CL EDUCATE - Less Down side and unlimited upside

Stock Opportunities Untested - but worth a good look
21

You may be right there. I am a bit skeptical about the fund raise as it will highly liquidate the promoters holding. They have in their AR mentioned that they are planning to raise around 30-50Mn which roughly translates to 200-300cr Rs. Their marketcap is around 200cr so their holdings would be 25% post raising of funds which is a small red flag. What they do with the funds will be more important. I dont think that they can raise funds in their subsidiary because a VC/PE Fund would just ask them for the parent company stake instead of giving it to the subsidiary. Lets see what happens in the meanwhile.

A good sign is that after the initial IPO at higher price, Promoter has bough back around 4 lakh shares (around 3%) in the last 2-3 years at an average of around 63 rs.

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Agree on the valuations part…I’m probably biased but a large part of their depressed market cap is due to their less than impressive history as well as the wealth destruction from other listed Education companies.

The fund raise (if it happens) will definitely happen at the subsidiary level since they have hived out the Digital business into a WOS recently and the Edelweiss offer document references only the edtech business. Any investor would infact prefer to enter at the subsidiary level where business is focused as against getting involved in the multiplicity of businesses at the parent level.

Yes, promoters have been continuously buying in small tranches every quarter right upto the previous quarter.

Will have to see how the business performs in the first normal quarter (my expectation Q3 FY2022) to gain some conviction.

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23

Video of the Chaiman’s Speech from the AGM Today

There are quite a few triggers possible here but the caveat being it is now time for them to deliver (which so far they have not)

  1. The surplus real estate that they intend to sell is reported to be valued at Rs.80 Crores to be sold off within 4 quarters. With the recent (supposed) revival of the Real Estate sector this may be easier to execute compared to the past 3-4 years. This would amount to 40% of its market cap.
  2. Possible acquisition of a large player (for which NDAs are reported to be signed)- to be completed over the next 4 quarters.
  3. Possible demerger of the Kestone Business- this looks the most plausible at this stage and could really unlock value
  4. Ongoing fund raise in the Edtech business. No update in the speech but considering that he said they aim to continue to be a debt free company the only way that the M&A can be concluded is through a equity raise.

Disclosure: Invested and closely tracking

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Copy of their latest presentation which was made to some investors. Only talks of the Edtech business opportunity. No concrete update thus far on the fund raises.

This presentation specifically talks of the demerger which can only be the Kestone business and is very encouraging as the market is clearly not valuing this specific business since it is housed within a Edtech/Education entity.

Will wait for the Q2 results for the next update.

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Please go through my previous posts in this thread for context. A few updates about the company since my last post (Feb. 2021)…

  1. The fund raise has not materialized, in either the EdTech or the MarTech verticals. Management seems to have shelved the plan, at least for now.
  2. The company has liquidated multiple land parcels. Cash realized: about 60 Cr. Management intends to deploy this cash in the business.
  3. The company has tied up with Vidya Mandir Classes for JEE / NEET coaching. The pilot program has been rolled out in Mumbai, Pune and the Gulf.
  4. Mr. Sathya and Mr. Puri continue to buy CLE from the market.

CUET: The application process for CUET 2022 is underway. CUET is a BIG opportunity for the company. TAM for both Law and IPM are small; it is likely to be tens of lakhs for CUET. Career Launcher has been getting ready for CUET for more than a year. Given the national footprint of the franchisee network and that the exam will have an aptitude component, the company has a clear advantage. Let’s see how this plays out.

Disc: Continue to remain invested; have added to my position periodically for more than three years; views biased.

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CLEdu_WS_IRDiscussionDeck_May31_2022.pdf (657.3 KB)

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27

Won’t AAKAASH (byju) and unacademy kill their business?

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Well it is certainly an outcome one has to figure out what is the probability of that scenario and wonder whether it’s priced in. At 340 crore market cap and 100 crores of cash on the balance sheet you value the core business at 240 crores. If one expects that with increase in franchisees the core business can grow back to pre pandemic levels (this company doesn’t need cash to grow) then i don’t think a lot of growth is priced in.

If triggers such as CUET play out the entire industry benefits from that and you just might have a rerating on the name.

Byju is facing its own challenges within the market place.

Disc: Invested

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29

Does anyne know why they are in two such unrelated industry? Education and SAAS are not related and their size remains too small to try and diversify like this. Does anyone have positive or negative feedback on this?

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Good question and i think it’s partly to do with legacy business and they generate free cash from the coaching business that they tried to venture into other adjacencies.

