CAREERPOINT -- double bottom confirmation

CONFERENCE CALL - from Capital Markets

Margins to improve further

The company held its conference call on 10th May 2016 and was addressed by Pramod Maheshwari MD

Key Highlights

  • On an adjusted basis, after removing the income from automotive ventures, consolidated net sales for year ended Mar’16 was up by 16% to Rs 75.89 crore. The Automotive venture had net sales of around Rs 12 crore in FY’15.

  • Tutorial Enrollments for year ended Mar’16 stood at 23010, up by around 3% after closure of 2 inefficient centres. The only long term classroom enrollments at branch center stood at 13688 up by around 6%. For 12 months ended Mar’16, in Formal education also, enrollments stood at 7847 as compared to 4954 enrollments for FY’15. Within formal education, the enrollment for higher education stood at 3455 and school education it stood at 3372 and enrollments for vocational training crossed 1000.

  • There were lot of regulatory changes that has happened for Engineering and Pre Medical exam. For 2017 JEE exams, instead of a 40% weightage for 12th standard and Board marks, it has been decided that any student having secured 75% in 12th class can appear for JEE exams. In Pre Medical exams, Supreme Court has laid down its judgment that there will only be a common entrance exam of Pre Medical across India and no State level exams will be considered.

  • As per the management, all these changes will bring in additional business to the company and is in general positive for the industry as a whole.

  • For FY’16 around Rs 53 lakh of revenue came from recording video lectures etc. Management expects strong revenues to come in future from this segment. A B2B library was also launched. It was able to sell first of its license to one of the schools as well. Study board.com website was launched and mobile apps have reached to more than 2500 active users.

  • Investment in formal education stood at Rs 130 crore comprises of 4 Universities. 2 of these Universities namely in Kota and Hamirpur are performing well and have started generating profits. 2 other Universities namely Rajsamand and Mohali have been converted into Residential Gurukul campuses as these Universities were performing lower and not up to the mark.

  • Management believes this figure of Rs 130 crore will come down to around Rs 20 crore in next 3 years.

  • Skill development vocational training program have crossed 1000 candidates in FY’16. Management is very optimistic about the scope and further penetration of this business.

  • The company also launched Global kids in preschool segment with 2 franchisees already confirmed and have started the schooling.

  • Going forward, the management expects the margins to improve as further operating leverage kicks in. Margins in next couple of years can reach to around 33-35% from currently around 25-27%.

  • Management continues to remain optimistic on Enrollment growth and aims to reach the peak level of enrollments of around 30000 achieved in the past, in the next 2 years of time frame.

  • No significant capex in FY’17 will be required.

  • The company will sell the land, whose book value is around Rs 44 crore, as and when appropriate value is received.

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@armchairinvest_ & I have written a post on Career Point. The next 2-4 quarters seem interesting for the company. The post is here. I am copying the entire thesis as well below. Needless to say this isn’t a buy/sell/hold recco. Please do your own due-d before investing. Both @armchairinvest_ & I are not SEBI registered Investment analysts. We both are invested in the stock and thus can be assumed to be biased in our views.

Disclaimer: This is not a recommendation to Buy/Sell/Hold. Kindly do your own analysis.

Career Point is a test prep company based out of Kota, Rajasthan, hub of medical and engineering test prep centres in India. Company is witnessing a revival in its core test prep business and is expected to take benefits of high operating leverage embedded in business model. As per the latest con-call, management is trying to monetize assets worth 35-40Cr and plan to utilize some of the proceeds to either pay dividends or buy back shares.

