Tree house - A Bluechip in the making

Tree House Education & Accessories Ltd (THEAL)
- Scalable Business Model in high potential Education sector

Content Index
• Treehouse Education & Accessories Ltd (THEAL) – Snapshot :- Slide #3
• THEAL’s – Investment Highlights :- Slide #4
• Our Research Desk’s views on THEAL :- Slide #5
• Pre-School Education – Industry Overview :- Slide #14
• THEAL – Business Overview :- Slide #22
• THEAL – Investment Rationale :- Slide #32
• THEAL – Financials:- Slide #41
• Concerns & Reasoning :- Slide #43
• Conclusion :- Slide #45
“ Specialists in discovering Multibagger stocks “

THEAL – Investment Snapshot
(as on Feb 17, 2014)
Recommendation :- BUY
Maximum Portfolio Allocation :- 6%
Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 80%
Current Accumulation Range :- 210-240 Rs
THEAL is a classic Peter Lynch type stock. It is operating in an
easy to understand business in which everyone can see the huge
growth opportunity. THEAL has shown great execution track
record to out-beat competition and emerge as India’s largest
Self-operated Pre-School chain.
Core Investment Thesis :
We believe THEAL’s inherently strong Earnings profile and
Returns profile is being masked by Long gestation assets in the K-
12 business segment. With the company announcing a
divestment of these Assets, our Analysis makes case for a healthy
re-rating of the stock. Valuation Re-rating of the stock would
anyways be only a bonus as Earnings growth itself can deliver
healthy profits for Investors.
Current Market Price – Rs. 219.95
Current Dividend Yield – 0.55%
Bloomberg / Reuters Code –THEAL. IN/
THEA.BO
BSE / NSE Code – 533540/ TREEHOUSE
Market Cap (INR BN / USD Mn) – 90.75
/147.32 [1 USD – Rs. 61.6]
Total Equity Shares [Mn]– 35.96
Face Value – Rs. 10
52 Week High / Low – Rs. 217.3 / Rs.302
Promoter’s Holding – 30.87%
FII - 1.16%
DII - 10.22%
Other Holdings - 57.75%

Investment Highlights

Thanks ! For helping us grow from a 4 – member startup to a 250
Member company..Looking forward to continuously serving you with
the best Research Ideas in Small Cap and Mid Cap stocks.

Dear Members,
We are happy to present “Treehouse Education & Accessories (THEAL)” as our Multibagger Idea for the month
of February. While we have been recommending 12 Ideas every year to our Members who are looking at us as a
good source of Idea generation for their Portfolios, we have only a handful of stocks in our Fund & Portfolios.
Although we are positive about all our Stock Recommendations, only the High conviction ideas amongst them make
the cut to our Portfolios. I certainly believe that THEAL has a high probability of entering our Core portfolio soon.
THEAL with its Low earnings risk and Quality business model can certainly be a good complementary addition to our
high growth Multibagger Ideas.
All of us know that India is a Young country with a large population of school going kids. Indian Education sector
offers tremendous opportunities with increasing spending of Indians towards education and increasing social bias of
sending Kids to Private schools. This huge opportunity is easily visible to everyone and in fact Education stocks had
been a darling of Stock Markets a few years ago. But Markets backed the wrong business models and bad
promoters and this resulted in huge wealth loss for Investors. We have always focused on companies that have
great Business models and that have a quality Management to capitalize on huge opportunities profitably. This has
helped us to stay away from the wrong stocks in the Education sector. The only two stocks which we have tracked in
this sector for the past several years has been THEAL and Navneet Education. This is our first recommendation from
the Education sector and we have enough reasons to believe that we are backing the right company.
- Pre-School per Center Return ratios - Hugely Profitable (ROIC of >40%).
- Strong Delta in overall Return ratios with the announced Asset divestments. (250 Cr of Investments).
- Long Term advantages of a Self-Operated Pre-School chain Vs Franchisee model. (Moats for Treehouse).
- Strong Growth Opportunity planned. (No: of Pre-Schools to more than double over the next 3 Years ).
- Earnings Quality and Operational Leverage in the business. (Low Volatility, Low Variable costs).
- Strong Financials (Negative Working Capital, Strong Balance Sheet, Investors Support, Promoters Buying).
- Reasonable Valuations for a Quality business run by a Credible & Competent Management.
Our Research Desk’s views on the Stock Idea

