Tree house education and accessories ltd. - Potential candidate for improvement in RoE

Stock Opportunities
1

TreeHouse Ltd

Treehouse ltd is operating in an easy to understand business in which everyone see the huge growth potential. Treehouse is operating in Pre- school chain and K-12 segment where Treehouse has shown great execution track record to out-beat competition and emerges as India’s largest self operated pre school chain.

It is operating in 2 segments as 1) pre-school 2)K-12

Recently in last year they have started Day care Facilities using the same preschool centre.
Basically Treehouse is concentrating on Asset- light model as all its preschool centres are rented. Though it owns some of the K-12 properties and they have invested about Rs.100crs in K-12 properties. Now they are planning to sell all 5 properties they own and lease them to further improve its return on capital. Out of 5 properties they already sold 2 properties located at Vadodra. One property transaction has been completed, another one is in process and as per management it will be completed by September. By selling these two properties they have received about Rs.69crs. and another three properties they are planning to sell in next 2 years. So it will get enough liquidity to grow their high margin asset light business pre-school centres.

Pre-school Business:

Recently they have done QIP for Rs.200 crs at Rs.440 per share. So they are very well capitalised to grow their pre school business. Company is planning to grow to 1000 pre- schools in next 3 years from 505 self operated preschools in FY2015. They have grown from 110 pre schools in FY2011 to 505 preschools in FY2015. Plus they have 107 franchise preschools as on FY2015 grown from 68 in FY2011. Though their focus is to grow self operated preschools, you can see huge growth there. Their per self operated preschools capex is approx. 50lacs-60lacs and they are capitalised very well, strong cash flow from operations and proceeds coming from upcoming realisation of properties, i think it will be easy for company to grow to 1000centres in next 3 years.
As this business is asset light and they rent all the centres, they major expenditure is Rent and Staff salary. These centres are breakeven within 2 years and with almost 30 -40 students.
CRISIL Research projects the overall preschool market will grow at a CAGR of 20% over 2013-18 from the current market size of INR 66bn to INR 165bn, driven by increasing penetration levels in the industry. So there is a huge growth opportunity lies in this business.
Though there is a huge competition considering significant market share by un organised sector and easy access to open pre schools as there is no government approvals needed.
However parents start emphasis on branding and internal set of teaching structures, organised sector potential growth is high.
Company choose to go for self operated model instead of franchise model as self operated model has high EBITDA as it has major cost rent and salary only and you can see they have EBITDA margin of more than 50% since last 4 years. Recent one was 56% . while in franchise model , they can charge around 10-15% of the revenue as a royalty.

K-12 Schools:

Treehouse also providing School management services for 24 k-12 schools located where it has a strong pre-school presence.

Tree House receives ~22% of the trust’s revenue (which itself consists of admission, tuition and school bus fee paid by students). With each support service being chargeable, this may increase to trust revenue over time. The services rendered include admission, administration, examination, school bus, laboratory, recruitment, and content management.
They have invested about Rs.240crs in K-12 schools where Rs.120crs in assets and Rs.120crs are security deposits to schools trusts.

Day Care services :

Recently they started day care services in 100 self operated preschools. They are going to sweat same properties so they will incur only staff cost as a major expenditure for this segment. As per management they said it will be operating at 80% EBITDA. They plan to make a turn over of about 30-35% preschools income in next 3-50years.

Financials:
Company’s turnover has increased from Rs.39 crs in Fy11 to Rs.207 crs in FY15 presenting CAGR of 51%, EBITDA has increased from Rs.16.9crs to 127 presenting CAGR of 65% and PAT increased from Rs.9 crs in FY11 to Rs.60crs in Fy15 presenting CAGR of 60%. They are operating at an EBITDA margin of more than 50% and PAT margin of more than 25%. And chances of margin improvement is high with day care facilities and reduction in debt. Company is currently trading at 25 P/E. I think company will grow decently looking in to management capability, their execution and growth opportunity going forward.
Please provide any inputs on it.

Disc: I am invested
This is not any buy or sell recommendation.

2

Things are happening with this script since last one year. I have observed that it has consistent record of high delivery trades. Company is accumulating cash. There are sporadic spikes in share price but suddenly supply comes and price fall is equally sharp.
On business front things looks good. Scalable business model should take this script to higher level. Though company operations are more concentrated in Maharashtra, with cash in hand it is expected to expand in other areas also. Expect this to post better results in future. VP community views on this business are solicited for the benefit of community.

