 "Tree House fails to impress with IPO pricing")
Depressed markets generally make IPOs a tough proposition, unless the company seeking to raise money has extremely strong fundamentals and is confident of its potential under any market condition or it is desperate for money. Tree House Education Accessories (Tree House) fits into the second slot.
[caption id=“attachment_58938” align=“alignleft” width=“380” caption=“Western India accounts for over 70 percent of the pre-school centres and 80 percent of these are in Mumbai.Sean Gallup/Getty Images”]
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Tree House operates in a unique pre-school space which caters to children between the age group of 2-4 years. Started in 2003, Tree House has grown from a single school to 177 centres across 23 cities. However, western India accounts for over 70 percent of these centres and 80 percent of these are in Mumbai. In India, pre-schools are a very fragmented market as input costs are considerably lower. Only 8-10 percent of the market is with organised players.
Tree House uses a combination of ‘owned’ centres and a franchisee model. Out of the 177 centres it runs, 108 are self-operated. The company has now ventured into the K-12 school segment and manages 12 such schools as of December 31, 2010. The self-operated model is a capital-intensive one where growth is slow; however, the management gets better control and flexibility compared to the franchisee model where the management gets a portion of the fees collected.
The proceeds of the current IPO will be used, along with internal accruals, to finance their expansion plans by opening another 120 pre-schools and acquire exclusive rights for seven more K-12 schools. The company also intends to construct two brick and mortar educational complexes in Rajasthan and Gujarat. Out of the IPO proceeds, Rs 41.3 crore will be utilised for pre-school expansion and Rs 55.6 crore for K-12 business expansion and Rs 40.2 crore for education complexes.
Tree House’s strong growth over the years is reflected in its financials. For the financial year ended 31 March 2011, the company posted a turnover of Rs 39.2 crore, a growth of 83 percent over the previous year and a net profit of Rs 9.2 crore, a cool 253 percent jump. Operating margins of the company have improved from 32 percent to 43 percent. The robust numbers have come on the back of a string of private equity investments made by Matrix Partners in August 2008 and Foundation Capital in May 2010.
Though the business model and financials of the company are attractive, the big negative is its IPO pricing. The company’s IPO of around Rs 114-129 crore is priced in the range of Rs 135 to Rs 153 per share. At its post issue fully diluted equity, the company has an EPS of Rs 2.73, which discounts the company lower price band by 49 times.
No doubt then that the company has received a poor response for its book building process. Applications have been for less than half the quantity on offer. Even the Qualified Institutional Buyers (QIB) have bid for only half the shares allotted to them.
It is better to avoid investment in the company at the IPO level, but one can look at the stock as it comes down post listing.