Career Point Infosystems - Avoid

While it is true that Career Point Infosystems is among the elite brands of tutorial service providers in the country, the one fact that cannot be ignored is that it operates in a highly competitive market that does not provide it with enough momentum to grow at a rapid pace.

Points To Note:
•    CPIL operates in a very crowded and fragmented market.
•    The company is competing against some well-known and branded names in the business.
•    Kota has recently been removed from the list of locations for conducting IIT-JEE exams.

The Kota-based Career Point Infosystems (CPIL) is coming out with an IPO to raise a total of Rs 115 crore to fund its expansion plans such as construction and development of an integrated campus facility, expansion of classroom infrastructure and office facility, strategic acquisitions, and general corporate expenditure. The company, which is following a book-building process, has set a price band of around Rs 295-310. Thus, considering this price band and the issue size of Rs 115 crore, the company could end up issuing shares of around 38.98-37.09 lakh shares taking their total diluted capital post this IPO to 1.83-1.81 crore shares.

CPIL is basically a tutorial services provider in India and offers this expertise to high school and post-high school students for various competitive entrance exams such as IIT-JEE, AIEEE, and the all-India pre-medical and pre-dental test. The company currently operates out of 17 training centres and 16 franchisees. As on FY10 its total turnover was Rs 65.8 crore while profits amounted to Rs 17.79 crore during the same period. This is reportedly the first time a competitive exam tutorial service provider is tapping the primary market and this has but naturally raised the curiosity level of the investors. Here then are a few pointers that investors would do well to keep in mind prior to parking their funds for this one.

The first and foremost factor is that though this could be a unique company from an IPO point of view, in the broader sense there is nothing extraordinary about the business and the company operates in a very crowded and fragmented market. Besides, though there are some well-established brand names in the business that have created entry barriers, there are still many old and new smaller players who steadily keep eating into the share of the big daddies. That is because it is a business model that is easily replicable. Secondly, the company is based out of Kota and derives almost 59 per cent of its total revenues from there. Kota is a coaching class hub for such entrance exams and this in turn makes the competition amongst such classes very intense, thereby impacting growth.

This can be deduced from the margins which have consistently declined over the last four years. Besides, apart from the other unorganised players the company is also competing against some well-known and branded names in the business such as Bansal Classes, FIITJEE, Akash Institute, Resonance, and Brilliant Tutorials, which have better brand recall. Further, one should also note that Kota has recently been removed from the list of locations for conducting IIT-JEE exams. IITs have cited “sensitive security issues” as one of the primary reasons for doing so. If that is the case then it could hit companies such as CPIL since the inflow of student to Kota for IIT JEE preparations might decline.

Also, there are the financials and the valuations to be taken into account. Though there is a consistency in the company’s financial performance, the profits have grown at quite a slow pace with a three year CAGR of just over 12 per cent. At FY10 profits of Rs 17.79 crore and diluted capital of 1.83-1.81 crore shares, CPIL gives an EPS of Rs 9.72–9.82, thereby resulting into a PE of 30-31.5x while on an EV/EBDITA basis the company is available at 19x. These we believe are quite steep valuations and fail to understand the rationale behind asking for such a high premium from the investors. At these valuations the upside looks capped and hence we don’t expect this scrip to yield any listing gain.