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Not a topper
Tree House Education is entering the capital market on 10th August 2011 via a fresh issue of 84.32 lakh equity shares of Rs.10 each, priced in the band of Rs. 135 to Rs. 153 per equity share, with a Rs. 6 discount being offered to retail investors. The issue, constituting 25.01% of post-issue paid-up capital of the company, closes on 12th August and will garner Rs. 112-127 crore for the company.
Tree House Education runs 223 pre-schools under the ‘Tree House’ brand across 33 Indian cities, catering to the 1.5 to 6 years age-group of the education segment. Two-thirds of the pre-schools are operated by the company, making it the largest self-operated pre-school chain in the country, while balance one-third being franchise-run. Of the total pre-schools in operation, 104 pre-schools (or 47%) are located in Mumbai alone, signifying the geographic concentration of the company’s operations. In addition to pre-schools, company also serves the K-12 segment by provides educational services to 12 schools in 4 cities through exclusive tie-ups.
For FY11, company reported revenue of Rs. 39 crore and earned PAT of Rs. 9 crore, resulting in net margin of 23.43%. On equity of Rs. 24.02 crore, it earned EPS of Rs. 4.09 for fiscal 2011. With a net worth of Rs. 123 crore, as of 31st March 2011, company had outstanding debt of Rs. 47 crore, as of date.
While its cash and bank balance stood at Rs. 28 crore, as of the latest balance sheet date, one fails to understand the urgency or pressing need for the company to go public currently, given the utterly fragile secondary market conditions. Moreover, in April 2011, company has already raised Rs. 19 crore via preferential allotment to existing PE investors and a Mauritius entity at Rs. 150 per share.
The promoters hold 39.47% of the pre-issued shares, while PE firms Matrix Partners and Foundation Capital hold 35.64% and 11.46% respectively, on the pre-issued capital. Post-IPO, promoter shareholding would decline to as low as 29.60%.
Of the issue proceeds, Rs. 42 crore is proposed to be utilised to establish 120 new company operated pre-schools in top 10 Indian cities by FY14, while Rs 40 crore will be utilized to establish 2 education complexes in Jhunjhunu (Rajasthan) and Vadodara (Gujarat). About Rs. 27 crore is planned to be spend on procuring exclusive right to provide education services (K-12 segment) to 7 schools, Rs. 29 crore worth loans would get re-paid and corporate office would be purchased for another Rs. 14 crore, from the funds raised.
While the company has reported healthy growth over the years, its valuations in the public offering look extremely aggressive. For the Rs. 135-153 price band, shares are being offered at PE multiples of 33x and 37x respectively, which is double the valuation enjoyed by listed companies operating in the education sector.
Take for example, Career Point (having gone public last October) had a topline double of Tree House at Rs. 79 crore for FY11, PAT triple at Rs. 27 crore and a healthier net margin of 35% vis-a-vis Tree House’s 23%. In addition to being a debt free company, Career Point is currently ruling at a PE multiple of 17x, market cap of Rs.530 crore and enterprise value (EV) of Rs. 507 crore. On the other hand, Tree House is expecting a market cap of Rs. 500 crore at Rs. 153 per share, on listing, and an enterprise value of Rs. 515 crore.
Even taking a broader call on the entire listed education space, companies such as Educomp, Everonn, Core Projects, Aptech, NIIT are all ruling between PE multiples of 7x to 15x, thereby indicating no justification for the issue to be priced in earnings multiple in mid-30s for a company with topline of less than Rs. 50 crore. This is clearly very aggressive valuation, by all means and counts.
Given the extremely volatile conditions in the secondary market and the issue’s exorbitant valuations, Tree House is a clear avoid.
Zerodha (Trading Account)
RHP
