MD says no pledged shares have been sold by any of the lenders.
MD says selling might have been triggered by “rumors” of pledged shares being offloaded. This led to a cascading effect bringing down the price and market cap.
Reduced market cap caused funds to sell for technical reasons (if they aren’t supposed to hold companies below a certain market cap)
MD has promised to work with the lenders and use own assets to release pledged shares soon and bring things back on track.
Says business model is intact and that things are fine on the business side.
We’ll need to see how the market reacts tomorrow. If investors buy into this story, then the stock should recover tomorrow.
Discl: Invested at around 260 levels more than a year ago.
I am glad that management came out and clarified everything w.r.t. the net debt situation apart from the points you have mentioned. They said that they are trying to become 100-125 cr cash positive which looks far fetched but achievable within 2-3 years. That selling by institutional players is understandable as they do have those requirements (learnt from “One up the Wall Street”). If tomorrow still it opens at lower circuit I will add more.
Disc. It forms 20% of my portfolio and my avg is closer to 300Rs.
Management clarification gives the comfort. But still it is puzzling why would anyone want to pledge shares to buy back its own shares as management claims. It may be seen as confidence in the company, but management should also have known it can act against the shareholders when things turn bad as it happened now.
Promoter is not as innocent as it sounds. Negative cash flow from investing (to support expansion) + rising receivables means either resort to debt or dilute equity. Debt is “dirty” and can impact net profit so promoter here diluted equity by 25% since mid 2012. However, to keep its stake constant at ~ 30%, it started to buy shares via borrowed funds and this resulted in rising pledge shares. Thus even after buying 2.7 mn shares since sept 2013, promoter stake in the company is close to the june 2012 levels i.e. ~ 30%.
So promoter now have to fix the receivable problem and generate more operating cash to strengthen its fundamentals.
Given the fall in the share price, I spent 2. 5 hours leafing through ARs and listening to promoters. Like ritesh pointed out there’s a lot of dissonance amongst data points
promoter claims he pledged shares to buy more share - but his shareholding has hardly moved. Since the AR does not indicate that for the debt the compay carries shares were pledged, it follows that he used bulk of the money for a purpose other than for the company. Given that education is a highly regulated industry and politically sensitive subject (greasing is common to get licenses to run pre-schools, pass inspections etc.), what was this used for ?
ROE’s are just about a little north of 11-12 % - that seems low to me given EBITDA of 55%. I am surprised no one picked that up - the only industry that has this kind of margins are things like toll roads in their early years which are hugely asset heavy - most education businesses run at 20 % ROCE’s and need very little dilution. Case in point is MT educare - which operates a similar decentralized model of not owning assets and are spread out through the city.
consistent capital raising of upwards of Rs. 300 Cr. cumulatively for a business at this scale is something I am just not able to explain
I read through the promoter interviews, he always talks of market size, opportunity, fast growth but seldom talks of profitability and keeps talking of QIP/money raising etc.
if receivables are more than 3 years old, why r they booking it upfront as revenues - why not recognize it pro rata or in the year in which they are actually due ? Seems absurd that they would recognize revenues more than a year ahead of time when they know money won’t come in until much later. If they are taking up such contracts, its also not a great idea from a business perspective either
discussion points are welcome - I am considering investing if I can get answer/quantify the above risks.
Thanks for the excel. It gives clear details. The dirty trick buying shares by pledging shares is not worth the effort. Right thing would have been the promoter should not have let his stake go below 30%.
Thanks for raising important questions. I am not expert but let me try to answer for the 2~4 questions from my analysis so far, Welcome corrections.
Low ROE-> Here we got to see the ROE is for the combined entity of the pre-schools and K-12. The K-12 is asset heavy and it is what denting the ROE. In the earlier calculations, the K-12 assets which constitute 43% is delivering only 0.04X Asset turnover, whereas the pre-schools business is around.45X. The company’s plan is delivered and focus only on pre-schools. The company is in significant expansion phase now and that is also the reason for ordinary ROE’s. After a while I think it should stable and ratio’s should definitely improve. The better way is to check the per center profitability and breakeven period of the per center is less than 2 years. The centers earn anywhere b/w 30~120% return on their capital investment.
