MT Educare: A potential play on India's For Profit Education Sector

Stock Opportunities Untested - but worth a good look
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Disclaimer: This is not a recommendation to Buy/Sell/Hold. This is just for the sake of discussion here. I am posting my own analysis and views here to initiate a discussion. Needless to say, I could be wrong.

MT Educare, is one of the largest coaching institutes in India. It is an undisputed market leader in the Mumbai market and is slowly expanding into adjacent markets of Maharashtra, Karnataka & Andhra Pradesh in an asset light model. It provides coaching for Science, commerce, Engineering entrances, CA and MBA entrances. The company has 128 coaching locations in 7 states and has serviced ~ 82,000 students in the FY gone by.

Coaching business has strong economics and MT Educare has executed very well in the Mumbai market. This expansion in Mumbai is driven largely through standardizing its teaching methodology and not on ‘Star teacher’ concept. The sector in general has not seen many scaled up players owing to lack of standardization and low entry barriers leading to local players becoming leaders in their respective markets.

MT’s strategy of slowly expanding outside Mumbai is an interesting one in our view, they have executed well in Karnataka with revenues reaching ~10% of the overall pie in two years. Further they have walked their talk on selling their PuC college in Mangalore which they had bought to establish credibility in the market.

In our view the approach (asset-light, variable cost model) taken by MT to expand in new markets is a low risk high reward model. Company has recently also expanded in Andhra Pradesh in this similar fashion by partnering with an educational institute which has around ~35K students under various PuC colleges.

The business has an attractive profile with strong pricing power, improving profit margins and negative working capital. All these points coupled with the positive management feedback through scuttlebutt and initial success in Karnataka give us comfort that MT can expand beyond its ‘home-turf’.

We like MT Educare because of the following reasons:

Strong position in Mumbai- MT Educare started in 1988 with a single class has expanded to ~ 90 centres in Mumbai in 2014-15. This is noteworthy, especially, given the scalability issues in coaching market. Other dominant local players such as Sinhal, Kalra Shukla, and Thakkar Classes haven’t been able to scale up as much as MT has. The brand MT is extremely strong in Mumbai with huge network advantages through coaching centres across length and breadth of the city. This is very difficult to replicate for a competitor. We believe that the company will continue to hold its market position in the Mumbai market. The company also has strong pricing power, evidenced by strong increase in ARPU/student of 15% CAGR over the last 5 years (FY10-FY15). We attribute the strong position in Mumbai market to successful execution by the MT team. The school segment is highly fragmented and largely an unorganized market. MT has used a standardized approach for delivery and has used extensive teacher training to reduce reliance on key/star teachers. This hasn’t been the case for competition which has affected their scalability
Strong financial performance – MT Educare has demonstrated strong growth in both top-line and bottom-line. It has grown its revenues and PAT at a CAGR of 24% and 37% over FY11-FY14. Company has generated >20% return ratios over the last 4 years. The company also works on a negative working capital model with students paying fees in advance. As utilizations levels has improved at its various centres its operating profit margins (EBITDA) have also increased from 11.5% in FY09 to 20.5% in FY15.

Expansion in adjacent markets in an asset light model- MT is looking to slowly expand into Karnataka, Andhra Pradesh and other regions in Maharashtra. After its successful expansion in Karnataka through the asset-light model, the company has further used a similar model in A.P through its partnership with Sri Gayatri Education Society (SGES). In addition to being asset light, the model is also variable cost driven with PU colleges taking a share of the revenues. This will limit losses on fixed costs such as rent etc for MT as it expands in new geography. We believe that a large part of the future growth for MT would come from non-Mumbai markets. Below is a brief on the model adopted by MT in each market

  • Karnataka: The company first expanded in Karnataka in 2012 through its own PUC college. The company subsequently expanded in this market by partnering with existing PUC for premises. The company in FY 15 sold its college premises as they feel they have now got a foot hold in the market. Partnering with PUC college is an asset light model and completely on variable cost as MT doesn’t own any asset and only pays a share of the revenues in lieu of the premises. The company has 14 tie ups in Karnataka and plans to reach 30 colleges by FY18. Karnataka at the moment contributes ~ 10% of revenues for MT
  • Andhra Pradesh*: MT has recently partnered with Sri Gayatri Eemphasized textducation Society (SGES), which has 35,000+ students in its junior colleges. Under this partnership, MT would provide coaching to the students under SGES. MT would provide coaching for 4 courses. This is again an asset light model wherein MT hasn’t done any investments in real estate and would share a portion of the revenue with SGES. SGES in return will provide real estate and a captive audience for MT
    -Other markets: MT through its acquisitions of Lakshya has presence in Punjab & Haryana. Further, MT is looking to leverage this brand by expanding in its other established markets viz- Mumbai, Karnataka. It plans to leverage its strong brand in Mumbai in other parts of Maharashtra. It has also made TN a hub for CA coaching centre

