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Content Index
Treehouse Education & Accessories Ltd (THEAL) Snapshot :- Slide #3
THEALs Investment Highlights :- Slide #4
Our Research Desks views on THEAL :- Slide #5
Pre-School Education Industry Overview :- Slide #14
THEAL Business Overview :- Slide #22
THEAL Investment Rationale :- Slide #32
THEAL Financials:- Slide #41
Concerns & Reasoning :- Slide #43
Conclusion :- Slide #45
Investment Highlights
* Since majority of the companys Pre-Schools are self-operated, it has more negotiating power and
keeps costs under check. It has also resorted to modes such as Day Care centers, Teacher training, Increased
batches etc to sweat its Assets better and reduce Rental costs as % of revenue. Its strong execution track
record in this regard can be seen from its profitability even in a high cost market like Mumbai.
7.) Reasonable Valuations for a Quality business run by a Credible & Competent Management :
* One of the most comforting factors in THEAL has been the Management quality of Mr. Rajesh Bhatia. There
has been a lot of passion and discipline with which he has continued to build THEAL. We are convinced that the
company has a long way to go and it has the right set of people at the top to drive this growth.
Regards,
Indias overall spend on Education to GDP has grown from just 1% to 5% which has been the major growth
driver and revenue source for private sector education providers.
Urban households account for 26% of the population but account for 57% of the overall private spend on
education. Technical Education caters to just 2.6% of the overall students but account for 20% of the overall
household on education.
On a percapita basis, the richest 10% of the urban population spends 90 times more on education than the
poorest 10% of the rural population.
Preschools are predominantly neighbourhood institutions which address a micro market and are driven by
local conditions. Individual pre-schools, therefore, require low capital as compared to other educational
institutes.
There are no education board to regulate these schools. However, branding and an internal set of teaching
structures are increasingly becoming mandatory due to the increasing demands of parents.
There are many models of operations in the pre-school segment. The key models of preschool are selfoperated model and franchisee model.
Most key players in the preschool segment go for franchisee model as it helps them to expand faster and
there is no major capital investment.
THEAL is the largest self operated preschool chain in India and is known for qualified and experienced
teachers, standardized curriculum and quality education.
THEAL has about 379 preschool centers as on 31st March,2013 and proposes to open another 90 in FY14
taking the total to about 469 preschool centers.
THEAL is also present in the K-12 school segment, especially at locations where it has a strong pre-school
presence. It also provides School Management services to 24 operational K-12 schools.
THEAL offers a wide range of courses for different age group of children from play group, nursery, junior
KG, senior KG, mother toddler, activity classes, teacher training and summer camps.
THEAL vs Peers
The self operated model helps the company to maintain standardization and quality across its branches
apart from allowing it to capture the entire revenue opportunity instead of sharing with the franchisee
partner. Self Operated model is more difficult to execute compared with a Franchisee model.
Tree House has the largest self operated model with 75% of its overall centers compared to peers who
have only about 25% on self operated model.
The company intends to maintain its ratio of 75: 25 in case of Self Operated : Franchisee. The company
opens Franchisee modes only in locations where it doesnt have any execution experience and where it is
necessary to have a local partner who runs the show.
Franchisee Model
In this model, the company expands its operations and extends its brand name through a franchise, in lieu
of which, it is paid a one-time franchise and a royalty fee.
The royalty fee, which is based on total fees generated by the preschool, is in the range of 10- 20%. THEAL
charges a royalty of 15%. In the franchise model, most preschools have a minimum built-up area
requirement of 1,000-2,000 sq ft with a one-time franchise fee, depending on the location.
THEAL charges a differentiated franchisee fee as per the tier of the cities, which is far above the peers. This
is due to the higher Brand equity and the difference in THEALs and its peers strategy for expansion.
THEALs profitable centers are quite high. Most of the centers become profitable as they mature. This can
be seen from the improvement in FY13 over FY12. In FY 12 the number of profitable centers was about 153
out of 184 centers which translates into a success rate of about 83.15%.
In FY13 the number of profitable centers was about 229 as against 262 total centers which translates into a
success rate of 87.40%. The number of successful centers in Jaipur, Hyderabad and Kolkata showed
significant improvement which demonstrates the potential to expand in varied geographies.
THEALs revenues have grown from about Rs.39.24 Cr in FY11 to about Rs.216.09 Cr in FY15 ie, a growth of
about 53.19% CAGR. The growth in revenues was driven by increase in number of centers and increase in
student per school which stood at a healthy 60-75 per school during the past 5 years.
The EBITDA margin grew from 15-18% in FY08-09 to 54.1% over the past four years. This growth was led by
Improving operating leverage. With fixed selling and admin costs, any increase in enrollments has led to
strong improvements in profitability.
The preschool EBITDA margin are likely to exceed expectations, with key levers being improving average
student per preschool growth, lower SG&A expenses and better realizations vs cost inflation.
THEAL has grown rapidly from FY08 with the support of PE funding. The company has perfected its PreSchool business and scaled it up rapidly during the last 5 years.
THEAL has grown its revenues from Rs.5.42 Cr in FY08 to about Rs.114.28 Cr in FY13 growing at a CAGR of
about 83.9%. While the base is now higher, the company can still aim for a 30%+ CAGR.
THEALs EBITDA margins has grown from about 15.87% in FY08 to about 55% in FY13 as several of its PreSchool centers started generating profits.
THEAL had posted a loss of Rs.0.19 Cr in FY08 as a result of several new openings in the previous year.