1.) Pre-School per Center Returns Ratios – Highly Profitable (ROIC’s > 40%):
* The Overall returns ratios of its Pre-School business is masked by its Long Gestation K-12 Assets (43% of
Balance Sheet Assets delivering only 0.04X Asset Turnover). The blended Asset Turnover ratio of the company’s
Pre-School business is around 0.45X. With an Operating Profit Margin of around 50%, the company generates
unleveraged ROE’s of > 22%. (Slide – 37 for more details).
* While even this ROE may look ordinary, the real high ROE nature of the business gets hidden in the Blended
numbers. The company has been on a rapid expansion spree adding large number of Pre-Schools over the last few
years. In fact, out of the 440+ Pre-Schools – almost 300 schools were added over the last 3 years. These Pre-
Schools will deliver far higher Utilization Ratios and eventually higher Margins going forward.
* Most of these new Pre-Schools have reported strong Performance, with a majority of them breaking even
within a 2 year period. In fact, all the schools which are over 3 years old are extremely profitable with strong
utilization ratios and consistently delivering significantly higher Asset Turnovers of over 1.2X and thus higher ROE’s.
* In order to show the real ROCE picture of the company’s Pre-Schools, we have analyzed the Per-Center
profitability along with Return metrics (Slide -34). The company’s old Pre-School centers earn between 30-120%
returns on their Capital Investment. This shows the high quality returns profile of the company’s business model
and current trends indicate similar returns from the company’s new Pre-Schools.
* Company’s Margins continue to be higher than Industry Average, reflecting the strong Brand equity. It’s ability
to attract students in a short time frame can be seen from the shorter Break Even periods and the relatively higher
Franchisee fee compared with competitors. Company continues to keep costs under control and expand Margins.
* Since majority of the company’s Pre-Schools are self-operated, it has more negotiating power and
keeps costs under check. It has also resorted to modes such as Day Care centers, Teacher training, Increased
batches etc to sweat its Assets better and reduce Rental costs as % of revenue. Its strong execution track
record in this regard can be seen from its profitability even in a high cost market like Mumbai.

2.) Strong Delta in the overall Return Ratios with the announced Asset divestments :
* Currently Treehouse Education has almost 250 Cr of its Balance Sheet assets tied up for its K-12 business in the
form of Lands, Buildings, Security Deposits etc. The company had announcement a Divestment plan on these Assets
and we believe that the company would net in around 150 Cr Rs through its Asset divestments. (Slide – 36).
* These Assets are not inherently bad Capital Allocation decisions. In fact the company’s K-12 Assets can be sold
at a premium of 1.25-1.5X its Book Value. It is just that the K-12 business is a far more long gestation business
compared to the company’s Pre-School business and hence it’s presence dampens the Return Ratios in the short to
medium term and limits aggressive CAPEX needs of THEAL’s Pre-Schools.
* K-12 business has far bigger potential than Pre-Schools considering the opportunity size involved and the
relatively lower competition. Scaling up this business requires a lot of capital. We believe that once the regulatory
hurdles decrease and the company perfects its K-12 business, THEAL can definitely scale up K-12 business quickly.
* K-12 Schools have high student stickiness and assures strong revenue streams over a 12 year period. Hence
once a K-12 school matures, it can delivers strong Free Cash Flows. With the Asset sales, even the ROCE of the
remaining capital locked in the K-12 schools can deliver healthy returns (Slide – 38). Company can continue to
expand its K-12 business on an asset light model and use its Pre-School network as Feeder input and thus achieving
quick break even compared with other K-12 schools.
* Company’s Revenues would continue to be dominated by its Pre-School business as it embarks on an
aggressive expansion plan and the planned asset sales can be used to fund that growth. Considering the company’s
increasing reach, financial position, brand value – THEAL has the potential to replicate a similar success story in K-
12 segment over the next 10 years using an Asset light business model.
* We believe that the company’s increasing Balance sheet allocation towards Pre-School assets for the next 3-5
years can significantly improve its Returns Ratios and help it capitalize on the huge opportunity for Pre-Schools in
Tier- 2 and 3 towns. This can certainly trigger much higher Valuation for the stock going forward.

