Tree House Education & Accessories

The company, promoted by Rajesh Bhatia and Geeta Bhatia, is in the business of education and operates pre-schools in India. As of June 15, 2011, it had 223 pre-schools under the brand name, Tree House, across 33 cities in India. Out of 223 pre-schools, 149 are self-operated or operated by the company and rest are through franchisees. As of March 31, 2011, self-operated pre-schools had more than 370 teachers and served more than 5000 students. The company has also branched into educational services to K-12 schools and provides such services to 12 schools with over 5000 students in 4 cities in India.

Pre-schools offer playschool and nursery facilities, vacation camps, mother-toddler classes, hobby classes, day-care facilities and teacher training course. The pre-schools are largely concentrated in Maharashtra, Gujarat, Karnataka, Rajasthan and Andhra Pradesh.

For its franchisee operated pre-schools, it receives a fixed non-refundable onetime upfront fee and a service fee annually from the franchisees for the use of its brand and teaching methodologies. For FY 2011, its revenue from self-operated pre-schools was Rs.25.90 crore and from franchisee-operated pre-schools was Rs. 1.63 crore. The average fee per student is around Rs. 25000 per annum.

The company also provides a wide variety of educational services to K-12 schools which include designing curriculum and providing teaching aids, supplying methods for imparting education, organising extra-curricular activities for students and teacher training. The company generates revenue by way of service or consultancy fees which is usually based on (a) per child admitted to the school, for services forming part of service agreement; and (b) lump sum for services beyond the scope of service agreement. It intends to provide educational services to additional seven K-12 schools, based in Jaipur, Jhunjhunu, Vadodara, Pune and other cities to be identified by the K-12 school operators by FY 2013. It has entered into supplemental agreements with certain K-12 school operators to provide educational services to four K-12 schools. In FY 2011, its revenue from providing educational services to K-12 schools was Rs. 10.47 crore.

The company intends to enter the capital market to raise money in the range of Rs. 114 crore to Rs. 129 crore by issuing around 84.32 lakh equity share of face value of Rs. 10 each at a price range of Rs. 135 to Rs. 153 per share (there is a discount of Rs. 6 per equity share for retail investor). The proceeds will be used by the company for opening 120 company operated new pre-schools in various cities by fiscal 2014 (Rs 41.3 crore); acquisition of office space (Rs 11.04 crore); procurement of exclusivity rights to provide educational services to seven additional K-12 schools by fiscal 2013 (Rs 15.6 crore); construction of infrastructure for an educational complex in Rajasthan and Gujarat (Rs 40.05 crore); repayment of loans (Rs 28.59 crore); and for general purposes.

Strengths

• It has a scalable business model and has expanded its presence from 1 city in 2003 to 33 cities in 2011. The number of students in its self-operated pre-schools increased from 51 in 2003 to 5355 students on March 31, 2011. In a similar manner, the number of teachers at its self-operated pre-schools increased to 378 on March 31, 2011 from 4 in 2003. Further, the model of centrally procuring all the material for its pre-schools assists the company in economizing its costs.

Weaknesses

• The pre-school industry is highly competitive and unorganized, with no single company controlling a significant market share in the business. It faces competition from both organized and unorganized players in the market. Among the organized players, Kidzee, Euro Kids, Roots to Wings and Kangaroo Kids are major competitors in the pre-school business.

• The market for providing educational services to K-12 schools is highly fragmented and, hence, it faces competition from local players like Educomp, Career Launcher and Everonn.

• The aggregate of the contingent liabilities on March 31, 2010 and March 31, 2011 was Rs. 8.2 crore and Rs. 23.9 crore, respectively. In the event that any of the above contingent liabilities fructify, it could adversely affect the financial condition of the company.

• One of the ventures, Madhav Education and Research Institute India Private Limited, by its promoters is authorized to engage in a similar line of business. As such a conflict of interest may occur between the company's business and the business of the members of its promoter group and could have an adverse effect on business, prospects, results of operations and financial condition.

• 148 of the 149 self-owned pre-schools of the company operate from rented premises, including those rented by the promoters of the company. If any of the occupation arrangements are terminated or not renewed on acceptable conditions, the pre-schools on these premises may have to be relocated, leading to disruption in operations. It may be unable to acquire new premises for these pre-schools and may be forced to close down some of these pre-schools. Further, it may be unable to acquire rented premises at acceptable rates and any costs incurred to relocate the pre-schools may have an adverse effect on the revenue and profits of the company. Importantly, students at pre-schools are usually from areas around the location of the pre-schools. Closure/relocation of such pre-schools may lead to reduction in the number of students enrolled.

• Operating pre-schools and providing educational services to K-12 schools are currently unregulated. Introduction of any law or regulations prescribing limitations on fees or minimum standards could adversely affect the profitability of the business. The Maharashtra government has already proposed to introduce a legislation to regulate fees in unaided and private schools within the state. Any regulations preventing or restricting pre-schools due to any child development issues can also affect the company's business model.

Valuation

The company's revenue has grown at CAGR of 94% from FY 2008 to FY 2011. In FY 2011, net sales were Rs. 39.24 crore, with operating profit margin (OPM) of 43.1% and net profit of Rs. 9.20 crore.

At a price band of Rs. 135 to Rs. 153 per equity share of Rs. 10 face value, the P/E at the lower band works out to 49.5 times and at the upper band it works out to be 56.1 on EPS of Rs.2.7 for FY 2011 (on post-IPO equity). In the education industry, leading companies such as Educomp Solutions, Everonn Education and Career Point Infosystems have PE of 8.5, 14.5 and 19.4 times respectively. The closest peer in the listed space is Zee Learn, which owns Kidzee pre-schools and has over 750 centres in more than 315 cities, trades at P/E of 134.7 times.