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Tree House 1QFY2015 performance highlights and results update

August 11, 2014, Monday, 05:09 GMT | 00:09 EST | 09:39 IST | 12:09 SGT
Contributed by Angel Broking

Tree House Education & Accessories Ltd (THEAL) reported in-line numbers for 1QFY2015. Its top-line surged by 31.9% yoy to Rs.54cr, in line with our estimate of Rs.52cr, owing to addition of 15 pre-schools during the quarter. The EBITDA grew by 46% yoy to Rs.33cr while margins expanded by 600bp yoy to 61.7% (owing to lower other expenses as a percentage of sales by 646bp yoy). Subsequently, the Adjusted PAT came in at Rs.16cr, higher by 30.5% yoy, and in line with our estimate of Rs.15cr.

Budding pre-school segment provides growth visibility

As per CRISIL Research, the size of the pre-school segment is expected to grow to Rs.13,300cr in 2015 from the current Rs.5,000cr. The concept of imparting education to young toddlers is catching up fast today. Moreover, with an urbanization rate of 40% and escalated average household disposable incomes, the demand for the segment is expected to maintain its momentum.

Dual business model with geographical expansion to provide competitive edge

The dual business model of running self owned schools (SOS) and franchises, facilitates THEAL to maintain its quality of education, maximize profits (through SOS) and widen its reach (through franchises). Moreover, entry into the K-12 segment compliments the pre-school segment. THEAL has initiated its expansion plans in Tier 2, 3 cities which will drive the revenue growth as well as aid in improving operational margins since the major cost component of rentals is significantly lower in these cities.

Outlook and valuation

Given the growth opportunities in the pre-school segment and consistent geographical expansion by THEAL, we expect its top-line and net profit to grow at a CAGR of 26.6% and 35.7% over FY2014-16 to Rs.251cr and Rs.79cr, respectively, in FY2016E. Hence, despite the current run-up in the stock price, we continue to maintain our Accumulate rating on the company with a revised target price of Rs.425, based on 20x PE for FY2016E earnings.

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