KOTA TUTORING: FINANCING THE

EXPANSION
 Kota Tutoring: Financing the Expansion
Company Background
Kota Tutoring was started by Anand Agarwal in Kota, Rajasthan. Anand Agarwal was born
and raised in a small village on the outskirts of Kota. He attended IIT Kharagpur and graduated
with a degree in Physics. Anand went on to work for prestigious high-tech company in France.
In his spare time, he used to tutor his co-workers’ children. Once he came back to India, he
worked as an instructor for the prestigious Bansal Classes for six years. Post which he started
his own academy, Kota Tutoring in 2005.

Kota Tutoring became one of the leading test-prep schools, with more than 22000 students
studying annually to prepare for the IIT JEE. Out of the nearly 10,000 open seats at IIT, Kota
Tutoring’s students ended up securing 1600 to 1700 each year. Kota Tutorial had been able to
attract a great team of professors, 280 in total, 70 of whom were graduates of IIT themselves.

Anand Agarwal was planning to expand Kota Tutorial in the Indian metros: Mumbai, Chennai,
Delhi and Bangalore and also in foreign markets of Dubai, Singapore, Malaysia and Australia.
As part of this expansion, he had been approached by two parties with investment plans. One
was from Raghav Agarwal who had approached Anand through a more personal channel while
the other was from RM Capital, a top tier corporate financing NBFC. RM Capital had strong
relations with several of the industry leaders like the Apollo Group, Education Management,
and DeVry.

Raghav having been brought up in a similar setting as Anand, understood the market better
than RM capital which had little or no local knowledge.
Financial Issues Identified
1.) Conflict of Interest
Anand Agarwal didn’t have the right estimate of the valuation of Kota Tutoring. The
valuation of the company should ideally been done by the company itself, having been
helped by Raghav for putting up the financial statements, there was certain scope for
conflict of interest on Raghav’s part.
Anand, so as to make sure that he was getting the right value for his company, contacted
several parties. RM capital valued the company 16 times the PAT post funding while
Raghav valued it at 12 times the PAT post funding. There is an apparent disparity in
terms of valuation of the company. Further, noting the fact that Kota Tutoring had poor
record keeping, it was difficult to precisely assess the PAT and hence the total
valuation.

2.) Poor Record Keeping

A common risk for cash-based businesses in emerging markets is related to poor record
keeping. This is a significant drawback for a private equity fund seeking to acquire
small business, the fund may not be able to efficiently monitor revenues especially if it
has a minority share and does not have easy access to information.

3.) On expansion the profit margins could drop

Kota was the hub of coaching classes with thousands of students and teachers pouring
in from all parts of the country. This also ensured a good supply of talented students
and teachers, thereby ensuring a high success rate and profit margins for the coaching
classes. However, once Kota Tutoring expanded in the metros, the talent supply would
get limited in terms of students and faculty.

The expected drop in supply of students and faculty would also mean a drop in the
success rate of Kota Tutoring. The issue, however, being the fact that it was difficult,
nearly impossible, to account for such a shift, thereby inflating the expected future
returns.

4.) High competition

It was difficult to assess the role of competition on the growth of Kota Tutoring. There
was low barrier to entry for the competitors because of lower capital required to set up
classrooms and coaching centers. Plus, several competitors were switching over to
online classes which could be attended from far off locations thereby increasing the
reach of the industry leaders, particularly operating out of Kota.
The difficult to assess competition also meant that the future returns could not be
estimated precisely thereby giving an incorrect estimate of the future returns of the
company. It’s important to have an estimate of the growth of the company for the fact
that the returns are estimated as against those growth prospects.
5.) Future Prospects of funding
The future prospects of raising funds will be limited by both the options available. The
equity option has several restrictions associated with it, whereas debt would increase
the equity cost, thereby hindering future prospects of raising money.
Further, the equity raised through partnership with Raghav Agarwal would reduce the
ownership of Anand by 12%.
Analysis and Interpretations
1.) Market
Engineering education is very highly regarded in India, with around 1200000
engineering aspirants every year. There are many parents and students alike who wish
to study at an IIT, one of the best schools in the nation and well known internationally.
Indian parents were known to make any sacrifice to make sure their children received
the best possible education. As cited in the case, the cab driver who spent almost 80%
of his income on his son’s education.

