IPO

Saturday, March 18, 2017 Click here for Rating Reckoner
CL Educate
Costly offer
CM RATING35/100
Incorporated in 1996 and promoted by Satya Narayan R and R Gautum Puri, CL Educate (CL) provides various educational products and services. It is a diversified and integrated technology-enabled provider of education products, services, content and infrastructure, with a presence across the education value chain.

They operate through two segments, education and training programme (including sale of study material) and vocational training. The education and training program (including sale of study material) segment includes coaching for higher education entrances. The vocational training segment includes specific projects undertaken (including government projects).

CL offers test preparation courses and services under the Career Launcher brand, publishing and content development services under the brand GK Publications and event management, marketing support, customer engagement, and managed manpower and training services under the Kestone brand name. They also provides integrated solutions to educational institutions and universities, including business advisory and outreach support services under the CL Media brand, as well as research incubation and support services under the brand Accendere brand.

As on September 2016, the company had a network of 151 test prep centres, across 87 cities in India, including 45 owned test prep centres and 106 test prep centres operated under a partnership model with an enrolment of 53892 students. In addition, CL has currently four owned test prep centres in UAE. In government vocational training program, the company had 6,663 enrolments in FY 2016.

Under the umbrella brand Career Launcher, CL offers reputed test prep courses for MBA, Banking and Staff Selection Commission and law entrance examinations, as well as courses for engineering, medical, civil services, Grade VIII-XII tuitions and international education (GRE, GMAT and SAT) among others.

In addition, the company operates K-12 schools under the Indus World School brand name. Total enrolments in K-12 schools stood at 2654 students as on September 2016. The company operates total eight such Indus world schools, of which two are owned, five are under infrastructure partnership and one under educational partnership model.

As on September 30, 2016, the company had a network of 635 dealers and distributors, across India, for the sale of titles and its publication business.

The company aims to acquire ETEN, a company engaged in the test preparation business for chartered accountancy courses and civil services entrance examination via VSAT network in India at consideration of around Rs 6 crore subject to due diligence which is currently going on.

The company has also proposed to sell off its K-12 school business on a slump sale business at consideration of around Rs 85 crore and the management is working on the same.

The Offer and the Objects

The offer comprises fresh issue of 21.80 lakh shares, which at the lower price band of Rs 500 per share, works out to Rs 109.01 crore, and at the higher price band of Rs 502, the issue size works out to Rs 109.44 crore. The offer also comprises offer for sale of 25.80 lakh shares, which at lower price band of Rs 500 per share, works out to Rs 128.99 crore and at higher price band of Rs 502, the issue size works out to Rs 129.51 crore. The minimum bid lot is 29 equity shares and in multiples of 29 equity shares. The issue is being made through the book-building process and will open on 20th March and will close on 22nd March, with anchor investor bidding date of 19th March 2017.

The offer for sale of 25.8 lakh shares is made by selling shareholders comprises promoters and group (around 9.74 lakh shares) , institutions such as Gaja Trustee Company, GPE (India), SP Family Trust (around 11.68 lakh shares) and other individual investors.

The objects of the fresh issue are prepayment or repayment of debt facility availed of by subsidiary Career Laucher Infrastructure Private Limited (CLIP) of Rs 18.60 crore, for acquisition and strategic initiatives around Rs 20 crore, and Rs 52.50 crore for meeting the working capital requirements of itself and subsidiaries GKP Publications and Kestone apart from the benefits of listing the equity shares on BSE and NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

Structural changes in the Indian economy, such as rising disposable incomes, growing numbers of nuclear families, limited quality educational institutions, complex nature of competitive exams, high stress on marks and over-dependence of students on coaching and tuition classes right from young age are expected to drive the coaching and test preparation industry.

Well recognised brand in the education sector. The business does not involve much capex and is asset light.

The government's focus on education and skill development, increasing literacy rates, increasing penetration of internet will aid the company for future growth.

As per Crisil Research, the test preparation market size was around Rs 378 billion end FY 2016 and is expected to record a CAGR of 13% to Rs 702 crore by FY 2021. The academic book size market is around Rs 202 billion as on FY 2016 and is expected to grow to Rs 352 billion, a CAGR of 12% by FY 2021.

Weaknesses

The fragmented and competitive industry has limited barrier on entry. The company faces severe competition from local and regional players.

The company has huge outstanding trade receivables despite major chunk of test preparation fees being received upfront. Outstanding debtors end Sep'16 stood at around Rs 127 crore (150 debtors days), of which around Rs 94 crore is outstanding for more than six months. Further, Rs 6.42 crore is outstanding for more than six months from 2 group entities (Nalanda Foundation and Career Launcher Education foundation).

The vocational business segment is conducted under programs funded by grants from the Central and state governments. Such grants are typically received after a period of 9-12 months, resulting in large working capital requirement for the company.

In dealing with related party, the company converted one of the receivables of around Rs 27 crore to Nalanda Foundation into an unsecured loans over due course of business. In FY 2013, the company had written off around Rs 11.29 crore of loan was given to Career Launcher Education foundation, its group entity.

