CL Educate Limited (CLEDUCATE) Earnings Call Transcript

Ladies and gentlemen, good day. And welcome to the CL Educate Limited Q3 FY '20 Investor Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Arjun Wadhwa, CFO; CL Educate Limited. Thank you, and over to you, sir.

Thanks, Lisan. Hi, everyone. I'm Arjun, I'm the CFO of CL Educate. I'm joined on this conference call by Nikhil Mahajan. He's our Executive Director and CEO of our Enterprise Business. The 2 of us will be taking you through this call today. I'd like to start by thanking all of you for joining us. And I'll move ahead directly on to Slide #6, which is the YTD Q3 financial year '20 consolidated financial results, a snapshot of where we are at this point in time. I'm delighted to share that our total enrollments have gone up 37%. On a comparative basis, we were about 62,000 students at the same time last year. This year, we're closer to 85,000. A large part of this is as a result of the efforts we've made in the digital sales and in our attempts to sachet-ize some of our products. I'll be sharing more details on that at a later point in time. Our core businesses, our MBA test-prep, our Law test-prep, have also shown growth, albeit in smaller terms, but they have also shown growth over the same 9-month time period. Because of our attempt to sachet-ize the products and because of the change in our product mix, the revenue from operations has seen a slight decrease. We're down by about 1.5%. But the billing from our test-prep business during this time period has actually grown. So while the revenue might be down on a 9-month perspective, I'm not overly concerned by this figure because the billing that has contributed to this revenue has grown. And that is a function of the enrollment growth that we've also seen. The decrease in revenue has also meant that our EBITDA is a little lower than what it was same time last year. We were at INR 33-and-a-little-bit crores at December '18. We are now at a little over INR 31 crores. The EBITDA is one basis for comparison. But as I shared with you in our H1 and Q2 call, we also look at an adjusted EBITDA figure, where we take into account onetime effects that impacted the EBITDA same time last year. And if we also take corresponding adjustments to that effect for the same time this year, our adjusted EBITDA has actually grown 43%. So from a business MIS perspective, the adjusted EBITDA is a figure that we look at very closely. And that, I'm happy to share, has grown 43%. I'll share the working of this in a future slide. But just in terms of the numbers themselves, they are up from about 24.5% to about 35% here. The net profit as a result of the EBITDA also going down is lower on a comparative basis. But just like in the case of the adjusted EBITDA, if I take a look at the adjusted net profit, taking into account what has changed, the onetime impacts that were there last year in December '18, which are not there in December '19, and also the change in accounting policies that have happened over the last 2 years on account of Ind AS 115 and 116, the adjusted net profit has also showed an increase of about 51%. So just to give you a quick snapshot of where we are heading into the last quarter, enrollments are up 37%, the revenue is marginally off. But as I shared, our billing in the test-prep space has grown. So I remain confident going forward. The EBITDA is down marginally. But the adjusted EBITDA, which is a reflection of our business performance, and the adjusted net profit, both of those have grown significantly over the same time last year, which are 2 numbers that we look at very closely. I'll explain this in a little bit more detail in my next slide. I've also written some details here for you to understand what we're talking about. Let me start with the reported EBITDA right at the top. I'll take into effect the impact of Ind AS 115. Just to repeat, as we had shared in our last 4 investor calls, the complete impact of Ind AS 115 was taken in Q4 FY '19. We did not take that impact over the course of each of its first 3 quarters last year because it was a new accounting policy, and it took us a little while to work out the exact details of the sales. So the entire impact of that fell in Q4. So hence, the Q3 numbers are not necessarily directly comparable. The corresponding impact on a 9 months perspective would have meant my EBITDA for this year would be INR 0.16 crores higher. The next line that you see on the sheet is the vocational reversal that we've taken into account here. There are 2 elements that go into this. First of all, we do a write-off on a quarterly basis of some of our outstanding vocational letters from the government. We've taken an additional write-off of INR 1 crore this quarter. So same time this year -- so for this year, I beg your pardon, we've taken a consolidated 9-month write-off of INR 3.75 crores. So if I were to ignore that and just to compare the business performance on a one-off basis, I would add this back to my EBITDA to get to my adjusted EBITDA figure. If I were to compare this with last year, last year, we had taken a similar results at about this time, it was about INR 3.6 crores. But I had also received the benefit of an ECL reversal to the tune of INR 5.7 crores in quarter 3 last year. That ECL reversal came on account of our collecting about INR 7.5 crores from the government in that quarter itself, which was a large outstanding that was due to us at that time last year. So that INR 7.5 crore, which came in, created an ECL reversal of INR 5.7 crore. So the net impact of that on my vocational business would be negative INR 2 crores. So just to explain that once more, INR 3.6 crores on account of the vocational write-off I've taken last year and INR 5.7 crores on account of the ECL reversal that was an outcome of the INR 7.5 crores that came in. So the net impact of that would be INR 2.13 crores. Last year, I had also received INR 20 lakhs a month from SP classes as onetime revenue as part of my business agreement with that organization. That agreement ended early this year. In terms of the INR 20 lakhs, we continue to work with SP classes in Mumbai. But the fixed component of INR 20 lakhs per month that was coming to us for servicing old students of SP classes that we had taken over as part of that business