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Expensive

RESEARCH
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Date 13/05/2019
CL Educate Limited

COMPANY OVERVIEW FINANCIALS

CL Educate is a primary engaged in the business of Market Cap: 1 - 71.55 Cr

educational products and services. lt majorly operates in 2
segmentsi.e. the consumer andenterprise. Book Value: - 233.44/-

The Consumer Service segment includes the businessesof

Dividend Yield: - 0.00%
Test Preparation and Training (Test Prep) Publishing and EPS: - 11.38/-
Content Development & Campus Recruitment Training
(CRT) program. Debt to Equity: - 0.16

Under the Enterprise Services the company offers Sales CAGR (5yrs): - 7.75%
integrated solutions to educational institutions and
universities across India.
Profit CAGR (5yrs): - 17.77%

The company offers test preparation and training services

ROE (1 year): - 1.62 %

under the Career Launcher brand; publishing and content ROCE (1 year): - 4.36 %
development services under the GK Publications brand;
vocational training services; and event management,
marketing support, customer engagement, and managed
manpower andtrainingservicesunderthe Kestone brand.
What is Good ?
lt also provides integrated solutions, including business
• Low debt.
advisory and outreach support services under the CL
Media brand; andresearch incubation andsupport services • Leader in offline test preparation coaching
under the brand Accendere brand. • Diversified revenue mix.
• Strong brand equity
As of March 31, 2018, the company had 63 owned centers
and 149 businesspartner centers. lt servescorporates, and ·Wide reach
educational institutions and universities.

What is Bad?
• Tough competition from online players
• Poor revenue growth
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· Test preparation
Career Launcher, ETEN
and training services

· Publishing and content GK Publications

development

· Integrated business, marketing,

Kestone
and sales services for corporate
-· Integrated solutions to educational CL Media
Institutions and universities
Accendere

· Vocational training programs

Career Launcher
(not active now)

Corporate Structure

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What's the moat?

Cl Educate ltd has a very strong brand moat. Career launcher and Gk publications are market leaders
in test preparation and publishing segments. 2/3rd of the core income is generated from Career
launcher and GK publications. Let's understand how the moat is created:-

*Network Effect
* Relation building

Network Effect exists in CL because once it became a popular brand due to its first mover advantage,
all students wanted to join CL, which creates the fear of missing ut in them minds of other students.
Thus. it creates a herd mentality wherein everyone who wishes to clear CLAT or CAT join it one after
the other. As more and more students join it, the word of mouth spreads and helps them rope in even
more students.

Relation building is a process, where direct interaction is seen among alurnni's and team members of
career launcher, with the advantage of wide network and good communication relationship with
alumni's, career launcher can not only acquire students. but also it can appoint new associates who
were willing to work with career launcher. with good relation building, company can minimize
advertisement and promotional costs.

REVENUE BREAKUP

• Consumer
• Enterprise
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Advantages of India in education Industry: -

ROBUSTDEMAND
-lndia has the largest population in the world in the age bracket of 5-24 Years, which presents many
opportunities in the education space. There is a high demand supply gap in the sector in India.

COMPETITIVE ADVANTAGE
-lndia has a huge English-speaking population which makes the delivery of educational products easy.
India was ranked 27 out of 80 countries in English proficiency index 2017.

POLICYSUPPORT
·100% FOI (automatic route) is allowed in the education sector in India, the government of India has
taken initiatives for higher educations and foreign educations.

INCREASE IN INVESTMENTS
-Between April 2000 and June 2018, inflows of us$1.75 billion has been witnessed as FOI in education
sector.

BUSINESS

l)Does the company have sustainable Moat? (3)

yes, it has a strong moat of having huge brand value. Moreover, the company enjoys a kind of network
effect to certain extent, wide reach through test centers and franchisee-based model, the company is
able to serve a greater number of students which reduces the cost of marketing and customer
acquisition.

2)Does the company have strong Pricing Power? (2)

yes, being a market leader in "Test Prep" and publishing, it can enjoy strong pricing power in consumer
segment. but in enterprise segment, the company has very less bargaining power due to high
competition.

3)1s the business simple to understand? (2)

Yes, the consumer segment consists of test preparations and content publishing under the brand
career launcher and Gk publications but when it comes to enterprise segment it is a bit complex.
because the business of kestone and accendere are very innovative and the category is currently at a
very early stage, but is set for future growth.

4)Does the business operate in a fast-changing industry? (2)

Yes. the company mainly operates in unorganized educational segment. The segment is facing tough
competition from online players like BYJUS, Unacademy, Toppr etc. The company needs to constantly
upgrade the technology related to the deliverable and learning experience to sustain their market
share.