Future demand for IIT enrollment (therefore tutoring services) looked to remain strong
because available seats in engineering and other disciplines at the top schools had not
grown as fast as the population and the literacy rate, making entrance to undergraduate
schools much more competitive.

2.) Strengths of Kota Tutoring

Kota Tutoring had very high success rate in the entrance test to the IITs, so much so
that 1600-1700 students out of the 10000 open seats came from the Kota Tutoring. Plus,
Anand was able to attract very talented set of students and faculty and ended up securing
280 faculty members out of which 70 were graduates of IITs.
The key to success of Kota Tutoring has been its ability to attract and retain the quality
talent. However, it faced a serious challenge in terms of attracting and retaining talent
once it expanded in the metro cities.
Kota Tutoring generated enough cash to fund its present growth, however, it needed
funding to expand in other parts of the country. However, the strong record it had had
made it a strong brand in this sector, hence customer acceptance was expected to be on
the higher side.

3.) Competition
Kota Tutoring was facing tough competition in Kota by several existing players and the
new ones coming up. There was low entry barrier as low capital was required for setting
up classes and coaching centers.
Plus, several major players had started online classes to cater to the students who were
not willing to stay in Kota but were looking for best quality tutoring.

4.) Risks Involved

Recruiting and retaining skilled teachers, especially when it was considering expanding
in other cities was going to be a major issue for Kota Tutoring.
Another risk involved with businesses like Kota Tutoring was poor record keeping.
Investments
a.) Raghav Agarwal
Raghav offered a common stock equity funding worth Rs. 44 Crores. The actual post
money equity valuation would be 12 times the Profit After Tax of the for the FY 2016.
The post money valuation would be Rs. 440 Crores.
Price Per Share: Rs. 2151
No. of Share to be issued: 204,545 Equity Shares

The investment imposed certain restrictions on Kota Tutoring, as in it required consent

of the investors for any of the following:
i.) Issue or create any series or class of securities with rights superior to or on parity
with common equity shares
ii.) Pay dividends on shares of the capital stock of the company
iii.) Effect any exchange or reclassification of any stock affecting the common
equity stock or any recapitalization involving the company
iv.) Repurchase or redeem, any securities of the company other than from the
employees of the company upon termination of their employment pursuant to
prior existing agreements
v.) Effect any amendment of the Company’s certificate of Incorporation of Bylaws
which would materially adversely affect the rights of the equity stock
vi.) Voluntarily dissolve or liquidate
vii.) Effect any merger or acquisition
b.) The investors will have the right to appoint a director on the board of the company.
Capitalization Table

Investors Pre-Financing Post-Financing

No. of Shares % No. of Shares %
Founder 1500000 100 1336955 78.5
Family 163043 9.5
Raghav 204545 12
Total 1500000 100 1704543 100

RM Capital

RM Capital was offering a total term loan amount of Rs. 150 Crores for a term of 10 years
at the interest rate of 12% per annum. Valuation of the company would be Rs. 600 Crores
post funding, that is, 16 times the audited FY 2016 Profit After Tax.
Implementation and Recommendations

Investment Ownership Pre- Money Post-money

Raghav 44 12% 396Crores 440 crores

RM Capital 150 - 450 600

Anand should prefer making the deal with RM Capital for the 10 year long term loan
because of the following aspects associated:

- One of the key factors in the deal is that Anand Agarwal was not willing to let go
of any control on his company, hence the 12% ownership to Raghav was not
something he was looking out for.
- The deal with Raghav imposed several other restrictions on Kota Tutoring in
terms of decision making.
- RM Capital had valued the company at higher amount of Rs. 450 Crores
compared to Rs. 396 Crores done by Raghav
- Raghav although had a better understanding the local market and dynamics of the
Indian Education sector, was eagerly looking forward to the opportunity for the
fact the apparent upside to it in terms enormous growth prospects.
- RM Capital had partnerships with some of the industry leaders like the Apollo
Group, Education Management, and DeVry.
- RM Capital out of its experience of handling larger companies would also help
improve the overall management of Kota Tutoring in terms organising the
financial transactions.
- The exit plan for a debt was always more convenient as compared to that of the
the deal offered by Raghav as the latter mentioned that the company and
promoters would endeavour to lists its common shares on recognised stock
exchanges, however, if the exit could not be executed in the above manner, the
deal allowed the investors to sell their shares to any third party including the
competitors. Hence making the relative a greater downside associated with equity
funding.