Tough test ahead for CL Educate

Presence in non-consumer segments led to higher receivables, stretched working capital requirements

CL Educate offers test preparation services through its ‘Career Launcher’ brand for entrance tests to management (MBA), law, banking and other courses (consumer segment). The company also caters to the corporate segment and universities by providing services such as corporate training, advisory and research incubation, as well as vocational training under government schemes, among others.

Its presence in the non-consumer segments (about 40 per cent of revenue) had led to higher receivables, as well as stretched working capital requirements. Unimpressive financials and weak return ratios are also some key concerns.

Though none of the listed education companies are strictly comparable to CL Educate, another coaching company, MT Educare (Mahesh Tutorials brand), is trading at about 10 times the FY17 estimated earnings. At the upper price band, the CL Educate issue is valued at 23 times its annualised FY17 earnings, more than double that of MT Educare. Rich valuations fail to adequately capture the key concerns. Investors could, thus, skip this issue. 

CL Educate has posted weak financial performance in recent years, with revenue growing at only 11 per cent compounded annual rate over FY12-16. As a significant chunk of its capital (60 per cent) is stuck in the under-performing K12 segment (which it is looking to hive off), its return on equity ratio had declined from 10.1 per cent in FY15 to 8.95 per cent in FY16. 

The management believes this metric could improve, once they sell off this business. Another key concern for the company is that some of its tests could lose favour or even regulatory certification, which could lead to a fall in its revenues. This happened in May 2015, when there was a change in the pattern of the civil service preliminary exams. This segment's revenue was virtually wiped off, ending at Rs 2 crore after this policy change, from Rs 18 crore earlier. This instance reveals the risk faced by the company in terms of policies governing key tests, as well as changing consumer preference/demand for various tests. 

The strong brand recall of Career Launcher, an asset-light model and pan-India presence are among CL Educate’s key strengths. The company plans to focus on growing its consumer segment and is going slow on the government projects. Of the issue proceeds of up to Rs 239 crore, around Rs 109 crore will flow into the company, with the rest being an Offer for Sale. The company plans to use Rs 53 crore to meet its working capital requirement, Rs 20 crore for strategic acquisitions and Rs 19 crore to reduce its debt.

Overall, education stocks have failed to create wealth for investors so far. With the concerns mentioned, CL Educate is unlikely to reverse this trend.