Aptech Limited. Industry Analysis: Two Wheelers - Motorcycles EPS - FY11 EPS - FY12 EPS - FY13 EPS - FY14E INR 9.21 INR INR 6.41 INR 6.

Transcription

1 A Qualitative Equity Research Company CMP(14/3/2014) Intrinsic Value Range(14/3/2014) Recommendation Industry Analysis: Two Wheelers - Motorcycles INR 70.6 INR BUY Aptech has a strong balance sheet with positive cash (and equivalent) balances and current assets. The price multiples based on these (price/ current asset of 3x and price/ cash asset value of 5.3) clearly indicate undervaluation of Aptech s operating assets. Net EV/ EBITA of just 2x for a zero debt business with strong balance sheet is another indication of an undervalued stock. ROIC excluding goodwill and intangibles of about 50% can be attributed to good asset productivity ratios (Revenues/ Invested Capital ratio of 5) resulting in good asset utilization. We attribute good asset productivity ratio to franchise based business model, where capital expenditures are borne by the Aptech s business partners and Aptech provides training material and courseware in return for franchise fee. Aptech has consistently generated good gross and free cash flows (INR 12.19cr, 22.98cr and 7.99cr in FY12, FY13 and 1H14 respectively), primarily by opting for asset light business model that ensures minimal investment in capacity by partnering with business entities through franchises, or maintaining 10-40% equity in Aptech centres. Sufficient FCF and non-operating income has ensured that Aptech paid good dividends in the past 2.5 years. For FY14, we expect dividend yield of 6.4% for the stock on CMP of INR70.6. Investment conclusion: In view of strong operating fundamentals, we believe that Aptech is undervalued and deserves a higher valuation. Considering the strong balance sheet, and operating leverage, we find that the company is undervalued at current levels. We expect that Aptech s earnings growth will improve as IT industry demand continues to improve, with a recovery in the USA. Aptech has already recorded YoY revenue growth rates of 9%, 9.7% and 3.6% over the past three quarters respectively and we expect 8-10% YoY revenue growth rates in the next four quarters with average net income margin of 15%. We value Aptech at 1.8x of its book value (INR 62/share at end of FY14E) and 16.4x of its FY14E EPS of INR 6.73 for stock price of INR 110/share, which also means target Net EV/ EBITA of 7. Aptech s business is classified into two categories, viz. Individual Training (or Retail) and Enterprise Business (or Non-retail). Individual Training segment comprises of vocational, certification and skill upgrade courses to individual students. Enterprise Business segment addresses content development, training and assessment related needs of government, institutional and corporate customers. Mr. Rakesh Jhunjhunwala, promoter and chairman, along with Rare Equity Pvt. Ltd owned 30.48% of Aptech s equity at end of FY13. EPS - FY11 EPS - FY12 EPS - FY13 EPS - FY14E INR 9.21 INR INR 6.41 INR 6.73 Market Profile BSE NSE BLOOMBERG REUTERS APTECHT APTR:IN APTA.NS 52 week price range INR Average Volume 371,848 Beta 1.45 Dividend yield 6.4% Shares outstanding (mn) 40.3 Market cap (INR bn) 2.8 Float 37.4% % Institutional Holdings 7.9% % Public and Others 29.5% Borrowings/ Assets 0.0% Return on equity (LTM) 10.4% Return on assets (LTM) 9.0% 1

2 Attractive valuation supported by good fundamentals We note that Aptech is trading at 1.1x times of its 1H14 end book value (BVPS of INR62.1). Even if Aptech reports flat earnings for FY15, Aptech is trading at 1.15x times its FY15 book value (BVPS of INR65.5 assuming 50% dividend payout for FY15). As such, the valuation seems attractive at CMP of INR70.6. However, we inspect Aptech s fundamentals before we form an opinion on Aptech s intrinsic value. Aptech has consistently generated good free cash flows, primarily by opting for asset light business model. Aptech has consistently generated good gross and free cash flows, primarily by opting for asset light business model that ensures minimal investment in capacity by partnering with business entities through franchises or maintaining 10-40% equity in Aptech centers. High investment in operating assets in 2011 was due to acquisition of MAAC. Sufficient FCF and non-operating income has ensured that Aptech paid good dividends in the past 2.5 