arrangement, that income was a onetime income and has, as a result, been discontinued. Also -- and by this time last year, we had written back liabilities of INR 4.8 crores on account of some -- on account of an ESOP and the other on account of some franchisee expenses. So if I take the entire impact of all of these that I just spoke about in detail, my EBITDA for this year, which is INR 31 crores, from a business MIS perspective would be an EBITDA of about INR 35 crores. And so last year's INR 33 crores would effectively be about INR 24 crores and a little bit. So the switch from last year to this year is a jump of 43% from a business performance perspective. And it's important that you understand this going forward that this is the impact that the business has created. The rest is on account of accounting. So I want to just make sure that the 2 are distinguished when you look at our numbers for this quarter this year versus the same quarter last year. This similar impact then flows down the line from my EBITDA to my PBT and then on to PAT. The one significant -- or the 2 significant differences that happened also from a comparative to last year perspective is Ind AS 116, which unlike 115 last year, I've taken the entire impact every single quarter this year. This impact will continue in future years. So what I'm sharing with you for the Q3 FY '20 numbers of finance cost and depreciation, that they are higher than what they were last year. That impact, you'll continue to see in future years. But it's important for you to understand the reason why they also have changed so significantly. And a large part of that is on account of Ind AS 116. Finally, the effective tax rate that will be applicable to us this year will be considerably lower than what it was last year. So you'll also notice a difference in our adjusted PAT on account of that. So in a nutshell, this gives you a quick overview of where we are from a financial perspective last year to this year. Just to reiterate, the enrollments, if I go back one slide, the enrollments are up 37%, the adjusted EBITDA is up 43% and the adjusted net profit is up 51%. Moving forward to Slide 8. This gives you a breakup of the consolidated results. I've already spent sufficient time talking about this. You'll notice that the total expenses for this year are higher than the total expenses for last year. That is obviously on account of what I've just shared, the ECL reversal that happened and the liabilities that were written back. So the difference in the -- if I net those out, the expenses are actually lower. So moving forward, I'll move on to Slide 9 now, which gives you a quick overview of the segmental metrics. As most of you would be aware, we run 2 lines of business, Consumer and Enterprise. Consumer includes our test-prep business and our training business. Publishing includes our books, our GK Publications business. The Enterprise business is broken up into 2 parts, corporate, which is largely a B2B business, and institutional, which is a B2I business, where we deal directly with schools, colleges, universities, et cetera. Those are the 4 areas of business for us. If I were to look at the segmental revenues for each of these, they're up there on your screen. The test-prep numbers, as we've shared a couple of slides ago, are down marginally. That is largely on account of the change in my product mix. The publishing numbers are down as well. I'll spend a little bit of time on the Enterprise business. On the corporate side, our numbers are stable. And on the institutional side, they've grown about 4.5%. So overall, our total revenue from operations are INR 254 crores against INR 258 crores same time last year. Moving on to Slide #12 now, I'll just wait for a few seconds for you to join me on Slide 12. Just a quick glimpse on the operating metrics related to our test-prep business. The number of centers that we are currently operational in are very similar to last year. They are 191 versus 192. We continue to look for good business partners, and we continue to add more to our franchise network. You'll see this number growing in the months ahead. The number of test-preps -- the number of students in test-prep, as I've shared previously, have grown about 23,000. That's a 37% growth. And you'll notice that a large chunk of that comes from the online space, where our numbers have grown from about 33% to 48%. So that's a space we continue to be very bullish on. And going forward, you might continue to notice that our numbers will continue to grow. But on account of the product mix, the average pricing might vary going forward. And this could impact revenues for specific quarters, but over a period of time, the multiple of P into Q should be significantly higher. As shared previously, our publishing business is fairly stable. We've done a similar number of books sold for this year as compared to last year. Moving forward, just a few highlights about our test-prep business. As I shared previously, digital is something that continues to power us forward, growth of 30% year-on-year. The sachet-ized products seem to be doing well. We've had a 24,000 growth in students on account of that, 17,000 of which have come on account of our new GATEflix product, which was launched earlier this year. We've also seen our AI/ML internship numbers grow. This is a joint program that we're doing in partnership with Intel and AICTE. Going forward, we will continue to chase volume growth in all these product markets that we operate in. Our focus continues to be growing the different volumes, trying to get more market share and to chase higher EBITDA. Some of this will come on account of digital growth. Some of it will come on account of variation in our product mix. As I shared, this might impact our average prices on a temporary basis. But in the long run, the multiple of P and Q will continue to grow. The MBA and Law markets continue to be extremely competitive, but I'm happy to share that both of these have also seen growth on a 9-year -- on a 9-month perspective so far this year. 2 areas that we continue to remain very bullish on going forward are IPM and engineering-medical. And if I were to look at a third, it would be civils. These are areas that we see as high potential growth areas. IPM is potentially an explosion waiting to happen