@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”