years. In the future, we expect Aptech to maintain 25-50% dividend payout ratios. For FY14, we expect dividend yield of over 6% for the stock on CMP of INR70.6. Figure 1: Positive free cash flow is sustainable given Aptech s business model in INR lakhs H14 Noplat 1,892 2,444 2,085 1,077 Gross cash flow 2,318 2,573 2,404 1,240 Less: Gross investment in operating assets -5,206-1, Free cash flow (FCF) -2,888 1,219 2, Non operating income 1,707 1, ,480 Total cash flow -1,181 2,549 1,814 2,279 Cash flow to debt holders 2, Cash flow to equity holders -3,813 2,167 1,786 2,267 Cash flow to minority interest holders , Analyst s estimates Note: Non-operating income arises due to interest and dividend income, change in loans and advances, non-current investments and excess cash Strong balance sheet reduces earnings volatility Aptech is well financed and currently has outstanding loans. Other liabilities such as employee defined benefit plans and operating working capital related liabilities, are only 13.5% of total assets. Aptech is well financed and currently has no outstanding loans. Other liabilities such as employee defined benefit plans and operating working capital related liabilities, are only 13.5% of total assets. Elimination of fixed financial costs offers has reduced earnings volatility in the past three years, whereas organic revenue growth has remained volatile. Figure 2: Good financing structure in INR lakhs H14 Borrowings (includes operating lease) Other debt 1,905 1,391 1,831 1,769 Operating working capital related liabilities 3,602 2,890 3,481 3,401 Total borrowings/ Total assets 1% 0% 0% 0% Total liabilities/total assets 18% 11% 13% 13%, Analyst s estimates 2

3 ROIC excluding goodwill and intangibles of about 50% can be attributed to good asset productivity ratios (Revenues/ Invested Capital ratio of 5) Figure 1 indicates that Aptech has been able to fund its dividend payments through FCF, nonoperating income (dividend and interest receipts) and cash/ current investments. We believe that FCF generated by Aptech should be able to support at least 50% dividend payout ratio in the future. ROIC excluding goodwill and intangibles (Figure 3) is about 50%, and a major source of good FCF generation is the asset productivity of Aptech. For e.g. Revenues/ Invested Capital (without goodwill and intangibles) ratio of 5x indicates that less capital is required to generate incremental revenues. We attribute good asset productivity ratio to franchise based business model, where capital expenditures are borne by the Aptech s business partners and Aptech provides training material and courseware in return for franchise fee. Figure 3: Good asset productivity ratios produce good ROIC in INR lakhs H14 ROIC excluding goodwill and intangibles 39.0% 60.9% 51.1% 58.2% ROIC including goodwill and intangibles 12.0% 13.1% 10.9% 11.2% Operating cash tax rate 2.6% 2.4% 25.7% 23.8% Pretax ROIC excluding goodwill and intangibles 40.0% 62.3% 68.7% 76.4% Pretax ROIC including goodwill and intangibles 12.3% 13.4% 14.7% 14.8% Operating margin 10.1% 14.1% 16.2% 15.1% Revenues/Invested Capital without goodwill and acquired intangibles Revenues/Invested Capital with goodwill and acquired intangibles , Analyst s estimates Aptech has been able to report positive net income in the past 14 quarters Aptech acquired MAAC, a high end provider of multimedia and animation courses, in FY11 and paid a high premium for it (INR68cr of goodwill). As a result, Aptech s ROIC with goodwill and intangibles is just 11.2% and recent earnings volatility has kept this measure of ROIC lower. However, we are yet to see substantial growth in revenues from MAAC and ARENA (low cost provider of multimedia and animation courses) to justify the high premium paid for MAAC acquisition. In fact, management indicated that MAAC revenues have been adjusted lower in FY13 as a result of some accounting adjustments, which has put pressure on top line in past one and half years. We believe that high premium paid for MAAC and subsequent lack of clarity on income from animation and multimedia division has been an overhang on the stock price. Even though MAAC revenue has been adjusted downward due to changes in accounting conventions, Aptech has been able to report positive net income in the past 14 quarters (Figure 4). We believe that consistently positive net income in the future (INR 2,708 lakhs in FY14E) will ultimately result in appreciation of book value and with revenue improving due to better economic conditions, leading to an appreciation in the stock price. 3

