Four IIT pass outs make a killing in their six year old education venture

Earlier this week, Mumbai-based MT Educare (formerly Mahesh Tutorials) announced that it has acquired a 51% stake in an IIT coaching institute named Lakshya Forum for Competitions for an undisclosed amount.

The founders of Lakshya – Vamsi Krishna and his team of four IITans – would be a happy lot today since getting to a Rs. 100 crore top line and competing with Kota-based big shots like Resonance and Career Point would have been a difficult task for them.

Anyway let’s get to the moot point regarding the valuations they probably received for their six year old venture. Rough calculations indicate that the young entrepreneurs pulled off an enterprise value of USD10 million (Rs. 44 crores) for their coaching facility, resulting in net receipt of USD5 million (Rs. 22 crores) cash from MT Educare for the 51% stake sold.

This I would say is no small money.

Lakshya Forum for Competitions, which runs four centers at Patiala, Bathinda, Chandigarh and Panchkula, has about 2500 students. Assuming an annual average fee of Rs. 35,000 per student, Lakshya is likely to have raked in about Rs. 9 crores in fee this year. Considering that EBITDA margins for IIT coaching institutes is in the range of 40-50%, I assume Lakshya would be making a minimum Rs. 3.6 crores at the EBITDA level.

The two listed companies in the coaching space: Career Point and MT Educare are available at around 3.5x their revenues and 14x EBITDA. Placing these multiples for Lakshya results in an enterprise value of USD10 million (Rs. 44 crores).

Given the poor market conditions and small scale of operations, the founders of Lakshya probably could not get a higher valuation for their business. Any buyer seeking a majority stake in a company usually pays a premium for the purchase. Moreover, Lakshya earns much higher profit margins than MT Educare. It also provides MT Educare a ready presence in North India.

My best wishes to Vamsi Krishna and his team for their future ventures.

Gym business...does it make sense?

Mahendra Singh Dhoni has started a new venture – SportsFit World Private Limited – suggested the Economic Times copy of the last week. The company, which MSD has formed along with his business partner and manager Arun Pandey, would be opening a chain of fitness centers (or gyms) across India. The new partners plan to open 200 gyms across the country over the next five years. Options for going alone or through franchisees is still in the works. With this, MSD would join the league of Talwalkars, Gold's Gym, Fitness One and Snap Fitness.

I shall here try to explore the gym business for the readers of this blog.

For the sake of understanding, let’s assume that we have taken the franchise of Gold’s Gym on April 1 2012. Establishing a fully-loaded Gold’s gym can cost anything between Rs. 3 crores to Rs. 5 crores, assuming that the land/building is not owned but taken on lease. A reasonable size would be say 7,500 sq ft of area. Similar to most master franchisees, Gold’s Gym would require that we buy the fitness equipment from them or their subsidiaries. They would also have their say in the choice of interiors and related infrastructure. So, it’s better, we assume this to be a sunk cost with no options of saving even a penny.

Assuming that we already have a location in mind, it is generally said that the fitness center can be expected to kick-start operations in about three months. Taking into consideration that all goes well, our cash outflow till the date of inauguration – i.e. July 1 2012 – would stand at Rs. 5.37 crores (including Rs. 18.75 lacs as interest and Rs. 15.75 lacs as rent). I assume that the investment amount has been taken as loan from friends who seek 15% pa interest; while the rent is Rs. 70 per sq ft. In other words, we are down Rs. 5.35 crores on the date of opening.

Let’s focus now on the cash inflows for the year ending March 31, 2013. Say the membership fee to our gym costs Rs. 25,000 per annum (which are very much premium charges) and the total memberships sold averaged 600 for the first year of operations. This means that during the period July 1 2012 to March 31 2013, we generate cash inflows to the tune of Rs. 1.5 crores. After adjusting for the franchisee royalty of Rs. 11.25 lacs (i.e. 7.5% of revenue), we are left with net cash inflows of Rs. 1.39 crores.

Coming to the operational costs, we now focus on the rentals, staff salaries, electricity charges, and other administrative costs payable during the year. Rent payments of our gym come at Rs. 47.25 lacs (nine months only), staff salaries are Rs 20.0 lacs (Manager, Trainer, Junior Trainer, others), electricity charges are Rs. 9.0 lacs (Rs. 1 lac per month), while administrative costs are Rs. 2 lacs. All this adds up to Rs. 76 lacs and results in an Ebitda margin of 40%, which is very much the industry norm. Seems good until now, right!

