Higher Adoption of Digital Solutions Should Provide Impetus To Aptech Limited's Growth

Summary

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• Aptech’s balance sheet is healthy with zero net debt as on March 31, 2020.
• Repayment of short-term working capital liability of INR2,258 Lakhs on balance sheet should happen as collection from debtors improves. With relaxation in lockdown, Aptech Limited should be able to achieve this objective.
• Push for digital tools and a surge in demand for online courses due to coronavirus means opportunities have increased for Aptech to offer digital courses.

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Aptech Ltd. is the global learning solutions company and it commenced education and training business in 1986. The company has trained over 7 million students worldwide. It has a presence in over 40 emerging countries through 2 main streams of businesses. These streams are “individual training” and “enterprise business”. Since the company has been tagged as a leader in career education, it has over 800 learning centres across the world.

Aptech’s business has been classified into 2 reporting segments. These are “retail” and “institutional”. Retail segment focuses on catering to individual students with help of a network of branded franchise centres providing in-classroom learning programs. Institutional segment services assessment & testing and corporate training needs of institutional customers.

Growth Enablers for Aptech Limited

• Operational Efficiency Should Help Next Leg of Growth: Aptech ended FY20 with revenue from operations of INR21,682 lakhs, translating to a growth of 4.0% year-over-year. One thing should not be forgotten that this growth was seen despite a significant business impact from coronavirus in 4Q20. This crisis conservatively impacted Aptech’s revenue by an estimated INR16 crores. PBT was INR1,718 lakhs and PAT was INR1,351 lakhs in FY20. In a bid to combat impact of COVID-19 pandemic, Aptech capitalized on trend for digital training, assessment, and payments by adaption of business and opening new market segments. Retail segment saw 12.2% jump in revenues during FY20, despite closure of all educational institutions enforced by various countries in February and March 2020 so that virus spread can be contained.

 

• Revenue Mix Plays an Important Role: Retail segment’s revenue mix for FY20 was 81:19 split between domestic and international segments. This is a change from 77:23 in FY19 and was mainly on account of continued growth in domestic retail alongside a decline in international retail revenue, but improvement in margin mix, as low margin businesses were exited. Domestic retail revenue saw a growth of 19.4% from INR10,793 lakhs in FY19 to INR12,885 lakhs in FY20, owing to power brands Arena, MAAC, and Lakmé Academy Powered by Aptech. International retail division revenue saw a fall of 11.4% on an overall basis. But if we exclude low margin business contribution, it exhibited a growth of 3.8% in FY20. This was seen even when some major markets were impacted due to virus.

 

• Domestic Retail and Institutional Retail Businesses: In FY20, Aptech Limited’s domestic retail division's growth story was led by consistent upswing which was seen in business momentum for four brands, viz. Arena Animation, MAAC, Lakmé Academy Powered by Aptech, and Aptech Montana International Preschool. Later on, deceleration in business was seen due to pandemic in last month of FY20. The company hiked course prices for Arena and MAAC programs, leading to an increase in per student booking amounts for brands. During FY20, Aptech increased intensity and scale of marketing spends across all brands, mainly Arena, MAAC, and Lakmé Academy. A lot has been done in international retail to replicate success seen in domestic market. International retail division increased partner outreach to build confidence in brand, augmented support, launched new events so that some improvement can be seen in student engagement, and extensively conducted training programs for centre staff during FY20.

 

• Range of Opportunities to Capitalize On: Aptech mainly carries out operations in vocational segment in retail division. Vast population of unemployed and “unemployable” educated youth means that significant market opportunity is available as most industries across sectors are on lookout for skilled workforce. There is a scope to expand into more verticals within vocational segment, more segments apart from vocational and preschool segments within non-formal education space, and more product offerings. Emerging countries, where Aptech is not present, lack formal education seats to cater to demand of job-seeking youth.

 

• Industry Dynamics Should Unfold Further Growth Opportunities: India has world’s largest population of ~500 million in age bracket of 5-24 years, providing great opportunity for education sector. India has become second largest market for E-learning after the United States. This sector should reach USD1.96 billion by 2021, having ~9.5 million users. Total amount of FDI inflow into education sector in India was USD3.24 billion from April 2000 to March 2020. Union Budget 2020-21 allocates INR59,845 crore (USD8.56 billion) for Department of School Education and Literacy. Given Aptech’s sound cash position and removal of lockdown restrictions, it should be able to capitalize on industry dynamics.

 

Favourable Valuations is an Added Advantage

Aptech Limited has a market capitalization of INR 46,110.11 lakhs and at current price of INR114.45, stock trades at ~33.86x of FY20 EPS which is at a discount to the sectoral average of ~36.12x. The company has compounded its total revenue at ~7.43% over FY16-FY20. The company has been at forefront in managing its business during coronavirus pandemic as it has adopted certain measures. For retail, Aptech is embracing remote delivery, online counseling and digital marketing. It is also encouraging digital payments. International retail division of Aptech plans to enhance focus on core franchising business.

Excluding low-margin business revenue, which Aptech exited, international division saw a growth of 3.8% in FY20 on year-over-year basis despite COVID-19 impact. Vietnam, which is one of top 3 markets, is showing revival due to additional efforts put by Aptech.

Conclusion

Over FY16-FY21E, Aptech should be able to compound its revenues at ~7.61% with focus on digital tools, cost management and operational excellence to act as primary growth enablers. Aptech has undertaken a range of measures to address “new normal” by doing a “Digital Pivot,” and this means taking entire value chain online, wherever there is a possibility. Digital Pivot for institutional segment will mean implementation of social distancing norms at examination centres, and new offerings like remote proctored exam, LCMS, and web-based evaluation.

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Exclusivity:

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Stock Disclosures:

The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.