Zee Learn Ltd Research Report

Company
Date of report May 8, 2017
Issuer
Target Price (Rs) 78
Gain (%) 66
Rationale

Zee Learn is fast emerging as a dominant player in the play school and K12 segment through its Kidzee and Mount Litera Zee School (MLZS) brands. The compelling growth dynamics of the Indian demographics, rising affluence and a strong ethos of good quality education are expected to drive growth for education in the country. Being predominantly a franchisee based business, we believe that Zee Learn can maintain its traction in establishing a pan India franchisee over the next decade. To support its brand growth, the company has put in place strong pedagogy of ‘Illume and Octave’ and follows a policy of 0% tolerance in its implementation.

On the back of the above, we expect revenues to grow at a CAGR of 23.6% to Rs 353.5 crore by FY20. EBITDA and PAT too are expected to grow at a CAGR of 44.5% to Rs 157 crore and 60.8% to Rs 100.9 crore, respectively, by FY20. Return ratios ROE and ROCE too are expected to grow up to 22.3% and 28.3%, respectively. ROIC should also exhibit strong traction. We have valued the business of Zee Learn by DCF method with a target price of Rs. 78. However we have not rated the stock given that we would like to see more follow through on continued performance and execution.

We initiate coverage on Zee Learn with no rating but have valued it with a DCF based valuation. Our optimism stems from the fact that-

 Company is expected to operate 2,470 franchisee preschools and 147 K12 franchisee schools apart from its 6 owned preschools and K12 schools by FY20.

 Students in the preschool segment are expected to grow at a CAGR of 25.8% to 2,39,855 students while in K12 segment at a CAGR of 33.7% to 1,16,340 students by FY20.

 The company charges advance annual payments, which ensure regularity of cash inflows.

 Revenues for the preschool segment are expected to grow at a CAGR of 19.6% to Rs 218.5 crore from the K12 segment at a CAGR of 34.3% to Rs 110.4 crore by FY20.

 The company has transferred Rs. 125 crore in debts out of the entire Rs 386.6 in FY17 to the trust which runs its owned school leading to a huge reduction in debt and interest costs. This will also result in an improvement in overall margins.

 With the company having operations being stabilized and no big capital expenditure to be incurred over the next 4-5 years, strong cash flow generation of 30.2% CAGR to Rs 136.9 crore by FY20 is on the cards.

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