Key positives

Revival of core Earnings – At peak CP used to generate core EBITDA of 36Cr (FY12), of which test prep used to be a major contributor Post FY12, the company saw a downward trend in earnings from the tutorial division. The reason was adverse regulations regarding the engineering entrance examinations by the government. Engineering exams, post the new regulations carried a higher weightage for XII board exams. This impacted the enrollments – Career Point was exposed heavily to the engineering exams with ~ 60% of enrollments were for AIEEE. CP’s long term enrollments fell from 23K to ~ 10K in FY15. As enrollments fell, reverse of an operating leverage played through leading to precipitous fall in earnings and even a loss in FY15. Since FY13 the company has been able to move its mix of enrollments towards medical students which now contribute ~40% of the overall mix. Things are now looking up for the company from a regulatory stand-point both for engineering & medical exams. On the engineering front – the weightage of XII boards is being removed. This will give enrollments a shot in the arm as students will again solely focus on entrance exams. On the medical side – there will be a central exam (instead of multiple state level exams) that will be conducted (the Supreme Court has passed a decision in favour of the same) soon, most likely from the coming academic year. This will benefit organized coaching players like Career Point. Both these should improve enrollments and will help in earnings revival due to operating leverage,
Improvement in asset heavy business leading to higher probability of monetization– Company had invested heavily in 2 universities and 2 Engineering colleges post its IPO in 2011-12. As per the management – in its con-call its university in Hamirpur is cash positive and profitable. Its university in Rajasthan should follow suit in the next 12-18 months. As this business improves – gets more enrollments and becomes cash flow positive the chances of it getting monetized improve. Management in its previous con-call has alluded to it. The cash generated from this can be utilized towards buyback/dividends (Source: Q4’16 Con-call). Further as the cash flow improves the share of management revenues (charged by CP to the university to run the university) accruing to Career Point also improves. This is a direct add to the bottom line.
New revenue streams – monetizing video content through offline and online channels and contract with NSDC to aid to top as well as bottom line handsomely.
Key negatives

Capital mis-allocation – historically management has invested lot of money in capital intensive businesses such as schools, colleges. These assets lead to poor returns in earlier years because of long gestation period. Business generates lot of cash intrinsically and will have good amount of cash because of asset monetization, further deployment of cash in asset heavy businesses remain a concern.
Limited growth opportunities in core business – We believe, growth avenues are limited in core business of test prep leading to management look out for deployment of excess capital in new revenue streams. Historically this has led to poor return ratios and diversification into completely different line of business of NBFC.
Regulation – any adverse regulation by ministry of HRD can put business in bad shape again.
Valuation – at CMP of 118 it is trading at 0.6x book value. Downside looks limited from here.

Key things to track

Volume growth in test prep vertical
University asset monetisation
Subsequent utilisation of cash to reward shareholders
Traction in management fees, skill development verticals
About the company – Career Point is one of the few listed entities into education space in India. Offerings of the company are summarised below:

Test Prep –
for entrance into engineering and medical colleges
8 company owned centres in Rajasthan including flagship center in Kota and 7 franchises outside Rajasthan
Management fees –
Manages school and colleges (currently, company owns these assets through trusts) and book revenues under different heads such as mess services, hostel services etc
NBFC –
Education loans and trade financing to businesses in kota only, 2-3x collateral
target customer is well known directly or indirectly
35Cr of loan book, duration less than a year, disbursements all through equity, no debt
Skill development – for GoI and state govt
10yr agreement with National Skill Development Corporation (NSDC), total cost to execute the project will be ~17Cr of which soft loan of 12Cr from NSDC
20-25% EBITDA margin in first year and 30-35% from 2nd yr onwards
7K students to be trained in FY17 @ INR15,000/student @ 20-25% margins – ~10Cr revenues, 2Cr EBITDA (source: CNBC interview)
Business Mix – test prep business is the major contributor to revenues and company is one of the top 5 players in Kota test prep industry. Below is business mix info about the company:

