India Equity Research

Education

July 3, 2014

BUY

MT Educare Ltd

Target Price

INR 200 Unique subscription model is the business lever

Last Price

INR 120
MTEL.IN
MTED.NS
2,784,840
127.5/66.9
46,960/25,830

Bloomberg Code
Reuters Code
Avg. Vol. (3m)
52 -wk High/Low INR
M cap Full/Free float (INR mn)

MTEL has reported a significant YoY growth in past four quarters, with
the average YoY growth of over 30%. We believe that this pace would
continue in coming years due to rising aspiration of students for entrance exams. Company would be able to report over 25% YoY growth
in coming years, according to us.

MTEL vs Sensex

40%

MTEL

We initiate coverage on MT Educare Ltd (MTEL), which is engaged in support and coaching services for students of SSC, HSC,
graduation, CA and competitive exams such as JEE, Medical,
MBA, CFP etc. The company has over 25 years of experience in
coaching business and has presence in 138 cities with total number of 226 coaching centers across India.

Sensex

20%
0%

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14

-20%
-40%

(in %age)

Mar14

Dec13

Sep13

Promoter

45.34

45.34

45.34

FII

11.38

11.58

11.63

DII

3.75

3.94

3.74

Others

39.53

39.14

39.29

Right Horizons Score Matrix

Quantitative Score

2.14

GOOD

Qualitative Score

1.32

EXCELLENT

Overall Score

3.46

GOOD

For detailed Score Matrix report, write to us at Right Horizons

Key performance

2013

2015 (E)

2016 (E)

Revenue (INR mn)

2,018

2,448

3,051

Growth (in %)

28.3%

21.3%

24.6%

EBIT (INR mn)

295

412

518

15.5%

17.7%

17.9%

208

313

387

10.9%

13.5%

13.3%

5.3

7.9

9.8

22.70

15.15

12.23

EBIT Margin (%)

PAT (INR mn)
PAT Margin (%)
Basic EPS
Price/EPS Ratio

MTEL is currently operating at TTM EBITDA and net margin of 21%

and 10.5% respectively. Company has managed to sustain profitability
due to its asset light business model and continued thrust for expansion
in new geographies with suitable offerings.
MTEL is a zero debt company and managed its financials well with the
use of internal accruals during the time of expansion. It has provided
the financial flexibility to the company for further expansion.
Improvement in profitability aided key metrics: Company reported
ROE and ROIC of 19% and 26% respectively, while total assets and
capital turnover ratios reported at 1.10 and 1.80 respectively.

MTEL is currently trading at P/E of 22.7x (TTM) and FY15 forwarded P/E of 15.1x (FY15 estimated earnings of INR110.3 million). MTEL has emerged as a strong player in a highly fragmented coaching industry and has the ability to deliver strong
operating performance; on the back of high operating leverage
business model. Despite continued organic expansion and strategic acquisitions, MTEL managed its financials well and kept it
balance sheet debt free.
Despite competition from unorganized and local players, MTEL
managed to report consistent and sustained performance during
past several quarters and we expect the company to sustain and
improve key operating metrics on the back of strong cash flow, a
recurring theme in the past several quarters. We value MTEL on
traditional DCF method of valuation and are comfortable with
an FY15 P/E of 25x, with a fair value of INR200.
Tushar Pendharkar, +91 022 41002018

tushar.p@righthorizons.com

Business and Outlook

MTEL started with one center in Mumbai during 1988 and
within the span of 25 years it has expanded its presence in
138 cities with total number of 226 coaching centers across
India. It is one of the largest and oldest player in Indian
coaching and the only listed player on stock exchanges in its
segment. Company offers its services for students in three
business verticals:
School Segment, which includes students from IX and
X standard. Company has also started INK Model for V,
VI, VII and VIII standard.
Science Segment, which includes students from XI and
XII standard, where the main focus is to prepare them
for Engineering and Medical examination.
Commerce Segment, which includes students from XI
and XII standard, where the center prepares them for
CA and CS entrance along with their B.Com studies
In addition, MTEL also provides coaching services for
CAT, MAT, Government Jobs, etc. While, company has the
total strength of over 80,000 students in its different formats
of coaching services, students from school segment contribute most with over 40% of the total strength, followed by
commerce and science, where the contribution is over 30%
and 18% respectively.

