Tree House

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Tree House Education & Accessories Limited

August 08, 2011 SMC Ranking

Business Overview
The company operates the largest number of self-operated pre-schools in India. As of June 15, 2011, it has 223 pre-schools under the brand name of “Tree House” across 33 cities in India. As of March 31, 2011, 110 self-operated pre-schools having 370 teachers served more than 5,000 students. The company has also branched 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.

Issue Highlights
Industry Total Issue Size Issue Size (`Cr.) Price Band (`) Offer Date Close Date Face Value Lot Size CRISIL IPO Grade 3/5 Furnishing - Laminates 8,432,189 114 - 129 135 - 153* 10-Aug-11 12-Aug-11 10 40 Indicating average fundamentals

Strengths
Focus on Self-Operated Pre-Schools: The company's business model is focused on operations primarily through self-operated pre-schools and as of June 15, 2011, it had 223 pre-schools under the brand name of “Tree House”, of which 149 are self-operated which represents 66.82% of the total pre-schools. The company-owned model helps a company to maintain quality, hygiene and safety control. Further, a higher percentage of self-operated pre-schools help the company in introducing newer teaching aids and planning the infrastructure of the pre-schools. Brand Awareness and Geographical Presence: The company has been successful in establishing “Tree House” as a brand which is recognized in the market for pre-schools and its quality teaching methods. The first pre-school was set up in 2003 which served 51 students and as of June 15, 2011, the company has grown to 223 pre-schools. As of March 31, 2011, 110 self-operated pre-schools served more than 5,000 students. The brand awareness serves in attracting talent to the company and aids in increasing enrolments for its pre-schools. The company is selective in appointing franchisees to operate its preschools and ensures the franchisees maintain quality in methods and standards for operating the pre-schools. This contributes towards sustaining the brand name of the company. Scalable Business Model: The company has a scalable business model and has expanded its presence from 1 city in 2003 to 33 cities in 2011. The number of students in its selfoperated pre-schools increased from 51 in 2003 to 5,355 students as of March 31, 2011. In a similar manner, the number of teachers at its self-operated pre-schools increased to 378 as of March 31, 2011 from 4 in 2003. Further, the model of centrally procuring all the material for its pre-schools assists the company in economizing its costs.

*An additional discount of `6 to retail investor

Issue Composition
Net Public Issue QIB NIB Retail

In shares

8,432,189 4,216,095 1,264,828 2,951,266

Book Running Lead Manager JM Financial, Motilal Oswal Name of the registrar Link Intime

Strategy
Enter New Geographical Markets and Further Deepen Presence In Existing Markets: The company proposes to continue growing its pre-schools through geographic expansion by establishing and expanding in various cities and towns in India. It proposes to open additional 120 self-operated pre-schools across India by Fiscal 2014. Further, in addition to the twelve K-12 schools as of June 15, 2011, the company proposes to start providing educational services to additional seven K-12 schools by Fiscal 2013. Pre-Schools To Supplement the Enrolments at K-12 Schools: The company plans to use to its advantage its existing relationships with pre-school students and their parents by encouraging students to join K-12 schools where the company provides educational services. Several of existing pre-schools operate close to the K-12 schools to which the company provides educational services. Thus, the students completing pre-schooling with the company shall act as potential feeders to these K-12 schools. Pursue Strategic Acquisitions and Partnerships: The company primarily operates its pre-schools through franchisees in non-metro cities. In order to expand its business and presence in the market in pre-schools, it continuously evaluates opportunities to acquire existing pre-schools or enter into franchisee arrangements with partners to run the preschools under the brand name 'Tree House'. The company seeks to pursue selective opportunities for providing educational services to K-12 schools to augment its capabilities, broaden its service offerings and increase its geographical presence.