3.) Long Term Advantages of Self-Operated Pre Schools Vs Franchisee model (Competitive Moats) :
* THEAL’s biggest difference with that of other Pre-School chains is that majority of its Pre-Schools are company
operated compared to Franchisee based expansion of others. The company’s Self Operated : Franchisee mix of 75:
25 is starkly in difference with peers such as Euro Kids or Kidzee. The company has perfected its model of scaling up
self operated schools and is now the largest self operated Pre-School in India.
* After analyzing both models from every perspective, we believe there is enough evidence to believe that Self-
Operated model makes far more Financial sense for shareholders (Slide – 26). In a relatively asset light business
such as Pre-Schools in which everything is centralized and the local Franchisee just contributes to location and basic
administration, there is very little advantage in going for Franchisee model. In addition to Financials, Quality of
education is higher and thus self-operated schools command higher Brand equity.
* Company’s better Brand Equity is visible in its shorter Break even, higher utilization, better Margins etc. Strong
Word-of-Mouth publicity has helped the company to attracts students compared with peers. The company is in fact
the Market leader in 9 out of the Top-20 cities in India. Company is geographically stronger in Western India. With
THEAL entering several new markets, it expects to increase its Market share across different geographies.
* Company’s self-operated model helps it to negotiate better and keep costs low and also allows it to compete
much more effectively in the Market place. Self operated structure also allows it to provide better opportunities for
its HR resources (Teachers) and creates a solid base for future expansions.
* Company’s aggressive and profitable expansion in a self operated model speaks volumes about the
Management’s execution capability. They have been the only ones to consistently emphasis on the importance of
having a self operated pre-school chain and have delivered on the tough task of execution.
* We expect THEAL to have 1,00,000 (1 Lakh) students in its Pre-Schools by 2018. This large scale can easily be
used to leverage into several new opportunities such as K-12 Schools, Day Care, Accessories etc. If the company is
able to deliver a strong user experience it definitely has a long way to go in building several alternate profit streams.

4.) Strong Growth Opportunity planned (Pre-School centers to more than double over next 3 years) :
* THEAL’s strong track record of opening new pre-schools in the last 5 years gives us confidence of the company
achieving its target of operating 1000 pre-schools over the next 2-3 years. This along with student growth in
existing centers can help the company’s revenues to compound at 30%+ over the next few years (Slide – 39).
* THEAL has also been open to acquisitions at fair price to drive inorganic growth in its Pre-School business. It
had acquired Brainworks and Global Champs over the last 2 years. Company’s plans to tap its Global Champs brand
for expanding its Budget Pre-Schools and Brainworks brand to expand on a Franchisee mode to low cost locations.
* With an increasing Social desire for Pre-School education driven by working parents, increased affordability,
urbanization and higher awareness of benefits of education - the opportunity for growth of Pre-Schools is
humongous in India. With Organized players not even cornering 30% of the overall Market which itself is growing
fast, well established players such as THEAL can continue their strong growth for many more years.
* The next set of growth is expected to come from Tier-2 and 3 towns which are under-penetrated by most of
the organized chains. THEAL will use Franchisee models in areas where it does not have any execution capability.
The company is able to charge a higher Franchisee fee compared with its competitors.
* The company continues to increase its Teacher training capacity as it would help it to scale up without
compromising on quality. It also helps the company to have control over costs and have lower attrition. Its
consistent focus on improving quality of user experience has given it a better brand image.
* Company increases the number of Batches in its Top performing centers (Morning batch, Afternoon batch
etc) and hence it can increase the overall capacities without any significant investments. This makes the company’s
capacity expansion relatively easy and highly profitable.

