1

Unique subscription model is the business lever Target Price INR 200

BUY

We initiate coverage on MT Educare Ltd (MTEL), which is en-

gaged in support and coaching services for students of SSC, HSC,

graduation, CA and competitive exams such as JEE, Medical,

MBA, CFP etc. The company has over 25 years of experience in

coaching business and has presence in 138 cities with total num-

ber of 226 coaching centers across India.

MTEL has reported a significant YoY growth in past four quarters, with

the average YoY growth of over 30%. We believe that this pace would

continue in coming years due to rising aspiration of students for en-

trance exams. Company would be able to report over 25% YoY growth

in coming years, according to us.

MTEL is currently operating at TTM EBITDA and net margin of 21%

and 10.5% respectively. Company has managed to sustain profitability

due to its asset light business model and continued thrust for expansion

in new geographies with suitable offerings.

MTEL is a zero debt company and managed its financials well with the

use of internal accruals during the time of expansion. It has provided

the financial flexibility to the company for further expansion.

Improvement in profitability aided key metrics: Company reported

ROE and ROIC of 19% and 26% respectively, while total assets and

capital turnover ratios reported at 1.10 and 1.80 respectively.

MTEL is currently trading at P/E of 22.7x (TTM) and FY15 for-

warded P/E of 15.1x (FY15 estimated earnings of INR110.3 mil-

lion). MTEL has emerged as a strong player in a highly frag-

mented coaching industry and has the ability to deliver strong

operating performance; on the back of high operating leverage

business model. Despite continued organic expansion and strate-

gic acquisitions, MTEL managed its financials well and kept it

balance sheet debt free.

Despite competition from unorganized and local players, MTEL

managed to report consistent and sustained performance during

past several quarters and we expect the company to sustain and

improve key operating metrics on the back of strong cash flow, a

recurring theme in the past several quarters. We value MTEL on

traditional DCF method of valuation and are comfortable with

an FY15 P/E of 25x, with a fair value of INR200.

India Equity Research

Education

July 3, 2014

MT Educare Ltd

Last Price INR 120 Bloomberg Code MTEL.IN

Reuters Code MTED.NS

Avg. Vol. (3m) 2,784,840

52 -wk High/Low INR 127.5/66.9

M cap Full/Free float (INR mn) 46,960/25,830

Key performance 2013 2015 (E) 2016 (E)

Revenue (INR mn) 2,018 2,448 3,051

Growth (in %) 28.3% 21.3% 24.6%

EBIT (INR mn) 295 412 518

EBIT Margin (%) 15.5% 17.7% 17.9%

PAT (INR mn) 208 313 387

PAT Margin (%) 10.9% 13.5% 13.3%

Basic EPS 5.3 7.9 9.8

Price/EPS Ratio 22.70 15.15 12.23

(in %age) Mar—14 Dec—13 Sep—13

Promoter 45.34 45.34 45.34

FII 11.38 11.58 11.63

DII 3.75 3.94 3.74

Others 39.53 39.14 39.29

Tushar Pendharkar, +91 022 41002018 tushar.p@righthorizons.com

Right Horizons Score Matrix®

Quantitative Score 2.14 GOOD

Qualitative Score 1.32 EXCELLENT

3.46 GOOD Overall Score

For detailed Score Matrix report, write to us at Right Horizons

-40%

-20%

0%

20%

40%

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14

MTEL vs Sensex

MTEL Sensex

2

Business and Outlook

MTEL started with one center in Mumbai during 1988 and

within the span of 25 years it has expanded its presence in

138 cities with total number of 226 coaching centers across

India. It is one of the largest and oldest player in Indian

coaching and the only listed player on stock exchanges in its

segment. Company offers its services for students in three

business verticals:

School Segment, which includes students from IX and

X standard. Company has also started INK Model for V,

VI, VII and VIII standard.

Science Segment, which includes students from XI and

XII standard, where the main focus is to prepare them

for Engineering and Medical examination.

Commerce Segment, which includes students from XI

and XII standard, where the center prepares them for

CA and CS entrance along with their B.Com studies

In addition, MTEL also provides coaching services for

CAT, MAT, Government Jobs, etc. While, company has the

total strength of over 80,000 students in its different formats

of coaching services, students from school segment contrib-

ute most with over 40% of the total strength, followed by

commerce and science, where the contribution is over 30%

and 18% respectively.

