Management Meet Note November 17, 2014 Rating matrix Rating Target Target Period Potential Upside : : : : MT Educare (MTEDU) Unrated NA NA NA Organised play in unorganised industry… Key Financials | Crore Net Sales EBITDA Net Profit EPS (|) FY11 105.5 19.0 8.0 2.4 FY12 130.6 23.1 12.8 3.8 FY13 157.3 29.3 17.8 4.6 FY14 201.8 42.3 20.8 5.3 FY11 57.6 4.9 27.3 11.4 33.5 40.8 FY12 36.2 4.0 22.5 9.5 24.5 26.4 FY13 29.9 3.3 17.7 5.3 22.5 23.9 FY14 25.7 2.6 12.3 4.8 19.5 26.2 Valuation summary P/E EV / Revenues EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Market Capitalization (| Crore) Total Debt (Sep-14) (| Crore) Cash and Investments (Sep-14) (| Crore) EV (| Crore) 52 week H/L Equity capital Face value Amount 540.7 21.0 519.7 144 / 90 39.8 10.0 Price performance (%) MT Educare TreeHouse Edu Zee Learn Repro India | 136 1M 3M 6M 12M 7.3 (9.9) 0.4 (9.7) 35.9 (0.5) 12.5 31.2 47.9 17.7 9.6 38.0 112.4 67.5 44.8 62.7 Analyst Abhishek Shindadkar [email protected] Hardik Varma [email protected] We met Yagnesh Sanghrajka, CFO, MT Educare, to understand the company’s business model and future prospects. The company was started as “Mahesh Tutorials” by current founder and CEO, Mahesh Shetty, in 1988, and focused on school coaching in Mumbai. Over the years, the company has widened its geographical presence – expanded to other states such as Karnataka, Andhra Pradesh, Gujarat, Punjab, Haryana, Delhi, Tamil Nadu – and business segments (school - 44% of revenues, science - 25%, commerce - 18%, MBA, Robomate products) by bringing pan-India curriculum experts under MT’s umbrella. Growth momentum was helped by a combination of organic growth (opening of Mangalore pre-university, PU, campus to offer XI, XII and engineering coaching), and acquisitions such as Chitale Personalised Learning Centre (2011, MBA coaching, Mumbai), Lakshya (FY13, Advanced IIT, Chandigarh) and Sri Gayatri Education Society (FY14, engineering, AP). Karnataka, Lakshya may be game changer for science vertical The management commentary suggests that changes in IIT/engineering admission procedure could present significant opportunities for pan-India players like MT Educare and help accelerate growth. Note, the company operates a pre-university (PU) tie-up model wherein it provides test prep coaching for engineering and medical entrance exams post college hours using campus premises in a revenue sharing model. Currently, 14 such operational college tie-ups exist in Karnataka, which the management hopes to raise to 30 by FY18E. MT also built a PU college at Mangalore with a capacity of 3,000 students (current utilisation, 55%) accompanied by a hostel facility. The planned capex of | 60 crore was funded through internal accruals, while the company plans to lease back the facility by FY15E end. Further, acquisition of Lakshya (focusing on IIT advanced testprep) in the North could bear fruit as the company plans to leverage the brand and expand it to other geographies (Mumbai, Pune, Kolhapur, Nashik and Karnataka). MT also plans to launch foundation courses (Standard VIII-X) in Mumbai to act as a feeder for IIT advanced batches. Noticeably, the company is seeing healthy conversions from X to XI students and suggests excellent brand recall for MT. Healthy balance sheet metrics, dividend payout ratio MT’s revenues, PAT grew at 23%, 51% CAGR during FY09-14 to | 201.8 crore, | 20.8 crore, respectively, while EBITDA margins expanded 8.5 percentage points (pp) to 21.1% vs. 12.6% in FY09. The company increased its dividend payout ratio to ~43% in FY14 vs. ~18% in FY11 with RoEs of ~20% in FY14. Exhibit 1: Financial performance Income from operations (| crore) EBITDA (| crore) Net profit (| crore) FY12 FY13 FY14 130.6 157.3 201.8 19.0 23.1 29.3 42.3 8.0 12.8 17.8 20.8 EPS (|) - diluted PE (x) 2.4 3.8 4.6 5.3 57.6 36.2 29.9 25.7 EV to EBITDA(x) 27.3 22.5 17.7 12.3 RoNW (%) 33.5 24.5 22.5 19.5 RoCE (%) 40.8 26.4 23.9 26.2 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research FY11 105.5 Getting foothold in AP via tie-up with Shree Gayatri Educational Society The company plans to replicate the Karnataka model in Andhra Pradesh, albeit through its partnership with Shree Gayatri Educational Society (SGES). SGES has ~33,000 students (9,000 residential, 24,000 day students) spread across 71 locations and 51 centres. It offers four types of courses, starting from the regular batch (state board) to advanced IIT preparation. Current realisation rates are generally lower than local peers while MT sees scope for improvement given the improving revenue mix towards advanced courses and as its leverages the strength of the Lakshya brand. The management expects incremental revenue contribution of | 50 crore from SGES in FY15E. Contrary to industry, no “Star” teacher concept in MT… While majority of the coaching institutes in the country have a “Star” teacher concept, who act as crowd-pullers, MT does not work on one but “many”. Lecturers at MT comprise full-time and visiting faculties who are offered training to ensure uniformity and work on set standards of the institute (100-150 hours training for school coaching, 250-300 hours for test preparation). As of FY14, MT Educare employed ~1,300 teachers vs. 892 in FY12, a CAGR of 21% while employee costs have risen from | 18 crore in FY12 to | 28.6 crore in FY14, led by increased teacher intake, training costs and rising salary Robomate – future growth engine in schools Though revenues in the schools division are highly concentrated in the Mumbai region, MT plans to widen its presence across Maharashtra through the franchisee model. Recently, the company also started selling Robomate products – online content delivery developed in controlled environment – to reach non-MT students. The product offering is available across all verticals (engineering, medical, CA) at prices ranging from | 20,000 - | 75,000. Till date, Robomate registered sales of | 2.5 crore. Exhibit 2: Revenues grow at 23% CAGR during FY09-14 250 28.3 26.8 24 23.8 20.4 150 18 % | crores 200 13.7 100 12 6 50 0 30 73.2 83.2 105.5 130.6 157.3 201.8 FY09 FY10 FY11 FY12 FY13 FY14 Revenue 0 Growth, YoY Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Exhibit 3: EBITDA margins improve 8.5 pp during FY09-14 25 45 21.1 18.0 15.5 27 18.6 17.7 20 15 12.6 % | crores 36 10 18 5 9 0 9.2 12.9 19.0 23.1 29.3 42.5 FY09 FY10 FY11 FY12 FY13 FY14 EBITDA 0 EBITDA margin (%) Source: Company, ICICIdirect.com Research Exhibit 4: PAT grows at 51% CAGR during FY09-14 led by higher margins 25 15 15 10.3 6 3.6 5 9 7.6 6.3 10 0 12 11.3 9.8 % | crores 20 3 2.6 5.2 8.0 12.8 17.8 20.8 FY09 FY10 FY11 FY12 FY13 FY14 PAT 0 PAT margin (%) Source: Company, ICICIdirect.com Research Exhibit 5: School revenues grow at 21% CAGR during FY12-14 led by higher realisations 40,000 100 88.0 38,000 36,000 80 70.4 70 60 34,841 33,224 60.0 x | crores 90 34,000 32,000 31,774 30,000 50 FY12 FY13 School revenue FY14 School enrolments Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Exhibit 6: Rising enrolments in test prep led to 24% CAGR in science revenues during FY12-14 60 14,524 36 14,400 40.1 14,175 32.6 14,000 x | crores 48 14,800 50.3 24 13,600 13,511 13,200 12 12,800 0 FY12 FY13 Science revenue FY14 Science enrolments Source: Company, ICICIdirect.com Research Exhibit 7: Commerce revenues