CL Educate: Costly class

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.

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.

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.

The IPO includes offer-for-sale of about 2.6 million shares and fresh issue of about 2.2 million shares. Of the expected ₹110 crore of fresh issue funds, about ₹52 crore will be used for working capital; ₹18.6 crore to repay loans which will help unlock value from its mortgaged property assets; and about ₹20 crore will for acquisitions.

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