Apply if willing to hold for medium term
MT Educare Limited (MT) is tapping the capital markets with an offer for sale of 80 lac shares and a fresh issue of equity shares for Rs 35 crs in a price band of Rs 74-80. The issue is open between the 27th and 29th of March 2012. The company has completed an allocation to anchor investors for 17,37,914 Equity shares at Rs 74, the lower end of the price band.
| Price Band | Rs 74 – Rs 80 |
| Fresh Issue in Rupees | Rs 35 crs |
| Fresh issue in Shares | 47,29,730 Equity Shares at lower band to 43,75,000 Equity Shares at upper band |
| Offer for sale in Shares | 80,00,000 Equity Shares |
| Total Issue Size in Rupees | Rs 94.20 crs at lower end to Rs 99 crs at upper end |
| Total Issue Size in Shares | 1,27,29,730 Equity Shares at lower band to 1,23,75,000 Equity Shares at Upper Band |
| QIB’s | 63,64,865 Equity Shares at lower band to 61,87,500 Equity Shares at upper band |
| Non Institutional Investors | 19,09,459 Equity Shares at lower band to 18,56,250 Equity Shares at upper band |
| Retail Investors | 44,55,405 Equity Shares at lower band to 43,31,250 Equity Shares at upper band |
| Book Running Lead Manager | Enam Securities Private Limited |
| Anchor Investors | Anchor Investors alloted 17,37,914 Equity Shares at Rs 74 lower price band |
| Issue Opening Date | Tuesday 27th March 2012 |
| Issue closing date | Thursday 29th March 2012 |
| IPO Grade | CRISIL grade 4/5 indicating above average fundamentals |
| Paid -up Capital Pre IPO | 3,51,72,872 Equity Shares |
| Paid -up Capital Post IPO | 3,99,02,602 Equity Shares at lower band to 3,95,47,872 Equity Shares at upper band |
| Market Cap post listing | 295.28 crs at lower band to Rs 316.38 crs at higher band |
| Bid Lot | 80 shares |
| Bidding Amount for Retail | 2480 shares at Rs 80 or Rs 1,98,400 per application |
Business
MT is an education support and coaching services provider for students in the secondary and higher secondary school and for students pursuing graduation degree in commerce, preparing for various competitive examinations and undertaking chartered accountancy examinations. The company operates across the states of Maharashtra, Tamil Nadu, Karnataka and Gujarat through 188 coaching centres in 110 locations. The data is as of 31st January and includes 19 coaching centres in 8 locations in cities like Nasik, Aurangabad and Nagpur through franchisee arrangement. The primary operations of the company which started off and is popular by the name of the promoter as Mahesh Tutorials has 142 coaching centres in 87 locations in Mumbai.
The main sections of students serviced by the company can be classified into three categories namely School Section, Science Section and Commerce Section. The School section caters to 9th and 10th standard students preparing for the board exams. Similarly the Science section consists of students in the 11th and 12thstandard students appearing for science and engineering students appearing for entrance exams to medical and engineering courses conducted by the states of Maharashtra and Karnataka. The Commerce section consists of the 11th and 12th standard students in commerce and CPT conducted by ICAI. The company has coached a total of 58,300 students in Fiscal 11which has grown from 52,727 students in the previous year.
College education in Karnataka is carried on by recognised trusts and with this objective MT Educare Charitable Trust was set up in November 2008 by the promoter of MT Educare Mr Mahesh Shetty. There is an agreement between MT Educare and the trust that the company would provide services to the trust for the smooth functioning and efficient management of the Mangalore Pre-University. This effectively means that the land and building owned and constructed by the company would be leased to the trust, services managed by MT Educare and classes conducted by MT Educare. This effectively gives them revenue opportunities in the particular campus and becomes a role model for the company in getting future college management contracts in the state.