5)1s the company's product able to withstand being easily substituted or outdated? (2)
No. the company faces threat from online education apps and portal like BYJU's, unacadmey etc.
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6)1s the company's business immune from easy replication by new players? (3)
Yes, in test preparations and publications, it is the market leader, where new players cannot enter
easily, in addition to that, the company keeps on increasing the number of physical test preparation
centers on periodical basis. But in enterprise segment it is still in growth stage, so there is a high
threat of competition.

7)Does the industry have long term visibility? (4)

Yes, the education sector in India is estimated at USS 91.7 billion in FY18 and is expected to reach USS
101.1 billion in FY19. As of December 2018, internet penetration in India had reached 46.13 per cent.
Central government announced in union budget 2018-19 with an outlay of Rs 1 lakh erare (USS 15.44
billion) for education sector in upcoming four years.

8)To what degree is the business cyclical, countercyclical, or recession-resistant? Is the earnings
growth constant or cyclical? (3)
Education sector: - Educational Services is widely considered a counter-cyclical industry. Typically,
when the economy is doing poorly and unemployment is rising, more working adults. as their career
prospects start to dim. decide to upgrade their education. This in turn. leads to higher enrollment and
increased profit for the consumer segment which mainly consists of "test prep" and Publications.

MANAGEMENT

l)ls management's salary too high? On what basis warrants and esops are issued to the management?
(3)
No, the remuneration of the key managers was 1.5 crore approximately. lt is a high compared to the net
profit proportion but, for managing a company with a market cap in excess of 150 erares, this amount is
justified. The Company has not issued any kind of warrants for the FY 2017-18

2)1s the company free of promoter pledging of shares? (4)

Yes, the company is free from promoter pledging of shares

3)1s the management trustworthy? Do they have a history of compliance and legal troubles? (3)
Yes, the management is trustworthy, there is no information which proves otherwise.

4)Has there been any substantial equity Dilution in the last 2 years? (2)
yes, the company has seen substantial equity dilution in 2017 as it came with an IPO.

5)What has management done with the free cash in the past years? (3)
Cl educate utilized its past cash flows for Acquisition of ETEN and Accendere. The company has also
increased its investment in exiting subsidiaries like
*Threesixtyone Degree Minds Consulting Private Limited
* B & S Strategy Services Private Limited
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6)1s the management guilty of di-worsification (3)

No, the management is not guilty of di-worsification, the acquisitions and takeovers are majorly in
educational products and service segment like ETEN,GK publications, ICEGATE, and the company has
also successfully entered in enterprise segments through the brand Accendere, Kestone.

7)Are there too many related party transactions? (2)

Yes. the company invests a substantial amount into its subsidiaries. The company has 9 subsidiaries
and 2 associate companies.

8)1s the tax payout less than 25%? (4)

No, the current tax payout is 33.25%.

9)1s the industry in which the company operates highly regulated? Can regulatory or geopolitical
changes affect the working of the company?(3)
The educational industry is not highly regulated in India, particularly the unorganized education
services.

FINANCIALS

l)Does the business have a consistent sales and profit growth history and is there room for future
growth? (2)
Both standalone and consolidated business have volatile sales. The consumer segment, which is one
of its core business, has shown good profit growth, but in enterprise segment the performance is quite
d issatisfactory.

2)Doesthe company enjoy significant degree of operating leverage? (3)

Yes, the company has a significant degree of operating leverage in consumer segment. As any
increase in the number of consumers in the way of test preparations or by online courses, would only
require an increase in the capacity of the servers and handling capacity, but in ETEN & GK publications
infrastructural increase is also needed, that is why the company is investing more in Business
partnerships and franchises, and reducing self-owned centers.

3)Are the profits of the company are actually turning into cash flow? (2)
No. the profits of the company are not actually turning into cash flows. out of the total sales revenue.
40% is trade receivables. Which indicates a credit business model and cash flows from operating
activities is negative for (2017-18).

4)Has it generated healthy return ratios? (1)

No, the company has very poor ROE and ROCE ratio. The company is still in nascent stage.The ROE for
the year was 1.62 % and ROCE 4.36%.

5)Doesthe business generate strong free cash flow? (2)

No, the company does not have strong free cash flow balance.The company has been utilizing the cash
flows for new acquisitions, and to increase the stake in associate companies.
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6)1s the company conservatively financed? Is the debt to equity ratio of the company= 1 (3)
Yes. the debt to equity ratio of the company is less than 0.15.