The SAAS business was under incubation and needed the cash to develop the product. SAAS can sustain itself and they tried to raise money in the business as well but couldn’t (which I still haven’t understood how can you not raise money in the best fundraising environment in 2022). Ultimately these two businesses will/should be split to accrue to create value.

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CL Educate Initiating Coverage
Disc - Holding
CL Educate - Initiating Coverage.pdf (3.3 MB)

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CL Educate

April 02, 2023

Overview

Incorporated in 1996 by IIT-IIM alumni Mr Satya Narayanan V and Mr Gautam Puri, CL educate started with providing quality guidance and education for the test prep segment. Initially, it was a known name in the CAT coaching segment. But overtime, the company diversified into other segments for test preparation.

The company has relied on inorganic expansion with the acquisition of KITS, compassbox and paragon classes to expand into K-12 segment. These acquisitions were made between 2000-05 time period. In 2006, the company even opened its first school “Indus World School” which was shut down. The company had to write off certain outstandings to the tune of 15 cr

However, the company wanted to foray into the vocational training segment and hence acquired Kestone Marketing in 2008.

With all these trial and errors, the company finally settled onto asset light model where it lends the brand name and operational frameworks to franchisees who in turn operate the centers for test prep. In addition, Kestone could not fulfill the vocational education purpose. However it grew on its own in Martech (providing B2B marketing, digital marketing and experiential services) to contribute 35%-40% of the topline.

Business

The company operates in primarily the following sectors: Edtech & Martech

Edtech

In India, Edtech is primarily divided into 4 segments:

  1. Test Prep
  2. Online Certification
  3. Upskilling
  4. K-12 Segment

Here CL Educate, after facing several trial & errors, is focussing purely on test prep segment. Their edtech business is divided into 3 categories:

  1. Test Preparation
  2. Platform Monetization
  3. Content Monetization

Test Preparation

CL offers test preparation content and coaching for the following

  • Aptitude products for entrance exams like – CAT, CLAT, AILET, GRE, GMAT, Bank, SSC etc
  • Knowledge Products for entrance exams like – JEE, NEET, GATE, AIIMS, CUET etc

Company operates around ~200 centers of which 25 are own centers while 175 are franchisee partners. The company is planning to ramp this up to 500. Additional 300 would come via franchisee route only.

Platform Monetization

Under its Platform Monetization, it offers various educational institutions an array of its products such as:

  1. Integrated solutions to educational institutions & universities across India
  2. Student Recruitment Services
  3. Research & Incubation Services

This helps universities in the following:

  • Attract smart students
  • Improved Research Output & Publishing
  • Seed Funding and CSR projects
  • Attract research funds from Govt. & Industry

Content Monetization

CL under the brand name GK Publications distributes titles under 3 categories:

  1. Technical (comprising titles for GATE, technical vacancies in Central Public Works Department, etc.)
  2. Non-technical (comprising titles for CAT, Bank/SSC examinations, Civil Services examination, CUET etc.)
  3. School Business (comprising titles relevant for students preparing for their Board exams)

The company believes in the phygital (physical+digital) approach even after the advent of edtech for test prep segment where:

  1. Expansion takes place via an asset light model of franchisee
  2. Company’s in-house SAAS tools are used by students at home for taking test or revision

Also the company had taken baby steps towards CUET 2 years ago and hence the announcement and its concrete plan given by the government, CL had the head start to acquire students

Martech

For the MarTech segment, the company offers the following services to corporates:

  1. B2B Marketing
  2. Experiential Marketing

B2B Marketing

These are standard services offered by any digital marketing agency. Here CL educate offers Lead generation, creative designing, content creation, website designing and digital marketing services

Experiential Marketing

Here the company takes charge of the events (physical or digital) which are conducted by corporates. Kestone takes care of everything from booking the venue to marketing to setups.

In this regard, the company has launched its platform “VOSMOS” where the company will plan to integrate metaverse with virtual events (Source: Link). The company has been the pioneer in using web 3 and has been a key player in providing virtual event experience with metaverse

Corporate Structure

Prior to merger in March 2022, CL Educate used to have 5 WOS (wholly owned subsidiaries):

  • CL Education and Infrastructure
  • CL Media
  • GK Publications
  • Kestone
  • Accendere Knowledge Management Services

All these companies were merged with the parent (CL Educate). Hence the related party revenues have been considerably decreased along with loans provided. Besides this, CL Educate owns ~9.5% stake in Threesixtyone Degree Minds Consulting Private Limited. This company provides educational solutions to universities and corporates