Shareholding Pattern (%)
Particulars Promoters and promoters group QIB NIB Retail Total Pre-issue 39.47 35.64 21.12 3.78 100 Postissue 29.60 39.23 19.59 11.58 100

Analyst
Sumit Kukreja [email protected]

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Risk Factors Objects of the Issue
Particulars Expansion of Pre-school business Office space acquisition Procurement of Exclusivity Rights to provide Educational services Educational Complexes in Rajasthan and Gujarat Loan Repayment General Corporate Purpose TOTAL 40.05 28.59 [•] [•] 15.60 `Cr 41.29 11.04 Land-Use Conversion Yet To Be Approved: The company has agreed to acquire land in Jhunjhunu, Rajasthan to set up an educational complex and intends to utilize `24.89 Crores from Net Issue Proceeds for the same. However, 63% of the land is meant for agricultural use and the company is yet to get an approval for non-agricultural use. If the company is unable to obtain the approval for land use conversion then its plans for setting up the educational complex shall get delayed or get cancelled altogether. Self-Operated Pre-schools Operate from Rented Premises: 148 of the 149 self-owned pre-schools of the company operate from rented premises, including premises which have been rented the promoters of the company. If any of the occupation arrangements are terminated or not renewed on acceptable conditions, the company may be required to relocate those pre-schools and suffer disruption in operations. The company may be unable to acquire new premises for these pre-schools and may be forced to close down some of these pre-schools. Further, it may be unable to acquire rented premises at acceptable rates and any costs incurred to relocate the pre-schools may have an adverse effect on the revenue and profits of the company. Importantly, students at pre-schools are usually from areas in and around the location of the pre-schools. On closure/relocation of such pre-schools, it may lead to reduction in number of students enrolled with the company. Limited Experience in 3rd party Education Services: The company commenced the business of providing educational services to 3rd party K-12 schools in 2008 and as of June 15, 2011, it has the exclusivity rights to provide certain educational services to only 12 K12 schools. Due to the limited operating history in the segment the company may not have sufficient experience to address various risks, including its ability to provide educational services to schools successfully along with quality control. Risk of Regulation Going Forward: At present, operating pre-schools and providing educational services to K-12 schools in India is unregulated. However, the government may introduce a law in order to regulate the sector. For example, the government of state of Maharashtra has proposed to introduce a legislation to regulate fees in unaided and private schools within the state owing to disputes between parents and schools over fee hikes. A regulation or legislation providing mandatory guidelines regarding functioning, operation, opening of pre-schools, providing educational services, enrolment of students and chargeable fee may be introduced. Such guidelines may adversely affect the business operations and the financials of the company. Dependent on 3rd Party School Operators: As of June 15, 2011, the company has entered into service agreements with four K-12 school operators for providing educational services to a total of 12 K-12 schools. Under these agreements, the company pays a one-time fixed fee to the K-12 school operators to acquire exclusivity rights for providing educational services to their K-12 schools for a specified period. The fixed fee paid by the company is based on management estimates and there is no assurance that the company will be able to make expected rate of returns on the fees paid by it. Further, a K-12 school operator is required to pay the company an annual service fee based on the number of students enrolled with the K-12 school or for courses conducted by the K-12 school. There are a number of factors that are outside the control of the company which may result in default by the K-12 school operators of their obligations, including non-payment of dues, or termination of arrangements with them. Franchisees Failing to Operate the Franchisee Operated Pre-Schools Successfully: As of June 15, 2011, 74 of the 223 pre-schools are operated by the franchisees. The revenues from franchisee operations constitute 5.64% of the revenues for the year ended March 31, 2011. The franchisees are required to operate the franchisee operated pre-schools in the same manner in which the self-operated pre-schools are operated, including the design of the school and curriculum followed. Franchisees may not have access to financial resources they need in order to maintain the franchisee operated pre-schools due to unavailability of credit or other factors beyond their control. Any failure on part of the franchisees to operate the franchisee operated pre-schools successfully and in the expected manner, or at all, could adversely affect the brand, business, and results of operations of the company.

