Zee Learn: Asset light model & operating leverage

(Ayush Aggarwal) #1

Short note:

  • Zee Lear Ltd (ZLL) is operates in pre-school and K-12 segment education segment along with recent entry in manpower training and placement. ZLL has ~1700+ preschool centers under KIDZEE brand and ~100 K-12 schools under MLZS brand. It primarily operates through franchisee model, which presents a scalable opportunity with low opex requirement. Additionally, ZLL owns and operates 5 KIDZEE franchisee and 5 MLZS schools and ! MLZS IB school (premium school with 5-6L/pa fee).
  • Operating leverage at play: A successful scalable and asset light model with fixed opex rsulting in significant improvement in EBITDA margin. ZLL’s EBITDA maring improved form -ve 36% in Mar12 to +ve 23% [Jun17 LTM EBITDA margin is 32%]. This is a result of increasing network of franchisee for both preschool and K-12; increasing capacity utilization; 6-7% annual increment in fee with costs being nearly stable .

Preschool segment - KIDZEE

* ZLL has a chain of 1,741 operational centers and adds ~250 operational centers every year. Core franchisee number is growing at a rate of ~10% (1st  lever for volume growth)
* Average enrollment per Kidzee centre is c.74, against full capacity of c.175 per centre (2nd lever for volume growth0
* Kidzee charges INR35K as student fee per annum, which it has increased 6-7% pa. (pricing power, driving value growth)
* Franchisee pay one time INR2.5L signup fee and invest 18-20 lakh to setup center.
* Annuity based business model; only organized pre-school chain operating with a business model wherein its share of royalty is collected in advance. no debtors.
* ZLL charges 20-22% royalty from Franchisee


* Zee Learn acts as a consultant to local entrepreneurs who wish to setup K-12 schools, under its brand name Mount Litera Zee School and provides end to end Education management andAdvisory services.
* MLZS with 110 operational schools is one of the fastest growing school chains; Annual addition of 15 K-12 schools
* Average enrollment per MLZS is c.500, against full capacity of c.1800 per school
* Our own operating K-12 schools [5 MLZS + 1 IB] are in nascent stage with relatively low average enrollments of c. 700 per school, against full capacity of c.1800 per school
* ZLL charges 10% royalty into K-12 schools. Apart from the royalty in K-12 schools, we charge for the student kits that we supply, so roughly, if you includethe student kit price, we roughly take about 17% of the total fees from the franchisees per studentper annum
	* As far as K-12 school franchise revenue is concerned, we collect kit revenue in advance but royalty is collected not ona pre basis, on a post basis. So there you will have some debtors standing into
	* Kit revenues from students: 60% gross margin; improving enrollments would result in better margins thorugh bargaining power over vendors

* Leasing income form owned school: "As far as leasing business is concerned,again it will have a net margin of about 5% or so because it is not a business wherein youwill have healthy margins. You have lot of capex so, depreciation comes into it. You havelot of borrowings to build those assets, the interest comes into, but till the time we havethose borrowings in our balance sheet we will keep paying the interest and therefore themargin on that business will not be very significant. However, as and when going forwardin another eight to 10 years when we pay off all the loans, the margin on this business willalso keep growing."

Manpower recruitment and training Segment (Zica, Zima)

* High ROI, nil capital employed and low margin business [EBITDA margin 4-5% and net margin 1-1.5%]
* Aims to cater to 10K people for Zee Group first and then move outside

Market Opportunity
*The pre-school industry is still in its nascent stage in India with approximately 3% penetration. Considering the average enrollment in a pre-school is 75 kids per center, 113 mn kids would require over 15 lakh centers. However, as of today, India has a severe shortage of pre-school centers due to low awareness of Early Childhood and Care Education ECCE.




1. I'm invested in this company

(Prash) #2

Thanks for starting the thread. I had analyzed this stock during the Tree House fiasco. After the Educomp, Tree House, MT Educare cases, I am quite wary of education companies. Though Zee Learn is improving its numbers off late. Good that it stopped buying tainted Tree House.

Good thing is, Zee Learn has tried to remain asset light model and is betting more on franchise instead self-owned schools. This helps the company to grow without taking too much debt.
But the downside is with the market. Though the stats say, there is huge potential for market expansion and current penetration of pre-school is just 3%, it is not easy to grow here.

It is highly unorganized and opening a preschool and making it cash flow positive for franchise takes few years. Also becoming fully occupied is not easy.

It is important to find how the revenue/profit growth from existing schools and incremental revenue/profit addition from newer schools which are getting added.

(Sujay Ghosh) #3

These coverage-initiation reports from Axis & Edelweiss are quite detailed.

Axis.pdf (1.2 MB)
Edleweiss.pdf (1.3 MB)

(Ayush Aggarwal) #4

Thank you Prash for raising your queries.