business mix

Key characteristics of engineering/medical test prep business –

High operating leverage – scope to grow volumes by ~40% without any incremental fixed costs. There will only be inflationary increases in other costs and even lesser in employee costs as company is not hiring any new employee in last few years because of overcapacity of teachers post the regulatory problem led to drastic decline in students volumes. Company did not fire any teachers post the problem and it also did not hire to replace 5-10% natural churn of teachers.
Regular price hikes – In the education space, bargaining power remains with the education provider. Price hikes of 5-15% are regular in this business.
Cash cow – core test prep business generates lot of cash as is visible from investments in balance sheet although not very prudent. (350Cr of investments at cost of which ~115Cr came from IPO, rest is all internal accruals over last 10 years)
Growth challenges – difficult to scale outside Rajasthan as competing with local brands is a tedious task and there is no economies of scale
Role of regulation – very much vulnerable to any regulatory change. Witnessed the same during FY13, enrolments dropped to ~10k from 23k at peak kicking in reverse operating leverage.
Adverse regulation in 2012 – As per a new regulation issued in 2012, high weightage of 40% (earlier it was nil) was given to class 12 scores for admission into engineering college including IIT/NIT etc. This led to decline in tutorial students to Kota over ensuing 2-3 years as students preferred staying at home so as to prepare for class 12 as well. Though IIT board did not follow this regulation and came out with its set of criteria i.e. a student should either secure 20% percentile or 75% marks, lower of the two will be minimum required to sit for IIT exam.
This weightage to class 12 results has been withdrawn from 2017 session. Now, all types of engineering entrance exams have same criteria as IIT. This, change in regulation is expected to bring volume growth in coming years.
Test prep industry

India sees 12l students appear for engineering exam every year, of this, 2lacs students clear for advance level and 10k get selected across IITs

Kota coaching market is estimated to be INR 600Cr industry (expected to grow by 15% every year) with presence of 150 institutes. It has ~1.2lacs students across engineering and medical, of which Allen has 50-55% of market share. Other players amongst top 5 are CP, Resonance, Vibrant, Bansals.

Disclaimer: This is not a recommendation to Buy/Sell/Hold. Registration Status with SEBI: I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

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ThNks for sharing your write-up Rohit. Assuming some students come back and Rajasthan campus starts generating profits what do you think they could do for ebidta and EPS in fy 17 and 18? Also curious if you have met mgmt and have a view on sell of campuses or exit from nbfc business? General mentality of promoters is not to let money leave the business, hence a change would be very positive. Thanks.

Hi v4value,

We did not try to do numbers projections but we believe 15% increase in volumes can grow profits by 25-30%. They will also benefit from improving utilizations across university and schools, income from there is recognized in the form of management fees. So directionally we see this business going up.

Our understanding is that the guy wont leave NBFC business. About other assets, as per concall, he is planning to monetize them.

Best
Rajat

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Few concerns:

  1. Why cash flow from operations is negative for this business at both standalone and consolidate levels. Fee paid by the students in the tutorial business should have been reflected there.
  2. Most of the assets are under charitable trusts with the related party, how easy it is to monetize them and give money back to the company as receivables and loans to these entities are very high.

As per q1fy17 investor presentation:
Compared to q1fy16
Total enrolments fell from 18,438 to 16,270
Tutorial division enrollments fell 12,517 to 9625
Formal education grew form 5,921 to 6,645
Investment in carrier point was based on expected increase in enrollments after change in government policy for Med and eng courses that doesn seem to be happening.
Spoke with my friends based at Kota and Udaipur Rajasthan. Current trend among parents / students is ALLEN tutorial for Med entrance and RESONANCE for IIT/eng entrance. Carrer point is not a preferred one compared what it was 3/4 years back.
@rohitbalakrish_your inputs will be useful.
Regards,
NP

@narendra

You are absolutely right. Career Point is not a top brand anymore.
Some 10 years back when I was in Kota, Bansal was the leading player followed by Resonance in engineering space. Allen was top in Medical but was not even present in Engineering space. Just in short period of 10 years, Allen has become leading player in Engineering. I have been a teacher for some time in test prep industry. I am sure of one thing. While Education Industry/ Test Prep Industry is extremely lucrative in terms of growth, it is extremely difficult to have moat for brands here. Just in 4 - 5 years, Vibrant has beaten Bansal on its own game. Bansal classes, which was instrumental in building entire industry is now no more a top player. Vibrant, Resonance and Allen hold the ground here. Thing is that individual teachers have moat here not the brands. All Allen, Vibrant and Resonance has old Bansal faculty as its shining stars and now Bansal is not even among top 3 players. While Career Point (CP) is an old player in Kota, I do not see any star faculty there. So even a star faculty in Kota can beat CP alone. Not sure about growth of school division…