4 Figure 4: Aptech has reported positive net income in the past 14 quarters in INR lakhs 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Sales 5,395 4,711 4,450 4,644 4,742 3,979 4,078 3,857 4,522 3,674 4,858 4,248 4,960 3,722 Net income ,325 5, , Net income margin 10.1% 7.1% 74.7% 115.5% 14.0% 14.9% 24.1% 9.8% 13.2% 16.4% 32.0% 11.1% 17.5% 14.8% Source: Bloomberg Aptech has better operating fundamentals compared to those of its peers, NIIT and Tree House Aptech has high ROIC and enough excess cash to fund its working capital requirements. In fact, Aptech is in middle of share buyback program that should increase its EPS and should be beneficial for existing shareholders. We compare Aptech s ROIC (Figure 5) to that of its peers in the education sector, NIIT and Tree House. Aptech s ROIC, in excess of 50%, is substantially higher than that of NIIT and Treehouse and is primarily driven by its asset light business model. As can be seen in Figure 6, good asset productivity ratio (Revenue/ Invested capital) of Aptech is the main driver of its ROIC (58.2% at end of 1H14) and is the result of low working capital and nil operating leases. Even if Aptech utilizes its excess cash reserves to fund working capital liabilities and maintains working capital to 36% (similar to NIIT) of its invested capital, it can easily command a ROIC in excess of 40% compared to 6% for NIIT. On other hand, Tree House, which is in preschools segment, will have a reduced ROIC of 10.7% (Figure 7) if it maintains operating working capital at 36% of its invested capital. In fact, Tree house will have to fund its operating liabilities by raising more debt or equity as it does not has excess cash or other non-operating assets that can fund its operating working capital requirements. Hence, a big risk for Tree House exists in equity dilution if earnings growth stagnates due to increasing competition in the preschool segment from small players and Tree House continues to grow its asset base at a high rate. No such risk exists for Aptech as it has high ROIC and enough excess cash to fund its working capital requirements. In fact, Aptech is in middle of share buyback program that should increase its EPS and should be beneficial for continuing shareholders. Figure 5: Consistently better ROIC (excluding goodwill and intangibles) means Aptech s asset light business model is better than that of its peers H14 Aptech 39.0% 60.9% 51.1% 58.2% NIIT Ltd 24.4% -1.9% 6.3% NA Tree House 11.6% 15.1% 12.6% 13.9% Figure 6: Good asset productivity ratio (Revenues/ Invested capital) is the main driver of Aptech s ROIC H14 Aptech NIIT Ltd Tree House

5 Figure 7: Normalized ROIC (excluding goodwill and intangibles) also justifies Aptech s strong operating fundamentals Aptech NIIT Ltd Tree House Normalized ROIC 45.0% 6.3% 10.7% Figure 8: Aptech can fund its working capital requirements from internal accruals vs Tree House that has to rely on equity/debt funding INR lakhs Aptech Tree House Operating working capital (A) PPE and other operating assets (B) 3,786 48,147 Invested capital (C=A+B) 3,720 49,050 Goodwill and intangibles (D) 15,575 3,066 Invested capital including goodwill and intangibles (E=C+D) 19,295 52,117 Excess cash (F) 10,341 - Other non operating assets (G) 13,470 1,128 Total funds invested (E+F+G) 43,107 53,245 Note: Figures as of end of 1H14 Figure 9: EBITDAR/ (Interest + Rentals) - Aptech has substantial cushion against earnings volatility H14 Aptech NIIT Ltd Tree House

6 Aptech is undervalued based on fundamentals In view of strong operating fundamentals, we believe that Aptech is undervalued and deserves a higher valuation. We value Aptech at 1.8x of its book value (INR 62/share at end of FY14E) and 16.4x of its FY14E EPS of INR 6.73 for stock price of INR 110/share, which also means target Net EV/ EBITA of 7. In view of strong operating fundamentals, we believe that Aptech is undervalued and deserves a higher valuation. We note that Aptech has a strong balance sheet with positive current and cash asset value, and price multiples based on them (Figure 10) clearly indicates undervaluation of its operating assets. Net EV/ EBITA of just 2x for zero debt business