5.) Earnings Quality & Operational Leverage in the Business (Low Volatility & Low Variable Costs) :
* THEAL is one of the few businesses which can be safely called as a “Recession Proof & Inflation Proof
business”. Company’s earnings doesn’t alter materially due to an Economic downturn. It is one of the few big ticket
spending of an household which falls under the non-discretionary part.
* Despite Intense competition, quality Education providers can continue to have decent Pricing power derived
from a superior student experience. Demand is relatively in-elastic and just because some other Peer undercuts,
the Pre-School cannot drive away students from THEAL.
* We believe that THEAL’s earnings is of very high Quality considering its stability and very low Earnings risks
involved. Once a Pre-School centre get established, it continues to produce consistent earnings and has very little
risk of lower Revenues or enrollments unless there is significant damage to the company’s Brand.
* Pre-Schools have a lot of Fixed costs and very little variable costs (Slide – 35). Hence, the Operational leverage
in the business is extremely high. With increasing Utilization ratios, the Operating profit margins can vary from 30%
to 70% depending on the maturing of the center. Hence, the company’s delta in overall Margins and Return Ratios
can be significant as volumes build up.
* Additional Revenues from a center come not only at higher Margins but also without any new additional
Investment. Thus Incremental ROCE’s are very high in this business. With the Non-Volatile nature of the business,
the reverse negative operational leverage can’t occur in established centers and is possible only in case of a
recklessly aggressive expansion.
* Once a center gets established, the utilization ratios increase and with increased No: of branches - all well run
Pre School centers turns into cash cows. They start generating significant Free Cash Flow enabling the company to
use internal accruals for expansion.

6.) Financials - Negative Working Capital, Strong Balance Sheet, Investors Support, Promoters Buying :
* THEAL continues to stay “Lean and Efficient” and the company’s efficiency ratios are definitely above its
peers. Company continues to improve on its Revenue/ Student, EBIDTA/ Center metrics, etc (Slide – 31).
* If we strip out the Security deposits which are essentially a CAPEX element, THEAL works on a healthy
Negative Working capital cycle aided by strong Fee advances from students.
* Big Private Equity investors such as Matrix partners have continued to show faith in the Management team
and are investing in the business consistently (Slide – 40). We believe company’s has access to strong Equity capital
and hence funding aggressive growth should not be an issue.
* With a low debt Balance sheet combined with Cash inflows from asset divestments and Internal accruals, we
believe that the company does not require to substantially leverage its Balance sheet or dilute its Equity to achieve
its current expansion targets.
* Promoters have been consistently increasing their stake in the company and they have in fact subscribed to
shares at a premium to the current share price, which indicates their confidence in their business. With strong
Investor and promoter backing, the share does have a decent floor to its price.
7.) Reasonable Valuations for a Quality business run by a Credible & Competent Management :
* One of the most comforting factors in THEAL has been the Management quality of Mr. Rajesh Bhatia. There
has been a lot of passion and discipline with which he has continued to build THEAL. We are convinced that the
company has a long way to go and it has the right set of people at the top to drive this growth.

* THEAL has been the first Pre-School chain to give ESOP’s to teachers and make them enjoy the benefits of the
value creation that has happened. Our analysis also shows company follows clean accounting policies.
* Despite several positives - inherently superior business model, high growth rates, good management etc, the
stock is reasonably priced with a forward Price/ Earnings multiple of 14X, EV/ EBIDTA multiple of 6.5X and Cash
Flow from Operations multiple of 11X (Slide – 42).
In a country that is starved of quality education and that has seen demand for education booming, we believe
that THEAL has a great future. As the company continues to execute well, the company would start getting noticed
by Institutional investors and would recieve higher valuations. We believe that THEAL’s earnings quality can be
compared with hospital stocks such as Apollo, Fortis etc and this combined with lower gestation and higher ROCE
nature of Pre-School business should make the stock more attractive to investors.
At the current Market Capitalization of 800 Cr – THEAL is one of the few bets where a good Management team
is chasing a large opportunity with a share holder friendly business model. We would advise Investors to start
taking positions in the stock at the current price and increase their Allocation %’s going forward. The stock
definitely has the potential to become a Long Term Portfolio stock and deliver Multibagger returns overtime.
Regards,
[ Gokul Raj . P, Head – Investment Research ]

Pre-School Education – Industry Overview

Booming Education Opportunity
• India’s overall spend on Education to GDP has grown from just 1% to 5% which has been the major growth
driver and revenue source for private sector education providers.
• Urban households account for 26% of the population but account for 57% of the overall private spend on
education. Technical Education caters to just 2.6% of the overall students but account for 20% of the overall
household on education.
• On a percapita basis, the richest 10% of the urban population spends 90 times more on education than the
poorest 10% of the rural population.