Risks

  • Unsuccessful expansion in non- Mumbai market- We believe that a large part of the future growth for MT will come from its expansion into non-Mumbai market. If the company is unable to successfully expand in these markets, growth will be a challenge. Coaching in general is a highly fragmented, localized market with many local leaders in each city/region. Further, MT/Mahesh brand is still largely a new name in its new regions such as Karnataka & A.P and thus may find difficult to compete with established players. In the event of no/low growth from these new markets, MT could become a value trap
    Regulatory issues – Any changes in the regulations may impact the company negatively. For example, CBSE has made board exams optional for 10th standard students. Further many competitive examinations have undergone change in pattern for e.g.- In 2012 IIT JEE exam under-went a major shift from a paper pencil model to an online model and competitive exams frequently see a change in pattern and are also moving to an online model
    Concentration risk in Mumbai- Mumbai contributes 80% of the revenues and 66% of the centres are in Mumbai. Any change in exam patter or any adverse regulation against coaching institutes in Mumbai/Maharashtra can adversely impact MT.
  • Threat from online test prep players – With many competitive exams such as CAT, IIT-JEE etc. moving online, there has been a surge of online test-prep players over the last 2-3 years. As students become more adept with technology and with increase in mobile and internet penetration, online only players could pose a threat to offline players such as MT. MT with its ‘Robomate’ offering is trying to counter this threat by offering its digital solution on mobiles and tablets to MT & non MT students. It has tied up with local coaching classes in Tier 3 & Tier 4 towns in Maharashtra & Gujarat for sale of Robomate. In FY15 Robomate did revenues of ~ INR 3 Crs

Valuation & Upside

As mentioned above in the note, MT Educare has an attractive business profile with expanding margins, negative working capital, high return ratios and pricing power. The business is facing growth challenges as it looks to expand beyond its core market of Mumbai. We believe that the strategy adopted by the company is both scalable and economically prudent.

Company is currently trading at P/E of ~15-16 and an EV/EBITDA of 8.5

If the thesis of expansion outside Mumbai plays out well, we expect the company to increase its revenues and earnings at a CAGR of 25% over the next 3-4 years. In the event of that happening, we feel the business will also get re-rated as it will allay the investors’ fear of being a non-scalable business. A business with such a profile (High ROCE, negative working capital etc) and similar growth (>20%) should command an earnings multiple of greater than 20X (P/E)

Revenue Mix

About the Industry

Market size & Growth drivers – Non -School education is a large market in India. According to CRISIL estimates, the Indian coaching industry is expected to clock 17% CAGR (over FY2011-15E) from 40,187cr to 75,629cr. Bottom up estimates also suggest that IIT JEE & Medical test prep itself is a 5,000 crore industry. This market would continue to grow driven primarily by rising disposable incomes, increasing household spend on education and higher private sector participation.

Competition – Coaching Industry in India is a highly competitive market. With low entry barriers the market is highly fragmented with very limited pan India players. Some of the key players in the coaching/test prep market are outlined below:

Key Metrics to track

  • Volume & value growth in Mumbai & non Mumbai markets
  • Revenue contribution from non Mumbai markets
  • ARPU & EBITDA per student
  • Attrition of teachers
  • Revenue from Robomate and Lakshya

You can read the same here : MT Educare: A play on For Profit Education in India | Armchair Investing

Disclaimer: This is not a recommendation to Buy/Sell/Hold. Safe to assume I have vested interest in the company as I am a shareholder in the company.

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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I became interested in this stock earlier knowing prof. Manekar held almost 5% stake , but seems like he has sold now.Main concern was scalability of a coaching centre in different regions as this is intensely competitive and highly unorganized in nature.
Refer to this VP thread where lot of discussions happened on MT and many VPers pointed out positivies/concerns

Forbesindia link below provides a lot of details about the journey of Mahesh Tutorials to MT Educare.