Having paid the operational costs and royalties, we now need to pay Rs. 56.25 lacs as finance charges for the loan taken from friends for the nine months, as we have already added the interest for three months in sunk costs. Amortization of the pre-operative expenses of Rs. 35 lacs over the next ten years would mean a deduction of Rs 3.5 lacs from the P&L account this year. Taking these into consideration, we arrive at a profit before tax of just Rs. 1.75 lacs for the first year. Hold on, as we are yet to pay a corporate tax of 30% on this amounting to Rs. 52,500 to the government. At the end of March 31 2013, we end our first year with a net profit of 1.22 lacs.

Good luck MSD!

Mad Over Donuts...seriously

Last week, my sister called me up while returning from work, asking me to get her “Double Trouble”, a popular donut (doughnut) flavor available at the Mad Over Donuts (MOD) outlet near my office. She asked me to buy two donuts after having eaten one at the Juhu outlet the very same evening.

I have seen the MOD outlet several times while going to / returning from my office, but never in my two years have I felt the urge to even visit the orange-colored place to buy anything. You can blame it on my traditional/conservative thinking because I usually stay away from such firangi places which are frequented by the new generation of Indians these days.

Anyway, since the request for donuts had come from my little angel (who is also my life), I finally made it to the MOD outlet that evening for the first time and bought two pieces of Double Trouble. I also bought two espresso coffees which I shared along with my friend accompanying me that day and paid Rs. 185 for all the things. I guess the donuts came for about Rs. 50/- each, which I thought were quite reasonably priced.

The person serving me at the outlet informed that it was a franchisee store; which tinkled the businessman in me. Few days later, I started to research about MOD. And guess what did I find? I found that MOD is not an international brand like Dominos, Mc Donalds, or Pizza Hut, but a home grown one. This came as a real surprise to me since I always thought MOD was an up market (premium) foreign brand.

So, who are the people behind MOD – India’s first donut chain? Well, it all started when a young man named Lokesh Bharwani (probably a sindhi, suggests the surname), who was working in Singapore, thought of an opportunity to serve donuts to Indians. Lokesh roped in Kishi Arora (a beautiful chef) and took the plunge after spending one full year to research and develop the product with a team of food science specialists.

The start may have been slow, since the first MOD outlet opened its doors only in March 2008. The reason could also be that Lokesh wanted to play all his cards right and avoid failure. The gameplan worked and MOD expanded really fast. The company is now present through 35 stores across Delhi, Mumbai and Pune. According to media reports, Mirah Group (owner of Rajdhani and Falafels) was quick to spot the opportunity to invest in the craze for donuts and picked up one-third stake in MOD in 2010.

Now, comes another good piece of information. Last week, I had this guest at my place (an Indian, residing in Dubai) and he happened to visit the neighborhood MOD store yesterday with his friend. While casually chatting up with him last night, we engaged in discussing the donuts served at MOD and what he thought about them. Well, he had an interesting thing to share with me. My friend told me that MOD is costlier than Dunkin Donuts and Krispy Kreme, the international favorites for donuts. Moreover, he said that the donuts served by MOD good, but, not as soft and creamy as the ones he eats at Dunkin Donuts and Krispy Kreme in Dubai. Which means that Lokesh could be generating better profit margins than the international players. Anyway, whatever be the case, I know one thing. Lokesh is presently doing a roaring business and his MOD has a great fan following, including my little princess.

I wish him and Kishi all the luck.

Logistic companies Arshiya and Gateway Distriparks generate investor interest

The last week of this financial year witnessed a lot of bulk deals. I, therefore, would only be discussing selective candidates here at my discretion.

Credit Suisse Singapore was seen picking-up shares worth Rs. 12.5 crores in Arshiya International, a supply chain and logistic company, which has made it to the Ceejay House of Worli from an unknown office building in Marol, Andheri. Seller here was Citigroup.

Buying interest was seen in another company named Gateway Distriparks, which operates in similar space as Arshiya International. Morgan Stanley and Indea Absolute Return Fund were the buyers here, picking shares worth Rs. 37.7 crores and Rs. 8.3 crores each.

