MT Educare is entering the primary market on 27^th March 2012, with a fresh issue of Rs 35 crore and offer for sale of Rs. 80 lakh equity shares, both in the price band of Rs. 74-80 per share. This entails fresh issue of 44 lakh equity shares and offer for sale of Rs. 64 crore, at upper end of the price band.

Thus, the issue aggregates to Rs. 99 crore in value and 1.24 crore shares (at Rs. 80 per share). Representing 31.90% of the post-issue share capital of the company, the issue will close on 29^th March.

An education and coaching service provider, the company operates 188 coaching centers at 110 locations across Maharashtra, Tamil Nadu, Karnataka and Gujarat, as of 31^st January 2012, in addition to few centres in Delhi, Gurgaon and Dubai under JVs. However, the company can be pre-dominantly termed as a local coaching class, since Mumbai accounts for 142 of the 188 centres, i.e. 76%, and these Mumbai centres accounted for 90% of H1FY12 revenue.

The company coaches students in secondary and higher secondary school exams, engineering and medical entrance tests, B.Com. and Chartered Accountancy exams under the ‘Mahesh Tutorials’ brand. It has serviced 59,772 students in FY11, including 1,472 through its 28 franchisee-operated coaching centres, and has 757 faculty members.

For financial year ended 31^st March 2011, company reported Rs. 105 crore as total operating income, with PAT of Rs. 8 crore, on a consolidated basis, resulting in net margin of 7.6% and EPS of Rs. 2.36. During six months ended 30^th September 2011, total operating income rose to Rs. 72 crore and profit to Rs. 9.6 crore. EPS for H1FY12 stood at Rs. 2.77. However, these numbers cannot be merely doubled to estimate FY12 financials, since Q4 generally accounts for about only 20% of annual revenues, as revenue recognition is done over the course duration. Also, cost pressures continue to mount, with 30% annual growth in faculty fees, selling expenses and other direct costs.

Company’s networth, as on 30^th September 2011, stood at Rs. 57 crore, on equity of Rs. 35.17 crore. Promoter Mahesh Shetty holds 48.21%, whose stake will decline to 42.88%, post-issue (assuming price discovery at upper price band). On account of offer for sale, stake of PE firm Helix Investments will reduce from 28.64% to 5.25% (having invested since August 2007, effective cost for Helix is Rs. 32.56 per share, amounting to 22% IRR over a 4.5 years time period). Other individuals and employee trust account for 23.15% of pre-issue capital of the company.

The company plans to raise Rs 35 crore to partially finance construction of a pre-university college campus at Mangalore, Karnataka, to be operated by the employee-trust, to the extent of Rs. 21.7 crore and to establish new coaching centres at 20 locations for Rs. 5.3 crore in FY13 and FY14. This fund-raising is being undertaken despite cash and cash equivalents of Rs. 51 crore as of 30^th September 2011, of which only Rs. 7.1 crore has been deployed towards these objects upto 15^th February 2012, as per page 91 of the RHP.  

Few contracts / transactions raise concern on the company’s structuring of agreements:

1. Service agreement with employee-trust for Mangalore campus states that service fees to the company for academic year 2013-14 and 2014-15 will be paid on per-student basis and is contingent upon the completion of two floors of the pre-university building at Mangalore by June 2012, as well as, the company ensuring atleast 800 fresh admissions to the college for academic year 2012-13. This may be unfavourable to the company, as only Rs. 7 crore has been deployed till 15^th Feb 2012 towards the constructing the campus, which is estimated to cost Rs. 29 crore. (Balance Rs. 22 crore will be funded via IPO proceeds). Also the bias will always exist as only the trust has the right to review terms of this service agreement. The college currently has 535 students and ensuring 800 fresh enrolments may be a daunting task.
2. Advisory services agreement with Prosynapse Consultants, through its director Dr. Chhaya Shastri, who is also a director of MT Educare holding 4.88% of pre-issue equity of the company, to provide strategies for growth, marketing and sales promotion. Fees of Rs. 76 lakh is payable for FY12, while Rs. 50 lakh was paid in FY11 for the services, which is quite high, given that MT Educare’s FY11 net profit stood at Rs. 8 crore.
3. In FY11, a loan of Rs. 5 crore was given to a group company Neptune Venture and Developers, when MT Educare itself had Rs. 4.5 crore of outstanding secured loan as of 31-03-11.

Estimating FY12 EPS at about Rs.5 per share, the company is issuing shares at a PE multiple of 16 times, on the upper price band of Rs. 80. On comparison with Career Point, another listed coaching class in the engineering and medical entrance tests space, this issue appears to be on the higher side. (Other listed education companies will not give an apple-to-apple comparison).

Career Point, for 9 months ended 31st December 2011, reported revenues of Rs. 58 crore and PAT of Rs. 23 crore, entailing net margins of 39%. For FY11, it had revenue and PAT of Rs. 79 crore and Rs. 27 crore on equity of just Rs. 18 crore. Having raised Rs. 115 crore in September 2010 via a public issue, Career Point currently rules at a PE of about 12x and a market cap of Rs. 345 crore. So, MT Educare demanding a post-listing market cap of Rs. 316 crore (at Rs. 80 per share) appears quite stretched, given its lower margins (in mid-teens) and higher equity base (post-IPO equity of Rs. 39.5 crore). 

Although new centres, technological deployment, additional courses such as CAT, GMAT and fees from pre-university campus will help the company grow, its expenses have also been rising in equal proportions. Also, terms of agreements and transactions with related parties also provide some discomfort.

On a peer comparison with Career Point, issue of MT Educare can be given a miss, being aggressively priced in the current market conditions.