THEALs student population is expected to increase rapidly from about 7182 students in FY11 to about
53288 students in FY15 indicating strong cash flows.
The student per center which was around 40 in 2011 has scaled upto 78 in 2013 and is expected to remain
around 74-78 levels till 2015. This is what has led to strong Margin improvements.
The center per student ratio is calculated including the new centers. The total number of centers added by
the company has grown from 178 in FY11 to 379 in FY13 which is an increase of about 112% in two years.
The increase in student ratio has led to better student teacher ratio which is likely to improve from about
18 to 15 in FY2015.
Of the roughly 500 Cr balance sheet assets currently - 200 Cr Rs is locked in Pre-School business, 230 Cr in
K-12 business and 70 Cr as Cash and Equivalents.
THEAL is on the process of offloading its K-12 Assets which will help it to become asset light and raise
capital to fund its future growth.
THEAL has plans to sell 5 K-12 Properties. It hopes to sell these assets over the next 2-3 years and that
would help it to raise cash of about Rs.1200 Mn as against a book value of Rs.962 Mn. THEAL will be able to
accumulate net cash of about Rs.800 Mn by FY16E which is about 8% of its current Market cap.
THEAL expects the asset sale to be about 1.25-1.5X its book value which is reasonable considering the
quality of its K-12 assets.
Overall Financials
In 2010 THEAL has ventured into the K-12 segment. It operates 24 schools, with an overall investment of
more than INR 2.4bn i.e. about 50% of the asset base. The company also acquired business commercial
rights for INR 250mn to operate 12 schools for the next 30 years.
THEAL has invested INR 960mn in land & building and provided security deposit of INR 1.1bn to the trusts
to operate schools. This has made significant capital unutilized.
Once the asset reduction process is completed, THEAL will operate 24 schools with just INR 312mn in
investment. The K-12 school operations are a steady cash cow business with virtually zero earnings risk, it
should have the potential to exceed return on investments.
THEAL has guided ROC of about 20% from FY16 and has the potential to generate ROC of 56% in FY19.
THEAL has started its business in 2003 and is run by first generation entrepreneurs Rajesh & Geeta Bhatia.
The couple started the first THEAL pre-school in Mumbai with their life savings after looking at the lack of
quality pre-schooling opportunities for toddlers.
THEAL has attracted strong PE interest in the company from FY08 and has been consistently receiving funds
from PE investors till 2012. THEAL had come out with an IPO in August 2011to the tune of Rs.112 Cr and the
stock was listed in both NSE and BSE.
Promoters are extremely confident of the business and this can be seen from their increasing stake in the
company through Warrant Issuances and Open Market buying. In fact Warrants were being issued around
the current Market price which should give us some confidence.
Financials
FY12
FY13
FY14E FY15E
Net Sales
77.21
114.28 163.16
% Chg
96.76
48.01
42.77
Total
Expenditure
35.19
52.47
74.24
% Chg
57.66
49.10 41.49
EBITDA
42.02
61.81
88.92
EBITDA
Margins(%)
54.42
54.09
54.50
Interest
6.5
6.62
9.79
Depreciation
7.8
13.38
17.95
PBT
31.17
48.65
68.25
88.09
PAT
21.66
33.34
47.09
EPS
6.43
9.27
13.09
32.44
32.44
54.50
Circulation Operating pre-schools and providing educational services to K-12 schools are currently
unregulated, but the government may introduce a regulatory framework in future. Any such government
regulation, and THEALs inability to comply with the same, may adversely affect its revenue.
4) Expansion Risk:
The company plans to invest in pre-schools nationally to de-risk its business. However, due to increasing
competition and lack of knowledge on the local market may result in the companies business not being able
to scale upto expectations. The inability of the company to scale up its business in new geographies will
adversely affect its margins and profitability.
Price Chart
Sep
Jun
Mar
2013
2013
2012
Promoters
30.87
29.27
27.75
27.75
FII
1.16
1.19
1.28
1.56
DII
10.22 10.65
10.87
10.94
Others
57.75
58.89 60.10
59.75
Conclusion
Indias developing economy has created several Niche sub-sectors which are growing at a very fast rate
owing to increased Urbanization, Affordability, Aspirations etc. Companies which are market leaders in these
Sub-segments are companies which can deliver strong Investor returns. These are generally good hunting
spots for Multibagger Investors as most of these companies are currently Small-Cap and they have the
potential to grow into a Blue-Chip over the next 10 years. Most of our Multibagger ideas can be fit into this
template Astral Poly, Cera Sanitary ware, Poly Medicure, Mayur Uniquoters, PVR etc.
Similarly Pre-Schools is one such segment which has the potential to become a really large business
going forward. THEAL being the countrys largest self-operated Pre-School chain has the potential to grow
multifold going forward. More importantly, THEAL being in Education sector gives it the added advantage of
Revenue stability and lower earnings risk. We would like to view THEAL as a young Apollo Hospitals or PVR
in the making.
THEALs biggest positive is the high Return on Capital nature and Free Cash flow nature of its PreSchool business. The company has other advantages in the form of healthy Balance sheet, credible
Management, strong Growth etc. The companys expansion plans also provides decent visibility on earnings
growth and an improved scale of business.
Despite being a Small cap stock, THEAL doesnt have the usual risks associated with Small cap stocks
such as Governance issues, high Earnings volatility, Investor neglect etc. We believe that the companys
earning growth of 30%+ should deliver strong Investor returns and any improvement in its valuation is just
an added bonus. Price risk is lower and Earnings growth combined with a Re-rating would help the
company to deliver strong Multibagger returns to Investors.
THANK YOU