Aptech Ltd. gets CRISIL IER fundamental grade 3/5

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Aptech Ltd. gets CRISIL IER fundamental grade 3/5

| September 23,2010 10:43 am IST

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CRISIL Equities has assigned a CRISIL IER fundamental grade of 3/5 (pronounced three on five) to Aptech Ltd. (Aptech).

The grade indicates that the company’s fundamentals are `good’ relative to other listed equity securities in India. CRISIL Equities has assigned a valuation grade of 5/5, indicating that there is a ‘strong upside’ from the current market price of Rs. 155 (as on September 20, 2010). Our one-year fair value of the stock is Rs. 198. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.

The assigned fundamental grade reflects Aptech’s market leadership (~80% share) in the domestic multimedia, gaming and animation training segment. CRISIL Equities expects revenues from this segment to grow at a three-year CAGR of 12.4% and to constitute ~55% of total revenues in FY13. The grade also factors in the strong growth expected in the international retail training business driven by growth in markets like Vietnam, Nigeria, Russia, Brazil and the Philippines. We expect revenues from the international retail training business to grow at a three-year CAGR of 23.4% and constitute 20.3% of total revenues in FY13.

We expect these countries to collectively grow as large as Aptech’s China business (CY08 revenues of Rs. 1.1 bn) in the long term. The grade also considers the potential value unlocking through the IPO of BJB Career Education Company (BJBC) of China in which Aptech holds a 22.4% stake. BJBC filed for a listing on the NYSE in October 2009 and has decided to revisit the IPO at a later date. Post the IPO, Aptech would get a one-time dividend of Rs 283 mn (~Rs 6 per share).

However, the grade is moderated by the company’s mixed track record. While Aptech has been successful in China, it has had failures in the capex intensive ICT (Information and Communication Technologies) in school education and in the acquisition of Synergetics, a corporate IT training company. New businesses and acquisitions like Avalon (aviation and hospitality training firm) and N-Power (Aptech’s networking and hardware training brand) have been in the investment phase for four years and are expected to report positive EBITDA in FY13.

Financial outlook
CRISIL Equities expects Aptech’s revenues to grow at a three-year CAGR of 13.5% to Rs 3.1 bn in FY13. EBITDA margin is expected to improve to 24% in FY13 from 15.6% in FY10 on the back of increased contribution from the high-margin multimedia, gaming and animation segment, and the international retail business. Net profit is expected to grow to Rs 384 mn in FY13 from a reported loss of Rs 224 mn in FY10.

Valuation grade (5/5 – the current market price has strong upside)
CRISIL Equities has used the sum-of-the-parts method to value Aptech. We have assigned a fair value of Rs. 135 per share for Aptech’s shareholding in BJBC based on a P/E of 20x BJBC’s CY11 earnings and Rs. 63 per share for its core business based on a P/E of 12x FY12 EPS of Rs 5.2, resulting in a one-year fair value of Rs. 198 per share.

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