Issue details:
| ISSUE OPENS/ CLOSES ON | 27-03 / 29-03 -12 |
| ISSUE SIZE | FRESH ISSUE OF SHARES AMOUNTING TO RS 35CR PLUS OFFER FOR SALE OF 80,00,000 SHARES |
| BRLM | ENAM |
| PRICE BAND | RS 74-80 |
| IPO GRADE | 4 BY CRISIL |
| PROMOTERS | MAHESH SHETTY |
There is something basically wrong with IPO grading by CRISIL. The grade awarded is above average. Consider the following; The PAT margins for the company for the financial years 09, 10 and 11 (9 months) is 3.6%, 6.3% ad11.5% respectively. The basic EPS for the same period is Rs 0.80, Rs 1.50 and Rs 2.80. With IPO envisaged the margins have taken a jump in FY 11. The projected CAGR is 11.6% till 2015. More over the company is in to coaching business which is fragmented and dominated by regional players. CRISIL talks of brand equity. However, the company has not registered some of the trademark used for certain Courses.
One does not understand how CRISIL has given grade 4 for the IPO. Of course the rating agencies had given grade 4 for SKS MICRO, T D POWER, MUTHOOT FINANCE, A2Z MAINANTANCE, OBEROI REALTY, TECPRO SYSTEM, ORIENT GREEN POWER and BAJAJ CORP. All of them failed miserably in the exchanges.
BUSINESS:
MT Educare, provides educational coaching services for classes 9 and 10 (State board, CBSE and ICSE), classes 11 and 12, graduation (commerce), preparatory/entrance tests (engineering, medical and MBA) and professional courses such as chartered accountancy. The company has evolved from a local coaching player operating few centers under the partnership structure to a corporate entity.
MT Educare is one of the largest coaching service providers in Mumbai; it has 190 centers in 106 locations across Maharashtra, Karnataka, Gujarat and Tamil Nadu. It has coached around 58,000 students during FY11. The company runs the coaching classes under the brand name 'Mahesh Tutorials’.
In FY08, Helix, a private equity player, invested Rs 328 Mn by subscribing to compulsorily convertible preference shares which got converted into 29.33% equity shares in FY09. Its bonus adjusted per share cost is Rs 32.56.
FINANCIALS:
Revenue increased 14% to Rs 835 mn in FY10 from Rs 731 mn in FY09. Till 9MFY11, the company has posted Rs 857 mn as revenue. The growth was primarily driven by the increase in enrollments and fee hikes. Student enrollments increased at a two-year CAGR of 15% during the same period. The school segment’s contribution to revenue has remained high but has shown a decreasing trend due to increasing contribution from the commerce segment
NEW PROJECTS:
The company is planning to launch various new products. It has recently launched the MBA test preparatory coaching. It is also planning to launch UVA (university, vocational and affiliated) and internet based coaching for students below 9th standard. This product is aimed at the assimilation of commerce and MBA entrance coaching and will focus on students who want to pursue MBA instead of professional courses like CA. The company has also formed a joint venture with HT Education Ltd to offer school coaching in northern India to improve its visibility in the region. The other new projects include -Pre-university college, Interactive networked knowledge center and an, JV with HT Education Ltd.
MATTERS OF CONCERN:
- Geographical concentration. Around 80 % the centers are located in Maharastra particularly in Mumbai.
- Growth in the past has come from inorganically.
- Fragmented and highly competitive market.
- The coaching sector the company operates is not regulated by any central or state legislation. The central or state governments may introduce laws regulating the coaching sector in the future, as happened in Micro finance segment.
- The Ministry of Human Resource Development of the Government of India and the CBSE have, made the annual examinations conducted for Xth standard students studying in schools affiliated with the CBSE, optional from the academic year 2010-11. The future revenues may be adversely affected as the Company and the wholly owned subsidiary, are involved in providing coaching services for the Xth standard examinations conducted by the CBSE.
- The average cost of acquisition of Equity Shares by the Promoter, who holds around 50% of the total equity of the company is just 0.02 paisa.
VALUATION AND RECOMMENDATIONS:
The company is in to parallel education system without any sanctity and accountability. These kind of institutions are taking advantage of the void created in the system and exploiting the students and hapless parents. Government is bound to regulate this kind of business, which will affect revenue and profitability. The business model is unsustainable. The valuation at Rs 74 – 80, is too much stressed, considering its track record and constraint in scalability. The company post IPO will have an equity around Rs 36Cr. Even to show an EPS of Rs 5, it has to earn PAT of Rs 18cr, which is very unlikely.
Career point, a company which is into similar business, came public in 2010 at Rs 310, is now trading around Rs 196.
Look at the performance of the IPOs managed by ENAM in the past. They have a failure rate of as high as 90%. Even an “at par” IPO (Future Ventures) managed by them is trading below the issue price.
AVOID SUBSCRIPTION TO THE IPO.