Financial Highlights

Here is the highlight of Sales, Net Profits and Operating Profit Margins:

Some points to note:

  1. Negative net profits to the tune of -53 cr occurred in Mar 20 due to one time write off

  2. There was no impact on operational cash flow

  3. During 2017-18, the company sold its K-12 related business to B&S Strategy Services Pvt. Ltd in a cash plus stock deal. As a result, one of the subsidiaries of the company, namely, CLEIS (Career Launcher Education Infrastructure & Services) Ltd. received a 44.18% stake in B&S Strategy Services Pvt. Ltd. This has been written off on account of school closure due to Covid

  4. On the other hand, Mar 21 had the negative profits of -13 cr majorly on account of covid lockdowns

It takes 80-90 days for their cash to be converted. ROCE is muted at ~12%-13% in a stable state.

The biggest expense line items are Franchisee expenses and Project Expenses. These are the share of revenues given to franchisees

However, the company plans to take it to 16%-17% in the steady state on account of expansion via asset light model and returning excess cash to shareholders

Key Strengths aka Moats

  1. No reliance on star teachers and hence making the organization star teacher dependant

  2. Dependent on systems driven, process driven and take youngsters and groom them into becoming effective leaders,

  3. Local entrepreneurs for franchisee have skin in the game and hence always hunt for youngsters who can be groomed to become star teachers

  4. Diversified and integrated education products, services, content and infrastructure provider, with pan- India presence and a focus on knowledge-creation;

  5. Asset-light, technology-enabled business model;

  6. Strong brand equity; leader in MBA prep with 10%+ market share

  7. Track record of successful inorganic expansion due to better human capital management

Valuation

The current valuation of the company is 279 cr. The total sales is for 275 cr with net profit 25 cr. Cash sitting on the Balance sheet is 94 cr with 4 cr of debt. Enterprise value comes out to be 180 cr

  • In a steady state, for eg., they used to have 151 centers with 273 cr of revenue in 2016 with 53% coming from test prep. This comes out to be 95 lakhs per center
  • In this steady state, with 500 centers, the topline comes out to be 475 crore
  • With the Martech growth assumed at 20% (the past has been 40%), the current revenues of 120 cr translates to 207 cr in 2025.
  • Translates to 475+207 cr in sales = 682 cr in sales
  • EBITDA at 10% means 68 cr in EBITDA. Assuming the current EV/EBITDA multiple at 7.2, EV comes out to be 480 cr
  • Adding 100 cr of cash makes 580 cr of MCap

Let’s see how this plays out

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34

Had an insightful meeting in Delhi with Career Launcher management last week.

  1. CUET exam : more the states where central govt comes in power, more the adoption of CUET entrance exam. Currently a 11cr biz, can scale to 100 cr + in coming years. Opening centres in smaller towns with teaching in the regional language can be a big moat. CUET is not tested only in English.
  2. Demerger of Martech being evaluated even now as was asked on last investor call. Management understands the ROCE benefits by focusing only on edtech.
  3. Student mobility: by offering the test prep + admission counselling services into colleges worldwide, CL can achieve geographic expansion as well as cover whole spectrum of counselling, visa etc. This cross sell opportunity can be big in the future.
  4. Buyback ends on Nov 28th.
  5. With a net cash balance sheet of 100 cr + cash in a 420 cr mcap co, promoter is continuing to evaluate opportunities to use this cash
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35

@Nitya_Shah Any idea about when is raipur land expected to be sold?

36

Why there are trade payable, trade receivables so high when it’s a cash and carry model couldn’t find the answers anywhere. Moreover what are other liabilities of 43 CR.
Thanking you

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They run on franchise models where Company deals with different franchise partners.
It is through this model, they can maintain asset light model. Otherwise, it becomes opex heavy structure.

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38

Please study the business as a whole. There is also a martech division. And as Vineet ji pointed out above is part of the answer too

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39

I have been in their conference calls. I feel management lacks fire. I agree limited downside but don’t agree to unlimited upside. I will give them some more time before exiting to prove me wrong. Issues I see are

  1. They knew CLAT test had moved and crash course will be of no value. They were found sleeping and did nothing.
  2. CUET progress is too slow.
  3. It seems they have lost market share in MBA as well
  4. The metaverse that they show in very toyish built by interns it seems

Invested and Biased.

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40

This coaching business has never made money. @Nitya_Shah I read a brilliant report of him saying that career point and veranda are in almost identical business they also did not made money. Moat lies in the faculty and not in the centers. They can charge but not exorbitantly to turn around business from here.

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