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No matter whether Career Point is a good brand or not, keep one thing in mind - no. of students will increase every year. Ask why? Because of India’s ever increasing population and lack of seats in good institutions. So if you’re in for the long haul, then this stock is very good.

absolutely correct.moreover they own the assets and have huge operating leverage.their school buisness will become a cash cow and also they are getting into that skil development thing.sureshot multibagger from 5 yrs perspective.

@mknits @hardyboy

I do not have iota of doubt about growth potential of Indian Education Sector. However, building a credible brand with good moat is extremely difficult. I do not have lot of hope from test Prep division of Career Point but School Division might do wonders. Skill Development is already a crowded space. Point is entry to barrier are nil here and switching cost for consumers is extremely low…

entry barrier is not low.the real estate prices ensure that early movers will enjoy moat.no parent want their children to travel 20 km out side city limits to attend school. ROCE for new players will always be low. i agree that the test prep thing will not do well not only for them but others also.however they have the assets which can be converted to traditional schooling

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CAREERPOINTLTD.pdf (865.2 KB)

Career Point Ltd. (CPL) is in the process of restructuring, wherein the education business will be demerged into a separate listed entity (CP Edutech Ltd.), leaving CPL with the NBFC business.

CPL offers diverse products & services across the entire spectrum, starting from Pre-school, right upto Engineering/ PHD courses. Apart from the Universities managed by them, it offers numerous distance learning courses. The Company has established a niche in test preparation and school curriculum tutoring through a nationwide network of branches. It runs an asset light model & is growing at a fast pace. Apart from a few owned centres, there are a number of franchisees & school association centres, currently a network of about 86 centres in 73 cities across 21 States & counting.

CPL is also running schools & universities in Kota, Jodhpur and Hamirpur. Education is a negative working capital business. Every time a student is enrolled, cash flows are received upfront, and are assured for the entire duration of the course which could run over a number of years. Setting up a university also has huge entry barriers as it requires a state legislature approval, entailing a huge amount of liaisoning, in addition to the capital investment.

The NBFC part of the business funds the institutions (schools/ colleges) & is entitled to interest income while the education business manages them for a mgt. fee. The entire operations are managed from internal resources (including the NBFC business) as the Co. is pretty much debt free.

It is pertinent to note that while some more illustrious names in the industry have been burning money, threatening their very survival, CPL has always been profitable, even during Covid times.

For the current year, CPL should do revenues of about 107 crs with profits of about 58 crs. The market cap is only about 457 crs so the investment is available at rather attractive valuations. Further, the Company is currently available below its book value, leaving enough margin of safety.

CPL announced a second interim dividend along with its Q3 numbers, something not done before. It could well be an effort at catching investor fancy/ interest for the stock & following on in the same vein, a decent final dividend could very much be on the cards. Besides, the Co. has invested enormous efforts & time at the ongoing de-merger exercise. A pre-curser to the value unlocking going forward?!

Disc: Invested

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I belong to the city, where company is headquatered and enageged in major operations. The promoters started there IIT coaching business, where I used to study.

To know know the company better, look at the past related party transactions that company has done in the past with promoter entities. When investors asked related questions in the concalls, the company stopped doing concalls alltogether :slight_smile:

The NBFC business looks to be rotating the money from listed entities to promoter / other entities. No real business there.

Dividend of Rs 1 or Rs 2 , comes to less than 0.25% yield, and cannot be concluded as promoter’s intent to share wealth with minority shareholders.

Based on my first hand view about the promoters, I dont have any inclination to invest in the company, irrespective of the valuation. But people change, once in a while, and promoters may have changed.

But in this bull run, anything can work, CP may be a multi bagger, who knows.

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