Moneycontrol
Mar 20, 2017 09:12 AM IST | Source: Moneycontrol.com

CL Educate’s IPO opens today: Analysts not highly enthused on issue

Analysts feel that high valuations offer limited upside to the stock. Along with that, they also highlight financial performance, regulatory frameworks, if any, to hit the firm.

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CL Educate, the latest entrant in the initial public offering (IPO) arena, aims to raise Rs 239 crore. The issue has opened on Monday and will close on March 22 with a price band of Rs 500-502. The company operates segments in the education sector, which includes test preparation, K-12 and vocational training.

The issue comprises 47.60 lakh equity shares or about 33.61 per cent. It consists of fresh issue of 21, 80,119 shares and an offer for sale of up to 25, 79, 881 scrips by existing shareholders.

Analysts, however, are not very upbeat on the issue, as high valuation may not offer much scope for an upside on the stock.

ICICI Securities recommends investors to avoid the issue as the current valuation offers limited upside. “It is one of the leading players in the education provider space. However, it is available at 27 times FY17 estimated earnings per share (EPS) on an annualised basis. Recently, it has witnessed slightly higher debtor days,” the research firm said in a report.

Furthermore, there are concerns if it fails to attract students in its test prep business, which has a 45.7 percent share in the revenues. This may adversely affect income, business as well as prospects, the brokerage house said in its report. Simultaneously, any other regulatory or legal framework, if introduced in future, may increase compliance requirements.

On March 17, the company raised Rs 72 crore from anchor investors at Rs 502 apiece. As many as 14.28 lakh equity shares have been allotted to anchor investors, including DSP Blackrock MicroCap Fund, Sundaram Mutual Fund, Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd and ICICI Lombard General Insurance Company. These shares are worth Rs 71.69 crore, according to a regulatory filing.

Angel Broking, meanwhile, has a neutral rating on the issue. A combination of high valuation and capital intensive business will mean limited upside to the stock, it said.

It has highlighted the unimpressive financial performance of the firm in the past 4-5 years, where profits have been low and fluctuating. Moreover, more than 45 percent of the company’s revenue is from institutional businesses.

These include corporate training, vocational training under government schemes and advisory and research incubation services to educational institutions, which has resulted into stretched working capital cycle, the brokerage house said.

There are some positives that it outlined such as its pan-India presence due to integrated education products, services and content. Along with this, it has a well-recognised brand ‘Career Launcher’ and an asset light, tech-enabled business model, Angel Broking said in its report.

In terms of valuations, the pre-issue P/E works out to 23.2 times of its annualised first half of FY17 earnings which is higher compared to its peers such as MT Educare, it added.

SMC Research, on its part, has given it 2.5 star rating out of 5. The research firm rates two stars as a neutral rating, while three stars stands for a fair rating.

The research firm highlights on the positives of pan-India presence, reputed courses, track record of successful inorganic expansion along with strong brand equity.

Among risks, it cites the competitive and fragmented market as well as short term impact of demonetisation. Considering the P/E valuation on the upper end of the price band of Rs. 502, the stock is priced at pre-issue P/E of 42.16 times on FY17 earnings per share, it states.

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