Diversification of Services: Strong hold on

PCMB, while raising footprints in other formats of competitive exams
MTEL has focus over national level examinations, such as
engineering, medical, CA, MBA, etc., which has unique curriculum across India. Significant experience in PCMB
(Physics, Chemistry, Mathematics and Biology) segment
has provided an enviable position to the company over its
other competitors operating in similar segment. To diversify
the product line even deeper, company has made couple of
acquisitions during past few years it acquired Chitale
Coaching Classes to make presence in MBA entrance
coaching market and also made acquisition of Lakshya
Coaching to target students for engineering entrance exams
in Northern India.

INVESTMENT RATIONALE
MTEL is a well established player in coaching industry and consistently expanding its base across India.
Focus over localization of its businesses is the key of
its success
MTEL is a zero debt company and has a track record
of strong operating cash flow, which is expected to
continue further.
Diversification in product offerings aided the company
to expand its base in new geographies. Rather than
pushing its services in market, MTEL is focusing more
over Customer Centric approach.
Inorganic strategic moves and tie ups in new geographies could be a strong trigger for coming years.

School segment has immense potential to grow and outperform in coaching industry. This segment has reported a better than
expected increase in per batch occupancy rate in past few years and it has also witnessed the willingness of parents to pay more
for quality coaching, which the students are not getting in schools. The INK model, which is a coaching through internet, is also
gaining wide acceptance due to easy accessibility and in house tuition. This model provides for personal coaching and parents
appear to have better control over their wards.
MTEL has recently started a PU (pre-university) college in Mangalore, Karnataka and has also forayed into direct education
over the past 12 months. The company has tie-ups with other colleges in Karnataka to provide test preparatory coaching and
management consultancy services. In the deal, MTEL shares over 15% of the revenue with the college for utilizing the college
infrastructure and in return colleges get extra income during their non academic sessions. Currently it has tie-ups with 9 operational colleges. Management is targeting over 30 college tie-ups by the end of FY18.

Geographical Diversification: Expanding pan India presence with focus over localization
To reduce single location concentration, MTEL is aggressively expanding its presence across new geographies such as Karnataka, Gujarat, Punjab, Tamil Nadu and Delhi, which would further reduce regional dependency over Maharashtra, where it is
currently operating 75% of the total centers. During FY13, MTEL acquired Lakshya coaching and made its presence in northern India. Now the company is planning to expand Lakshya network in other parts of the country, especially western India,
where MTEL has strong presence. This move would not only strengthen the competitive position of the company; however, it
would also reduce operating pressure over MTELs existing infrastructure

LAKSHYA Acquisition: A strategic move to cater northern India

MTEL acquired 51% stake in Lakshya, which is one of the fastest growing coaching institute in north India for engineering &
medical entrance examination. The recent change in IIT JEE examination pattern has also aided the acquisition in favor of
MTEL. Unlike old system of one single entrance exam for IIT JEE, the new examination pattern conduct two exams JEE
Mains and JEE Advanced. Only top candidates for JEE Mains are eligible to appear for JEE Advanced exams. Therefore, with
the acquisition of Lakshya, MTEL is well poised to provide right mix to prospective students who could attend coaching during
XI & XII from MTEL and prepare for JEE from Lakshya. Though that would require a significant expansion of Lakshya centers in areas where MTEL is operating, and company has already started doing CAPEX to make most out of the acquisition.
MTEL has started expanding Lakshya in Punjab, Haryana, UP, J&K and Himanchal Pradesh. The next leg of expansion would
be in western & southern regions of India. The recent expansion in Karnataka for XI and XII science aspirants through college
tie-ups could be a potential targets for Lakshya and is expected to work as strong foundation for growth.

