CL Educate IPO: Play for small listing gains in near-term

Primary market has just begun to become active in the month of March. After stellar responses received by new kids on the block like Bombay Stock Exchange, Radio City and D-Mart, CL Educate hits the primary market today.

Stock markets are known to reflect the change taking place in the economy. Companies that are growing at a faster pace are rapidly lapped up by investors and carried to new highs. The same is true with primary issues. Over the last two decades, companies from completely new sectors have tapped the markets. By the turn of the century, information technology companies arrived in the market and these were followed by private sector banks, gold loan companies, and airlines, among others.

However, one sector that investors expected to deliver, and which has disappointed is education. This is a bit of a surprise because in an average Indian family, education gets priority over every other need. Investors expected the few companies who tapped the market to deliver both in terms of financial and market performance, especially since the promoters of such companies were supposed to be well-educated. Unfortunately, that has not been the case, Educomp and Tree House are two failed companies that come to mind whenever one thinks of the education sector.

However, CL Educate follows a business model unlike that of listed education companies.

Promoted by IIM graduates, CL Educate, which commenced operations in 1996, has a diversified and integrated technology-enabled approach to education. It has a presence across the education value chain and has diversified its operations across six business segments, spanning test preparation and training services, generally referred to as “test prep”.

It has a publishing and content development division through its brand GK Publications, integrated business, marketing and sales services for corporates conducted under the brand Kestone, including event management, marketing support (including digital marketing support), customer engagement, managed manpower and training services.

The company also implements vocational training programmes as prescribed under government schemes in various states across India. It also offers integrated solutions to educational institutions and universities, including business advisory and outreach support services, under the brand CL Media, as well as research incubation and support services conducted under the brand Accendere. Finally, just like most other education institutes it runs K-12 schools operated under its brand Indus World School.

In terms of revenue share the ‘test prep’ business accounts for 47.9 percent of the revenue followed by the integrated business division under Kestone which generates 31.52 percent of revenue. Vocational training is 11.32 percent of revenue while the remaining divisions contribute the rest.

Multiple revenue streams offer a de-risked business model unlike a seasonal business model. Further, its presence across the country and the large stream of courses for entrance exams for government jobs, engineering, medical, law and CA brings in a steady stream of students into the company’s fold.

As for finances, it has posted steady 11 percent compounded revenue growth over the last five years, but profit growth has been volatile on account of branch addition and regular acquisitions. Another factor that separates CL Educate from other players in the sector is its asset-light model of expansion. Thus, out of the present issue, a major part of the funds will be taken away by its promoters and investors as part of the ‘offer for sale’ nature of the issue. Out of the near Rs 238 crore issue, only around Rs 100 crore will be utilised in the business for working capital requirement, repayment of debt and some acquisitions in future.

Based on its FY16 numbers the company is valued at 27.5 times its Rs 18.37 earnings. The pricing is in line with MT Educare and can offer some listing gains for investors. However, in the long run, the low entry barrier of such ‘coaching classes’ can be of some concern.

-Shishir Asthana

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