Indian Education System
• Indian Education system continues to be highly
regulated and fragmented. Most of the Market is
unorganized with very few national players.
• Indian companies have been able to scale up in
relatively less regulated spaces such as Pre-Schools
and IT training.
• Over the past few years, Corporates have also
started entering the highly regulated K-12 segment
through proxy structuring to take advantage of the
huge demand – Supply mismatch.

Indian K-12 Education
• The Indian K-12 segment can be
divided into two types i.e by
Management and by Level of
Education as shown.
• K-12 admissions have seen huge
shift from Government schools to
Private schools over the past few
years driven by Increasing
Aspirations and decreased quality
of public school education.
projects.
• The enrolment in K-12 is
expected to grow to about 351
mn in 2018 which will lead to
additional capacity requirement of
about 34 million.
• The K-12 share in the total
enrolments is poised to increase
to about 48% in 2016-17 from
42% in 2011-12 .

Big opportunity in Tuition Fees
• Tuition fee is the single largest
component of private
expenditure on education and
accounts for 34% of overall
expenditure.
• Of the total private expenditure
on technical education, 58% is on
tuition fees . Of the total private
spend on tuition fee, 62% goes to
private institutions.
• Tuition fees go up progressively
in general education as the level
of education rises. The maximum
jump happens between higher
secondary and above higher
secondary level.
• Comparing similar levels of
education, tuition fees are always
higher in urban areas compared
to rural areas.

Preschool Opportunity for Organized Players
• The Indian Preschool GER penetration is among
the lowest in the world at 54% as against a global
average of about 80-90% which offers enormous
potential for the industry.
• The Indian preschool market is estimated at
about USD1.3Bn and is growing at about 38%. The
number of preschools in India is about 31,000 and
is expected to grow by about 26% per annum. The
total number of students enrolled in preschool
stands at about 2.6 mn with a preschool
penetration of 2.7%.

Preschool Market Growth
• CRISIL Research projects the
overall preschool market will
grow at a CAGR of 20% over
2013-18 from the current market
size of INR 66bn to INR 165bn,
driven by increasing penetration
levels in the industry.
• The organized preschool market
is expected to grow at a CAGR of
26% over FY13-18E to INR 42.8bn
from INR 13.2bn.
• Assuming an addition of about
80 students per preschool the
organized sector would need to
add about 8400 preschools.
• India’s total students catered by
the organized preschool are set
to reach 1.02 mn from the
current levels of 0.35 mn.

Preschool Competitive Scenario
• Preschools are predominantly neighbourhood institutions which address a micro market and are driven by
local conditions. Individual pre-schools, therefore, require low capital as compared to other educational
institutes.
• There are no education board to regulate these schools. However, branding and an internal set of teaching
structures are increasingly becoming mandatory due to the increasing demands of parents.
• There are many models of operations in the pre-school segment. The key models of preschool are self-
operated model and franchisee model.
• Most key players in the preschool segment go for franchisee model as it helps them to expand faster and
there is no major capital investment.

THEAL – Business Overview

Tree House-A Snapshot
• THEAL is the largest self operated preschool chain in India and is known for qualified and experienced
teachers, standardized curriculum and quality education.
• THEAL has about 379 preschool centers as on 31st March,2013 and proposes to open another 90 in FY14
taking the total to about 469 preschool centers.
• THEAL is also present in the K-12 school segment, especially at locations where it has a strong pre-school
presence. It also provides School Management services to 24 operational K-12 schools.
• THEAL offers a wide range of courses for different age group of children from play group, nursery, junior
KG, senior KG, mother toddler, activity classes, teacher training and summer camps.

Pre School - Service Offerings

THEAL vs Peers
• The biggest difference of THEAL
compared to its peers is its focus on Self
operated Pre-Schools compared with it’s
peers focus on Franchisee expansion.
• In the case of a franchisee model the
profitability margins and overall returns
are much lower but franchisee model
provides greater flexibility in terms of
scalability but has lesser quality control .
projects.
• The franchisor enjoys a EBITDA margins
of anywhere between 70-85% on all
franchisee centers excluding one time
license fee received from the franchisee.
• In the case of a franchisee he has to incur
higher capital expenditure apart from
paying license fee and royalty to franchisor.
• While the Margins may be higher, the
overall quantum of Profits and ROC’s are
higher in Self-Operated mode (with higher
Operational Leverage).

