digital content for classes and offers teachers training programmes. It has also just branched out into the online tutorial business. “We are in the business of education that caters to the K12 (kindergarten to class 12) market today,” he says.

After stepping out of IIM-A, Prakash worked in a quasi-entrepreneurial education venture for a while but quit soon to launch Educomp. The company started out by setting up computer laboratories in schools. “Carmel Convent in Gwalior gave me my first break,” he recalls. The school continues to be an Educomp client though convincing the management then was an uphill task. “Computers were expensive and not widely used,” he says.

But Carmel Convent accepted Educomp’s proposal as Prakash said that his company would invest in the PCs. “I said let the students pay me a nominal sum per month for the services. The idea clicked,” he recalls.

A private school may have kickstarted Prakash’s business operations, but today a large chunk of his revenues comes from government schools. Educomp works closely with the central government and state governments to set up computer labs in schools run by them. While government schools are still focusing on providing basic computer literacy, private schools are now keen on including multimedia education, Prakash says.

So less than two years ago, Educomp started developing multimedia content. Today a team of over 150 content developers in Delhi, Bangalore, etc creates lessons and programmes that can be used in classrooms. To help teachers access the digital lessons and programmes, the company stations its assistants in schools that lease the content.

Prakash’s business idea has taken off for two reasons. One, schools are increasingly keen on including computer education in a big way. Two, his BOOT (Build-Own-Operate-Transfer) model is quite appealing. “We tell clients that we will network the school and set up the infrastructure at our cost, offer content and charge between Rs 80 and Rs 100 per student a month. Three years later, we transfer the assets to the school,” he says.

Prakash says the education process outsourcing industry offers a huge opportunity globally. “It is a great business as India has a pool of talented teachers most of whom are poorly paid.”

But why did Shantanu Prakash think of getting into the business of education? Because its intellectual property component was higher than the capital component requirement. “With my service-class background, I could not have set up a capital-intensive business,” he says. “Besides, education will never go out of fashion,” he feels.