Diversification of Services: Strong hold on

PCMB, while raising footprints in other for-

mats of competitive exams

MTEL has focus over national level examinations, such as

engineering, medical, CA, MBA, etc., which has unique cur-

riculum across India. Significant experience in PCMB

(Physics, Chemistry, Mathematics and Biology) segment

has provided an enviable position to the company over its

other competitors operating in similar segment. To diversify

the product line even deeper, company has made couple of

acquisitions during past few years – it acquired Chitale

Coaching Classes to make presence in MBA entrance

coaching market and also made acquisition of Lakshya

Coaching to target students for engineering entrance exams

in Northern India.

INVESTMENT RATIONALE

MTEL is a well established player in coaching indus-

try and consistently expanding its base across India.

Focus over localization of its businesses is the key of

its success

MTEL is a zero debt company and has a track record

of strong operating cash flow, which is expected to

continue further.

Diversification in product offerings aided the company

to expand its base in new geographies. Rather than

pushing its services in market, MTEL is focusing more

over ‘Customer Centric’ approach.

Inorganic strategic moves and tie ups in new geogra-

phies could be a strong trigger for coming years.

3

School segment has immense potential to grow and outperform in coaching industry. This segment has reported a better than

expected increase in per batch occupancy rate in past few years and it has also witnessed the willingness of parents to pay more

for quality coaching, which the students are not getting in schools. The INK model, which is a coaching through internet, is also

gaining wide acceptance due to easy accessibility and in house tuition. This model provides for personal coaching and parents

appear to have better control over their wards.

MTEL has recently started a PU (pre-university) college in Mangalore, Karnataka and has also forayed into direct education

over the past 12 months. The company has tie-ups with other colleges in Karnataka to provide test preparatory coaching and

management consultancy services. In the deal, MTEL shares over 15% of the revenue with the college for utilizing the college

infrastructure and in return colleges get extra income during their non academic sessions. Currently it has tie-ups with 9 opera-

tional colleges. Management is targeting over 30 college tie-ups by the end of FY18.

Geographical Diversification: Expanding pan India presence with focus over localization

To reduce single location concentration, MTEL is aggressively expanding its presence across new geographies such as Karna-

taka, Gujarat, Punjab, Tamil Nadu and Delhi, which would further reduce regional dependency over Maharashtra, where it is

currently operating 75% of the total centers. During FY13, MTEL acquired Lakshya coaching and made its presence in north-

ern India. Now the company is planning to expand Lakshya network in other parts of the country, especially western India,

where MTEL has strong presence. This move would not only strengthen the competitive position of the company; however, it

would also reduce operating pressure over MTEL’s existing infrastructure

‘LAKSHYA’ Acquisition: A strategic move to cater northern India

MTEL acquired 51% stake in Lakshya, which is one of the fastest growing coaching institute in north India for engineering &

medical entrance examination. The recent change in IIT JEE examination pattern has also aided the acquisition in favor of

MTEL. Unlike old system of one single entrance exam for IIT JEE, the new examination pattern conduct two exams – JEE

Mains and JEE Advanced. Only top candidates for JEE Mains are eligible to appear for JEE Advanced exams. Therefore, with

the acquisition of Lakshya, MTEL is well poised to provide right mix to prospective students who could attend coaching during

XI & XII from MTEL and prepare for JEE from Lakshya. Though that would require a significant expansion of Lakshya cen-

ters in areas where MTEL is operating, and company has already started doing CAPEX to make most out of the acquisition.

MTEL has started expanding Lakshya in Punjab, Haryana, UP, J&K and Himanchal Pradesh. The next leg of expansion would

be in western & southern regions of India. The recent expansion in Karnataka for XI and XII science aspirants through college

tie-ups could be a potential targets for Lakshya and is expected to work as strong foundation for growth.