What gives me confidence is they are on avg signing up 300 franchisees every year and operationalizing 250 in a year, with no additional cost - so all of signing up fee (3002.5l/franchisee = 7.5Cr goes to EBIT) plus 250 operational centers with avg 75 students result in 13 Cr direct to EBIT (25075*35000/student fee * 20% royalty). So this suggests 20 cr being add every year (20, 40, 60, 80…) + 6-7% price increase. With NO CAPEX (fixed or working capital) required, and very minimal incremental cost. ROIIC is infinity, if i may say so… :slight_smile: [I may be too optimistic - but what i see is a firm which will be driwing in cash flows.

Simlar dynamics in K12 Schools: 15 schools with 1800 capacity each every year.** With time student ratio will increase in each shcool, resulting in higher EBIT with no additional cost. AGAIN ~16%-17% royalty/student.

Their owned schools. Increasing capacity utilization. half of the debt transferred to schools SPV (or what ever the structure is called). Lease income will also increase with every new student added + royalty. Their is capacity to expand (available acerage in owned shcools).

So a growing annuity model with minimum to no capex required, resulting in very high incremental ROIC.
This chart below gives me goosebums:

(rvetri) #5

Just wish to point out red flags… The Co has a subsidiary which builds
school buildings… And so the Co has a 100 cr plus debt…imagine a Co with
Net Block of 4 cr and doing a business of 170 cr… Has a debt of some 140
odd chores ?. And then in addition the subsidiary also has a huge debt…

Zee learn is in a great business model but for its
subsidiary…Shareholders must pressurise the management to spin off the
subsidiary from the parent Co… Another irritation is the constant
pledging of Zee Learn shares by its promoters… All Zee group cos doing so
well and cash machines - why promoters would do such things… The
dividends they get from their shares in all cos should be well enough for
their exigencies…

(Ayush Aggarwal) #6

Hi rvetri,

thank yu for taking out time and pointing out the concerns.

Here are my thoughts below. Let me know what do you think after reading this.

Understanding business model of DVPL (Source: https://www.quora.com/Is-it-profitable-to-run-a-private-school-in-India)

  • A school can only be run by an educational charitable trust & no profits can be taken out of it.
  • So the company (DVPL here) constructs the school and lease it out to the trust. The trust runs the schools and pays rent decided on per student basis.
  • Also through following mechanism the company (DVPL) transfers its debt to the trust: 1) Trust has to provide security deposit to company (DVPL) to operate the asset ; 2) Trust takes up loan and provides deposit to DVPL. DVPL pay back its own debt. As a result you have transferred debt from company to trust.
  • Now when trust operates the school all the balancing figure revenue minus operating cost minus interest will be paid out as Rent to DVPL
  • Understand, operationalizing a school is a long term process. And student are sticky. As the students move up the class, you keep adding student and monetize the asset.; 1) Being an upfront fixed cost business the increase in cost would be minimal, but with time fee increase and increased capacity utilization will work wonder to profits; 2) With time student increases so rent also increases. PLUS ZLL provides study material kit

Debt arrangement

  • ZLL/DVPL owns 6 schools five MLZS and 1 ‘premium’ IB school. (these schools also act as a ‘proof of concept’ – if that’s the right way to say it. These schools help establish standard, MLZS brand etc etc. resulting in franchisee); 1) The IB school at BKC, Mumbai 345cr was invested to build this school including the premium and one time royalty paid to MMRDA to take the land on lease for 80 years; 2) The School has capacity of 1500 and student base of 300. Avg. fee per student is INR
  • Out of some 345cr >>125cr has been transferred to trusts. Resulting in lower LT debt and increase in other liability (security deposits)

Promotor pledging:
• Promotor holding is 66% and as of June 2017 the pledging was 0% (http://www.bseindia.com/corporates/shpSecurities.aspx?scripcd=533287&qtrid=94.00)
• However, between Jun-Aug2017 some 12-13% out of 66% is pledged ; a) Some 6.9% has been pledged as security for debenture holders; b) Some 6% pledged for other purpose (‘collateral pledge for facility of promotor group company’)

(Ayush Aggarwal) #7

The avg fee is 6.5 Lakhs per student per annum

(rvetri) #8

Thanks AyushA. You have spent a lot of time to clarify my questions. Can DVPL not be spun out as another entity owned by current shareholders in the ratio 1:1. And then we can see the real value of ZLL discovered.

Disc: Already invested in…but the concerns mentioned does not allow me invest more…

(Prash) #9

Thanks for detailed reply Ayush. I went through both the Axis and Edelweiss reports. They are quite positive on the stock.
Being wary of the ways tree house, Educomp has folded up, I have couple of key questions for which I will be looking for answers,

  1. How is future capex going to be for the company? I see in Axis and Edelweiss reports, they keep as 25Cr. Any reasons for that?
  2. As per the Quora link was given, the current model of subsidiary DVPL leasing out the K12 school to Trust and transferring debt and receiving regular rent is a jugaad and can be a risky bet. Is that so? Has ZeeLearn explained anywhere how they are insulated from this risk?
  3. The way THEAL and Educomp got into the problem was too much focus growth, accounting profits, but least bothered about the free cash flow. They went on to raise debts, sell equity to continue their growth plans. Now, what makes us think ZeeLearn won’t do this? They also had pretty bad cashflow from FY12-FY15 and bcos of heavy investments and now they seemed to be turning around. But 3-4 additional schools of their own can easily increase their debt and change the cashflow. Is there any commentary from ZeeLearn on their future self-owned school plans?

