In an interview to CNBC-TV18, Yagnesh Sanrajika, chief financial officer, MT Educare gives the details of the acquisition of Lakshya Forum for Competitions. MT Educare's shares rose 4.5 percent to a 52-week high of Rs 130.90 on NSE in morning trade today.
Sanrajika says the deal is spread over a three year period and will be in the range of Rs 25-30 crore. On how the acquisition will result in MT Educare's earnings, he says, "Going forward, the EPS additions, just in terms of profits that it'll contribute in the next three years, should be to the tune of about 15 percent."
Below is the edited transcript of Sanrajika's interview.
Q: Can you tell us what you paid and what you get?
A: This is a North India based IIT entrance player. It is a leading player in its segment. So, they are currently at a run rate at about Rs 12-13 crore but growing at about 40-45 percent compounded annual growth rate (CAGR) over the next three years. The consideration is spread out over a period of three years. It is an earned graded payout, based on milestones that Lakshya management will achieve over a period of next three years. We are assuming that the total consideration will be in the range of Rs 25- 30 crore.
Q: Take us through this Lakshya’s financials? Is it breaking even on the operating front as well as on the bottomline? What sort of revenue contribution can we see for your consolidated numbers going forward?
A: Lakshya is already more than breaking even. This is a company established by four IITians, back in 2006. So the operating leverages are now kicking in.The first year of profitability is in 2012-2013. They will make about 10 percent PAT margins in 2012-2013. We are expecting these margins to double as the operating leverage kicks in. So, the margins are expected to be about 18-20 percent in the next three years. The topline is expected to be somewhere in the range of about Rs 35-36 crore by 2015-2016.
Q: How much will this deal add to MT Educare’s EPS earnings?
A: Going forward, the EPS additions, just in terms of profits that it will contribute in the next three years should be to the tune of about 15 percent. So, in terms of EPS you can easily calculate. MTEL is anyway growing at 20 percent plus so add to it 15 percent more.
Q: Why Lakshya, why not Bansal’s?
A: Lakshya strategically fits very well in our scheme of things. The new examination pattern in IIT has three important examinations that everybody has to clear. Lakshya is very well poised to give us that benefit. It is complimentary to our service offerings and with the help of Lakshya, we are launching our Bombay services. We are going to launch JEE advanced and NEET advanced examination curriculums in Bombay. So, the strategic kind of acquisition was to also get a foothold in North India where they are very strong as well as launch these services in Mumbai where we are already strong. So this is going to be a double effect for us.
Q: You are doing pretty well in terms of your organic growth and now you have stepped it up a bit in your inorganic ventures as well. Just give us some perspective, one or two years down the line what is your method of growing? Would it be more aggressive via the inorganic route and if so what would be the funding plans for that?
A: We already have cash on hand of about more than Rs 60 crore, which is good enough for a lot of our organic expansion plans that we have announced during the IPO. These plans are very much on course. The main growth is still going to come from our organic plans because this was an acquisition made strategically. This was to add the only service offering that we did not have in our bouquet.
We serve science students, commerce students and we are anyway very strong in the school segment. So, the main growth going forward in the next two to three years is still going to come from organic activities and organic developments. This is because most of our locations and centers are at 45-50 percent capacity right now.
So, we have a lot of leverage sitting on our centers right now. Hence, most of the growth is expected to come from there. Acquisitions like Lakshya are probably going to be once in a while because then that’s not going to be very substantial. There is a lot of cash growth that we also see in terms of adding to EPS from our organic activities.
Most of the growth will come from organic activities and more from outside of Maharashtra. We have been traditionally very strong in Maharashtra and Mumbai. Now the next phase of growth is going to come from our activities in Karnataka and Tamil Nadu where we are growing very fast.
Q: What should we assume in terms of an organic run rate including that 15 percent that Lakshya will fetch you? On that base, what kind of earnings growth should be assumed?
A: We don’t give guidance going forward, but just in terms of approximate growth rate that we are seeing in our business, it is easily north of 22-25 percent on topline and because of average fee realisation, that grows up every year by about 10-12 percent. So you could see north of 25 percent growth in our bottomline as well.