4

25 years journey transformed a local business into a national coaching chain

BUSINESS SEGMENTS OFFERINGS: Suitable for students of all age groups

SCHOOL SECTION IX and X standard (which includes CBSE, ICSE and State Boards)

INK Model for V, VI, VII and VIII standard

SCIENCE SECTION

XI and XII standard

Preparation for Engineering and Medical entrance examinations (JEE Mains & Advanced

and NEET)

COMMERCE SECTION

XI and XII standard

CA-IPCC, CA Final and CA-CPT

CS-Entrance

B.Com and Graduation syllabus

Coaching for CAT, CMAT and GMAT

OTHERS Overseas coaching services, such as Dubai

Preparation of entrance exams for Government services

Sale of study material through various distribution channels

The regions where MTEL has presence are strategically evaluated by the company and the offerings are based on

growth prospects & preference of the students towards entrance exams. MTEL launched CA courses in Tamil

Nadu, Engineering in Karnataka, acquired Lakshya in Northern India, etc. Company is diversifying the offerings

and focusing more on scalability.

Recent initiative for UVA (University, Vocational & Affiliated) education model could be the EBITDA booster,

considering the network expansion with colleges. In this way of operations, colleges get extra revenue for provid-

ing infrastructure to MTEL during non academic sessions and MTEL uses a well established infra of colleges at a

nominal cost. We believe that it could be a strong trigger for next 3 years.

5

Income Statement and Balance Sheet

Coaching institutes operate mostly on fixed component cost and that provides them significant operating leverage. The factor

which influences the most is the total strength of the students, which could also be considered as occupancy of the batch. Over

the past several years, company has witnessed significant acceptance in the market due to rising aspirations for entrance exams

and continued diversification in product offerings. Growth at MTEL in past few years was the mix of organic as well as inor-

ganic and has comfortably drove revenue at a better than expected rate. Despite continued expansion and inorganic growth,

profitability at operating level has improved and would be able to expand further with expansion, according to us. TTM

EBITDA margin of the MTEL in past several quarters have been between 18-22%.

We believe that company has much more stabilized it at current levels and would be able to sustain it in coming years. MTEL

has improved its cash flow from operations and we believe that it would remain positive in coming years due to asset light

business model. Despite significant expansion in past ten years, MTEL managed to control its financials and kept its balance

sheet debt free. Strong cash flow from operating activities and fewer burdens of non operating expenses would be able to pro-

vide sufficient strength to the balance sheet, according to us.

Continuous improvement in profitability delivered strong cash flow

During past four years, MTEL’s operating revenue has grown at a CAGR of over 24% in past 4 years, which is commendable

considering the fragmented market of coaching industry. The company has managed to generate healthy ROIs over the period

of growth and reported ROE and ROIC between 15-20%, which is a respectable performance for a business which is expan-

sion. Cash flows from operations (CFO) and Free Cash Flows (FCF) has been positive in past several years and generated

enough cash for expansion activities.

TTM Performance Analysis Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

Basic EPS (TTM) 4.54 4.67 4.82 4.95 5.29

Price to Earnings (TTM) 17.7 20.0 19.4 18.2 16.4

PEG Ratio (TTM) 0.9 2.9 1.7 0.2

Revenue Per Share (TTM) 38.93 42.03 45.90 48.45 50.58

Price to Sales (TTM) 2.1 2.2 2.0 1.9 1.7

Net Operating Revenue (TTM) 1,548.7 1,672.1 1,826.0 1,927.6 2,012.1

TTM Quarterly Growth 29.3% 8.0% 9.2% 5.6% 4.4%

EBITDA Margin (TTM) 18.9% 18.7% 19.2% 19.8% 21.0%

Net Profit Margin (TTM) 11.7% 11.1% 10.5% 10.2% 10.5%

Degree of Leverages (TTM)

Degree of Operating Leverages 0.29 0.76 1.15 1.43 2.83

Degree of Financial Leverages 1.20 0.49 0.31 0.33 0.55

Degree of Total Leverages 0.35 0.38 0.35 0.48 1.55

6

Ongoing network rollout and occupancy rate would continue the aid top-line momentum

Zero debt at balance sheet and high operating leverage model improves performance

Despite continued expansion, net margin improved and maintained positive CFO

7

Improvement in operating level performance delivered strong results

Despite continued expansion and fragmented market, especially from local coaching institutes; MTEL has managed operating

margins well and also expanded operations at a significant rate. EBITDA margins increased to above 20%, while expansion in

other formats of coaching improved profits in absolute terms. We believe that the numbers would continue to grow in next five

years due to rising career aspirations of students.