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Looking at the numbers I was also initially interested in the company. But delving deeper into the business model of the company, I think that major portion of their business is under threat wherein they used to provide coaching after school hours but now schools have themselves taken the initiative and parents anyday would prefer to enrol their kids at one place/institution (even if that means shelving higher costs) rather than going through the hassle of being associated with 2 institutes.

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@rokrdude Thanks Rokrdude! Can you elaborate a bit more on this? I did some on ground research and found that they are still a very strong player in Mumbai market and it will be difficult to displace them. I haven’t really seen this happening in Delhi, maybe it is a different market, but I think coaching by schools themselves will be inherently a tougher model.

Coaching and schooling are two different services, if you will, in my view. Coaching is more result oriented while schooling maybe more holistic. Location, ease etc may be factors one may consider but I think eventually results trump as that will drive the parents/students decision.

A coaching institute leveraging a school’s infrastructure and providing coaching after schooling hours, is something MT is also doing. I don’t see this a threat to MT.

@stockjobinvest Thanks for sharing the link. Its pretty informative. I agree, scalability is a concern. But I feel they have taken a prudent approach to piggy back on existing student base and infra vis-a-vis creating their own infra and doing marketing etc to develop traction. They have reached a revenue run-rate of ~ 20 Crores in Karnataka in 2.5 years which is not spectactular, but certainly not bad in my view.

Their strategy to partner with SGES in AP can really provide a fillip for them. SGES is the 3rd largest education trust in AP after Narayana and Sri Chaitanya.

The jury is still out though. But if the expansion outside mumbai succeeds, it will be not trading where it is trading now.

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My first post on value pickr. Please correct/advise me if you find it to be lacking in any aspects w.r.t. expected content quality/facts.

I have been reading up on the other value pickr threads. Undeniably good fundamentals for MT. The coaching business is a very big opportunity in India. As an entrepreneur in the e-learning space myself, I can tell you that MT is definitely on the tech-edge (comparable, if not better than the competition), although its e-learning products are costly (hence only 2% contri. to revenue?).

A bit of personal experience - MT is an old company and I have used their products during my schooling (way back in 2006). I found them to be very good at the time.

Fundamentals are strong (strong operating margins (16-17%) but lower net margins (9-11%) and high ROCE and RoA (>20-25%) with no debt), and the valuation appears attractive, if not exactly cheap, at around 17X PE.

Scaling potential might be an issue, but it is like Buffett’s favourite “local geographical moat” business where a strong brand in any one local region goes a long way (and MT has a strong brand in Maharashtra/Mumbai) since a long time. Even if scaling fails, current business is strong enough to survive. Would love to buy below current levels, but will enter at current levels as well.

What are your thoughts on the asset light/heavy nature? Can we anticipate profits being converted to FCF? Except the past two years (~30-40 Cr. in capex, almost twice of net profit, taking FCF below zero), they haven’t incurred significant capex in the past 5-6 years, which is good. I understand achieving scale would require capex, but will FCF continue to be strong after the initial outlay? I think the local brand moat will provide a good stream of cash, but my concern is a heavy capex outlay for scale with below-average returns on it will seriously impact the financials. Thoughts?

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@rutvikkarve Hi Rutvik, Thanks for your comments. If you look at Capex in the recent past a big chunk was for the PUC College that they opened in Mangalore in 2012. Now that’s gone, I expect their business to be asset light. Thus capex will not be much.

I think their expansion in K’taka & AP would not have substantial capex going forward as they are not building out the infra, but are rather piggy-backing on the existing infra of PUC colleges. Also, some of their new centres in Mumbai/K’taka etc would become mature and start delivering better margins. All this should Ideally improve FCF from here.

Good to hear that in your view MT’s tech product is not bad.

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Hello Rohit,

Thanks for the detailed write-up.
It looks very interesting.

Had bought Careerpoint earlier, but due to low conviction and non-core related subsidiaries (vehicle dealerships), sold off during May correction to reallocate capital to existing pf.

Would like to put forth my views with respect to Prof. Bakshi’s “Seven Intelligent Fanatics” article.

Integrity (IMHO, they have established their credentials) -

  1. Despite the coaching sector being highly competitive and result-oriented, MT Educare puts emphasis on coaching through the right processes. It is evident through the high training costs for ensuring the uniformity of discourse from a tutor.
  2. Dividend Payouts
  3. Operating Cash flow tallies with the Operating Profit (One of key indicators of Sanjoy Bhattacharya to check for integrity) to 0.5 or more

Energy/Focus (Too early to tell):

  1. Realization of the PuC Mangalore venture being not a high-return endeavour, mgmt was able to bring the focus back to their core-expertise which was providing quality coaching.
  2. Emphasis on the bottomline more than the topline.