25 years journey transformed a local business into a national coaching chain

The regions where MTEL has presence are strategically evaluated by the company and the offerings are based on
growth prospects & preference of the students towards entrance exams. MTEL launched CA courses in Tamil
Nadu, Engineering in Karnataka, acquired Lakshya in Northern India, etc. Company is diversifying the offerings
and focusing more on scalability.
Recent initiative for UVA (University, Vocational & Affiliated) education model could be the EBITDA booster,
considering the network expansion with colleges. In this way of operations, colleges get extra revenue for providing infrastructure to MTEL during non academic sessions and MTEL uses a well established infra of colleges at a
nominal cost. We believe that it could be a strong trigger for next 3 years.
BUSINESS SEGMENTS
SCHOOL SECTION

OFFERINGS: Suitable for students of all age groups

IX and X standard (which includes CBSE, ICSE and State Boards)
INK Model for V, VI, VII and VIII standard
XI and XII standard

SCIENCE SECTION

Preparation for Engineering and Medical entrance examinations (JEE Mains & Advanced
and NEET)
XI and XII standard

COMMERCE SECTION

CA-IPCC, CA Final and CA-CPT

CS-Entrance
B.Com and Graduation syllabus
Coaching for CAT, CMAT and GMAT

OTHERS

Overseas coaching services, such as Dubai

Preparation of entrance exams for Government services
Sale of study material through various distribution channels

Income Statement and Balance Sheet

Coaching institutes operate mostly on fixed component cost and that provides them significant operating leverage. The factor
which influences the most is the total strength of the students, which could also be considered as occupancy of the batch. Over
the past several years, company has witnessed significant acceptance in the market due to rising aspirations for entrance exams
and continued diversification in product offerings. Growth at MTEL in past few years was the mix of organic as well as inorganic and has comfortably drove revenue at a better than expected rate. Despite continued expansion and inorganic growth,
profitability at operating level has improved and would be able to expand further with expansion, according to us. TTM
EBITDA margin of the MTEL in past several quarters have been between 18-22%.
We believe that company has much more stabilized it at current levels and would be able to sustain it in coming years. MTEL
has improved its cash flow from operations and we believe that it would remain positive in coming years due to asset light
business model. Despite significant expansion in past ten years, MTEL managed to control its financials and kept its balance
sheet debt free. Strong cash flow from operating activities and fewer burdens of non operating expenses would be able to provide sufficient strength to the balance sheet, according to us.

Continuous improvement in profitability delivered strong cash flow

During past four years, MTELs operating revenue has grown at a CAGR of over 24% in past 4 years, which is commendable
considering the fragmented market of coaching industry. The company has managed to generate healthy ROIs over the period
of growth and reported ROE and ROIC between 15-20%, which is a respectable performance for a business which is expansion. Cash flows from operations (CFO) and Free Cash Flows (FCF) has been positive in past several years and generated
enough cash for expansion activities.
TTM Performance Analysis

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Basic EPS (TTM)

4.54

4.67

4.82

4.95

5.29

Price to Earnings (TTM)

17.7

20.0

19.4

18.2

16.4

0.9

2.9

1.7

0.2

38.93

42.03

45.90

48.45

50.58

2.1

2.2

2.0

1.9

1.7

Net Operating Revenue (TTM)

1,548.7

1,672.1

1,826.0

1,927.6

2,012.1

TTM Quarterly Growth

29.3%

8.0%

9.2%

5.6%

4.4%

EBITDA Margin (TTM)

18.9%

18.7%

19.2%

19.8%

21.0%

Net Profit Margin (TTM)

11.7%

11.1%

10.5%

10.2%

10.5%

Degree of Operating Leverages

0.29

0.76

1.15

1.43

2.83

Degree of Financial Leverages

1.20

0.49

0.31

0.33

0.55

Degree of Total Leverages

0.35

0.38

0.35

0.48

1.55

PEG Ratio (TTM)

Revenue Per Share (TTM)
Price to Sales (TTM)

Degree of Leverages (TTM)

Ongoing network rollout and occupancy rate would continue the aid top-line momentum

Zero debt at balance sheet and high operating leverage model improves performance

Despite continued expansion, net margin improved and maintained positive CFO

Improvement in operating level performance delivered strong results

Despite continued expansion and fragmented market, especially from local coaching institutes; MTEL has managed operating
margins well and also expanded operations at a significant rate. EBITDA margins increased to above 20%, while expansion in
other formats of coaching improved profits in absolute terms. We believe that the numbers would continue to grow in next five
years due to rising career aspirations of students.

