Hi Vamsi,

Thanks for the the heads up on the field situation at Nellore . Just had one question regarding your last statement. Considering October-November months are the time for harvesting 2nd crop and preparing for third crop in Nellore do you foresee the preparation of next crop be hindered only for 3rd crop of this financial year or also impact will be on 1st crop next year preparation of which normally starts around February. I am not talking about financial stress because of loss of 2nd crop of this season (I think most of the regular farmers would have savings/reserves from last few years bumper sales) but more about clearing the fields of flood waters.

There is total confusion.
I guess we should be careful in posting something which we are not 100 % sure, esp regarding price limits targets etc, as this may impact small investor behaviour and may incur some losses.

Best regards
Santosh

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.

Hi Ritesh,

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%.

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

1. 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 ?

2. 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.

3. 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

4. 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.

5. 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.