MTEL’s shareholders’ equity has reported a CAGR

of over 33% in past four years. We believe that the

momentum could sustain over the medium term, due

to continued expansion and marginal rise in occu-

pancy in batches

We believe that the shareholders’ equity could con-

tinue to grow at the CAGR of between 20-23% due to

consistent improvement in operating profitability,

thus keeping ROE above 20%.

High operating leverage kind of models improve as-

set quality and rise in occupancy keeps the momen-

tum in long run.

Network expansion would continue in future and

localization of the new centers would be the key in

future, according to us.

We believe that, for the long term, MTEL would be

able to keep ROTA near to 15%

MTEL is estimated at a WACC around 15%, and

with its ROCE close to 20%, appears better posi-

tioned on average as compared to similar growth

companies.

We believe that the company would be able to main-

tain its ROCE well above the level of 20% due to

continued improvement in profitability in past four

years

10%

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20%

25%

30%

35%

0

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2

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3

3

4

2011 2012 2013 2014 2015 2016 2017 2018 2019

INR

Bil

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n

Shareholders' Equity & ROE

Shareholders' Equity, LHS Return on Equity (ROE), RHS

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15%

20%

25%

30%

35%

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3

4

2011 2012 2013 2014 2015 2016 2017 2018 2019

INR

Bil

lio

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Capital Employed & ROCE

Capital Employed, LHS Return on Capital Employed (ROCE), RHS

5%

7%

9%

11%

13%

15%

17%

19%

0

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2011 2012 2013 2014 2015 2016 2017 2018 2019

INR

Bil

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Total Assets & ROTA

Total Assets, LHS Return on Total Assets (ROTA), RHS

8

Continued expansion could raise employee expenses; keeping other costs under control

Rise in employee expenses could be the concern for the company due to continued expansion of coaching centers and geo-

graphical risks associated with that. However, other expenses, such as direct expenses and material cost would be under control

due to its fixed nature and low variability. MTEL operates at an asset light business model, therefore it leaves the company to

focus more on student acquisition to reach maximum occupancy per batch.

We believe that the employee expenses could report notable growth in coming years due to additional hiring of staffs to work

on new coaching centers. Administration expenses would remain stable; however, control over non operating cost would be the

key for coming years, which we believe that it would remain in favor of MTEL due to rising acceptance of coaching studies in

Tier II and III cities, which would further increase the occupancy rate.

Operating & Non Operating Expenses 2011 2012 2013 2014 YoY Growth CAGR/Avg

Growth

(INR Million)

Gross Operating Revenue 1,055 1,306 1,573 2,018 28.3% 24.1%

ELEMENTS OF EXPENSES

Direct Expenses & Materials Cost 555 698 816 999 22.5% 21.7%

Employment Cost 135 180 219 286 30.4% 28.2%

Administration & Other Expenses 174 197 245 310 26.6% 21.1%

Total Expenses 865 1,075 1,280 1,595 24.6% 22.6%

PERCENTAGE IN GROSS SALES

Direct Expenses & Materials Cost 52.6% 53.4% 51.9% 49.5% — 51.9%

Employment Cost 12.8% 13.8% 13.9% 14.2% — 13.7%

Administration & Other Expenses 16.5% 15.1% 15.6% 15.3% — 15.6%

Expenses against Net Operating Revenue 82.0% 82.3% 81.4% 79.0% — 81.2%

CONTRIBUTION TO TOTAL EXPENSES

Direct Expenses & Materials Cost 64.2% 64.9% 63.8% 62.7% — 63.9%

Employment Cost 15.7% 16.7% 17.1% 17.9% — 16.9%

Administration & Other Expenses 20.2% 18.3% 19.1% 19.4% — 19.3%

9

Income Statement (INR Million) 2011 2012 2013 2014 2015 (E) 2016 (E) 2017 (E)

Net Revenue 1,055 1,306 1,573 2,018 2,448 3,051 3,900 Revenue Growth 23.8% 20.5% 28.3% 21.3% 24.6% 27.8%

Direct Expenses & Material Cost (555) (698) (816) (999) (1,151) (1,432) (1,827)

