IPO Size: Rs. 200 cr – Entirely fresh issue

• Objects: repay Rs. 60 cr debt, part-fund an earlier acquisition for Rs. 25 cr, growth investment of Rs. 50 cr
• Allocation: 75% for institutions, 15% HNI, 10% retail, as company is loss making

Price band: Rs. 130-137 per share

M cap: Rs. 764 cr, implying 26% dilution

IPO Date: Tue 29^th Mar to Thu 31^st Mar 2022, Listing 7^th April 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Company Overview

Engaged in online and offline education for software professional upskilling (both B2B and B2C) and test preparation for government exams, CA, IAS. 70% of H1FY22’s Rs. 48 cr revenue came from software upskilling (Edureka) and 30% from government test preparation (Veranda Race).

Strength:

1. Company offers courses for government examinations in vernacular medium and has established strong presence in Karnataka and Tamil Nadu, with summer months being the strongest seasons.  
2. New courses: CA and IAS test courses were launched in July-Aug 21 and their revenue contribution is yet to scale up.

Small size of operations

Company’s annualised topline is barley Rs. 100 cr, despite Edureka being in business for 10 years. Moreover, the division itself is loss making, taking company’s consolidated bottomline in the red – FY21 net loss of Rs. 51 cr and H1FY22 net loss of Rs. 38 cr.

High Cost Structure

Student retention rate of 20% requires heavy advertising expenses (Rs. 15 cr in H1FY22 or 30% of topline). High teacher attrition of 37% also elevates cost. Absence of operating leverage has strained profitability, leading to operating loss rising to Rs. 25 cr in H1FY22 from Rs. 17 cr operating loss in FY21.

Weak Fundamentals

1. Net worth as of 30.9.21 is negative at Rs. 105 cr. Even after part repayment post IPO, debt will be Rs. 40 cr.
2. All 4 business divisions require marketing investments to scale up, keeping net profits at bay for few more years.
3. Multiple target audiences like tech companies, direct students (K12, to undergrads), education institutions, combined with entering offline space and new online geograhies, makes profitability challenging.

Expensive Valuation

Edureka was acquired in Sep 21 for Rs. 240 cr, of which, Rs. 83 cr consideration is due to be paid in Sep 2024, while Rs. 25 cr will be met through IPO proceeds. This implies nearly 50% of the acquisition will be funded by incoming investors.

Edureka was acquired at a revenue multiple of about 3x and the average revenue multiple for future dilution in another previous acquisition (Veranda Race) is also 3x. In this backdrop, seeking 7.6x revenue multiple, based on H1FY22’s annualised revenue is unjustified, especially when IPO investors are part-funding the acquisition.

While company undertook Rs. 40 cr private placement in Dec 2021, at Rs. 130 per share, valuation multiples have since contracted sharply, especially for loss-making businesses, which has not been factored into the current IPO pricing. Besides, company’s growth is yet to be proven, so is the promoter/managerial track record. Estimating future potential on past 18 months financials presented in RHP is futile. Hence, valuation premium for market potential or basis another high-growth peer becomes out of question.