Career Launcher IPO Review: Take this coaching

CL Educate, which operates test preparation training centers under Career Launcher, is set to open its IPO for subscription on 20 March. The new-Delhi-based company has set the price band of INR500 – 502 per share and the IPO will close on 22 March. Investors can place their orders in lots of 29 shares. The public offer will be managed by Kotak Mahindra Capital Company while Karvy Computershare has been appointed the registrar. Through CL Educate IPO review, we try to find out the important bits of information before you make your investment decision.

CL Educate is promoted by Satya Narayanan R, Gautam Puri, Nikhil Mahajan, R. Shiva Kumar, Sreenivasan R, and Sujit Bhattacharyya who are hands-on entrepreneurs with deep understanding of the coaching industry. The company was started in 1996 by Satya Narayanan with just one coaching centre but has now grown into a network of 151 centers across 87 cities in India. Over these years, CL Educate has grown through acquisitions apart from the organic route and had 53,892 enrolments in its test prep courses as of 30 September 2016.  In addition to the test preparation business, CL Educate publishes and develops content under GK Publications and offers vocational training programs and business, marketing and sales services for corporate clients. The company also operates formal education schools under ‘The Indus School’.

CL Educate IPO – Backed by Gaja Capital

Like any successful business, CL Educate attracted private equity investment from Gaja Capital through GPE (India) and Gaja Trustee Company Private Limited. Through its investment in 2007 and 2008, Gaja Capital currently owns slightly over 15% equity stake in the company. It is important to highlight that CL Educate was largely known for its Career Launcher coaching classes back then. Our own desi investor HDFC came calling in 2014 and has nearly 5% ownership in CL educate.

A surprise element in the list of biggest shareholders is the SP Family Trust which owns 562,913 shares or 4.7% equity stake in the company. Shantanu Prakash of Educomp Solutions was allotted some shares in the company which he has subsequently transferred to SP Family Trust.

With 119,904 shares, Edelweiss Finance & Investments Limited is also an important investor in CL Educate.

CL Educate IPO Review – A mix of fresh shares and OFS

The upcoming IPO will mobilize nearly INR238.9 crore at upper end of the price band and it will be a mix of fresh shares and Offer for Sale (OFS). Out of this, proceeds to the company will be INR109.4 crore. CL Educate plans to use IPO proceeds for funding working capital requirements of itself and subsidiaries GKP and Kestone (INR52.5 crore), pre-payment of loans availed by subsidiary CLIP (INR18.6 crore) and acquisitions and other strategic initiatives (INR20 crore).

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The IPO will also include sale of 2,579,881 shares through OFS by existing shareholders and this includes Gaja Capital, SP Family Trust and individuals among promoters and promoter group. Even after participating in the IPO, Gaja Capital’s two arms will remain substantial shareholders and we like this as it shows their confidence in the business. The SP Family Trust will be selling its entire stake while Edelweiss will also make a full exit. All the six promoters, including Satya Narayanan, plan to partially sell their shareholding.

Career Launcher IPO Review – Consistent revenue growth

CL Educate divides its operations in six verticals but the biggest of the lot continues to be test preparation and training vertical. This business-line contributed 53.3% to the top line in the six months ended 30 September and another 33% was contributed by business, marketing and sales services for corporates. As one can see, remaining verticals of publishing, vocational training, K-12 schools are not big revenue drivers. The top two businesses have growing operations and have propelled the top line for a consistent growth in the last four years. If the results for the latest six months are any indication, CL Educate is on its way to achieve higher revenues this year as well.

Evidently, the company’s financial performance is solid and revenues have grown consistently. This cannot be said for its profits and earnings have been uneven. This has also resulted in inconsistent margins, although the margin of 7.9% in the latest six months points to an improving trend.

Indus World School to be sold

As we mentioned above, CL Educate has some small business lines and the formal education business, run under Indus World School, is one of them. The company operates eight schools in Punjab, Delhi NCR, Madhya Pradesh, Chhattisgarh, Maharashtra and Haryana and has 2,654 students enrolled. The business, started in 2006, contributed just 2.2% to CL Educate’s revenues in the latest six months and the company is planning to sell this business line. According to the red herring prospectus, CL Educate has signed term sheet for sale of the business on slump sale basis for an aggregate consideration of INR85 crore.

Setting up schools is a capital intensive business and has a much longer gestation when compared to test preparation business. We like the move to shed this low-margin business.

CL Educate IPO Review – Should you invest?

So finally, we come back to the question if CL Educate IPO is good enough for subscription. There is no denying that Career Launcher is quite a strong and well-known brand and that it operates in an industry where demand of its services is unlikely to dip. The test preparation industry as of now is estimated at INR378 crore (INR3.78 billion) and continues to grow in double-digit percentage rates. The narrative for the necessity for coaching has not changed much in these years. High competition for the limited seats in even more limited quality institutions have ensured that parents spend a higher share of their income levels on coaching. This is all too well-known to our readers, so we will not spend much time here.

CL Educate is strong company but it is not really a high entry-barrier business which means there are always new entrants willing to spoil pricing for established players. The digital evolution of new generation is also a threat. CL Educate has also not been able to maintain steady profitability, despite very strong cash flows. This means we need rely on valuations to arrive at the investment decision. The EPS of 18.37 in FY2016 means CL Educate IPO is priced at a PE ratio of 27.5. This is not very high for a growing business. The situation has improved further in the latest six months and annualized EPS brings down PE ratio to 23.2. Given the natural downside of extrapolation, it is better to not take FY2017 estimates too seriously.

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