Diversified revenue stream, stable profit margin, established brand name as well as the strategic shift to new and growing service segments make CL Educate (CLE) a company with strong fundamentals. However, the company’s initial public offer (IPO) price of ₹500-502 per share does not leave much on the table for retail investors.
The price discounts the company’s trailing 12-month consolidated earnings by over 25 times. This is pricier than that of closest peer MT Educare that trades at about 17 times the trailing 12-month earnings. Granted, CL Educate operates in more segments and plans to expand faster through acquisitions. But investors can take a wait-and-watch approach rather than subscribe now at premium valuation for a company with a small market cap.
Diversified business
CLE derives half its revenue from coaching classes for professional entrance exams(MBA, Law, etc) through own and franchised centres in 87 cities. Marketing and sales services to corporates accounts for about a third of the company’s revenue. Sale of content — textbooks, tests in printed and digital formats — contributes about 7 per cent of revenue.
Its vocational skill training segment (Government contracts) has a long receivables cycles.
The company also plans to switch to an asset light model in its school and business school segment. Currently, about 60 per cent of the capital (₹160 crore) is deployed here, and return ratio is low (₹1 crore contribution to net profit). Asset sale is expected to improve its return on capital from about 8 per cent currently to an estimated 20 per cent in three years.
Finally, the university services business, including research support, is operated by subsidiaries CL Media and Accendere (51 per cent owned). This segment’s revenue has grown at over 38 per cent on average in the last two years to ₹5.2 crore in 2015-16. Though at a low base, growth is likely to be robust in this segment.
CLE’s average annual growth in consolidated revenue and profit has been 14 per cent and 10 per cent respectively in the last three years. In 2015-16, revenue increased 4 per cent y-o-y to ₹297 crore. Profit increased 3 per cent in the same period to ₹21.7 crore.
Net profit margin has been stable at about 7 per cent over the last three years. Debt-to-equity may improve to 0.2 times after debt repayment and is likely to remain at these levels.
Risks
CLE’s different business segments and operating models face a few risks that may impact earnings growth. One, the Indian education sector is touted to have a strong macro investment case — young population, growing graduate enrolment, increasing role of for-profit private players, higher disposable income and cultural inclination to spend on education. Yet, private players face various execution challenges, such as low returns in the K-12 school space, intense competition in the coaching space and long payment cycles for Government contracts. In spite of robust growth in target market, listed players have not delivered value to investors.
Two, while CL Educate has built a brand in coaching services, the business is competitive. After September 2016, about four test prep centres were closed, likely due to not meeting performance metrics. Also, the company deals with various ongoing litigations with franchisees. These issues could impact revenue growth in its largest revenue segment.
Three, its corporate service segment has concentration risk with the top five clients contributing about 27 per cent of the revenue.
Issue details.
CL Educate IPO details
| |
| Subscription Dates | 20 – 22 March 2017 |
| Price Band | INR500 – 502 per share |
| Fresh issue | 2,180,119 shares (INR109.4 crore at upper end) |
| Offer For Sale | 2,579,881 shares (INR129.5 crore at upper end) |
| Total IPO size | 4,760,000 shares (INR238.9 crore at upper end) |
| Minimum bid (lot size) | 29 shares |
| Face Value | INR10 per share |
| Retail Allocation | 35% |
| Listing On | NSE, BSE |
- Its profits are low and fluctuating. Its profits were 4.2% in FY15 and 2.6% for FY16. It incurred loss in FY12.
- As per its annual report, auditors made comment that the Company does not have a comprehensive procurement policy for purchase of goods and services, which could potentially result in the Company procuring unnecessary goods and services, or procuring goods of lower quality, or procure goods and services at unreasonable prices.
- The Company has granted unsecured loans to companies and other parties covered in the register maintained under Section 189 of the Act and auditors of the opinion that the terms and conditions of loans granted by the Company to 2 parties covered in the register maintained under Section 189 of the Act, (total loan amount granted Rs. 10,000 and balance outstanding as at balance sheet date Rs.61,472,802 are prejudicial to the Company’s interest on account of the fact that the Company is not charging any interest on such loans.
- A significant portion of its operating revenues is derived from its test prep business. Failure to attract students in our test prep business, including due to an unsatisfactory success ratio, may adversely affect its business and prospects.
- Company business and prospects may be adversely affected if they are unable to maintain and grow its business and brand image.
- Its competitive and growth strategies are subject to execution risks that may impact its business and prospects.
- They operate in a significantly fragmented and competitive market and any failure on its part to effectively compete may adversely affect its profitability and market share.
- Other risk factors (Internal and external) can be viewed in the draft prospectus.
In terms of valuations, the pre-issue P/E works out to 23.2 times of its annualised first half of FY17 earnings which is higher compared to its peers such as MT Educare, it added.
SMC Research, on its part, has given it 2.5 star rating out of 5. The research firm rates two stars as a neutral rating, while three stars stands for a fair rating.
The research firm highlights on the positives of pan-India presence, reputed courses, track record of successful inorganic expansion along with strong brand equity.
Among risks, it cites the competitive and fragmented market as well as short term impact of demonetisation. Considering the P/E valuation on the upper end of the price band of Rs. 502, the stock is priced at pre-issue P/E of 42.16 times on FY17 earnings per share, it states.
Disclaimer :-
I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy. Please consult your investment advisor before you invest in such high risk investment options.
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