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Thursday, August 11, 2011

Tree House Education & Accessories Limited (THEAL) IPO Analysis Report

Tree House Education & Accessories Limited (THEAL) IPO Review
Issue Highlights
Issue Size: 84,32,189 Equity Shares(Including Anchor Portion)
Face Value: Rs. 10
Price Band: Rs. 135 to Rs.153
Retail Discount: Rs. 6 per Share
Market Lot : 40 Shares
Maximum Retail Subscription: 34 Lots ( Rs. 1,99,920)
Issue Type: 100 % Book-Built Issue
Issue Period: 10/8/2011 to 12/8/2011

About company and the Industry
The company operates a chain of pre-schools under the brand name of Tree House Education & Accessories Limited across 33 cities in India. Company offers Play School and Nursery Facilities, Vacation Camps, Mother-Toddler Classes, Hobby Classes, Day-Care Facilities and Teacher Training Course. India is the country with 59 crore of its citizen in the age group of 0-24 years. Presently India spends around 3.5 % of its GDP on education and with growing Indian economy and increasing thrust on education this allocation shall definitely increase and this fact portrays brighter future for the company. The industry is supposed to grow with the growing Indian economy. Pre-school industry is supposed to grow at CAGR of 21% to Rs. 133 billion by FY2015.The Company is very aggressive on expansion, it started with just 12 branches in FY 07 and presently it is having 177 branches under and majority of those are self-operated. Self-operated branches ensure more commitment and quality in comparison with the franchisee model, and besides  offer cost advantages too.

Objects of the issue
·         Expansion of the pre-school business
·         Acquisition of the office space
·         Procurements of exclusivity rights to provide educational service
·         Construction for educational complexes in Rajasthan  & Gujarat
·         Repayment of loans
·         General corporate purposes

Strengths
·         Company conducts operations primarily through self-operated pre-schools and only 33% of pre-schools are franchisee operated
·         Education is provided through standardized and innovative teaching methods
·         Company is very aggressive on the growth front , from only one city in 2003 company is presently having reach over 33 cities
Threats
·         An educational complex  project worth 24.89 crore Rs. awaits government nod for the use of the land
·         The company is novice in the business of providing education to K-12 (  Kindergarten to  12th Standard ) schools, it commenced its operation only in the year 2008
·         Tough competition from leading players like Kidzee, Euro Kids, Roots To Wings(By Educomp) and Kangaroo Kids
·         Business in seasonal in nature and prominent in only first and third quarter of a financial year
·         Around 45% of pre-schools are in Mumbai metropolitan area
Strengths
Financial Analysis **

Parameter
FY11
FY10
EPS   #
4.04 ì
1.58 ì
Book Value   #
36.37 ì
27.59 ì
P/E   #
37.87
96.83
CAGR (3 Years)
194 %
NA
PEG   #
.2
NA
P/B   #
4.2 ì
5.54 ì
ROE   #
11.1 %
5.72 %
Debt/Equity Ratio
.38
.17
Interest Cover
10.03
5.96
ROCE (Return On Capital Employed)
5.88%
4.03%
M-Cap/Sales Ratio
13.14
18.09
Current Ratio
3.85
4.27
M-Cap/Reserve Ratio
5.23
8.77
NPM
23.43%
12.15%


# Post issue equity is considered
** Calculations are done at the upper price band of ì  153 Rs.

Comparison  with Peers #

Stock
P/E
ROCE
NPM
PEG
ROE
Tree House
37.87
5.88
23.43%
.2
11.1%
Educomp
7.04
22 *
26 % *
.15*
17.5 % *
Everonn
13.85
16.47
24.19%
.3
13.87% *


# FY 11 data for peer companies
*moneycontrol.com Data, for FY 10
Inference
As we can see in the above table valuations of Tree house are much stretched, post issue this stock shall be trading at very high price-to earning multiple in comparison with its peers. Both peer companies are giving better return on capital than the Tree House. Though company is very aggressive on growth front and could give better returns in forthcoming years  provided company maintains its growth streak while beating the competition. Listing gains in this stock are expected but not guaranteed owing to prevailing global market sentiment .Only dare devils with the risk appetite should go for this issue. Risk-averse investor better skip this issue as established names in this industry are available at much cheaper rates in the secondary market.
Disclaimer: Analysis is for the information purpose only. Though due diligence has been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.

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