We believe that the shareholders equity could continue to grow at the CAGR of between 20-23% due to
consistent improvement in operating profitability,
thus keeping ROE above 20%.

Shareholders' Equity & ROE

4

35%

30%

3
INR Billion

MTELs shareholders equity has reported a CAGR

of over 33% in past four years. We believe that the
momentum could sustain over the medium term, due
to continued expansion and marginal rise in occupancy in batches

25%

20%

1
15%

1
0

10%

2011

2012

2013

2014

2015

Shareholders' Equity, LHS

2017

2018

2019

Return on Equity (ROE), RHS

Total Assets & ROTA

INR Billion

High operating leverage kind of models improve asset quality and rise in occupancy keeps the momentum in long run.
Network expansion would continue in future and
localization of the new centers would be the key in
future, according to us.

2016

19%

17%
15%

13%

3
11%

9%

We believe that, for the long term, MTEL would be

able to keep ROTA near to 15%

7%

5%
2011

2012

2013

2014

Total Assets, LHS

2015

2016

2017

2018

2019

Return on Total Assets (ROTA), RHS

Capital Employed & ROCE

We believe that the company would be able to maintain its ROCE well above the level of 20% due to
continued improvement in profitability in past four
years

35%

30%

3
INR Billion

MTEL is estimated at a WACC around 15%, and

with its ROCE close to 20%, appears better positioned on average as compared to similar growth
companies.

25%

20%

1
15%

1
0

10%
2011

2012

2013

2014

Capital Employed, LHS

2015

2016

2017

2018

2019

Return on Capital Employed (ROCE), RHS

Continued expansion could raise employee expenses; keeping other costs under control
Rise in employee expenses could be the concern for the company due to continued expansion of coaching centers and geographical risks associated with that. However, other expenses, such as direct expenses and material cost would be under control
due to its fixed nature and low variability. MTEL operates at an asset light business model, therefore it leaves the company to
focus more on student acquisition to reach maximum occupancy per batch.
We believe that the employee expenses could report notable growth in coming years due to additional hiring of staffs to work
on new coaching centers. Administration expenses would remain stable; however, control over non operating cost would be the
key for coming years, which we believe that it would remain in favor of MTEL due to rising acceptance of coaching studies in
Tier II and III cities, which would further increase the occupancy rate.
2011

2012

2013

2014

YoY Growth

CAGR/Avg
Growth

1,055

1,306

1,573

2,018

28.3%

24.1%

Direct Expenses & Materials Cost

555

698

816

999

22.5%

21.7%

Employment Cost

135

180

219

286

30.4%

28.2%

Administration & Other Expenses

174

197

245

310

26.6%

21.1%

Total Expenses

865

1,075

1,280

1,595

24.6%

22.6%

Direct Expenses & Materials Cost

52.6%

53.4%

51.9%

49.5%

51.9%

Employment Cost

12.8%

13.8%

13.9%

14.2%

13.7%

Administration & Other Expenses

16.5%

15.1%

15.6%

15.3%

15.6%

Expenses against Net Operating Revenue

82.0%

82.3%

81.4%

79.0%

81.2%

Direct Expenses & Materials Cost

64.2%

64.9%

63.8%

62.7%

63.9%

Employment Cost

15.7%

16.7%

17.1%

17.9%

16.9%

Administration & Other Expenses

20.2%

18.3%

19.1%

19.4%

19.3%

Operating & Non Operating Expenses

(INR Million)
Gross Operating Revenue

ELEMENTS OF EXPENSES

PERCENTAGE IN GROSS SALES

CONTRIBUTION TO TOTAL EXPENSES

Continued expansion in new

geographies and strong product
offerings improved top-line performance in a fragmented and
ultra competitive market

EBITDA margins are expected

to remain above 20% due to
rising occupancy and high operating leverage business model

Income Statement (INR Million)

2011

2012

2013

2014

2015 (E)

2016 (E)

2017 (E)

Net Revenue
Revenue Growth

1,055

1,306
23.8%

1,573
20.5%

2,018
28.3%

2,448
21.3%

3,051
24.6%

3,900
27.8%

Direct Expenses & Material Cost

Employment Cost
Administration Expenses
Depreciation & Amortization

(555)
(135)
(174)
(83)

