MT Educare IPO: Valuation appears to be over-stretched

MT Educare : Amalgamation of group entities to get a better valuation for promoters, significant offloading of anchor-investor before listing and conflicts of interest between public company and promoters’ closely-held firms make the offer suspect.

The Offer

The present offer consists of a fresh issue of Rs 35 crore with a price band of Rs 74 to Rs 80 (paid up Rs 10) from the company and an “offer for sale” of 80 lakh shares with the same price band from the anchor investor, Helix Investments Company, Mauritius.

Issue Object

While the offer for sale is for facilitating the anchor investor to offload significant portion of his investments, the fresh issue amount will be utilized for part-financing the cost of construction of a pre-university of college campus (PUC) in Mangalore and establishing new coaching centres at 20 locations besides meeting general corporate needs.

Background

MT Educare Ltd. (MEL), promoted by Mahesh Shetty, which runs the coaching classes under the banner “Mahesh Tutorials”, is one of the leading players in the Indian educational coaching industry. MEL operates 190 coaching centres across 106 locations in Maharashtra, Karnataka, Gujurat and Tamil Nadu. Mumbai alone reportedly has 138 centres. The company claims to have coached about 58000 students in fiscal 2011.

Having opened its first branch in Mumbai 1988, the Mahesh Tutorials-chain was run by different companies of the promoters until 2008. It was only in 2009 all the coaching activities were brought under one roof, MEL. Interestingly, even while it was a loss making company in 2007, Helix Investments, Mauritius, invested Rs.32.80 cr whose average cost of holding worked out to Rs.32.56 a share. Helix, which holds more than 100 lakh shares, is now divesting 80 lakh shares thereby reducing its stake from 28.6% to just about 6%. Promoters currently hold about 48% which would be reduced to 40-42% post-issue. Through amalgamations and bonus issues the promoters’ cost of holding has been brought down to just 2 paise per share!

Track Record

Before the amalgamation of group entities, MEL had Rs 5.86 crore revenue in fiscal 2008 on which it incurred a loss of Rs 2.91 crore. Next year, income shot up to Rs 75.17 crore and the company posted a net profit of Rs 2.62 crore. In fiscal 2010 income grew a modest 14% but, profit jumped 100%! In fiscal 2011 revenue increased 25% to Rs 107 crore and profit surged 58% to Rs 8.25 crore. On an equity base of Rs 34.35 crore this yielded an EPS of Rs 2.40. MEL paid its maiden dividend of 4% only last year.

Prospects

During the first half of fiscal 2012, MEL has clocked Rs 79.29 crore revenue on which it has netted a profit of Rs 9.75 crore. The company admits that its first half is generally better than the second half. The Maharashtra coaching industry is projected to grow at more than 11% per annum in the next 3 years. Being a debt-free company, MEL’s bottom line is thus expected to grow at a decent pace.

Valuation

Even though MEL’s prospects seem to be reasonably secured, its valuation appears to be over-stretched. As compared to some of the peers, a P/E of more than 30 times and a P/BV of more than 5 times look very steep. Moreover the company’s liberal funding for its Mangalore PUC campus through a Trust from where the main promoter has recently resigned, consultancy payments to a company promoted by one of the directors, promoters’ abysmal cost of holding (just 2 paise per share), promoters’ low stake (less than 42%) and anchor investor’s rush to offload a substantial portion of his holding before listing do not instill confidence.

How MT EDUCARE compares with Education stocks

(Source: India Aarthik Research)

IPO Rating

CRISIL has assigned an IPO grade of 4 out of 5 to MEL’s IPO. While the grade indicates that the fundamentals of the IPO were above average, it also clarifies that the grade was not an opinion on the issue price in comparison to the fundamentals.

Investment Banker’s Track

MEL’s public offer is managed by Enam Securities which has associated with 24 public issues during the last three calendar years. Of these only four are currently quoting above the offer price. Except Coal India and Pipav Defence, none of the IPOs has yielded any worthwhile return. Six IPOs have drained more than 50% of the investment value. Eight issues lost between 30% and 45%.

Concerns

• Unconvincing consultancy agreement with Prosynapse owned by one of the directors.
• Assets/properties of coaching centres are predominantly leased from promoter-entities.
• Agreement with MT Educare charitable trust for the Mangalore PUC is not in the interest of the public shareholders of MEL.
• Issue proceeds meant for general corporate purposes exceed more than 25%.
• More than 50% of the proposed new coaching centres are yet to be identified.
• Promoters’ real estate ventures are into huge losses.