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Educomp, which was rumoured to be fudging accounts, lays the allegations to rest with its third quarter results

Educomp is a young company started in 1994 with a unique business model. The company provides technology driven education products and services from kindergarten to twelfth grade for public and private schools. It has defined four segments and is targeting it accordingly.

One of the segment is kindergarten to class 12 of private schools which is called 'Smart Class'. Then there is Instructional & Computing Technologies (ICT) - under this it offers computer literacy program to government schools, involving setting up of a computer lab in each school and running the project on Build, Own, Operate and Transfer (BOOT) model. Another segment is under the Professional Development where they offer workshop for teachers, students and parents. Then it is into marketing CD ROMs and education aid content directly.

Its whole approach of trying to capture a market which is complex and trying to tap in the base of the education pyramid makes it interesting. And since there are not too many companies trying to expand in this section makes it all the more appealing.

The Buzz?
Samar Jeet and Tismy Jalpuria of 'The Pioneer' reported on page one on January 20, 2009 that after Satyam, Educomp is now under scanner for fudging accounts. And since then it kept coming on page 1 of the newspaper with one or the other query. Following this report Educomp's share price plunged by 9 per cent on the day. Also there was some rumour and report going around as to what all was wrong with the company.

This caught the government napping, and the next day Corporate Affairs Minister P.C. Gupta told media that based on what is coming in certain sections of the media, an investigation has been ordered. This fuelled the panic and hence, shares of Educomp fell by more than 22 per cent.

Educomp responded swiftly by giving clarification on the rumor report in writing to the BSE; it also issued press release to the same effect. To make sure that the rumour is quashed at the earliest it used internet advertisement and contacted its investors through mail.

After two days of seeing its prices crash it went on to file a complaint with the Economic Offence Wing of the Delhi Police i.e. January 22, 2009. And finally on January 23, 2009 it managed to gain back a respectable 7 per cent.

Analysts' Reaction
This company has been a favourite for many in the analyst community. Among the noted ones who came out in defence when allegations were levelled were Merrill Lynch and CLSA.

Merrill Lynch came out with a commentary on the company's clarification and reiterated 'buy' for Educomp. It was satisfied with the clarifications given by the company and acknowledged some of them. Merrill Lynch expects Educomp to be one of the fastest growing companies in their list. The company's focus on technology driven education for both private and public schools, gives it a unique edge.

In India there is less than five per cent of internet penetration for technology based education, in the private sector. And with technology gaining importance in day to day life, makes this segment a ripe market. Also, with increased spending by state government in education sector makes the business attractive.

Account fudging allegations and clarifications
Allegation: The report said that that the company had manipulated books of account to show higher profits and diverted company funds. And this manipulation would be of Rs 184 crores of assets to adjust the profits.

Clarification: Educomp came up with extensive reply which explained why there was this gap and the author of the malicious report had no understanding of the business model. The reason for high capital expenditure was due to its cyclic nature. As most of the deals with schools would happen in second half, it was expected to have high expenditure in this part of the year.

Allegation: Then it also claimed that the company's growth in sales and debtors are in excess of expectation.

Clarification: The clarification once again comes down to the business model and how the debtor days have been reduced from FY2007 to FY2008.

Allegation: This was the denting allegation where it stated, that promoters made money which stands to over Rs 250 crores. And the report left the impression of insider trading.

Clarification: The Company has stated that 55 per cent of the shares are still held by the promoter. It also gave a detailed description as to when the shares well sold and what was the quantity.

Allegation: Promoters had raised Rs 314.94 crore through FCCB (Foreign Currency Convertible Bond) out of which Rs 52.93 crore was utilized in its subsidiary companies (sounded like Satyam's support to Matyas). Also, Rs 220.75 crore was kept in SBI London Branch.

Clarification: Educomp's stand was to inform investors about the regulation of RBI regarding FCCB. And that it has to be kept outside of the country.

Allegation: The cash flow analysis revealed that the company spent too much on purchasing computers, software and knowledge based content. And though the company has 4500 employees but they are all underpaid. The other option could be that the claim of the number of employees is nonsense as they would be paying each about Rs 7,000 per month which does not match to its peers in the software industry.

Clarification: Again the clarification started with reprimand that the author had no knowledge about the business model or the clients it (Educomp) serves. Hence, it went ahead and clarified that the company should not be compared to IT companies. And since the job profile was different so was the payment scheme. It said that different companies have different growth plan and clients are to be served based on their need.

Since the Satyam drama has unfolded, investors' sentiment is extremely volatile. And even a rumour is enough to punish any company irrespective of its reputation. The management's quick response as well as the reiteration by the analyst community helped it. Its decision to file a case with the Economic Offence Wing (EOW) brought investors faith back.

With Educomp declaring third quarter results, the whole rumour has been stubbed. The company has reported an increase in profit by 65 per cent to Rs 31.55 crores compared to Rs 19.01 crore reported in the corresponding quarter of the previous year. Further the company's assurance of getting one of the big to audit has helped it.