Preschool Matrix – Own Outlets vs Franchisee

THEAL’s Geographic Presence
• THEAL manages about 300
preschools while the
franchisees manage about 79
preschools across geographies.
• THEAL’s current operations
are centered around Western
India with nearly 50% of the
300 self operated schools
situated in Mumbai region.
• THEAL plans to tap other
regions like Bangalore in South
India and Kolkata in East India
in the Tier I areas as well as
Pune, Udaipur and
Bhubaneswar in the Tier II
regions going forward.
• THEAL plans to open 45
centers in Tier-II and Tier-III
cities in FY14 and FY15 apart
from its Tier-1 openings.

Self Operated Model
• The self operated model helps the company to maintain standardization and quality across its branches
apart from allowing it to capture the entire revenue opportunity instead of sharing with the franchisee
partner. Self Operated model is more difficult to execute compared with a Franchisee model.
• Tree House has the largest self operated model with 75% of its overall centers compared to peers who
have only about 25% on self operated model.
• The company intends to maintain its ratio of 75: 25 in case of Self Operated : Franchisee. The company
opens Franchisee modes only in locations where it doesn’t have any execution experience and where it is
necessary to have a local partner who runs the show.

Franchisee Model
• In this model, the company expands its operations and extends its brand name through a franchise, in lieu
of which, it is paid a one-time franchise and a royalty fee.
• The royalty fee, which is based on total fees generated by the preschool, is in the range of 10- 20%. THEAL
charges a royalty of 15%. In the franchise model, most preschools have a minimum built-up area
requirement of 1,000-2,000 sq ft with a one-time franchise fee, depending on the location.
• THEAL charges a differentiated franchisee fee as per the tier of the cities, which is far above the peers. This
is due to the higher Brand equity and the difference in THEAL’s and its peers strategy for expansion.

Highly profitable Centers
• THEAL’s profitable centers are quite high. Most of the centers become profitable as they mature. This can
be seen from the improvement in FY13 over FY12. In FY 12 the number of profitable centers was about 153
out of 184 centers which translates into a success rate of about 83.15%.
• In FY13 the number of profitable centers was about 229 as against 262 total centers which translates into a
success rate of 87.40%. The number of successful centers in Jaipur, Hyderabad and Kolkata showed
significant improvement which demonstrates the potential to expand in varied geographies.

Strong Revenues & EBITDA Margins
• THEAL’s revenues have grown from about Rs.39.24 Cr in FY11 to about Rs.216.09 Cr in FY15 ie, a growth of
about 53.19% CAGR. The growth in revenues was driven by increase in number of centers and increase in
student per school which stood at a healthy 60-75 per school during the past 5 years.
• The EBITDA margin grew from 15-18% in FY08-09 to 54.1% over the past four years. This growth was led by
Improving operating leverage. With fixed selling and admin costs, any increase in enrollments has led to
strong improvements in profitability.
• The preschool EBITDA margin are likely to exceed expectations, with key levers being improving average
student per preschool growth, lower SG&A expenses and better realizations vs cost inflation.

THEAL – Investment Rationale

Robust Track Record
• THEAL has grown rapidly from FY08 with the support of PE funding. The company has perfected its Pre-
School business and scaled it up rapidly during the last 5 years.
• THEAL has grown its revenues from Rs.5.42 Cr in FY08 to about Rs.114.28 Cr in FY13 growing at a CAGR of
about 83.9%. While the base is now higher, the company can still aim for a 30%+ CAGR.
• THEAL’s EBITDA margins has grown from about 15.87% in FY08 to about 55% in FY13 as several of its Pre-
School centers started generating profits.
• THEAL had posted a loss of Rs.0.19 Cr in FY08 as a result of several new openings in the previous year.

High ROC Business
• THEAL is one of the
few businesses that
has a potential to
generate ROC of
more than 100% in a
optimistic scenario
and a 25% ROC in a
bad scenario.
• The inherent
Returns potential of
its business model is
extremely high. The
company’s best Pre-
School centers have
been earnings ROC’s
upwards of 100% for
several years now.
• Even in case of a
Margin dip, the
company will
continue to maintain
higher ROE’s.