Employment Cost (135) (180) (219) (286) (337) (423) (545) Administration Expenses (174) (197) (245) (310) (372) (464) (593)

Depreciation & Amortization (83) (78) (86) (128) (176) (214) (260)

EBIT (Operational Profit) 107 153 207 295 412 518 676

Operating Margin 10.4% 12.0% 13.8% 15.5% 17.7% 17.9% 18.2%

Other Income 21 40 47 24 70 77 87 Reported Tax (48) (64) (76) (111) (169) (208) (267)

Profit After Tax 80 128 178 208 313 387 496 PAT Margin 7.8% 10.1% 11.8% 10.9% 13.5% 13.3% 13.4%

Basic EPS 2.4 3.8 4.6 5.3 7.9 9.8 12.5

Balance Sheet (INR Million) 2011 2012 2013 2014 2015 (E) 2016 (E) 2017 (E)

Net Tangible & Intangible Assets 328 307 665 878 893 911 902

Capital WIP 9 164 122 65 61 47 55

Non Current Investments 6 6 6 135 135 135 135

Goodwill on Consolidation 18 33 21 8 13 14 18

Deferred Tax Assets 31 41 41 47 0 0 0

LT Loans & Advances 104 139 302 197 160 168 215

Other Non Current Assets 1 0 1 0 0 0 0

Cash & Cash Equivalents 207 176 242 98 394 793 1,213

Current Investments 227 107 153 113 120 126 161

Inventories 0 0 0 1 1 1 1

Trade Receivables 52 64 100 89 105 123 148

ST Loans & Advances 74 260 122 197 240 252 323

Other Current Assets 3 0 1 3 3 3 3

Total Assets 1,059 1,298 1,777 1,829 2,123 2,571 3,173

Other Long Term Liabilities 34 53 84 30 47 58 74

Long Term Provision 10 7 6 12 16 20 26

Short Term Borrowings 45 0 0 0 0 0 0

Trade Payables 11 11 20 38 47 58 74

Other Currnet Liabilities 396 516 490 394 419 522 667

Short Term Provisions 81 138 167 243 279 348 445

Minority Interest 5 1 (2) (7) (7) (7) (7)

Equity Share Capital 344 352 395 398 398 398 398

Reserves & Surplus 133 219 616 722 924 1,175 1,496

Total Liabilities & Equity 1,059 1,298 1,777 1,829 2,123 2,571 3,173

Continued expansion in new

geographies and strong product

offerings improved top-line per-

formance in a fragmented and

ultra competitive market

EBITDA margins are expected

to remain above 20% due to

rising occupancy and high oper-

ating leverage business model

Growth in assets was significant

in past several years due to both

organic and inorganic expan-

sion across India.

Despite continued expansion in

new markets, company managed

to report debt free balance sheet

10

Continued expansion and high operating leverage, justifies higher multiples

We have used ‘Price to Earnings’ and Discounted Cash Flow method of valuation to value MTEL; and both methods of valua-

tion lead us to assign a target price of in the range of INR 200. We have modeled MTEL using 15% long term market return

and 8% risk-free rate; and got the Cost of Equity at 15%, and due to zero debt at balance sheet Weighted Average Cost of

Capital (WACC) also reflects 15%. MTEL’s

TTM basic earnings per share was reported

at INR 5.3 and it currently trades at 23.6x

P/E multiple. Due to push on network ex-

pansion, strong revenue growth and wide

presence across India, we would value

MTEL at 25x FY15 P/E at INR 200 per

share, given the improving outlook.

At the expected terminal value growth of

5% and the WACC of 15%, our sensitivity

analysis on the price movements at different

stages are as under. We arrive at a price

target of INR 200 based upon a blend of

the two approaches that we have used to

arrive at a fair value for MTEL.

