Contesting claims in a recent research report by proxy advisory Institutional Investor Advisory Services (IiAS), education sector firm Zee Learn's company spokesperson has said synergies between MT Educare and itself are being implemented in a phased manner.
IiAS had said in its research report on April 30 that Zee Learn board needs to find a solution for the entire business.
Responding to a query by Moneycontrol on this report, the company spokesperson of Zee Learn said efforts are being taken to expand the product reach and enhance brand traction of MT Educare products.
Proxy advisory firm IiAS's report titled ‘Zee Learn fails its test’ talked about the company’s alleged poor capital allocation decisions, high debt, weakening cash flows and the MT Educare acquisition.
Zee Learn is part of Subhash Chandra's Essel Group which is looking at selling assets to pare down debt.
Moneycontrol had sent a questionnaire to Zee Learn seeking the company’s response on this matter. The company spokesperson listed out a slew of strategies taken by Zee Learn on the acquisition as well as its business operations.
The acquisition of MT Educare
Zee Learn acquired tutorial/student coaching firm MT Educare in May 2018. IiAS in its research said while Zee Learn and MT Educare have complementary businesses, the two entities have been unable to leverage each other’s reach and brands to build synergies.
Zee Learn is focused on in-classroom education (from preschools to K-12) and MT Educare provides after-school tutorials like Mahesh Tutorials and Chitale classes, said IiAS.
In response to this, Zee Learn company spokesperson said that IiAS has probably not understood the business approaches of the two firms.
“While both are in the education sector, they operate in distinct and different domains of educational services. Zee Learn is a core education company that predominantly manages preschool and schools within the four walls of the schools, whereas MT Educare is a supplementary education company providing Test-Prep and Tutorials services outside the four walls of the school,” said the company spokesperson.
The spokesperson said the core education network is spread across the country, while the supplementary, test-prep segment is centred around large cities and centres that have traditionally been the hub of Coaching and Test-Prep.
“As a result of these different models, Zee Learn’s network spans across 2000 plus locations in 800 cities in India, whereas MT Educare is present in only 130 odd locations in 50 plus cities,” said the company spokesperson.
Is the acquisition value accretive for Zee Learn?
IiAS in its research report said the financials of MT Educare had deteriorated in FY18 itself and this was the year in which Zee Learn acquired a stake in it.
To this, Zee Learn said the acquisition of MT happened in FY19 (May 2018) and MT was experiencing significant business operation challenges and financial results were not good prior to Zee Learn’s acquisition.
Zee Learn company spokesperson said in FY18, MT Educare posted a consolidated loss (profit before tax or PBT) of Rs 201.7 crore. However, the spokesperson added that post-acquisition in FY19 MT Educare had a sharp turnaround and it posted consolidated revenue of Rs 228.6 crore, EBITDA of Rs 28.5 crore (compared to negative Rs 171.9 crore in the year-ago) and PBT of Rs 11.4 crore.
But what about the write-offs in MT Educare?
IiAS in its reports said the immediate write-offs in MT Educare raise questions on the due diligence undertaken for the MT Educare acquisition. It added that in substance if the net asset value of MT Educare would have been adjusted for the write-offs, negative net assets were acquired by ZEE Learn.
The company said this statement is factually incorrect.
“Write-offs as provision for doubtful debts was done in FY18 of Rs 169.7 crore and not in FY19. Acquisition of MT Educare happened in May 2018 which is FY19,” said the response.
Similarly, IiAS said Zee Learn needs to strengthen its governance standards with respect to related party transactions. The company spokesperson said in response to this that both Zee Learn and MT Educare follow a robust related party transaction policy.
Leadership management at Zee Learn
IiAS said the current board is relatively new at both Zee Learn and at MT Educare. It added that most of the directors and management leadership that undertook the MT Educare transaction have left.
Zee Learn spokesperson said both Zee Learn and MT Educare Boards are very strong and robust with many leading professionals from business and educational background being part of it.
Will Zee Learn sell its cash cow?
IiAS in its research report said selling the asset-light high-margin Kidzee (playschool and pre-school arm of Zee Learn) business to support debt taken for the six schools is a suboptimal decision.
Kidzee is Asia's largest pre-school chain with a network of more than 1,900 centres in over 750 cities.
Zee Learn, however, said as part of the business strategy all organisations continuously evaluate multiple options for business up-gradation and evolution.
“Zee Learn is no different, however, whatever happens, will be for the best of the company and its stakeholders. This will be done with due consent/approval of the authorities and shareholders and will be informed to the public at the appropriate point of time,” said the spokesperson.
In FY19, Zee Learn had a profit after tax of Rs 83.4 crore compared to Rs 49.3 crore in the year-ago period. The company's total revenue stood at Rs 549.3 crore in FY19, a rise of 102 percent on a year-on-year basis.