1.It has no peers in the strict sense with respect to content and execution
2.Operating Margin in excess of 50 %
3.India is a huge country and potential for expansion of their business is excellent.
Stock Value: Educomp Solutions
People term it as “Intrinsic Value” and I am no Warren Buffet to use those terms. That’s the reason I use the simple term “Stock Value”. Because stock market is a place where nobody can be right always and even the market sometimes. I use certain conservative assumption to calculate stock value which I explain to you as well.
I am going to calculate value of this stock based on the following two ways and list the results.
1.Based on Discounted Earnings per share
EPS = 40
EPS CAGR for last 3 years = 41 %
Assumptions:
EPS Growth Rate for Next 10 Years = 20% 25% 30%
Discount Rate = 5 % (Conservative Bank Yield)
EPS Growth rate is constant for next 10 years
Since, last 3 year CAGR for EPS is 41 %, I opted for one conservative estimate (20 %) and two other values to see what effect it can bring.
Note: CAGR refers to Compounded Annual Growth Rate. Also please note that this assumption is a CAGR value for next 10 years and might not make sense sometimes in the short term.
Stock Value Based on Discounted EPS
If EPS Growth Rate Assumption is 20% then Stock Value = Rs. 897
If EPS Growth Rate Assumption is 25% then Stock Value = Rs. 1180
If EPS Growth Rate Assumption is 30% then Stock Value = Rs. 1552
2.Based on Discounted Net operating Cash Flow
Current Operating Cash Flow = Rs. 680 Million
Operating Cash Flow CAGR = 83 %
Number of Shares = 17.2 Million
Assumptions:
Operating Cash Flow Growth Rate for next 10 years = 30% 35% 40%
Discount Rate = 5% (Conservative Bank Yield)
Operating Cash Flow CAGR is Constant for Next 10 years.
I have calculated the last 3 year CAGR for Net operating cash flow and it stands at 83%. Hence, I assumed a higher growth rate of 30% 35% and 40% for operating cash flow for next 10 years.
Stock Value Based on Discounted Net Operating Cash Flow
If Operating Cash Flow Growth Rate is 30% then Stock Value = Rs.1534
If Operating Cash Flow Growth Rate is 35% then Stock Value = Rs.2018
If Operating Cash Flow Growth Rate is 40% then Stock Value = Rs.2650
If you compare the stock value between these two methods, there is huge difference and in fact the value based on Discounted Net Operating Cash Flow is almost double the value of EPS Based estimate. Why is that? Of course, if I assume same 20% growth for operating cash flow, then the value is Rs. 890 which is similar to EPS Based estimate. But does it make sense to assume 20% growth rate when the company has generated net operating cash flow at CAGR 83% for the last 3 years? I do not think so. Hence, I assumed little higher than what I assumed for EPS growth. What this analysis indicate is that market assumes that Educomp Solutions Net Operating Cash flow would grow at 35% (CAGR)for next 10 years (If my assumption makes sense) and they think that stock value now is atleast Rs.2000 which is what it commands right now. You might ask why did the stock was trading at Rs. 1350 range just few days back? Well, stock price accounts and discounts for many things and I will certainly try to write an article about it in the coming days.
Stock Value based on cash flow gives better idea about the company rather than looking at just EPS. May be that’s the reason, market has put huge premium on this stock. But there is also one more thing. I have in fact calculated the value based on Net Operating Cash Flow which excludes money the company raised through financing which stands at Rs. 3306 Millions as of 2008. A company without strong growth potential and fundamentals would not have raised this much money and may be investors considered that too. But my another question is, would you have found this by just looking at PE Ratio or PC Ratio? Let’s see.
PE = 40 Stock Price = 2097 PE Ratio = 2097/40 = 52
PC Ratio = Stock Price Divided by Operating Cash Flow per share
Operating cash flow per share for Educomp = 680 / 17 = 40
PC Ratio = 2097/40 = 52
Wow……Two values are identical and I do not think people would have valued based on this. Hence, I strongly feel that at least few investors if not all have looked at cash flow of Educomp along with few more things I list out here.
Current Ratio is above 5 even though debt equity ratio is greater than 1.
Total Revenue CAGR of 126% for last 3 years.
Net profitability to net sales stands at 26% and I think not many companies have this kind of profit.
Conclusion: I strongly feel investors have done their home work before investing in this scrip. This was my attempt to find out why this stock attracts huge valuation in this tough time and we have found reasonably convincing answer if not completely convincing. Hence, looking at cash flow statement provides more clarity than just looking at PE or general trend. Also, analyzing the stock in totality including PE, PC Ratios, General Trend, Company growth along with cash flow statement and balance sheet gives you much more clear picture which can reduce the risk to an extent. I might not be correct, hence I request readers to share their thoughts in the blog. Thanks.
Caution: This example has been taken only to see if cash flow statement gives any additional information to value stocks and it is based on certain assumptions. Hence,please do not take this as a recommendation.