Disclaimer: Already invested in this stock.

3

Any info on how the schools are performing outside Maharashtra?

4

Hi,

I am from Gujarat.My little one was in Treehouse play school. After getting good experience and their teaching methodology,curriculum, i have decided to continue her for nursery too. Even i have talked to other parents and they were happy too. What i have noticed that they started gaining ground in Gujarat. Even before my daughters admission to Treehouse , i have visited Euro kids, Kid zee and other play groups too. but i have seen the difference here while talking to their teachers and coordinators. Even i have not invested that time, but after looking at my daughters performance, their school activities, their coordination with parents i have decided to get in to this company. This is my own experience with Treehouse. And i think it will auger well going forward.

Prashant

1 Like
5

The Company has shown good growth.
My only concern why is the debt rising yoy. The rate of increase of debt is same as revenue and the stock is not trading cheap.

1 Like
6

@hazariwalapu Thanks for your inputs. In your view, what is the difference in model and pricing between Treehouse and the others?

7

Thanks for the info. Reason enough to dig further.

8

The 5year PAT and 5 year cash flow from operations do not match. The growth seems to be debt driven. Why is it taking a lot of debt for a asset light franchise business?

(2010-14)
Five year PAT - 100cr
Five year operating cash flow - 40cr

2 Likes
9

@hazariwalapu

I type “Tree House Ltd” and get the following results:-

Tree House.jpg843×525 129 KB

Now either you’ve got the name of the listed company wrong or Google doesn’t seem to know about any such company.

My guess is the company’s listed name is “Tree House Education & Accessories Ltd”.

My sincere request to you to provide correct and complete information for others to look up such companies other members may not be aware about.

Thanks!

10

sorry for this. Thanks for draw my attention towards this. it is Treehouse Education and accessories ltd.

Sorry once again.

Prashant

1 Like
11

Dear Sreenath,

As they have started from a very low base as they started in 2003 and then they grow by investments from PE partners. Now if you see they had 110 self operated preschools in FY11 and they have grown to 505 in Fy15 so they have grown by almost 400 self operated preschools in this period. Further, they were running only 12 K-12 schools in Fy11 they have grown to 24 by FY15 and also invested some in K-12 assets, those they are now planning to monetize + they have paid 90crs for Deposits for K-12 schools. If you see,their (Net block(after depreciation) + Capital work in progress ) increased from 113 crs in Fy11 to 347crs.so almost incresed by 234 crs after depreciation. In FY15 balance sheet they have cash of :162 crs against Total Debt of :100 crs. And another 52 crs will come from one asset sold in Vadodra and this transaction will complete by sept.

From ARFy11:
We have extended our educational services on an exclusive basis to K-12 segment since Nov-2008. The K-12 school operators are required to pay onetime fee, so that they can obtain the exclusive rights for educational services provided by us. The usual term of our service agreement is 30years, which includes annual service/consultancy fee as agreed for every child enrolled in the K-12 school. Besides, as per the service agreement we inspect the K-12 schools and ensure that the K-12 school operators do not avail any educational services from any other organisation.

Now on operating cashflow front, if you study their cash flow statement you will find:
Deposits given to K-12 schools : 20.18(fy12), 54.19(fy13), 14.59(FY14)charged in working capital change in cashflow statement =90 crs of deposits given to K-12 schools.
so if you add this to operating cash flow it will be 130 crs.

Now they have enough capacity generated for K-12 so they are not looking for further expansion in K-12 in near future. and a robust base of Pre schools (505 self operated +107 franchise), to generate lots of cash going ahead. other point is they have lots of cash in Balance sheet now + generating more cash from operations + cash generation from K-12 asset monetization , they will get enough cash for further expansion of pre school business.

Disc: Invested.
Pl. do your own research before investing.