Disc: Not invested.

(umang_1991) #10

Free cash flows are my biggest concern. Despite business model being a cash throwing business, debt has been increasing. I think DVPL is draining cash out of the business.
Any idea if any capex is planned going ahead. Is the capex mostly towards school business, any new school planned.

Seems like a good turnaround story in case the cash flow question is solved. School business has huge operating leverage and once the schools reach operating break even they start throwing good cash.

considering schools are running upto senior levels (11th class) I believe they are are BE (if we can get clarity at school level are they operating BE or need money to run it would be great).

Rest the other 2 franchisee business is doing good and cash positive.

(umang_1991) #11

I think most of the answers are there in concall:

  1. Schools are at operating break even
  2. Every year 1000 students are enrolling
  3. No plans of opening new greenfield K12 schools (so little capex going forwards)
  4. But strangely they guided debt would remain at the current levels, it should reduce considering free cash flow thrown by franchisee business. Is it that the standalone company cannot pay debt of its subsidiary? This is an important point to ponder, because debt reduction is a classic indication of free cash flow generation
  5. K12 schools have a long gestation period 8-10 years. There period is slowly coming to an end, I believe operating leverage could show the magic in the next 3-4 years

(umang_1991) #12

No greenfield capex, so around 20 crs on the next 2-3 years. They guided that somework of around 20 odd crs are pending

This is standard way to operate school business in India as they are not allowed to earn profit. They have a security deposit 0f 100crs from school which will safeguard them from risk

They are not looking to open any more green field K12 schools. But I am worried on a comment from management that the consolidated debt remain at the same level. If company is not loosing cash from schools and making cash from the standalone business then where the cash is going to go? Ideally it should reduce debt

Disc: Not Invested

(Yushma) #13

The challenge with school business is apart from capex, the schools will have to incur operating losses till the time the schools reach a break-even level. Reason is once you start a school, you will not get admissions across grades. Even at the lowest level, 1 etc the admissions are part of the full capacity. Every year as the grade moves ahead and new students join at lower grades the capacity utilisation increases. Hiring of staff/ physical infra would be there for almost full capacity all these while.

The time frame for reaching break-even are typically longer that what the estimates are. This always results in higher losses in the initial years. The promoters need to have a deep pocket to sustain losses in the initial years.

One more aspect of generating revenue from Trusts is that the underlying business of trusts are loss making in the initial years. Rather than giving rent to the owner of the asset, it will be taking loan. So all the profits of the entity leasing the school asset is paper profit/ revenue sitting in the form of receivable.

The story may not be different in zee learn schools. Deep pockets/ ability to sustain would differentiate becoz its a cash cow once the school crosses the hurdle.

Pre-schools are low capex entities. However, one aspect that I heard from some of the fanchisees of Tree house is they plan to run independently as there is no significant differentiator being Treehouse. They are known in the area by parents etc

(Prash) #14

We will have to grow the nature of the debts which is on the books of Zee Learn and its subsidiary. I see that in 2016 AR they have mentioned they raised 65Cr through NCD at 10.4%.

They may want to continue to have debt if the interest rate is low or there are any pre-payment terms. In these times ultra low-interest rates, it is somewhat prudent to carry some debt.

As long as Debt/Equity is less than 1 and Interest coverage > 6 it should be ok.

Right now interest coverage is quite low now (<3 ) though Debt/Equity is fine.

Is the 2017 AR out? I am not able to find it.

(Prash) #15

Sorry, corrected the typo,

We will have to see the nature of the debts which is on the books of Zee Learn and its subsidiary. I see that in 2016 AR they have mentioned they raised 65Cr through NCD at 10.4%.

They may want to continue to have debt if the interest rate is low or there are any pre-payment terms. In these times ultra low-interest rates, it is somewhat prudent to carry some debt.

As long as Debt/Equity is less than 1 and Interest coverage > 6 it should be ok.

Right now interest coverage is quite low now (<3 ) though Debt/Equity is fine.

(saumilshah) #16

As on today is the pledged promoter holding just 13%?
I just checked the latest disclosure by company which shows around 62% pledged?

Am i missing something.


(saumilshah) #17

Do you know the current pledged shares of promoters?
As per my seeing it is very high but ayush mentioned just 13% are pledged?
Can i have your reply please.


(Prash) #18

From this link I see the pledge is 0%. Promoters released all pledges in Jun 2017 qtr


Disc: Not invested.

(mahabali3004) #19

Bad news. Promoter groups have pledged 78.36%. Link : https://trendlyne.com/equity/share-holding/1538/ZEELEARN/latest/zee-learn-limited/

Disc : Invested

(Prash) #20

Not a good news.

With 66% promoters holding, if 78% of shares pledged means, I think nearly 400 cr is raised at the current market cap. I am not clear why the company wants 400cr for?

Is the company not able to meet the WC requirements?
Are they planning to pay off debts?

Disc; Hold a tracking position