Objects of the Issue
The issue includes an offer for sale of 80 lakh shares by the PE investor Helix Investments Company, and a fresh issue of Rs 35 crs. The net proceeds from this fresh issue would be used for the following purposes: –
| Part financing the cost of construction of a PUC campus in Mangalore | Rs 200.00 cr |
| Establishing new coaching Centres at 20 locations | Rs 50.00 cr |
| General Corporate Purposes |
Financials
The revenues of the company have grown significantly and post the entry of the PE investor there has been a scaling up of the number of centres and therefore the number of students tutored. Exact number of centres has not been given in the RHP but the revenue has grown from Rs 454.62 lacs in March 2008 before the business was merged to Rs 7071.15 lacs in March 2009 to Rs 8275.51 lacs in March 2010 and Rs 10243.16 lacs in March 2011.
| Consolidated results | Rupees in Lakhs | |
| Period ended | ||
| year 2011 | Sep-11 | |
| Income | ||
| Fees Received | 10273.25 | 7064.78 |
| Other operating Income | 235.70 | 105.99 |
| Total operating Income | 10508.95 | 7170.77 |
| Other Income | 253.19 | 192.52 |
| Total Income | 10762.14 | 7363.29 |
| Expenditure | ||
| Direct Expenses | 5550.60 | 3638.96 |
| Personnel Expenses | 1354.47 | 905.29 |
| Adminstative Expenses | 1080.28 | 590.79 |
| Selling Expenses | 653.45 | 445.03 |
| Finance Expenses | 11.81 | 10.30 |
| Depriciation | 830.64 | 371.59 |
| Total Expenditure | 9481.25 | 5961.96 |
| Profit before Tax | 1280.89 | 1401.33 |
| Tax | 483.91 | 446.57 |
| Profit after Tax | 796.98 | 954.76 |
| Share of loss for minority | 13.71 | 7.43 |
| Net Profit | 810.69 | 962.19 |
| EPS | 2.30 | 2.74 |
| PE at lower | 32.11 | 27.05 |
| PE at upper | 34.71 | 29.24 |
| EPS and PE for six months period ending September 2011 is not annualised. | ||
The above financials show how the company has fared and the above are consolidated numbers where the results of Chitale’s Personalised Learning Private Limited (51% share of MT) is included from 1st February 2011. The net profit of the company in the year ended March 2011 was Rs 810.69lacs which in the six months ended September has grown to Rs 962.19 lacs. There is a lot of seasonality in the coaching business and the first half and second half are not comparable. The student finishes almost all his learning by the third quarter of the year and then begins to prepare for his examinations. New courses begin in the vacation which typically happens in April or thereafter, therefore impacting the second half results. It would be fair to assume that roughly between 60-70% of the profits come in the first half and roughly 30-40% of the profits come in the second half. Based on this it could be assumed that the profits for the year ended March 2012 would be in the region of Rs 1350 lacs to 1400 lacs.
The company’s net margins have been in the region of 7.5% for the year ended March 2011 and have improved substantially to 13% in the six month period ended September 2011. Every company would want us investors to believe that the growth is sustainable but it would be prudent to watch a few quarters before jumping to any conclusion. Also assuming the numbers it appears that the net margin for 2012 would be in the region of around 10%.
Looking at the numbers on a pre-IPO basis the EPS for the company is Rs 2.30 for the year ended March 2011 and Rs 2.74 for the half year ended September 2011. Assuming the net profit of Rs 13.5 crs to 14 crs that I believe is likely for the current year ended March 2012, the EPS would be between Rs 3.83 to Rs 3.98.
Track record of Merchant Bankers
Enam Securities Private Limited
The banker has given a list of 10 issues handled by it while in the summary; details of 25 issues are given. Of these 8 issues were in 2009-10, 15 issues in 2010-11 and 2 issues in 2011-12. The summary states that of these 25 issues based on 30 days after listing 14 shares were trading at a discount while 11 shares were trading at a premium. If one were to look at the names of the ten IPO’s that have been given, only 2 of them are trading at a premium currently while 8 of them are trading at a discount.
