MT Educare IPO Analysis

MT Educare, promoted by Mahesh R. Shetty, is one of the leading coaching services providers in Maharashtra, with primary operations in Mumbai. The company is an education support and coaching services provider for students in the secondary and higher secondary school and for students pursuing graduation degree in commerce, preparing for various competitive examinations and undertaking chartered accountancy examinations.



The main sections of students to whom the company offers services are as follows:

A) School Section: The school section consists of IXth and Xth standard students for (i) state board examinations conducted by the state education boards of Maharashtra, Gujarat and Karnataka; (ii) board examinations conducted by the Central Board Of Secondary Education (CBSE); and (iii) board examinations conducted by Indian Certificate of Secondary Education (ICSE);

B) Science Section: The science section consists of XIth and XIIth standard students in science and for engineering and medical Common Entrance Tests (CETs) conducted by the Maharashtra and Karnataka state governments;

C) Commerce Section: The Commerce Section consists of (i) XIth and XIIth standard students in commerce and Common Proficiency Test (CPT) conducted by Institute of Chartered Accountants of India (ICAI); (ii) undergraduate students pursuing their bachelor degree in commerce; and (iii) Chartered Accountant Integrated Professional Competence Course (CA IPCC) and Chartered Accountant (CA) Final examinations conducted by ICAI.

The company caters to 58,300 students through 188 centers at 110 locations spread across Maharashtra, Karnataka, Gujarat & Tamil Nadu. Of these, it operates 19 coaching centres in eight locations in Maharashtra in cities such as Nashik, Aurangabad and Nagpur, through franchisee arrangements. The company is one of the leading coaching services providers in Maharashtra, with primary operations in Mumbai with 142 coaching centres in 87 locations.

The company provide coaching for competitive examinations for admissions to universities offering masters in business administration degrees through its subsidiary, Chitale's Personalised Learning Private Limited (CPLPL), which it acquired 51% stake in February 2011, which operates in three locations in Mumbai.

Additionally, the company has started operations at six locations in New Delhi and Gurgaon under the brand "Study Mate –Powered by MT Educare" through HT Learning Centres Ltd (HTLCL), which is a joint venture of its wholly owned subsidiary, MT Education Services Pvt Ltd (MTESPL) with HT Education Ltd.

The company has started coaching services via internet-video conferencing facilities from October 2011 at the centre located in Mulund, Mumbai. Similarly two other centers, one at Ghatkopar, Mumbai, and one at Ahmedabad, Gujarat, have been stared in Jan 2012. The company proposes to open more such centers, which will enable faculty members to reach greater number of students simultaneously at various locations.

The company, through its Dubai branch, MT Management Solution, also provides management consultancy services to a coaching center in Dubai, which include providing coaching and administrative support services for secondary and higher secondary school curriculum of various education boards.

In June 2011, it commenced University Vocational and Affiliated (UVA) program to students pursuing graduation degree in commerce. UVA includes coaching for the graduation degree curriculum and for competitive examinations for admissions to universities providing masters in business administration degrees along with three supplementary vocational programs, namely, skill enhancement and employment/entrepreneurial development programs, life enrichment and advancement programs and transforming through outbound and behavioural education programs.

The company also undertakes projects for vocational training, grade enhancement program and teacher training with certain entities associated with the government of India and the state governments.

The company also offers coaching services for the CFP examination. For it, it has entered into agreement dated May 15, 2011, with the Financial Planning Standard Board of India for providing education and training on financial planning in India.

MT Educare Charitable Trust (Trust), an independent public charitable trust settled by its Promoter, Mahesh R. Shetty, operates pre-university colleges (PUCs) at Mangalore and Udupi in Karnataka. The company has entered into arrangements with MT Educare Charitable Trust to provide management services including infrastructural services to the PUC at Mangalore. In addition, it has entered into services agreement under which it will provide services for smooth functioning, and the efficient management and administration of the PUC at Mangalore The company has entered into lease deed with the trust for leasing out land situated at Mangalore measuring 0.74 acres along with the building constructed thereon to the Trust for a period of 30 years for conducting the operation of PUC.