Improving Operational Leverage
• THEAL’s student population is expected to increase rapidly from about 7182 students in FY11 to about
53288 students in FY15 indicating strong cash flows.
• The student per center which was around 40 in 2011 has scaled upto 78 in 2013 and is expected to remain
around 74-78 levels till 2015. This is what has led to strong Margin improvements.
• The center per student ratio is calculated including the new centers. The total number of centers added by
the company has grown from 178 in FY11 to 379 in FY13 which is an increase of about 112% in two years.
• The increase in student ratio has led to better student teacher ratio which is likely to improve from about
18 to 15 in FY2015.

K-12 Asset Sales to unlock capital
• Of the roughly 500 Cr balance sheet assets currently - 200 Cr Rs is locked in Pre-School business, 230 Cr in
K-12 business and 70 Cr as Cash and Equivalents.
• THEAL is on the process of offloading its K-12 Assets which will help it to become asset light and raise
capital to fund its future growth.
• THEAL has plans to sell 5 K-12 Properties. It hopes to sell these assets over the next 2-3 years and that
would help it to raise cash of about Rs.1200 Mn as against a book value of Rs.962 Mn. THEAL will be able to
accumulate net cash of about Rs.800 Mn by FY16E which is about 8% of its current Market cap.
• THEAL expects the asset sale to be about 1.25-1.5X its book value which is reasonable considering the
quality of its K-12 assets.

Improvement in Return Ratios
Pre-School
Overall Financials

K-12 ROC’s to improve
• In 2010 THEAL has ventured into the K-12 segment. It operates 24 schools, with an overall investment of
more than INR 2.4bn i.e. about 50% of the asset base. The company also acquired business commercial
rights for INR 250mn to operate 12 schools for the next 30 years.
• THEAL has invested INR 960mn in land & building and provided security deposit of INR 1.1bn to the trusts
to operate schools. This has made significant capital unutilized.
• Once the asset reduction process is completed, THEAL will operate 24 schools with just INR 312mn in
investment. The K-12 school operations are a steady cash cow business with virtually zero earnings risk, it
should have the potential to exceed return on investments.
• THEAL has guided ROC of about 20% from FY16 and has the potential to generate ROC of 56% in FY19.

Aggressive Center Expansion
• THEAL’s management has been
aggressive and has been adding about
80 preschools over the last four years at
a CAGR of about 60%.
• THEAL plans to add about 350
preschools over the next three years
from the current 300 self operated
preschools and thus more than
doubling the center count.
• THEAL has also planned to increase its
franchisee base from the current 79 to
about 260 as it moves to newer
locations in Tier-2 and 3 towns.
• Given that the new centers take a
turnaround time of 2 years time, we
believe there is enough earnings
visibility in the stock.

Strong PE Interest & Good Management
• THEAL has started its business in 2003 and is run by first generation entrepreneurs Rajesh & Geeta Bhatia.
The couple started the first THEAL pre-school in Mumbai with their life savings after looking at the lack of
quality pre-schooling opportunities for toddlers.
• THEAL has attracted strong PE interest in the company from FY08 and has been consistently receiving funds
from PE investors till 2012. THEAL had come out with an IPO in August 2011to the tune of Rs.112 Cr and the
stock was listed in both NSE and BSE.
• Promoters are extremely confident of the business and this can be seen from their increasing stake in the
company through Warrant Issuances and Open Market buying. In fact Warrants were being issued around
the current Market price which should give us some confidence.