Comparisons
The company has given comparable companies as Everonn Education, Educomp Solutions, NIIT and Career Point Infosystems Limited. The first two companies are more of IT teaching solutions in schools while NIIT is a national company offering courses in the IT space. It has branched out into many other courses and has significantly higher revenues of Rs 648 crs in the year ended March 2011 and Rs 502 crs in the nine months ended December 2011. In terms of net profit NIIT made Rs 49.74 crs in March 11 and Rs 53 crs in period ending December 2011. Its market capitalisation is Rs 842 crs trading at a PE multiple of under 12. The last company is Career Point which offers coaching courses for Engineering and IIT entrance exams. The company had revenues of Rs 78.62 crs for March 11 and net profit of Rs 27.37 crs. In the nine months ended December 11, thee revenues are Rs 57.96 crs and the net profit Rs 22.15 crs. The market capitalisation of the company is Rs 329 crs and the PE ratio 11.15 times.
Very clearly on the valuations front MT Educare cannot be considered to be cheap or comparable to the other listed players. Based on current performance it is certainly expensive. The coaching industry is very fragmented and there are hardly any players who are present all over the country. The way forward would be consolidation and it appears that MT Educare could have an advantage in this field being present in four states. There is plenty of opportunity in these 4 states and if a good job is to be done the company would have its hands full for atleast a few years.
Valuations
Based on pre-ipo capital the EPS for the year ended March 2011 is Rs 2.30 and for the six months ended September 2011 is Rs 2.74. Based on the September numbers the price band of Rs 74-80 would imply a PE multiple of 27 to 29 times. Factoring in the projected profit for the year of between Rs 13.5 to 14 crs and the fully diluted equity post the IPO raising Rs 35 crs would imply an EPS of 3.38 at the lower price band and Rs 3.54 at the upper price band. The resultant PE would be between 21.87 to 23.65 times at the lower price band and between 20.9 to 22.6 times at the upper price band.The company has investments of over Rs 32 crs in mutual funds and cash and bank balances of Rs 17.74 crs which gives it good leverage and other income which would help in valuation, but the immediate upside looks limited.
Concerns
MT has been a Mumbai centric company and is growing in 4 states. Managing Mumbai and managing 4 states is not the same thing. The key in coaching is personalisation and this is very important in this sphere of activity. Virtual classroom where teaching or learning is done through Video conferencing is a reality and is likely to become extremely popular as a concept would still have its limitations. The second concern is delivering sustained growth. The company post-consolidation had revenues of Rs 70 crs in March 2009 and is likely to finish March 2012 with revenues of about Rs 135 crs needs to grow at a rapid pace to keep up with competition. A decent part of the growth would come from acquisitions and consolidation but the key business of MT has to grow. Skilled manpower or teachers is critical to the business and though pay scales are good, retaining talent is a key. To this extent ESOP’s and promotion of teachers to management role would become a key. MT has been doing this but would need to continue to keep the flock of teachers together.
Conclusion
The current valuations are expensive and it is difficult to recommend the share based on current valuation. The future of the company and the field is bright and the opportunity tremendous without doubt. The market capitalisation of the company at the top end of the price band would be Rs 316 crsleaving little or no upside in the short to medium term. The market conditions are currently quite depressing and the confusion surrounding “GAAR” and its implications are yet to be clarified. Investors willing to be patient and having a 12 month holding view alone should apply as the short term volatility may unnerve investors. If you expect listing gains and that is the purpose of investing one should avoid the issue as present market conditions may not permit such movement. Finally one must remember that this share would list in the trade to trade segment for the first ten days making volatile movements almost impossible.
The issue as of close of Wednesday the penultimate day is overall subscribed 1.25 times with QIB portion subscribed 1.35 times, HNI portion subscribed 3.60 times and retail portion 0.15 times.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