(698)
(180)
(197)
(78)

(816)
(219)
(245)
(86)

(999)
(286)
(310)
(128)

(1,151)
(337)
(372)
(176)

(1,432)
(423)
(464)
(214)

(1,827)
(545)
(593)
(260)

EBIT (Operational Profit)

Operating Margin

107
10.4%

153
12.0%

207
13.8%

295
15.5%

412
17.7%

518
17.9%

676
18.2%

Other Income
Reported Tax

21
(48)

40
(64)

47
(76)

24
(111)

70
(169)

77
(208)

87
(267)

Profit After Tax

PAT Margin

80
7.8%

128
10.1%

178
11.8%

208
10.9%

313
13.5%

387
13.3%

496
13.4%

2.4

3.8

4.6

5.3

7.9

9.8

12.5

Basic EPS

Growth in assets was significant

in past several years due to both
organic and inorganic expansion across India.

Balance Sheet (INR Million)

2011

2012

2013

2014

2015 (E)

Net Tangible & Intangible Assets

Capital WIP
Non Current Investments
Goodwill on Consolidation
Deferred Tax Assets
LT Loans & Advances
Other Non Current Assets

328
9
6
18
31
104
1

307
164
6
33
41
139
0

665
122
6
21
41
302
1

878
65
135
8
47
197
0

893
61
135
13
0
160
0

911
47
135
14
0
168
0

902
55
135
18
0
215
0

Cash & Cash Equivalents

Current Investments
Inventories
Trade Receivables
ST Loans & Advances
Other Current Assets

207
227
0
52
74
3

176
107
0
64
260
0

242
153
0
100
122
1

98
113
1
89
197
3

394
120
1
105
240
3

793
126
1
123
252
3

1,213
161
1
148
323
3

1,059

1,298

1,777

1,829

2,123

2,571

3,173

Other Long Term Liabilities

Long Term Provision

34
10

53
7

84
6

30
12

47
16

58
20

74
26

Short Term Borrowings

Trade Payables
Other Currnet Liabilities
Short Term Provisions

45
11
396
81

0
11
516
138

0
20
490
167

0
38
394
243

0
47
419
279

0
58
522
348

0
74
667
445

(2)

(7)

(7)

(7)

(7)

344
133

352
219

395
616

398
722

398
924

398
1,175

398
1,496

1,059

1,298

1,777

1,829

2,123

2,571

3,173

Total Assets
Despite continued expansion in
new markets, company managed
to report debt free balance sheet

Minority Interest
Equity Share Capital
Reserves & Surplus
Total Liabilities & Equity

2016 (E) 2017 (E)

Continued expansion and high operating leverage, justifies higher multiples

We have used Price to Earnings and Discounted Cash Flow method of valuation to value MTEL; and both methods of valuation lead us to assign a target price of in the range of INR 200. We have modeled MTEL using 15% long term market return
and 8% risk-free rate; and got the Cost of Equity at 15%, and due to zero debt at balance sheet Weighted Average Cost of
Capital (WACC) also reflects 15%. MTELs
Weighted Average Cost of Capital (WACC)
TTM basic earnings per share was reported
Current Mkt
Book Value/Market
at INR 5.3 and it currently trades at 23.6x Capital Structure Value Type
Weight
Price
Value (INR mn)
P/E multiple. Due to push on network exDebt
Book Value
NA

7.0%
pansion, strong revenue growth and wide
presence across India, we would value
Equity
Market Value
120
4,774
15.0%
MTEL at 25x FY15 P/E at INR 200 per
share, given the improving outlook.
Cost of Equity (COE)

At the expected terminal value growth of Total return

5% and the WACC of 15%, our sensitivity
analysis on the price movements at different Risk free rate
stages are as under. We arrive at a price
target of INR 200 based upon a blend of Beta
the two approaches that we have used to
arrive at a fair value for MTEL.