12

Dear Rohan,
The difference between Treehouse and other is their business model:
As Treehouse mostly work on Self operated preschools 85% of preschools are self operated, and if you see their major cost is Rent and salary so they are having EBITDA more than 50% in last 5 years. Now they are planning same assets to use for daycare too. so they are further sweating the same asset as they do not have to pay more rent for these assets while they are getting extra income. so for day care facility their major cost will be only staff cost. so their EBITDA should improve further. So they are taking whole benefit of operating margin here.
While other preschools are base on franchise model so they are getting only benefit of Royalty that will be 10-20% of the revenue. Other benefit will be taken by franchise owner.

Thanks
Prashant

13

@hazariwalapu Any idea why accounts receivables have grown a lot faster than sales in the last 2 yrs. What kind of receivables do they have in schools (from parents?)?

14

One more thing that causes concern why the Promoters are having only 29.75% ( as per March 2015 BSE website) and out of which 28.66 % is pledged.

Regards
Manish

15

Thanks for the detailed explanation.

Monetizing its k12 assets and focusing on its self run pre-schools looks like a better focused strategy.
I had my doubts on the franchise business of Euro kids and kids zee preschools. This year student enrollment in my town was a grand total of 8 & 3 respectively. While a centrally managed ,self run preschool may offer better standards and higher enrollment.

At 25PE it looks fairly valued. Could give steady returns if its able to replicate its model in more states.
More info from members on performance from different locations would be helpful.

16

Very true Sreenath, that is where Treehouse is making a difference from others. Even at 25 PE it looks good if it can grow more than 25%in next 3-4 years it will make a big difference in the Valuation and it seems like that it can easily do that. For Promotors holding around 30% as they grown very fast and they mostly used PE funding to grow by providing them stake in the company. Even i am concerned about their pledging of 28%. but that pledging is personnel and not for company debt. As what i have noticed that Mr.Rajiv Bhatia is buying company’s stake continuously from market whenever there is a deep in the stock price. You can see so many disclosures on BSE announcement regarding this. and i think he is using this money to increase his stake in the company. On Trade receivables i am still working on it.

Thanks

Prashant

17

Dear Lynchfan,

Unlike Zee Learn and other Pre School operators, TreeHouse does not have too many Franchisee’s. Most of their centers are Company Owned and Company Operated. The premises are typically rented and they incur capex towards Advance (typically 10-12 Months rent)

18

Dear Hazariwalapu,

I have 2 concerns regarding TreeHouse

  1. Regulatory Risks: States like Tamil Nadu are planning to regulate Pre Schools by limiting Fee’s and excluding For Profit players. If this happens across states, TreeHouses business model could be disrupted severely.

Ref: http://www.tn.gov.in/schooleducation/draft_regulations/draftcode_regulations_playschool_090615.pdf

  1. Management Risk: Over the last six months I have noticed that TreeHouse is advertising on NDTV Profit extensively. I am unable to understand the point of a Pre School advertising on a business news channel. Is the management more driven by stock price than business in their marketing decisions?

Due to the above reasons I am cautious about investing in the company. However will track the company closely and hold a few shares.

  • Raj
19

Dear Rajagopal,
Thanks for raising these points.

The proposed regulations by the TN government is a welcome development. It stops the mushrooming of sub standard play schools in every street corner. Most of the newly started playschools lack basic needs,Single room schools, some on top floors, lacking in ventilation etc. I doubt if regulations like this will affect Treehouse. May even help by weeding out sub standard schools.

Regarding the fee regulations, its not in the proposal right? But agree with the fact that TN government is perfectly capable of destroying any good education system(matric- samacheer) with regulations.

Early learning advantages and lack of daycare facilities has been recognized by the govt(unable to find the source/ old article). So the fee regulations may not happen come in the short to medium term.

20

Dear Rajgopal,

Your concerns are valid.
I have gone through it. and i am seeing more positives here than the negatives for big and established Preschools. As most of these rules are already followed by Treehouse. As you see more than 75% of the preschool market is Unorganized because it is very easy to open preschools as there is no regulations and inspection for preschools. Now these kind of rules and regulations will weed out so many unorganized players and open up more opportunities for big organized players as it is very easy for them to follow these rules and regulations. so it will increase market share for organized pre schools.

As it is not showing any cap on fee structure so far in this PDF. There is not much concern about their revenues.

On the second point i have to work. As one possibility is their Day care centres, Because they are targeting working couple for Day care revenue and most of the working couples are used to see Business channel. But here question is Why only NDTV and not CNBC or any other?

Thanks

Prashant