Tree House IPO: Experts say avoid, it's highly priced

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Tree House IPO: Experts say avoid, it's highly priced

Educational services provider Tree House Education and Accessories has opened its initial public offering of 84.32 lakh shares for subscription today. A price band for the issue has fixed at Rs 135-153 a share. Company is going to offer a discount of Rs 6 to retail investors.

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Sunil Matkar
Moneycontrol.com

Educational services provider Tree House Education and Accessories has opened its initial public offering of 84.32 lakh shares for subscription today and will close on August 12, 2011. The price band for the issue has been fixed at Rs 135-153 a share. However, the company is going to offer a discount of Rs 6 per share to retail investors.

All experts and brokerages Moneycontrol.com spoke to said the issue looked overpriced and held an 'avoid' status to it.

In an explanation, IPO analyst Arun Kejriwal said, "The issue is highly priced. It is available at price-to-earnings multiple of 48 times post issue paid capital of the company at the lower end of price band of Rs 135-153. Secondly, more than 90% revenues come from pre-primary schools, which is unregulated market (anyone can open these type of schooIs). Category of K-12 schools is a regulated market. Third point is out of 223 schools, 112 are based in Mumbai-that is half of the total number of schools the company runs-and company is saying it has pan-India presence-where is the point of pan India presence?"

Investment advisor SP Tulsian said, "Given the extremely volatile conditions in the secondary market and the issue's exorbitant valuations, Tree House is a clear avoid."

" Career Point (having gone public last October) had a topline double of Tree House at Rs 79 crore for FY11, PAT tripled to Rs 27 crore with a healthier net margin of 35% vis-a-vis Tree House's 23%. In addition to being a debt-free company, Career Point is currently ruling at a PE multiple of 17x, market cap of Rs 530 crore and enterprise value (EV) of Rs 507 crore. On the other hand, Tree House is expecting a market cap of Rs 500 crore at Rs 153 per share, on listing, and an enterprise value of Rs 515 crore. Companies such as Educomp , Everonn , Core Projects , Aptech , NIIT are all ruling between PE multiples of 7x to 15x," Tulsian reasoned.

Another analyst, who wished not to be named, too said, Tree House IPO looked highly priced issue.

Rajesh Tambe, research patner at Suresh Rathi Securities says, eveyone should stay away from the primary market in current market conditions. He advised buying stocks in the secondary market as he feels lot of those stocks are available at cheap prices.

MLR Securities has recommended investors to avoid this issue considering its aggressive valuations of 49-56 times FY11 EPS. "Long-term investors can take exposure in the secondary market on dips as the company commands high margins as compared to other players in the industry, with scalable business model and robust industry outlook."

Another research firm GEPL Capital adviced avoiding the IPO, though listing gains can be seen due to a) small IPO size (Rs 110-125 crore), b) scalable business model and c) new kind of business (playgroup and nursery) in which it operates; which may evoke good response to the IPO.

The company aims to raise more than Rs 110 crore through the issue. It intends to utilise the proceeds for expansion of pre-school business; acquisition of office space; procurement of exclusivity rights to provide educational services; construction of infrastructure for educational complexes in Rajasthan and Gujarat; and repayment of loan.

The educational services provider reported a net profit of Rs 9.2 crore in the year ended March 31, 2011 on total income of Rs 41.15 crore. In the financial year 2009-10, net profit of the company stood at Rs 2.6 crore and total income was at Rs 21.87 crore. It has cash and bank balance of Rs 27.87 crore.

Tree House has 223 pre-schools under its brand name "Tree House" across 33 cities in India. Out of which, 149 are operated by the company, and the rest are through franchisees. The self-operated pre-schools serve more than 5,000 students, primarily in the age group of 1.5 to 6 years. About 50% of pre-schools are located in Mumbai itself, which is contradictory as company indirectly said has pan-India presence.

It entered into providing educational services to K-12 schools and provides such services to 12 schools which have over 5,000 students, in 4 cities in India.

sunil.matkar@network18online.com