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An expensive coach

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Set up in 1988, Mumbai-based operates coaching classes under the brand name of “Mahesh Tutorials”. It caters to various education streams, namely IX and X standards, commerce, science as well as competitive exams for post graduate courses, such as (CA), through it 190 centres in four states of Maharashtra, Karnataka, Gujarat and Tamil Nadu.

The proposed initial public offering (IPO) comprises fresh issue of shares (about Rs 35 crore) as well as sale of stake by private equity investor, Helix Investments. Post IPO, Helix’s stake will fall to 5.5 per cent from 28.8 per cent now. MT, a debt-free company with a cash kitty of Rs 17.3 crore, plans to deploy the proceeds of the IPO to set up new coaching centres as well as build a pre-university campus in Mangalore.

MT Educare’s topline has grown at a healthy rate of over 25 per cent in FY11 and is expected to grow by 34 per cent in FY12 (based on annualised six-month results). Its Ebitda margin has also expanded significantly from 14 per cent in FY09 to 25 per cent in the first half of FY12. Given its plans, growth rates in future should remain healthy.
 

IMPROVING MARGINS
  FY10 FY11 H1'FY12
Total income (Rs cr) 83.30 104.80 70.30
Ebitda (%) 15.50 18.00 22.80
Profit after tax (Rs cr) 5.23 8.25 9.75
EPS (Rs ) 1.52 2.40 2.78
RoNW (%) 12.72 17.28 17.14
RoNW is return on Net worth                                               Source: Company RHP
 
ISSUE DETAILS
Price (Rs ) 74-80
Size (Rs cr) 94.2-99
Opens on 27-Mar
Closes on 29-Mar
Crisil rating  4/5

 

On a post-issue basis after annualising the six months net profit, FY12 price to earnings (P/E) ratio works out to 15.14-16.21 times at the price band of Rs 74-Rs 80, respectively.

Though this is in line with its closest peer, Career Point (FY12 estimated PE of 16.6 times), valuations are steep when compared to larger peers, such as and Educomp, which are trading at FY12 P/E ratios of seven and 6.5 times, respectively. This indicates that IPO pricing factors in future growth leaving little room for appreciation in the near term.

Strategy, strengths
The company’s plans to expand geographically as well as across educational streams will ensure long-term growth. It plans to set up new centres in 20 untapped locations over the next two years. It is also expanding the online training programmes (currently in some centres in Mumbai) to other cities as well. Further, its plans to diversify into new educational streams such as test preparation coaching for CAT, MAT, IIT-JEE, CS, etc will help capture a larger student base.

The company has also expanded via joint ventures (with HT Education marking its entry in Northern and North Eastern regions) and acquisitions (51 per cent stake in Chitale’s Personalised Learning, providing coaching services for CAT, GMAT, among others). A cash-rich and debt-free balance sheet will aid its organic as well as inorganic growth in the future. It also plans to expand its consultancy and administrative support services in Dubai and other foreign locations.

Mahesh Tutorials is an established brand name in the Mumbai coaching industry. Its negligible expansion via franchisee (only 19 centres on franchisee model) should help prevent any brand dilution. The company operates pre-university campuses in Mangalore and Udipi wherein it provides management and infrastructure services. The company aims to enter  into more such agreements with various charitable trusts in Karnataka, which could open up huge untapped opportunities.

Key risks
The presence of many unorganised players in the coaching segment as well as low entry barriers for new players exposes the company to high competition.

Thus, the company's ability to maintain and improve the student enrolments run-rate will be a key growth driver. The company's huge dependence on school revenues (48 per cent) makes it vulnerable to any unfavourable regulatory changes in this segment.

Also, high dependence on Mumbai region for revenues increases the geographical risk.

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