with strong balance sheet is another indication of a stock that is undervalued. We believe that Aptech s earnings growth will improve as IT industry demand continues to improve with recovery in US. Aptech has already recorded YoY revenue growth rates of 9%, 9.7% and 3.6% over the past three quarters respectively and we expect 8-10% YoY revenue growth rates in the next four quarters with average net income margin of 15%. We value Aptech at 1.8x of its book value (INR 62/share at end of FY14E) and 16.4x of its FY14E EPS of INR 6.73 for stock price of INR 110/share, which also means target Net EV/ EBITA of 7. Figure 10: Aptech s price multiples indicate undervaluation Aptech Price to Book value 1.1 Price to current asset value 3.0 Price to cash asset value 5.3 Earnings/Share 6.7 Price/Earnings 10.5 Price/ Average of three year EPS 11.3 Earnings yield 9.5% Net EV/EBITA 2.0 Dividend yield 6.4% Source: Google finance, Company documents, Analyst s estimates Note: EPS has been adjusted for common shares, extraordinary earnings/costs and tax effects Net EV excludes value of non-operating assets, such as excess cash, investments and loans and advances. EBITA excludes non-operating costs related to defined benefit plans and non-operating income, such as dividend and interest income. Current asset value and cash asset value are calculated after deducting all liabilities ahead of common stock. We identify some risk factors that may lead to short term downside in Aptech s stock price: 1) New acquisitions at premium prices can depress ROIC (including goodwill and intangibles) below 10%, rendering the stock unattractive for long term investors. However we believe that Aptech has very little scope for new acquisitions as it has already overpaid for MAAC. 2) IT industry reporting below par growth rates will affect demand for Aptech s course enrolment rate. 3) Continued underperformance from Multimedia and Animation division would mean lower returns than anticipated from Aptech s acquisition of MAAC. 6

7 Disclaimer T h i s r e p o r t h a s b e e n p r e p a r e d b y t h e r e s e a r c h d e p a r t m e n t o f P R A T I B H U T I. T h i s r e p o r t i s n o t c o n s t r u e d a s a n o f f e r t o s e l l o r t h e s o l i c i t a t i o n o f a n o f f e r t o b u y a n y s e c u r i t y i n a n y j u r i s d i c t i o n T h i s d o c u m e n t i s n o t f o r p u b l i c d i s t r i b u t i o n a n d h a s b e e n f u r n i s h e d t o y o u s o l e l y f o r y o u r i n f o r m a t i o n a n d m u s t n o t b e r e p r o d u c e d o r r e d i s t r i b u t e d t o a n y o t h e r p e r s o n. P e r s o n s i n t o w h o s e p o s s e s s i o n t h i s d o c u m e n t m a y c o m e a r e r e q u i r e d t o o b s e r v e t h e s e r e s t r i c t i o n s. T h i s m a t e r i a l i s f o r t h e p e r s o n a l i n f o r m a t i o n o f t h e a u t h o r i z e d r e c i p i e n t, a n d w e a r e n o t s o l i c i t i n g a n y a c t i o n b a s e d u p o n i t. T h i s r e p o r t i s n o t t o b e c o n s t r u e d a s a n o f f e r t o s e l l o r t h e s o l i c i t a t i o n o f a n o f f e r t o b u y a n y s e c u r i t y i n a n y j u r i s d i c t i o n w h e r e s u c h a n o f f e r o r s o l i c i t a t i o n w o u l d b e i l l e g a l. I t i s f o r t h e g e n e r a l i n f o r m a t i o n o f c l i e n t s o f P R A T I B H U T I a n d i t s a f f i l i a t e s. I t d o e s n o t c o n s t i t u t e a p e r s o n a l r e c o m m e n d a t i o n o r t a k e i n t o a c c o u n t t h e p a r t i c u l a r i n v e s t m e n t o b j e c t i v e s, f i n a n c i a l s i t u a t i o n s, o r n e e d s o f i n d i v i d u a l c l i e n t s. W e h a v e r e v i e w e d t h e r e p o r t, a n d i n s o f a r a s i t i n c l u d e s c u r r e n t o r h i s t o r i c a l i n f o r m a t i o n, i t i s b e l i e v e d t o b e r e l i a b l e t h oug h i t s a c c u r a c y o r c o m p l e t e n e s s c a n n o t b e g u a r a n t e e d. N e i t h e r P R A T I B H U T I a n d i t s a f f i l i a t e s, n o r a n y p e r s o n c o n n e c t e d w i t h i t, a c c e p t s a n y l i a b i l i t y a r i s i n g f r o m t h e u s e o f t h i s d o c u m e n t. T h e r e c i p i e n t s o f t h i s m a t e r i a l s h o u l d r e l y o n t h e i r o w n i n v e s t i g a t i o n s a n d t a k e t h e i r o w n p r o f e s s