ICICI Prudential Mutual Fund bought shares worth Rs. 12.2 crores in Career Point, a tutorial company, from HDFC Mutual Fund. Few interesting things about Career Point: 1) the stock is available at 52-week low and could make for a good investment, 2) expected IPO of Mahesh Tutorials could be seen lifting investor interest, and 3) the company has some really strong backing of institutional investors.

However, ICICI Prudential Mutual Fund was seen selling shares in Shilpa Medicare. The fund house sold shares worth Rs. 7.9 crores to TANO Mauritius India. Shilpa Medicare counts Baring India and Pivotal Securities among its shareholders.

During the week, New York Life Investment Management India Fund bought shares worth Rs. 6 crores in Jabalpur-based Commercial Engineers & Body Builders. Since, they already own 12% outstanding shares in the company, the additional buying of shares indicate confidence among the existing investors.

Asian Satellite Broadcast (a Subhash Chandra company) was seen buying into IVRCL. Asian Satellite Broadcast acquired a total of 13 million shares at an average price of Rs. 60.44 per share, this week.

And lastly, my all-time favorite Supreme Infrastructure is again back in the list since Kitara Capital bought additional shares worth Rs. 2.9 crores at an average price of Rs. 288 in the company.

The week of big exits and the budget

The eleventh trading week of 2012 witnessed good amount of activity in the bulk deals section. It ended with the presentation of the union budget from Pranab Mukherjee.

Talking about bulk deals, on March 12 2012, Rupert Murdoch sold his entire stake in Hathway Cable to Providence Equity Advisors and Macquarie Bank for Rs. 358 crores. The deal was closed at an average price of Rs. 145/- per share. My calculations indicate that Rupert Murdoch made a mere 5% gain on his original investment in Hathway. Further, the huge 18% discount to the market price indicates that Rupert was finding it really hard to offload his stake in the company.

On March 14 2012, Kitara Capital (managed in India by Amitabh Chakraborty) bought shares worth Rs. 23.80 crores in Mumbai-based Supreme Infrastructure from Reliance Mutual Fund and the promoters of the company. Supreme Infrastructure (an entity of the Sharma family which owns large chunks of real estate in Powai) is involved in road projects across India. Kitara Capital is part of the Sultanate of Oman-based Ajit Khimji Group.

On the same date, V P Nandakumar of Manappuram Finance sold shares worth Rs. 144.65 crores in his company to investors like Baring India, Sequoia Capital and Siguler Guff. The shares were sold at an average price of Rs. 40/- per share.

Ashish Dhawan’s ChrysCapital was also seen buying 4.2 million shares of Karur Vysya Bank at an average price of Rs. 380/- through their fund Warhol Limited on March 16 2012. The seller here was India Max Investment Fund Limited.

Further, ICICI Emerging Sectors Fund continued to exit MCX India. On March 12 2012, the fund sold shares worth Rs. 31.7 crores in the company. This is in addition to the share sales of Rs. 56 crores done last week by ICICI Emerging Sectors Fund.

UK-based Coronation Investment Management Company, too, has been offloading shares in Educomp Solutions. The company sold shares worth Rs. 73 crores during the week. Malaysia’s SWF Khazanah also sold its entire stake of 4.17% in Yes Bank for Rs. 531 crores after holding it for five years.

Crisil should acquire a smaller player rather than splurge on buybacks

Well. Let me first clarify that this is purely my thought and therefore the analysis carried-out in the article need not have had the desired impact as proposed.

Here are some data points to begin with. Crisil India, a subsidiary of S&P, has a market capitalization of Rs. 6,700 crores or US$1.3 billion. During the last year, Crisil made a net profit of Rs. 206 crores on operating revenues of Rs. 807 crores, on a consolidated basis. Its latest balance sheet suggests that the company is debt-free and has cash and cash equivalents worth Rs. 258 crores.

Crisil has done well for itself as well as for its shareholders. Over 2007-11, Crisil’s revenue and net profit recorded a CAGR of 19% and 25% respectively. If one had bought shares worth Rs 1 lac in Crisil in Dec 2007, the shares would be worth more than Rs 2.5 lacs as of date with some extra earnings in the form of dividends.