In May 2015, when the assessment pattern of exams were changed and when civil entrance exams underwent policy changes, the company's revenues reduced from Rs 18 crore from this segment to around Rs 5 crore in FY 2016. Thus, such change in exam patterns either by government order or order of relevant testing agencies can adversely affect enrolments and revenues in the test preparation business, which accounted for around 53% of the total revenues end September 2016.

K-12 vertical is using nearly 60% of the total capital deployed by the company and the returns are yet to be seen and accounts for only 2.2% of total revenues, which is causing strain on profitability and performance and has resulted in the management taking a decision to exit the business. Till the sale gets complete, the vertical will continue to weigh on the financials.

The company's business is currently unregulated and any regulations from the government and other legal frameworks and any restrictions in terms of size and location of centres, number of enrolments and fees will impact the business.

The company and its subsidiaries are involved in various litigations in direct and indirect tax matters and any adverse outcome will affect the cash flows severely. Contingent liabilities stood at around Rs 31 crore end September 2016.

North India accounts for around 43% of total enrolments for the company and any adverse developments including political and state level restrictions can affect the business.

Valuation

For FY 2016, consolidated net sales were up 3% to Rs 282.64 crore. The OPM was almost flat at 12.7%, resulting in a 4% increase in OP to Rs 35.97 crore. There was a 22% increase in other income to Rs 14.04 crore. With a 9% increase in interest to Rs 10.16 crore and 16% increase in depreciation to Rs 9 crore, consolidated PBT was up by 6% to Rs 30.85 crore. After providing total tax of Rs 9.17 crore, consolidated PAT for FY 2016 stood at Rs 21.68 crore, up by 2% YoY.

For the six months ended September 2016, consolidated net sales stood at Rs 153.16 crore, with the OPM of 13.9%, leading to OP of Rs 21.33 crore. Interest cost and depreciation stood at Rs 4.67 crore and Rs 3.63 crore, respectively, leading to PBT of Rs 20.57 crore. After providing total tax of Rs 7.65 crore, consolidated PAT for the six months ended September 2016 stood at Rs 12.92 crore.

Post-issue, diluted equity share capital of the company stands at Rs 14.16 crore on which EPS for FY 2016 works out to Rs 15.3. EPS for the six months ended September 2016 is not annualised as usually first quarter is seasonally strongest and third quarter is seasonally lean quarter. The scrip is offered at P/E multiple of around 32.8 times FY 2016 earnings.

MT Educare and Career Point are some of its listed peers. MT Educare reported consolidated net sales and PAT of Rs 287.08 crore and Rs 32.35 crore, respectively, for FY 2016. At the current market price of around Rs 86, the stock trades at P/E of around 10.6 times its FY 2016 consolidated EPS of Rs 8.1. Career Point reported consolidated net sales and PAT of Rs 75.89 crore and Rs 14.45 crore, respectively, for FY 2016. At the current market price of around Rs 117, the stock trades at P/E of around 14.7 times its FY 2016 consolidated EPS of Rs 8.

Overall, the stock market's experience with companies in the education sector has not been encouraging till now and CL Educate does not raise enough confidence to ignore this experience.

CL Educate: Issue highlights

Offer for sale (in Rs crore)
- On lower price band128.99
- On upper price band129.51
Total Issue size for offer for sale ( in no of shares in lakh)25.8
Fresh Issue ( in Rs crore)
- On lower price band109.01
- On upper price band109.44
Issue size of fresh issue (in no of shares in lakh)21.80
Price band (Rs)500-502
Post issue share capital (Rs crore) 14.16
Post-issue Promoter & Group shareholding (%)47.9%
Issue open date20-03-2017
Issue closed date22-03-2017
ListingBSE, NSE
Rating 35/100

CL Educate: Consolidated Financials

1203(12)1303(12)1403(12)1503(12)1603(12)1609(06)
Net Sales165.69198.87218.61273.53282.64153.16
OPM (%)-3.9%5.6%10.9%12.6%12.7%13.9%
OP-6.5411.0723.7534.5235.9721.33
Other in. 10.4023.2111.1011.5514.047.54
PBDIT3.8634.2834.8546.0750.0128.87
Interest7.4010.118.979.3610.164.67
PBDT-3.5424.1725.8836.7139.8524.20
Dep.4.605.605.477.749.003.63
PBT -8.1418.5720.4128.9730.8520.57
EO 0.000.000.000.000.000.00
PBT after EO-8.1418.5720.4128.9730.8520.57
Tax (including Deferred Tax)-1.743.734.237.779.177.65
PAT-6.4014.8416.1821.2021.6812.92
MI and share of associates-0.910.270.84-0.030.000.00
Total PAT-5.4914.5715.3421.2321.6812.92
EPS*0.010.310.815.015.3#
*EPS is on post issue equity capital of Rs 14.16 crore of face value of Rs 10 each
# EPS for 6 months results are not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

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 Rating Reckoner
Rating range Risk-return profile Recommendation
51 or above Low risk, moderate to High return Must subscribe
45-50 Low risk low return or Moderate risk, moderate/high return May subscribe
40-44 High risk high return Avoid, however active risk seekers can try
Below 40 High risk, low/moderate return, Moderate risk low return Do not subscribe