Intelligence (Again they have shown that they are an intelligent mgmt) :

  1. No over-aggression as evidenced by almost 0 debt, and gradual expansion in Karnataka and AP.
  2. Emphasis on growth which maintaining gross margins and improving the bottomline.
  3. Tendency to gamble - no evidence of this. In fact, unlike its peer which went on a expansion spree, it remained focused and gained further market-share during the changes in the IIT/JEE exams or education policies.
  4. Ability to delegate - This is one very important point for me to identify a fanatic. Like the Outsider CEO’s, who prefer a decentralized corporate structure, while they concentrate on Capital Allocation/Strategy sides of the business. I find evidence of this through the emphasis laid on the process-driven training of the lecturers and thereby the students.

Above points are subjective/biased and open for feedback.

I would track the development of “Robomate”.

Attaching ICICI report dated Nov, 2014.

Disc: Not invested.
Planning to initiate a tracking position.

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@crazymama Those are very interesting points to look at Vishnu. Agree, that robomate is very important metric to track given the competition from online and how MT is able to tackle it.

One interesting thing that I heard was that this AP deal that they have done is a very sweet deal. Now again, I haven’t been able to confirm the details about the same from the management, but if it’s true, then again it shows the astuteness of the management/promoter.

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My understanding is that the market does not believe that they can replicate their business model from mumbai to the rest of the country and this is discounted in the price given that the stock price has gone no where since IPO which was done at Rs 90 sometime around 2013. There expansion in Karnataka and AP/Telenagana is not coaching centre oriented (as in Mumbai) and comes more from a collaboration with PU colleges. I have bought some shares to track this business and remain hopeful.

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I have taken a small tracking position in the counter. Need help of fellow members to understand following:

  1. MT has received some contracts from govt for coaching category students and that has added to its topline in recent past. Need to understand the split of ‘retail’ students and govt contracts and respective growth rates. I am given to understand that ‘retail’ students share may not be growing even in Maharashtra. If this is the case and growth is coming from govt. contracts for coaching ‘reserved category’ students then the hypothesis that process orientation and IT can take away market share from ‘Star’ teachers do not stand.

  2. Need to understand the coaching tie-ups in South India. What is the realisation per student expected through such tie-ups. Net profit basis, are the realisations similar to realisations in Mumbai market ?

Has anyone looked at these aspects and guide ?

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@sjain_13 Good questions. My understanding at this moment is that these are short term contracts (1-3 months) and are positioned like a crash course for govt school kids for national/state level entrance exams. Last year it was very small portion (~1%) so it’s not yet reflected in the numbers. This year I understand they have a contract to teach ~30K students, so it could be a decent size in FY16.
Overall, the govt part of the business is something to be understood closely because it will also have a bearing on the working capital position, since govt contracts have lengthy receivables.

Realizations by market is not available in the public domain.

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Q1FY16 Results are out

  • Sales 7484 Vs 5429 (Q1FY15)
  • PAT 604 Vs 726 (Q1FY15)
  • Direct Expenses 4111 Vs 2855 (Q1FY15)

Direct expenses include purchase of tablets and SD cards which are issued to students as part of the course material. The company carries an inventory at all times which is netted out from direct expenses.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/1E0EA226_DBF1_4EEB_BF79_B18577BB9FB6_082436.pdf

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The profit seems subdued due to higher amortisation. Adjusted for that last year’s profit would have been less by 3.5cr and gives a yoy growth of 60%
Disc: invested since 105

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Top line growth has been pretty impressive for them. Their increase in direct expenses is a part of their strategy to implement technology in a big way.