7)Canthe company run its business without relying on external funding in the upcoming years? (2)
No. the company does not have substantial cash reserves. lt may raise funds through external
borrowings for funding it's future plans.

BEHAVIORAL

l)What is the general sentiment around the stock? (3)

Indian market which generally evaluates the companies on traditional parameters like ROE.
profitability, revenue growth. is not positive about the company. The company is trading at a 75%
discount to its issued price due to extreme pessimism around the stock. Diversification and expansion
strategies decelerate the profit growth particularly in startup companies. which in turn displays a less
ROE and poor financials Which makes investor to think negative about the company.

Also. since education stocks have not performed well in the past. the market is skeptical about
investing in stocks operating in this industry. Thus, the stock is available at reasonable valuations.

Score = 64/100
One of the reasons to decline in price since ipo?

VALUATION RATIOS CL EDUCATE MT EDUCARE(PEER)

P/E MULTIPLE 23.2X 8.9X

EV/SALES MULTIPLE 2.1X 1.2X

EV/EBITDAMULTIPLE 15.lX 5.4X

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VALUATION

Price to sales multiple

Company Methodology Sales (cr) Estimated Estimated Value MOS Fair value
vaíuencnícr) per share (margin of safely) Per share

Cl educate Price to sales 170.1,4 (TTM) 323.83 249.63/- 20% 199.70/-

(1 9x sales)
Price to sales
Cl educate 155.21 (2017-2018) 294.90 228.60/- 20% 182.88/-
(l.9x sates)

C M h d l Book value Book value Es11ma1ed Value MOS Fair value

ompany et O O ogy per share per share per share. {margin of safety) Per share

Cl educate Price to book value 524.01/- 20% 419.21/-

(2.12x B.V) 24718/- 247 18/-

Data considered in calculating the fair value

Education industry avg P/S (price to sales): 1.9x
Education industry avg P/bv (price to book value): 2.12x
Shares outstanding: - 14,165,978

The correct valuation for CL educate should be close :f 228. Giving a 20% safety margin to the above
price, the value quoted is188.28. This is done to counter balance any crude approximation errors taken
to reach the above price.
The valuation has been based on relative multiples such as

* price to sales
* price to book value

Since the company earns its revenues by providing educational services. revenue is considered and
multiplied with the average Price to sales multiple prevailing in the industry to attain the fair value.
Here the fair value is 182.88/-.

NOTE: - Out of all three values, consider the least for conservative valuation i.e. Rs 182.88/-

Fair/Intrinsic value - Rs 182

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#Test Prep Centers

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Publishing
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Enterprise - Corporates
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• Corporates • #Billing (Cr)

Enterprise - Institutional 132

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Disclosure:
Finology Ventures Private Limited, a SEBI Registered Investment Advisor (INA000012218)
has no disciplinary history as on the date of publication of this report. We certify that the
views and opinions expressed in this report accurately reflect the views of Miss Urvi Kotak,
MBA, our research analyst and the author of this report about the subject company.

lt is hereby certified that no part of her compensation is, was or will ever be related to the
contents of this report. Further, it is certified that neither the Company nor the research
analyst or any of her relatives have any financial interest in the subject company or conflict
of interest with the same whatsoever.

Disclaimer.
This special report is meant as a source of information only so as to enable the readers to
further their own research and must not be used as the sole basis of any investment
decision. The readers are advised to further research on the subject company and consult
an investment advisor before taking any decisions. Nothing contained in this document
shall be construed as investment or financial recommendation or advice. The author may
change their views as and when time warrants without any notice.

Neither Finology ventures Pvt ltd. nor any of its employees (the "Company") has served as
an officer, director or employee of the subject company nor have they received any
compensation from it or have had any relation with the said company.

This report is not meant or directed for use or reference of any person residing, situated or
located in any place or jurisdiction where any such use or reference would be contrary to
the local law(s). Any such user who receives this report is hereby advised to ignore it.

This document is published on the basis of information publicly available, internal data and
other reliable data sources believed to be true but the Company does not guarantee any
accuracy or completeness of the same. The Company shall not be responsible for loss or
damage faced by the reader(s) arising out of any error in the information contained in this
report or any decision taken based on the same.

The information and content of this report may not be reproduced, circulated or conveyed
by the readers in any form through any means without prior written permission of the
Company.

Disclosure as per SEBI Guidelines:

l. Neither the Company nor any of its employees have served as an employee, officer or
director of the subject company.
2. The Company does not have any financial interest in the subject company.
3. The Company does not have actual or beneficial ownership of more than 1% in the
subject company at the end of the month immediately preceding the date of publication
of this report.