Weighted Average Cost of Capital (WACC)

Capital Structure Value Type Current Mkt

Price Book Value/Market

Value (INR mn) Weight

Debt Book Value NA — 7.0%

Equity Market Value 120 4,774 15.0%

Cost of Equity (COE) Cost of Debt (COD)

Total return 15.0% LT Int rate 10.0%

Tax Rate 30.0%

Risk free rate 8.0% COD 7.0%

Beta 1.00 WACC 15.0%

CAPM (COE) 15.0% ROIC 17.2%

Continuing value 2015 (E) 2016 (E) 2017 (E) 2018 (E) 2019 (E)

FCFF (INR mn) 291 441 593 785 1,067

Discount factor 0.87 0.76 0.66 0.57 0.50

PV of Explict Cash flow 253 333 390 449 530

PV of cash flows (INR mn) 1,955 Valuation

Value of Operations (INR mn) 7,524

Gorden Growth approach Value of Cash & Cash Eq (INR mn) 535

Growth in FCF 5.0% Non Equity claims (INR mn) —

Gorden Growth approach (INR mn) 11,200

PV of CV (INR mn) 5,568 Value per share 200

Sensitivity Analysis Between WACC and FCF growth rate

FCF Growth

200 1.0% 3.0% 5.0% 7.0% 9.0%

WACC

13.5% 180 204 241 299 410

14.0% 172 194 227 277 368

14.5% 165 185 214 258 333

15.0% 159 177 200 241 305

15.5% 153 169 192 226 281

16.0% 147 162 183 213 260

16.5% 142 156 175 201 242

11

Quantitative Performance 65%

BUSI-NESS

MATRIX

Net Operating Revenue 7%

Profitability Ratio

EBITDA Margin 5%

Net Profit Margin 3%

OPERAT-ING MA-

TRIX

Return on Investments

Retun on Equity 3%

Retun on Invested Capital 3%

Return on Capital Employed 3%

Return on Total Assets 3%

Activity Ratios

Total Asset Turnover 3%

Fixed Asset Turnover 3%

Capital Turnover 3%

Debtors Turnover 3%

Working Cap Turnover 3%

Solvency Ratios

Debt to Equity 3%

Interest Coverage Ratio 2%

Liquidity Ratios

Current Ratio 2%

Cash Ratio 2%

Cash Conversion 2%

VALUA-TION

MATRIX

Valuation Parameters

PEG 4%

Price to Book Value 4%

EV to EBITDA 4%

RIGHT HORIZONS SCOREMATRIX®

35% Qualitative Performance

SHARE-HOLDING PAT-TERN & CORPO-

RATE ACTIONS

Shareholding Pattern

Promoters' Holding 5%

Institutional Holding

Mutual Funds / UTI 2%

Financial Institutions / Banks 1%

Central / State Government 1%

Insurance Companies 1%

Foreign Institutional Investors 1%

Qualified Foreign Investor 1%

Public Holdings

More than 1% 3%

More than 5% 2%

OTHER PA-

RAMETERS

Market Volume

Average Trading Volume 3%

Delivery Volume Percentage 3%

Independent Director / Investor

Any Prominent Name 3%

Pledging

Promoters' Share Pledging 3%

Auditors

Name of Auditor 3%

Qualification of Auditor 3%

RH ScoreMatrix® is a proprietary tool to measure total risk of

the business on two broad parameters. The unique Score-

Matrix® builds on the difficult to measure qualitative metrics

which are extremely important to gauge total business risk at

any given point.

The rating system has been developed on the businesses

analyzed over the long period performance (7 years annual

and past 10 quarters). Rating scale of 1 to 5, with 1 indicat-

ing highest risk and 5 indicating least risk. Each weight indi-

cates relative dispensation of the parameter. Quantitative

performance holds 65% (or 2/3rd weight) and the balance on

Qualitative indicators. This composite rating thus developed

is a fair indication of the overall risk to the business and out-

look on the company over the medium term. For individual &

detailed ScoreMatrix® on companies under review; please

reach us at Right Horizons to the respective analyst.

SCALE Rating

OUTSTANDING >=4.00

EXCELLENT >=3.50

GOOD >=3.00

SATISFACTORY >=2.50

BELOWPAR <2.50

I, Tushar Pendharkar MBA(Finance), Business Analyst author of this report, hereby certify that all of the views expressed in this docu-

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of our compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document.

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corporate clients. Employee compliance with these policies is mandatory. Any comment or statement made herein are solely those of the analyst and do

not necessarily reflect those of Right Horizons.

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Disclosure & Disclaimers

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Disclosure of Interest Statement (July 3, 2014)

Disclaimer

MT Educare Ltd

Analyst ownership of the stock

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13

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