Crisil has managed this feat through both organic as well as inorganic growth. Crisil acquired Pipal Research in October 2010 for US$12.75 million, paying 1.6x sales for the same. Crisil had acquired another research firm named Irevna few years back for US$12.0 million, paying 2.2x sales. It is easy to conclude that both these acquisitions have been very fruitful for Crisil because research division is now the single largest contributor to the overall revenue of Crisil. Last year, the research division contributed 52.5% to the overall revenue, followed by Ratings (40.4%) and Advisory (7.1%).

Now, let me change the track to what I wish to communicate. The legendary investor Warren Buffett had recently announced a stock buyback, the first by Berkshire. Stock/Share buybacks are usually considered as a means to return excess money to shareholders. They also indicate that the company is not finding any other attractive investment opportunity for the cash it holds. Simply put, if Berkshire is doing a stock buyback, the management probably thinks that the best investment option (given the current market conditions) is to invest in its own stock.

Crisil too has engaged in quite a few stock buybacks. It recently closed a buyback program, purchasing shares worth Rs. 80 crores (USD16 million) from the open market. My moot point here is: Crisil could actually have put this money to better use, than do buybacks.

My theory behind this reasoning is simple.

With a M-cap of Rs 6700 crores, Crisil is currently trading at 8 times its sales, and 32 times its earnings. During the last five years, it traded at an average sales and earning multiples of 6x and 23x. In other words, this means that the market usually values Crisil at 6 times sales and/or 23 times earnings. ICRA, which is in similar business as Crisil, also trades at 8x sales.

Now assume that Crisil had actually used the money spent on last stock buyback to acquire another company similar to Irevna or Pipal and strengthened its research division further. In fact, a company in similar business is actually located in the vicinity of their Mumbai headquarters and clocks annual revenues of USD10 million. Taking cue from earlier acquisitions of Pipal and Irevna, we can safely assume that they could have scooped-up this company for anything between USD16-USD22 million.

The new acquisition could have added USD10 mn to the topline and USD60 mn to the market capitalization of Crisil.

I hope someone in Mape Advisory, which advised Crisil in previous acquisitions, reads this and helps Crisil become a Rs. 10,000 crore M-cap company soon.

MCX makes its debut; markets’ not surprised with listing gains

The tenth trading week of 2012 witnessed the first IPO listing for the year. On March 9 2012, MCX finally made its debut on the Indian bourses’, closing the day with gains of nearly 26% based on the issue price of Rs. 1032/- per share. This wasn’t of much cheer to the retail investors who ended up making between Rs 2100 to Rs 3100 on their investment of 2 lac rupees.

Data from Bulk deals sections indicates that Copthall Mauritius Investment Ltd. bought shares worth Rs. 56 crore in MCX at an average price of Rs. 1333/- per share. The seller was ICICI Emerging Sectors Fund.

Hyderabad-based Nava Bharat Ventures Ltd. also witnessed good deal activity this week. On March 9 2012, Kingfisher Capital CLO Limited (a subsidiary of Lehman Brothers Holdings) sold shares worth Rs. 60 crores in the company via bulk deals. Nearly 82% of these shares were bought by the promoters of Nava Bharat Ventures Ltd. through A N Investments Pvt Ltd, Nav Developers Limited, and Nava Bharat Ventures Employee Welfare Trust. Post this deal, Kingfisher Capital CLO Limited has cut down its stake in the company to 11.2% from 14.5%.

Other bulk deals for the week included companies like HDIL, Sintex, Core Projects and NCC.

On March 6 2012, Merill Lynch bought shares worth Rs. 25.4 crores in Mumbai-based real estate developer HDIL Limited. My earlier posts would inform that Goldman Sachs had also bought shares in HDIL Limited on Feb 14 2012. On the same date, Morgan Stanley scooped-up shares worth Rs. 14.9 crores in plastic products company Sintex Industries.

On March 7 2012, Goldman Sachs bought shares worth Rs. 18.2 crores in education service provider Core Projects, while Reliance Life Insurance Company bought shares worth Rs. 7.4 crores in infrastructure firm NCC Limited. My earlier posts would inform that Baer Capital had also bought shares worth Rs. 22 crores in NCC Limited on Feb 6 2012.