i o n a l a d v i c e. P r i c e a n d v a l u e o f t h e i n v e s t m e n t s r e f e r r e d t o i n t h i s m a t e r i a l m a y g o u p o r d o w n. P a s t p e r f o r m a n c e i s n o t a g u i d e f o r f u t u r e p e r f o r m a n c e. C e r t a i n t r a n s a c t i o n s - i n c l u d i n g t h o s e i n v o l v i n g f u t u r e s, o p t i o n s a n d o t h e r d e r i v a t i v e s a s w e l l a s n o n - i n v e s t m e n t g r a d e s e c u r i t i e s - i n v o l v e s u b s t a n t i a l r i s k a n d a r e n o t s u i t a b l e f o r a l l i n v e s t o r s. R e p o r t s b a s e d o n t e c h n i c a l a n a l y s i s c e n t e r s o n s t u d y i n g c h a r t s o f a s t o c k ' s p r i c e m o v e m e n t a n d t r a d i n g v o l u m e, a s o p p o s e d t o f o c u s i n g o n a c o m p a n y ' s f u n d a m e n t a l s a n d a s s u c h, m a y n o t m a t c h w i t h a r e p o r t o n a c o m p a n y ' s f u n d a m e n t a l s. O p i n i o n s e x p r e s s e d a r e o u r c u r r e n t o p i n i o n s a s o f t h e d a t e a p p e a r i n g o n t h i s m a t e r i a l o n l y. W h i l e w e e n d e a v o r t o u p d a t e o n a r e a s o n a b l e b a s i s t h e i n f o r m a t i o n d i s c u s s e d i n t h i s m a t e r i a l, t h e r e m a y b e r e g u l a t o r y, c o m p l i a n c e, o r o t h e r r e a s o n s t h a t p r e v e n t u s f r o m d o i n g s o. P r o s p e c t i v e i n v e s t o r s a n d o t h e r s a r e c a u t i o n e d t h a t a n y f o r w a r d - l o o k i n g s t a t e m e n t s a r e n o t p r e d i c t i o n s a n d m a y b e s u b j e c t t o c h a n g e w i t h o u t n o t i c e. O u r p r o p r i e t a r y t r a d i n g a n d i n v e s t m e n t b u s i n e s s e s m a y m a k e i n v e s t m e n t d e c i s i o n s t h a t a r e i n c o n s i s t e n t w i t h t h e r e c o m m e n d a t i o n s e x p r e s s e d h e r e i n. W e a n d o u r a f f i l i a t e s, o f f i c e r s, d i r e c t o r s, a n d e m p l o y e e s w o r l d w i d e m a y : ( a ) f r o m t i m e t o t i m e, h a v e l o n g o r s h o r t p o s i t i o n s i n, a n d b u y o r s e l l t h e s e c u r i t i e s t h e r e o f, o f c o m p a n y ( i e s ) m e n t i o n e d h e r e i n o r ( b ) b e e n g a g e d i n a n y o t h e r t r a n s a c t i o n i n v o l v i n g s u c h s e c u r i t i e s a n d e a r n b r o k e r a g e o r o t h e r c o m p e n s a t i o n o r a c t a s a m a r k e t m a k e r i n t h e f i n a n c i a l i n s t r u m e n t s o f t h e c o m p a n y ( i e s ) d i s c u s s e d h e r e i n o r a c t a s a d v i s o r o r l e n d e r / b o r r o w e r t o s u c h c o m p a n y ( i e s ) o r h a v e o t h e r p o t e n t i a l c o n f l i c t o f i n t e r e s t w i t h r e s p e c t t o a n y r e c o m m e n d a t i o n a n d r e l a t e d i n f o r m a t i o n a n d o p i n i o n s. T h e a n a l y s t f o r t h i s r e p o r t c e r t i f i e s t h a t a l l o f t h e v i e w s e x p r e s s e d i n t h i s r e p o r t a c c u r a t e l y r e f l e c t h i s o r h e r p e r s o n a l v i e w s a b o u t t h e s u b j e c t c o m p a n y o r c o m p a n i e s a n d i t s o r t h e i r s e c u r i t i e s, a n d n o p a r t o f h i s o r h e r c o m p e n s a t i o n w a s, i s o r w i l l b e, d i r e c t l y o r i n d i r e c t l y r e l a t e d t o s p e c i f i c r e c o m m e n d a t i o n s o r v i e w s e x p r e s s e d i n t h i s r e p o r t. N o p a r t o f t h i s m a t e r i a l m a y b e d u p l i c a t e d i n a n y f o r m a n d / o r r e d i s t r i b u t e d w i t h o u t P r a t i b h u t i p r i o r w r i t t e n c o n s e n t. T h i s d o c u m e n t i s n o t f o r p u b l i c d i s t r i b u t i o n a n d h a s b e e n f u r n i s h e d t o y o u s o l e l y f o r y o u r i n f o r m a t i o n a n d m u s t n o t b e r e p r o d u c e d o r r e d i s t r i b u t e d t o a n y o t h e r p e r s o n. P e r s o n s i n t o w h o s e p o s s e s s i o n t h i s d o c u m e n t m a y c o m e a r e r e q u i r e d t o o b s e r v e t h e s e r e s t r i c t i o n s. Contact Details Pratibhuti Regd. & Adm. Off: 3 rd Floor, 28 Rajabahadur Mansion, Mumbai Samachar Marg, Fort, Mumbai India. Tel: Fax: Corporate Off: Gr. Floor, 11, Raheja Centre, Free Press Marg, Nariman Point, Mumbai India. Tel: Fax: Website: onlinehelp@pratibhuti.com 7