15.0%
8.0%

CAPM (COE)

Continuing value
FCFF (INR mn)

Cost of Debt (COD)

LT Int rate

10.0%

Tax Rate

30.0%

COD

7.0%

1.00

WACC

15.0%

15.0%

ROIC

17.2%

2015 (E)

2016 (E)

2017 (E)

2018 (E)

2019 (E)

Discount factor

291
0.87

441
0.76

593
0.66

785
0.57

1,067
0.50

PV of Explict Cash flow

253

333

390

449

530

PV of cash flows (INR mn)

1,955

Valuation
Value of Operations (INR mn)
Value of Cash & Cash Eq (INR mn)

Gorden Growth approach

Growth in FCF

Non Equity claims (INR mn)

5.0%

Gorden Growth approach (INR mn)

11,200

PV of CV (INR mn)

5,568

Value per share

7,524
535

200

Sensitivity Analysis Between WACC and FCF growth rate

FCF Growth

WACC

200

1.0%

3.0%

5.0%

7.0%

9.0%

13.5%

180

204

241

299

410

14.0%

172

194

277

368

14.5%

165

185

227
214

258

333

15.0%

159

177

200

241

305

15.5%

153

169

226

281

16.0%

147
142

162
156

192
183
175

213
201

260
242

16.5%

RIGHT HORIZONS SCOREMATRIX

Quantitative Performance

65%

Net Operating Revenue

7%

BUSINESS Profitability Ratio

MATRIX EBITDA Margin
Net Profit Margin

5%
3%

Return on Investments
Retun on Equity
Retun on Invested Capital
Return on Capital Employed
Return on Total Assets
Activity Ratios
Total Asset Turnover
Fixed Asset Turnover
OPERAT- Capital Turnover
ING MA- Debtors Turnover
TRIX Working Cap Turnover
Solvency Ratios
Debt to Equity
Interest Coverage Ratio
Liquidity Ratios
Current Ratio
Cash Ratio
Cash Conversion

3%
3%
3%
3%
3%

3%
2%

2%
2%
2%

Valuation Parameters
VALUAPEG
TION
Price to Book Value
MATRIX
EV to EBITDA

11

3%
3%
3%
3%

SCALE

Rating

OUTSTANDING

>=4.00

EXCELLENT

>=3.50

GOOD

>=3.00

SATISFACTORY

>=2.50

BELOWPAR

<2.50

4%
4%
4%

Qualitative Performance

SHAREHOLDIN
G PATTERN &
CORPORATE
ACTIONS

Shareholding Pattern
Promoters' Holding
Institutional Holding
Mutual Funds / UTI
Financial Institutions / Banks
Central / State Government
Insurance Companies
Foreign Institutional Investors
Qualified Foreign Investor
Public Holdings
More than 1%
More than 5%
Market Volume
Average Trading Volume
Delivery Volume Percentage

Independent Director / Investor

OTHER Any Prominent Name
PARAMETE
Pledging
RS
Promoters' Share Pledging
Auditors
Name of Auditor
Qualification of Auditor

35%

5%
2%
1%
1%
1%
1%
1%
3%
2%

3%
3%

3%

3%

3%
3%

RH ScoreMatrix is a proprietary tool to measure total risk of

the business on two broad parameters. The unique ScoreMatrix builds on the difficult to measure qualitative metrics
which are extremely important to gauge total business risk at
any given point.
The rating system has been developed on the businesses
analyzed over the long period performance (7 years annual
and past 10 quarters). Rating scale of 1 to 5, with 1 indicating highest risk and 5 indicating least risk. Each weight indicates relative dispensation of the parameter. Quantitative
performance holds 65% (or 2/3rd weight) and the balance on
Qualitative indicators. This composite rating thus developed
is a fair indication of the overall risk to the business and outlook on the company over the medium term. For individual &
detailed ScoreMatrix on companies under review; please
reach us at Right Horizons to the respective analyst.

Disclosure & Disclaimers

Analyst Certification
I, Tushar Pendharkar MBA(Finance), Business Analyst author of this report, hereby certify that all of the views expressed in this document accurately reflect our personal views about the subject company/companies and its or their securities. I further certify that no part
of our compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document.

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Disclosure of Interest Statement (July 3, 2014)

MT Educare Ltd

Analyst ownership of the

stock
NO

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Right Horizons ownership Covered person ownership

of the stock
of the stock
NO

NO

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