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Tree House Education & Accessories Ltd IPO Review (Avoid)

Review By MLR Securities Private Ltd on Aug 10, 2011

Issue Period: 10th Aug - 12th Aug
Price Range*: INR 135-153
Issue Size: INR 113‐127 Cr
Mcap: INR 455-515 Cr
IPO Grading: CRISIL IPO Grade 3
BRLM: JM Financial, Motilal Oswal
Promoter: Rajesh & Geeta Bhatia

Tree House Education & Accessories Ltd is the largest self-operated preschool education provider in India. It runs 223 preschools and provides services to 12 K-12 schools in India. Out of the 223 centres, the company runs 149 self-operated schools and the rest are franchises. Tree House also provides preschool teacher training and day care centres under the brand Muskaan.

The company, due to its largely self-operated model, enjoys a cost advantage over its peers who mainly follow the franchisee route. The huge scale of self-operated schools gives Tree House a strong bargaining power and help in managing costs better than both unorganised players and franchisees of the organised players.

It was originally incorporated in 2003 as a proprietorship firm - M/s Tree House - by Rajesh Bhatia and his wife Geeta Bhatia. In 2007, the proprietorship firm was acquired by Tree House Education & Accessories Pvt Ltd and started to expand the preschool business. Matrix Partners invested in three phases in the company with the latest been at Rs 150/share in April 2011. Matrix currently holds 35% stake in Tree House. Foundation Capital invested at Rs 110/share for 11.4% stake in May 2010.

Company raised Rs 17 Cr through anchor investors at Rs 135/share. Investors are Rising India Focus Fund and Axis Mutual Fund.

Objects of the Issue

  • To launch 120 (self operated) pre schools by the end of 2014 - Rs 41.2 Cr
  • Acquisition of office space - Rs 11 Cr
  • Procurement of exclusivity rights to provide educational services (to add 7 K 12 schools by FY13) - Rs 15.6 Cr
  • Construction of infrastructure for educational complexes in Rajasthan and Gujarat - Rs 40 Cr
  • Repayment of loan - Rs 28.5 Cr

 

 

Valuations

The company's market cap is Rs 515 Cr at the upper price band of Rs 153. It is asking for a valuation of 37-42 times its FY11 EPS on a pre issue basis. Post issue it will expand to 49-56 times. Price to book value is at 1.8-2 post issue. We recommend investors to Avoid the issue due to steep pricing. Long term investors can take exposure in the secondary market on dips as it commands high margins as compared to its closest peers like Zee Learn & Eurokids.

 


Conclusion / Investment Strategy

We recommend investors Avoid this issue considering its aggressive valuations of 49-56 times FY11 EPS.

Long term investors can take exposure in the secondary market on dips as the company commands high margins as compared to other players in the industry, with scalable business model and robust industry outlook.

 

Reviewer recommends Avoid to the issue.

Review By MLR Securities Private Ltd on Aug 10, 2011