Consistent capital raising -> I think here the management is responsible for diverting funds to low asset turnover business such K-12. It invested heavily in the K-12 business fell short of the money and resorted to constantly raise money for expansion of the pre-schools. I think the investors are all just looking at the pre-school business and investing in them and pushing management to exit out of the K-12 assets which is holding the ROE. But again prudent management should have handled better and not ready to dilute equity at every instance.
Profitability -> Here again the blended numbers don’t look good. But with day care facilities the profitability should improve. Even currently the company margins are very high in the upward of 60% for Gross and 28% for net margin. MT Educare numbers are much lower. But with the constant capital requirement and investments, this company hardly many any free cash which has to change.
ROE’s have always been low even prior to IPO when K12 exposure had nto happened - and what does the promoter do with a Rs. 220 cr. loan is something that’s beyond me - that’s a lot of money to be taken out through a pledge -
Pledging was at an all time high just before QIP and reduced drastically - how, how did he repay Rs. 60 Cr. in one quarter (sum that’s large enough even for an ambani).High pledging with money taken out for personal use just before QIP at an exalted price coupled with a crash immediately thereafter , a huge fall in pledging and repayment thereafter, points to some possibilities that we ought to think about. It means the promoter needed a lot ofmoney for a small period of time just before QIP.
I have no idea still why promoter needed Rs. 200 Cr. for himself and how he repaid it so quickly after QIP. Your calculation raises more questions than answerrs
Yes I agree (before QIP in sept to dec 2014 quarter - the promoter pledged shares rose to 100% - this is highly irresponsible of the promoter/management!) - there is lot more to it and unless some one ask the management directly - we would only be speculating
The promoter has invested in some start ups (it was in the news recently but cannot find link). He buys token amount of 5-10,000 shares in Tree House from time to time but he has now started funding start ups also.
K-12 schooling is highly regulated and no profit making entity is allowed to run K-12 school. Present promoters enter into the segment through circuitous route of management contracts and advances paid to schools. The decision was not correct in my view. In the latest filing promoters have specifically stated that they will not invest in any new venture in K-12 segment. This is the best that has come out today from the management. It amounts to accepting mistake by management.
Pre-school segment is profitable segment. It is good that management is leaving asset heavy K-12 segment. Losses are not very high- not even one year EBITA. Once this segment is exited, ROI shall increase. Further company shall have more surplus to expand more aggressively in pre-school segment.
(Disc: I am invested in the company for last 2 years. I added more recently.)
Any further inputs? Seems to be all the negatives disappeared and stock hitting upper circuit for last 3 days. How to approach this stock now.
Now if we assume what management says is all correct, what is the best price to enter again?
My calculation shows with EPS of around 15Rs now, and no further dilution of shares in future and if we keep conservative projection of 15% growth, the stock is at 50% discount at this value.
40.0L shares is too high! The promoters had 1.26Cr shares out of which closed to 50% was pledged. Now how can they sell 30% of their holdings? That will bring down their ownership to below 20%
Let’s see if promoters give any clarification tomorrow and if they don’t then we should press charges against him in SEBI for share manipulation by coming openly on TV
Selling 40Lakh shares at 200.5 provides them Rs 80cr . This 80cr will be used to release the pledged shares. This will bring promoter holding to 20% .But all pledged shares would be released.
The reason behind this is : If the assortment of lenders were to sell the pledged shares in the market individually. It would affect investment sentiment further , crash the price and would result in a fire sale. The promoters and shareholders stand to lose more this way .
Selling the shares at this price (rs 200.5) in a block deal, is the only way Bhatias could raise the cash to release their pledged shares . ( considering the fact that Bhatias do not have cash or any other hard assets worth Rs 80cr )
Disclosure : Invested. The above logic is only a educated guess. Only the Company Disclosures tomorrow can clarify this.
Recently Rajesh Bhatia interviewed on CNBC. he told that they will release their pledged shares soon. Now i think they have taken a prudent step to release it by selling these shares. Suppose if they do not do this and if share price again go to Rs.120 for any reason, they need to pledged all of their shares and if lenders start selling these shares, they will sell all the shares at any cost and stock price will go to ditch even if company is fundamentally strong and ruin the company completely. Now by selling their 9.5% of share holding they will release all the pledged shares, though they have reduced their stake in the company but still they will have 20.51% of the stake and still be a major shareholder. and it will even save other shareholders too . This is my view on this event.