The company intends to continue to enter into arrangements with charitable trusts in Karnataka, for operating PUCs in Karnataka. The scope of management and consultancy services shall include advice on structuring of the PUCs courses/curriculum and classes, assistance and consultancy services with respect to recruitment of teachers for the PUCs, training of the PUCs, teachers, providing techniques based on usage of technology, management of tests/examinations conducted by the PUCs, advising on and assisting in marketing activities of the PUCs, and other administrative and information technology related services.

From May 2012; it plans to introduce coaching for Company Secretary (CS) examinations. It also proposes to offer new test preparation Courses for competitive exams like- CAT, MAT, IIT-JEE & other competitive exams.

The company has already entered into franchisee agreements and JV to conduct and operate coaching centres under revenue sharing arrangements. The company desires to expand into tier II and tier III cities in Maharashtra via such arrangements. The company is also exploring global opportunities through consultancy services & administrative support services in markets such as Dubai where it already has an operational branch (MT Management Solution).

The company has 757 faculty members across all coaching centers, with dedicated 77 resident faculty members for students in the School Section to focus on providing personal attention apart from regular classroom coaching.

The company is coming out with an initial public offering (IPO) (fresh issue cum offer for sale) amounting to Rs 94.2 to Rs 99 crore at a price band of Rs 74 – Rs 80 per share of face value Rs 10 each. The company is going for fresh share issue amounting to Rs 35 crore out of which Rs 20 crore is required for part financing the cost of construction of a PUC campus at Mangalore, Rs 5 crore for establishing new coaching centres at 20 locations and remaining for general corporate purpose. Also, there is offer for sales up to 80 lakh shares by Helix Investments amounting to Rs 59.2 – 64 crore. Helix, which is divesting its stake in the company, currently owns approx. 1 crore shares in the company

Strengths

Well recognized brand name of Mahesh Tutorials and experience in the business of education support and coaching.
Diverse product portfolio and caters to a big market.
Weaknesses

The company is present in the unorganised market, where competition is high and entry barriers low.
It is mostly concentrated around Mumbai, and 90% of its total fees received for half year ended September 2011 on standalone basis were from the centres in Mumbai.
The education sector is highly regulated and policies do change. Any changes in regulations that can reduce the importance of exams or the need to take non-school/collage tutions or any regulations curtailing the fees and regulating structure of courses/faculty of private coaching classes can dramatically change the fortunes of the company.
The Ministry of Human Resource Development of the Government of India and the CBSE have, through various circulars, made the annual examinations conducted for Xth standard students studying in schools affiliated with the CBSE, optional from the academic year 2010-11. The revenues of the company may be hence adversely affected as the Company and its wholly owned subsidiary, MTESPL, are involved in providing coaching services for the Xth standard examinations conducted by the CBSE.
The company's business largely depends on faculty members and spike in attrition among them may affect its operations and business.
The company has provided loans to MT Educare Charitable Trust in the past at a price not linked to market variables and may continue to do so in the future. Moreover, the issue proceeds will be used to finance investment for the Trust.
The company plans to expand in non-Mumbai markets through franchisee route, which can lead to dilution of control, disputes and creation of future competition by the franchisees.
Valuation

For the half-year ended September 2011, the company's consolidated net sales stood at Rs 71.71 crore, while net profit stood at Rs 9.62 crore. OPM was at 22.2%. For the year ended March 2011, consolidated net sales stood at Rs 105.09 crore, while net profit stood at Rs 8.11 crore. OPM was at 17.8%

The revenues of the company are lower in the fourth quarter as compared to the other three quarters as most examinations for IXth, Xth, XIth and XIIth standards are conducted in the months of February and March, thereby leading to a decrease in the number of classes as part of coaching services during this period. Hence, one cannot annualize company's first half earnings.

At the lower price band of Rs 74 per equity share of Rs 10 face value, the P/E works out to 36.4 times the EPS of Rs 2 (on post-IPO equity) for the year ended March 2011. At the upper band of Rs 80, P/E works out to 39 times the annualized EPS of Rs 2.1 (on post-IPO equity) for the year ended March 2011. Nearest comparable listed player, Career Point, trades at P/E of around 12 times FY 2011 earnings.