Did you know India has more than 4,500 ed-tech start-ups? Most of these propped up post the pandemic when the need for online education saw a massive boost. This is the time when India produced six ed-tech unicorns, and the entire sector raised billions of dollars in funds at inflated valuations.
One of the most ridiculous deals was that of Teachmint. It had raised US$ 78 million in its Series-B round from marquee investors including Rocketship.vc, Lightspeed India and Better Capital, at a valuation of US$ 500 million. Its operating revenue that year was a mere Rs. 80 lakh (under US$ 100,000)!
But that party was over soon. Lockdowns were lifted, people started going out again, and of course, funding dried up. Devaluation, layoffs, pivots and death became common news for the not-so-long-ago glorified ed-tech start-ups.
Even now, the lack of funding continues to grip the sector, forcing companies to embark on a path of sustainable business models and profitability. According to Inc24, the sector has raised US$ 100 million in funding in the first quarter of 2023, compared to US$ 2.5 billion in 2022, and, wait for it, US$ 4.2 billion in 2021.
The most common route for survival (or recovery, or even profitability) taken by start-ups has been an aggressive offline expansion, so they end up with a hybrid model.
But there’s one tiny listed ed-tech play, which has moved from a complete offline model to a new hybrid model (170 centres plus a digital platform) - pretty much the same space that every ed-tech start-up is now eyeing. And guess what - it’s available at a valuation of just 1.5x P/S, (while peers trade at 12-15x levels) and is also profitable!
Sounds like a steal deal, compared to what’s happening in the rest of the ed-tech market!
CL Educate - The Wiser One
CL Educate is an old horse, which started operations way back in 1996. It has been a popular name amongst the 80s and 90s kids.
While it started off as a preparation centre for CAT, the entrance test for the MBA, it has, over the last 25 years established a stronghold in the test-prep market, especially for MBA and for law:
MBA - CL Educate has a market share of 30-35%, and has expanded from just CAT to state-level and other exams like MHCET, SNAP and XAT
Law - Launched in 2004, CL Educate has a 35-40% market share in law entrance exams like CLAT and AILET
Other than test prep, CL Educate also offers admission consulting, publishes competitive books, runs a digital platform called Aspi.ai for online content delivery, and has a presence in the Middle East as well.
CL Educate operates in a manner very different from ed-tech start-ups that rely on VC funding.
While CL Educate appears dramatically different (and saner) compared to its new ed-tech peers across all metrics, CL Educate is not lagging behind on growth, despite its traditional roots.
Post lockdowns, it has exhibited a stellar financial performance in its ed-tech business:
Revenue CAGR of 25% over FY21-23; in 1QFY24, its revenue grew by 33% YoY
The company swung from booking losses of Rs. 13 crore in FY21 to making profits of Rs. 23 crore in FY23. EBITDA margins expanded from -0.4% in FY21 to 10.8% in FY23.
Avenues for Growth
The performance for CL Educate is expected to continue (or perhaps even accelerate) given the multiple tailwinds and expansion plans in place:
Booming market: The market size of the ed-tech business in India is estimated at around US$ 4.6 billion as of 2022, according to KPMG and Inc42. The market is expected to reach US$ 29 billion by 2030, which implies a CAGR of 25%, driven primarily by the segments of K-12 (kindergarten to class 12) and test prep (where CL Educate operates).
Centre expansion: CL Educate currently has 170 centres, and it plans on reaching a target of 500 centres over the next 2.5 to 3 years, which would imply a 43% CAGR in centre additions. However, revenue and profit growth are unlikely to be proportional to centre additions given the fact that centres take time to mature from inception to peak performance. Nonetheless, the aggressive centre addition can still lead to at least high-teen growth over the expansion period.
Potential in CUET: The CUET is a standardised entrance exam for multiple universities across India, conducted by the National Testing Agency (NTA). This exam eliminates the need for students to sit through multiple entrance exams of varying difficulties and allows them to target numerous institutions through just one unified entrance test. With 17 lakh registrations in its inaugural year, the market is expected to reach 70 lakh within the next 3-5 years. At this rate, this segment (that currently makes up under 4% of revenues) can go onto contribute to over 10% of revenues in the next 5 years!
Study abroad: CL Educate tapped into the study abroad market just last year, making this its newest foray. With 60 lakh students studying in non-native countries, across the globe, CL Educate plans to enter the business not just for students from India to anywhere, but also anywhere to anywhere, making this a global play.
Mar-tech business: While we’ve raving about ed-tech all this while, 40% of CL Educate’s business comes from marketing-tech (mar-tech), wherein, through an entity called Kestone, it offers services like event management (both physical and virtual), digital marketing services, and managed manpower services for the marketing industry. This business had been acquired by CL Educate in 2008. Although it is unrelated to ed-tech, the space is that marked by high-growth, customer stickiness, and increasing profitability. The segment had seen a dent in revenue and profitability because of the pandemic, and as the entire events business took a hit. However, the business is set to see high-growth again, driven by (i) a return to normalcy, and (ii) newer growth avenues in the form of virtual events and transitioning business to the metaverse.
Valuations far too low for its performance
CL Educate’s growth has the potential for acceleration because of both - favourable market conditions, and company-specific factors (led by an expansion in both products as well network). Additionally, it has the potential for further upping this through its presence in the mar-tech space.
However, the valuations seem far too low given:
Two-year forward Price/Sales of 1x, EV/EBITDA of 6x and PE of 10x, despite two-year revenue/EBITDA/PAT CAGR expectations of 20%/27%/30%
Cash balance of Rs. 100 crore, which makes it 25% on a market cap of Rs. 400 crore; thereby adding significant safety
On average, the money returned to shareholders in the form of dividends and buyback stands at 43% of the net profit, taking the dividend yield to 2.5% on a FY23 basis
At a tenth of the price versus peers
Additionally, compared to new-age peers, the stock trades at at least 1/10th the valuations commanded by new-age peers.
BYJU's is estimated to have revenue of Rs 15,000 crore in FY23. At its last valuation of Rs. 1.8 lakh crore, it is valued at a Price/Sales of 12x
Unacademy posted revenue of Rs. 1,250 crore in FY23. A valuation of Rs. 25,000 crore makes implies a Price/Sales multiple of 20x
Emerging unicorns like UpGrad and Vedantu also command premium valuations in the range of 12-15x Price/Sales
And CL Educate trades at a valuation of 1.5x trailing Price/Sales. The discount can be justified by the fact that:
CL Educate’s revenue is a fraction of new ed-tech companies despite its 25 year plus existence,
It has been unable to develop and sell platforms, which can result in large-scale reach, high operating leverage, and non-linear revenues, and
In-general tendencies of incumbents to die a slow death because of the lack of aggression and disruption.
But here’s the question - how much of a discount is a justified discount? That too, for a growing and profitable business, which also returns money to shareholders. Unlike the cut-offs for MBA entrance exams, if your answer is anything below 90%, you’ve found yourself an upside on CL Educate.
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