Tree House Education and Accessories - Avoid

Tree House Education and Accessories (Tree House), a pre-school education provider, is tapping the primary market with a fresh issue of 84.32 lakh equity shares. The company, which is following the book building process, has fixed a price band at Rs 135-153 per share. Through this price band, the company expects to garner Rs 113.83–129 crore. Of the funds so raised, nearly Rs 42 crore would be used for the expansion of its pre-school business, wherein the company would launch 120 new pre-schools in various parts of India by 2014. That apart, Rs 13.5 crore would be used towards the acquisition of office space, Rs 27 crore towards exclusivity rights to provide educational services and Rs 40.2 crore towards the construction of infrastructure for an educational complex in Rajasthan and Gujarat. Last, but not the least, Rs 28.58 crore would be used towards the repayment of loans.

Based out of Mumbai, Tree House is a pre-school education provider in India. The company operates one of the largest self-operated pre-school chains in India, and as of June 2011, it had about 223 pre-schools under the brand name ‘Tree House’ across 33 cities. A little over 46 per cent, or 104 of these pre-schools, are located in Mumbai itself. 149 of these 223 schools, or 67 per cent, are self-operated, while the rest are operated through franchisees. In each of these pre-schools, the company provides standardized services, such as playschool and nursery facilities, vacation camps, mother-toddler classes, hobby classes, day care and teacher training courses. Apart from this, the company also provides a variety of educational services to the K-12 segment, and as of June 2011, the company has exclusivity rights to provide certain educational services to 12 schools in the K-12 category. The company intends to provide such services to an additional seven schools by FY13. Of the FY11 revenues of Rs 39.23 crore, preschools generated Rs 27.53 crore, while the balance Rs 10.47 crore came from providing educational services to K-12.

Though one has to accept that this is a new and different business model, which is scalable, there are a few concerns that we have. First and foremost, one has to understand that though this is a unique business model that is hitting the capital market, it is certainly not the first company to start a preschool. Pre-schooling is already a crowded space, with unorganized players accounting for more than 95 per cent of the total market, while there a few known names, such as Eurokids, Kidzee, Kangaroo Kids, Shemrock and so on. With such tough competition, where parents have plenty of choices available, the key dependency is on how the company creates a brand image to appeal to customers. When asked about how the company is going about its branding exercise to create more awareness about Tree House, the management wasn’t able to give any insights. In fact, eventually the management just said that the company would reap huge benefits by listing its shares on the bourses. Thus, there doesn’t seem to be a clear-cut strategy put in place by the management on how to take the Tree House brand ahead, apart from depending on word-of-mouth publicity. Besides, the management also was not open to disclosing the average fee charged by the company per child, when asked specifically about this. After a lot of probing, the management gave a range of Rs 15000-45000 per child per year, and after some further prodding, it finally gave an average fee of Rs 25000 per child. What the rationale behind being so secretive about the average fee could be, is beyond our understanding.

Last, but not the least, are the company’s valuations. It should be noted that Tree House is a company with revenues of just Rs 41 crore, and profits of Rs 9.19 crore. However, if we look at the issue size and fully diluted capital comprising of 3.36 crore shares, then the market cap of the company itself stands at Rs 453.6–514 crore, which is 11-12.5x its FY11 sales. This, we believe, is quite steep. In fact, at its FY11 profits, Tree House’s PE stands at a massive 49.45-56x. This looks quite expensive, and leaves nothing for the investors. One also has to understand, that there is nothing unique that the management brings to the table, and considering the huge presence of unorganized players, it certainly isn’t a high entry barrier business. Given all of this, we don’t expect investors to give Tree House that kind of a premium on the bourses. Besides, the current market situation will make it even tougher for the scrip to sustain higher levels post listing. Thus, it is better to stay away from this IPO.