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Industry Overview
The education system in India comprises of formal, vocational and informal education. While all levels of formal education are highly regulated and fall under the purview of Ministry of Human Resource Development, Government of India (MHRD), non-formal education is unregulated. Formal education comprises of K-12 (mainly schools), higher education and post graduation. This segment is highly regulated by various statutory bodies formed by central and state governments. The K-12 segment represents education from kindergarten to class XII and forms the largest segment within the education space in India. K-12 education in India is delivered primarily through schools that are affiliated with CBSE, ICSE and other education boards. These schools are either run by government or by the private sector.

Peer comparison
Company name Aptech Carrer Point Core Projects Educomp Everonn NIIT Zee Learn Tree House* Mcap (`cr) EPS (`) 591 536 3220 2697 958 789 538 515.84 1.63 16.82 11.98 40.96 44.71 3.01 0.19 2.73 P/E P/BV Facevalue(`) Price(`) 10 10 2 2 10 2 1 10 121 296 291 281 500 47.8 BV 53.87 150.65 88.94 170.14 280.21 18.67

74.39 2.25 17.60 1.96 24.28 3.27 6.87 1.65

11.18 1.78 15.88 2.56 107.89 0.17 56.10 2.05

20.5 119.21 153 74.64

* all calculation on upper price band post issue, An additional discount of `6 to retail investor

Valuation
Considering the P/E valuation on the upper end of the price band of `153, the stock is priced at pre issue P/E of 42.07x on its annualised FY11 EPS of `3.64. Post issue, the stock discounts its FY11 annualised earnings per share of `2.73 by 56.10x. Looking at the P/B ratio at `153, the stock is priced at P/B ratio of 3.15x on the pre issue book value of ` 48.51 and on the post issue book value of `74.64, the P/B comes out to 2.05x. On the lower end of the price band of `135, the stock is priced at pre issue P/E of 37.12x on its annualised FY11 EPS of ` 3.64. Post issue, the stock discounts its FY11 annualised earnings per share of `2.73 by 49.50x. Looking at the P/B ratio at `135, the stock is priced at P/B ratio of 2.78x on the pre issue book value of `48.51 and on the post issue book value of `74.64, the P/B comes out to 1.81x.

Outlook
There is a strong demand outlook for education services in India, especially in the preschool and K-12 schools the company is present in. The company has a strong brand recall in a highly fragmented market and has witnessed very high growth rates in the past. However, compared to other listed players in education sector the IPO is priced to perfection.

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Annexure
Profit & Loss
Particulars Total Operating Income Total expenditure Operating Profit OPM% Other Income PBDIT Depreciation PBIT Interest PBT Tax Profit after tax FY 11 39.24 22.33 16.91 43% 1.91 18.82 3.96 14.86 1.24 13.63 4.43 9.20 FY 10 21.38 14.36 7.02 33% 0.50 7.52 2.93 4.59 0.58 4.01 1.41 2.60 FY 09 10.27 8.20 2.07 20% 0.38 2.45 1.87 0.58 0.04 0.53 0.02 0.51

` in Cr.
FY 08 5.42 4.56 0.85 16% 0.01 0.86 0.94 (0.08) 0.00 (0.08) 0.11 (0.19)

Balance Sheet
Particulars Net Block Capital WIP Fixed Assets Investments Current Assets, Loans & Advances Current Liabilities Loans Deferred Tax Liability Net Worth Represented by Share Capital Share application money Reserves Profit and loss account debit balance Net Worth 24.02 0.00 98.63 0.00 122.65 17.42 8.25 44.10 0.00 69.77 15.04 0.00 29.14 -0.17 44.01 FY11 62.34 66.49 128.83 2.65 53.47 13.86 46.62 1.82 122.65 FY10 33.01 30.50 63.52 1.02 23.00 5.39 12.00 0.38 69.77 FY09 23.51 15.51 39.02 0.00 7.93 2.78 0.04 0.12 44.01

` in Cr.
FY08 8.19 0.35 8.54 0.00 1.32 1.41 0.15 0.11 8.18

8.81 0.05 0.00 -0.68 8.18

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RANKING METHODOLOGY
WEAK NEUTRAL FAIR GOOD EXCELLENT

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