MT Educare IPO Review by KM Global (Apply)

Review By K.M. Global Financial Services Ltd on March 28, 2012

Issue Period Mar 27 - Mar 29
Price Band (Rs) 74-80
Fresh Issue (Rs Cr) 35
Offer for Sale (Rs Cr) 59-64
Mcap (Rs Cr) 292-316
Grading CRISIL Grade 4
Promoter Mahesh Shetty
Listing NSE, BSE
Grey Market (Rs) 7-8

BRLM
Enam Securities Pvt ltd

Objects of the Issue
Part finance construction of PUC Campus: 20 Rs Cr
Establishing new Coaching Centres at 20 locations: 5 Rs Cr

MT Educare is one of the leading coaching service providers with 188 coaching centers across 110 locations in Maharashtra, Karnataka, Gujarat, and Tamil Nadu, with primary operations in Mumbai with 142 centers. It mainly operates through self operated centers but has also started expanding through the franchisee route by opening 19 franchises centers in tier 2 cities like Nashik, Aurangabad and Nagpur.

MT Educare provides coaching services for classes 9 and 10 (State board, CBSE and ICSE), classes 11 and 12, graduation (commerce), entrance test preparatory courses (engineering, medical through MH-CET and MBA) and CA. It has 757 faculty members. The company runs the coaching classes under the brand name 'Mahesh Tutorials'. MT coached around 58,300 students in FY11 a jump of 11% on a year on year basis.

The company also operates pre-schools under the brand name Global Champs. It has 7 Global Champs centres operated by the company in Mumbai and Pune.

In FY08, Helix, a private equity player, invested Rs 32.8 Cr 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 32.6/s.

Industry Outlook

According to a CRISIL report, the Maharashtra coaching industry is expected to grow at a CAGR of 12% in FY11-FY15 to Rs 51 bn on the back of rising enrollments due to structural changes in Indian economy such as rising disposable income, rising interest in private institutions and cut throat competition among students.

Expansion Plans

Plans to provide infrastructure and management support to pre-university college (PUC) in Mangalore, Karnataka

The company has entered into a JV with HT Education ltd to provide coaching services in the northern and eastern states of India.

From May 2012, the company plan to introduce coaching for the examinations conducted by Institute of Company Secretaries in India in relation to the foundation examinations conducted by the regulatory institute.

It plans to monetize its course materials by making it available for sale in digital formats.

The company also intends to utilise its expertise in teaching and course materials in assisting schools and institutions in equipping their teachers in relation to courses covered in the School Section.

Promoter

Mahesh Shetty is the Chairman and Managing Director of the company. He is a science graduate from Mumbai University and has ~ 27 years of experience in the coaching sector.

He was awarded the 'Pride of the Nation Award' by the All India Achievers Association in 2008.

The company's total income grew by 26% in FY11 while PAT grew by 28% on a YoY basis. The growth was primarily driven by the increase in enrollments and fee hikes. Major chunk of revenue comes from the school section with a share of 49%, science section contributed 26% and the commerce section contributed 21% in 1HFY12.

EBITDA margin improved from 15% in FY09 to 26% in FY11 on the back of increase in the utilisation of the existing infrastructure which led to higher revenue growth with relatively lower increase in fixed overheads. The company doubled its capacity in FY09 with the help of PE investment of Rs 32 Cr.

Improvement in earnings led to increase in RoE which increased from 7% in FY09 to 17% in FY11. The company is a debt free as of 1HFY12. It has investments of Rs 36.5 Cr and cash and bank balance of Rs 17.3 Cr as of 1HFY12.

Concerns

Geographical Concentration - 76% of its coaching centres are based in Mumbai which contributed 90% of the total fee income in 1HFY12. Any change in the economic and demographic conditions of Mumbai would adversely affect its business operations.

Competitive nature of the Industry - The education support and coaching services market is highly competitive while being unorganized and fragmented. The players in the informal education market are mostly small and unrecognized. Its closest competitors are Sinhal Classes, Karla Shukla Classes, Brilliance Tutorials, JK Shah Classes to name a few.

MT Educare's market cap is Rs 292-316 Cr on a price band of Rs 74-80. It is asking for a valuation of 19.5-21 times its FY12 estimated EPS of Rs 3.8 considering its subdued fourth quarter, which accounts for just 20% of the total revenues. Its post issue P/BV is 3.2-3.5 times its BV/s of Rs 23. Career Point is the only listed player in this space is trading at a trailing P/E of 11. However,it is not a direct comparable to the MT Educare as the latter has a more diversified product profile.

Conclusion / Investment Strategy

Investors with high risk appetite can subscribe to the issue as it is the leading coaching service provider in Mumbai with a strong brand name, improving margins, zero leverage and a robust industry outlook.

Reviewer recommends Subscribing to the issue.