grow at 19% CAGR in FY12-14 led by higher student enrolments 60 30,000 36 28,000 37.2 32.6 26.4 25,178 24 26,000 x | crores 48 24,000 22,088 12 22,000 20,236 0 FY12 20,000 FY13 Commerce revenue FY14 Commerce enrolments Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 4 Exhibit 8: Geographical distribution of centres across India - dominant presence in Maharashtra Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 5 Financial summary Profit and loss statement (| crores) Total Revenues | Crore FY11 105.5 Growth (%) 27 Total Operating Expenditure EBITDA 86.5 19.0 FY12 130.6 FY13 157.3 24 107.5 23.1 Cash flow statement FY14 201.8 20 28 128.0 29.3 159.5 42.3 Growth (%) (77) 21 27 44 Depreciation & Amortization 8.3 7.8 8.6 12.8 (| crores) Equity FY12 35 Reserves & Surplus 13 22 62 72 Networth 48 57 101 112 Minority Interest 0 0 (0) (1) LT liabilties & provisions Source of funds 4 53 6 63 9 110 4 115 Other Income 2.1 4.0 4.7 2.4 Interest costs PBT before Exceptional Items (0.0) 12.8 (0.0) 19.2 25.4 0.0 31.9 Goodwill Growth (%) 74 NM NM NM Other non current assets Tax PAT before Exceptional Items 4.8 8.0 6.4 12.8 7.6 17.8 11.1 20.8 Loans and advances Exeptional items PAT before MI 8.0 12.8 17.8 20.8 Current Investments Minority Int & Pft. from associates PAT 8.0 0 12.8 17.8 20.8 Cash & Cash equivalents Growth (%) 53 61 39 17 Current liabilities EPS EPS (Growth %) 2.4 55 3.8 59 4.6 21 5.3 16 Source: Company, ICICIdirect.com Research | Crore FY12 35 Reserves & Surplus 13 22 62 72 Networth 48 57 101 112 Minority Interest 0 0 (0) (1) LT liabilties & provisions Source of funds 4 53 6 63 9 110 4 115 Goodwill Long term loans and advances Long term loans and advances Inventories Debtors Other current assets FY14 40 34 47 79 94 1 1 1 13 10 14 30 20 0 0 0 - 7 26 12 20 - - 0 0 23 11 15 11 5 6 10 9 21 18 24 10 0 0 0 0 45 53 51 43 Provisions 8 14 17 24 Net current assets Application of funds 3 53 (6) 63 (6) 110 (17) 115 FY13 40 FY11 FY12 FY13 FY14 5.3 Key ratios FY11 34 Net fixed assets Net fixed assets FY13 40 Source: Company, ICICIdirect.com Research Balance sheet (| crores) Equity | Crore FY11 34 FY14 40 (Year-end March) Per share data (|) EPS-diluted 2.4 3.8 4.6 Cash per share 10.9 7.1 9.9 5.3 BV 12.0 14.4 25.4 28.2 2.0 0.8 1.8 3.8 DPS Operating Ratios (%) 34 47 79 94 EBITDA Margin 18.0 17.7 18.6 21.0 1 1 1 13 Adjusted PBT Margin 12.2 14.7 16.1 15.8 10 14 30 20 Adjusted PAT Margin Return Ratios (%) 7.6 9.8 11.3 10.3 Other non current assets 0 0 0 - Loans and advances 7 26 12 20 RoNW 33.5 24.5 22.5 19.5 Inventories - - 0 0 RoCE 40.8 26.4 23.9 26.2 23 11 15 11 42.4 28.8 25.0 21.4 5 6 10 9 RoIC Valuation Ratios (x) 21 18 24 10 P/E 57.6 36.2 29.9 25.7 0 0 0 0 EV / EBITDA 27.3 22.5 17.7 12.3 45 53 51 43 Price to Book Value 11.4 9.5 5.3 4.8 Provisions 8 14 17 24 EV/Total Revenues 4.9 4.0 3.3 2.6 Net current assets Application of funds 3 53 (6) 63 (6) 110 (17) 115 MCap/Total Revenues Turnover Ratios 5.1 4.1 3.4 2.7 Debtor days 18 16 19 17 4 3 4 5 Current Investments Debtors Cash & Cash equivalents Other current assets Current liabilities Creditors days Solvency Ratios Source: Company, ICICIdirect.com Research Total Debt / Equity 0.1 - - - Current Ratio 1.1 0.9 0.9 0.7 Quick Ratio Debt / EBITDA 1.1 0.2 0.9 0.9 - 0.7 - - Source: Company, ICICIdirect.com Research . 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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head – Research [email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected] ANALYST CERTIFICATION We /I, Abhishek Shindadkar MBA, Hardik Varma MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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