Financials

Earnings Projection – P&L Account
• THEAL’s revenues are expected to grow by
43% and 32% in FY14 & FY15 driven by
improved capacity utilizations and
contributions from new centers.
• THEAL has EBITDA margins in the range
54%. We estimate EBITDA margins of about
54.5% in FY14 and FY15 on the back of
improved economies of scale.
• THEAL is likely to report PAT of Rs.47.09Cr
in FY14 and Rs.60.78Cr in FY15 with an EPS
of Rs.13.09 and Rs.16.90 in FY14 and FY15
respectively.
• THEAL’s interest cost in FY 13 was at
Rs.6.62 Cr and is expected to be about
Rs.9.79 Cr and Rs.12.97 Cr in FY14 and FY15
respectively.
• THEAL’s depreciation in FY13 was at
Rs.13.38Cr and is likely to be at Rs.17.95 Cr
and Rs.23.77 Cr in FY14 and FY15
respectively.
Specialists in discovering Multibagger stocks “
Particulars FY12 FY13 FY14E FY15E
Net Sales 77.21 114.28 163.16 216.09
% Chg 96.76 48.01 42.77 32.44
Total
Expenditure 35.19 52.47 74.24 98.32
% Chg 57.66 49.10 41.49 32.44
EBITDA 42.02 61.81 88.92 117.77
EBITDA
Margins(%) 54.42 54.09 54.50 54.50
Interest 6.5 6.62 9.79 12.97
Depreciation 7.8 13.38 17.95 23.77
PBT 31.17 48.65 68.25 88.09
PAT 21.66 33.34 47.09 60.78
EPS 6.43 9.27 13.09 16.90

Concerns & Reasoning
1.) Steep increase in competition :
The education sector in India is largely unorganized and the business of pre-schools is highly fragmented
and competitive. In addition to competition from unorganized players in the pre-schools business, THEAL
faces a lot of competition from organized players in the market where it competes with various pre-schools
like Kidzee, Euro Kids, and Roots to Wings.
2.) Geographic al Concentration:
Of the total 379 pre-schools, more than 40% are located in and around Mumbai metropolitan. This
suggests a geographical concentration risk to the company.
3.) Regulatory Changes:
Circulation Operating pre-schools and providing educational services to K-12 schools are currently
unregulated, but the government may introduce a regulatory framework in future. Any such government
regulation, and THEAL’s inability to comply with the same, may adversely affect its revenue.
4) Expansion Risk:
The company plans to invest in pre-schools nationally to de-risk its business. However, due to increasing
competition and lack of knowledge on the local market may result in the companies business not being able
to scale upto expectations. The inability of the company to scale up its business in new geographies will
adversely affect its margins and profitability.

Price Chart
• THEAL had corrected sharply during the past year from
Rs.302 to Rs.217 after a sharp run post its IPO.
• The Stock has exhibited volatility during the year and we
believe that the current share price is a great accumulation
zone for Investors with a long term perspective.
• Technically the stock has strong support at Rs.210 levels
and hence there is limited downside risk at the current
Market price of 220 Rs.
Share Holding
%
Dec Sep Jun Mar
2013 2013 2013 2012
Promoters 30.87 29.27 27.75 27.75
FII 1.16 1.19 1.28 1.56
DII 10.22 10.65 10.87 10.94
Others 57.75 58.89 60.10 59.75

Conclusion
India’s developing economy has created several Niche sub-sectors which are growing at a very fast rate
owing to increased Urbanization, Affordability, Aspirations etc. Companies which are market leaders in these
Sub-segments are companies which can deliver strong Investor returns. These are generally good hunting
spots for Multibagger Investors as most of these companies are currently Small-Cap and they have the
potential to grow into a Blue-Chip over the next 10 years. Most of our Multibagger ideas can be fit into this
template – Astral Poly, Cera Sanitary ware, Poly Medicure, Mayur Uniquoters, PVR etc.
Similarly Pre-Schools is one such segment which has the potential to become a really large business
going forward. THEAL being the country’s largest self-operated Pre-School chain has the potential to grow
multifold going forward. More importantly, THEAL being in Education sector gives it the added advantage of
Revenue stability and lower earnings risk. We would like to view THEAL as a young Apollo Hospitals or PVR
in the making.
THEAL’s biggest positive is the high Return on Capital nature and Free Cash flow nature of its Pre-
School business. The company has other advantages in the form of healthy Balance sheet, credible
Management, strong Growth etc. The company’s expansion plans also provides decent visibility on earnings
growth and an improved scale of business.
Despite being a Small cap stock, THEAL doesn’t have the usual risks associated with Small cap stocks
such as Governance issues, high Earnings volatility, Investor neglect etc. We believe that the company’s
earning growth of 30%+ should deliver strong Investor returns and any improvement in its valuation is just
an added bonus. Price risk is lower and Earnings growth combined with a Re-rating would help the
company to deliver strong Multibagger returns to Investors.

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