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I have worked extensively in this sector and would not recommend investment due to the following reasons

  1. The brand of Mahesh Tutorials is largely unknown outside Maharashtra. As you leave Mumbai the brand recall starts diminishing.
  2. The way the industry is structured, the tutors take the lions share of the revenue. And each of them has a local brand. For example, if Satish sir is teaching Economics in Vile Parle he is famous in the area. The fact that he teaches within MT Educare’s setup is incidental. He can start Satish Eco Classes anytime with minimal capital expense and break away students. In fact , every year , they lose many of their stalwarts who leave to start up their own setup.
  3. Operationally the company is weak. They used to run a preschool chain called Global Champs which was most mismanaged and their was no supervision from HO. They finally sold it to Treehouse.
  4. In India even today parents want a live teacher to teach their kids. Technology can only assist the teacher and not substitute him. In fact , the saga of Educomp / Everonn / Core / etc. suggests that he business model for using technology in education has flopped. The primary reason for this is that parents pay a certain fee to a school to get their kids educated. If the school chooses to outsource some of the teaching to tech-based educators, the parents say the money for that must come out of the schools income and not from the parents pocket. Obviously, trustees are not OK with it ( as if they were implementing this for the student’s sake in the first place !! ). The other dampener is also the lack of original content…most of the stuff is downloaded from the net anyways.
  5. Lastly, sadly , the industry has become a discount based one. Institutes vie with each other in offering discounts and good students study almost free. To keep getting more students the institutes have to advertise heavily throughout the year , increasingly every year.

This is my 2 bit. Am not invested. Will not be commenting again on this stock.

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I fully agree with you on your views about unviability of Educational Tutorials as an investment option .
Investment is an art as well as a sciences .Out of my investment career of 35 years as a hobby I found that , apart from financial analysis there are many intangibles such as honesty and quality of management , out look , fundamental changes in the business such as photo film to degital , and above all sheer commonsense .

Thanks .

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@thestocklady Thanks for your comments. Always good to get perspective from people who have been in the industry. You are right about MTbrand not being popular outside Mumbai, but thats the opportunity and they are going about in a manner that has some past success. I would encourage you to read about Narayana & Shree Chaitanya. Both of them have followed the PuC model and are India’s largest coaching institutes.

The Andhra deal that MT has done, could potentially change the game for them in their plan for expansion outside Mumbai. The terms of the deal are highly favorable for MT as well. Shree Gayatri, their partner in AP is the third largest PUC operator after Narayana & Shri Chaitanya.

They are doing the right things it seems to me- going slowly, not leveraging their balance sheet, in fact they have reduced their size of their balance sheet by selling the asset in Mangalore.

Will all this change be visible in the next quarter’s numbers? No. But over the next 2-3 years it should all add up.

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MT has to an extent solved this problem by giving ESOPs to senior teachers/faculty/employees. I think its a very good strategy and that is part of the reason he has scaled up so well in Mumbai.

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Q1 Results Analysis
http://prosperotree.com/investment-updates/264-mtel-q1fy16-results-inline-with-expectations
Disclaimer: Did dividend stripping, not invested.

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Spoke to someone in the Karnataka market. MT’s strategy on partnering with PUC’s is certainly interesting.

-Minimal Capital investment in the PUC model. Investment limited to some infrastrucutre related issues such as AC’s /Desks etc. Maximum investment is ~ 20-25 Lakhs/centre
-PUC Model is successful if both MT & the other partner has a long term view. Maintaining a JV (partnership) is a difficult proposition. One is actually managing egos so it can break down. So far no MT has not had anyone walking out of the partnership
-Typically MT goes after not so well doing campuses and then tries to turn them around. Here the biggest factor is good results. The key factor are results. At the moment Karnataka has 18-19 locations, of this 70-75% are doing well
-Sold the Managalore PUC college as it wasn’t doing well. Didn’t break even after 5 years so sold it off to recover investments. Sold it at no profit no loss.
-PUC model is more profitable than the normal model that MT follows. Slowly others are getting into PUC model as well, given its attractiveness. FIITJEE is coming in Bangalore but they are focusing on IIT. MT is focusing more on state boards at the moment
-Most of the PUC players are small and don’t have any plans of scaling up as such. As such there are not many organized players. There are 3-4 bigger players (Sri Chaitanya, Nalanda, Narayana & Deeksha) but none of them is doing well. Deeksha is winding up. MT has been expanding in the last 2 years. Plans to reach 30 tie-ups in the next 2 years. More than 70% of MT’s partnerships are doing well.
-MT doesn’t advertise a teacher or set of teachers. Other small PUCs focus on that. MT’s pitch is more about technology and its scale that it has achieved in other geographies
-Having established its first college in Mangalore- MT has a good brand recall across Karnataka. Mangalore is an education hub in K’taka.
-Karnataka has ~ 5000 students and the geography is profitable. Contributing 10-15% of revenues.

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