as soon as one of the bigger IIMs picks up this course. This is a joint BBA plus MBA course for students who are graduating from school, moving to college. So far, it is only being offered by a few of the IIMs. As soon as we see one of the bigger ones, Ahmedabad, Bangalore or Calcutta, pick it up, we should see a tremendous explosion in this market. The engineering-medical market, as I'm sure a lot of you would know, caters to about 15 lakh students or so. It's a market that has some business in it. And we see digital being an integral element of enabling our growth in this sector and for us to get a foothold in this sector. So we will continue to invest in these going forward. A quick snapshot of our publishing business. Overall, we've noticed that the market has slowed down a little bit. We've also consciously made an attempt to reduce the number of books that we are printing and sending out into the market on account of the slowdown. Instead of doing a lot more printing, we're repairing and churning out old stock. And our focus for the publishing space remains on chasing high collections. The publishing market has also been impacted over the last 1.5 years by certain changes that Amazon and Flipkart has made at a policy level. And due to this, we've also had to take a higher number of returns in this business compared to previous years. So if you go back a few slides and look at our publishing numbers, the dip on -- in that is: one, on account of the market slowdown; and two, on account of the changes at an environmental level. If I were to look at purely gross sales, our gross sales for this year are on par with what they were last year. But because of the Ind AS 115 impact where we have to take sales return as part of the top line, the revenue figures that you see for the group and for the publishing business on a segmental basis will be lower than what you -- than what the comparable figure was last year. I'll now request you to come to Slide #16 on the Enterprise business, where I'll invite Nikhil to take over.

Good afternoon, everybody. I'll quickly take you through some of the key operating parameters and the retraces of the Enterprise business. If you look at it, while on an overall basis, the growth is very marginal at 0.5% in terms of revenue. I think this is one line of business, which -- since it takes out the marketing dollars from either the corporates or the institution, the growth rate and the pace at which this business expands is directly proportional to the overall economic health of the economy. Last 4 quarters, as all of us are aware, has seen a sharp dip in the GDP expansion. And hence, a lot of corporates and institutions are moving very cautiously in terms of the spend on the marketing front, which has, to some extent, flown to our business as well. If you look at it, the corporate revenues for the first 9 months is more or less flat for us. Institutional revenues have grown by about 5%. On a apple-to-apple comparison, last year, we have had INR 2.5 crore line of business for some work we did for Dell, which isn't there this year. So adjusted for that, our business has grown about 17%, 18%. But on a consolidated basis, this segment is more or less flat. In the corporate business, our international -- the Singapore operations have now started reflecting good strength. And in the first 9 months, we have seen a growth of over 100%. And I think having reached a certain threshold of revenue, we are now well poised to continue an accelerated growth not only in Singapore but in other markets, where we are gradually [ pouring ]. On the institutional front, in the last 2 quarters, we have signed up a few partnerships. So the notable deals, Narsee Monjee Institute of Management Studies, IIT Kanpur and a technical training partnership with IBM. And I think these relationships and partnerships will begin to impact our business beginning the next quarter, which is the first quarter of FY '21. And I think these will begin to significantly add to both the top line and the bottom line in the coming years. Our immediate focus is on 2 prongs: focus well on the existing customers, up-sell, add more value-added services, improve collections; and also create more monetizable inventory for both the institutions and the corporates, especially in the digital and electronic space, where we can -- we are in a position to significantly up the our gross margins for this offering. If you look at it, Melting Pot is something, which as an event cycle, we have now built out this property over the last 3 years. Last year, the events took place in Bangalore, Dubai and Silicon Valley. We plan to replicate this event at all these 4 locations. I'm on Slide 18. This year, we are planning to replicate the same in these 4 markets. And the first of this one is actually happening this weekend in Mauritius, which is also acting as our launch event for our partnerships with corporates and universities in Africa and Mauritius. India and Middle East Melting Pot events will take place sometime in the month of May or June. We have not yet frozen the dates. But they're likely to be somewhere in early summer. And the Silicon Valley Melting Pot event will take place in October as it took place last year. And I think these events will become the torchbearers of our relationship with both on the institutional side as well as on the corporate side. Moving on to Slide 19. I'll just give you -- as most of you would be aware, the consolidation process, which we had initiated about 12 months ago, it is progressing. And the NCLT's convened Shareholder Meeting and the Creditor meetings took place last week. And the objectives were successfully achieved. The second motion filing with NCLT is happening this week. And it is likely to come up for hearing either later in this month or in mid-March. So we expect that this process is likely to be fully completed by end of July or mid-August. And just to reiterate, the effective date of this merger is going to be April 1, 2019. As we have been talking about, we are continuously focused on extending our services in markets where we see a lot of synergy with Indian operations, both in the educational space as well as in the go-to-market field for both corporates and institution. And as we had updated in the last Board meeting, we are expecting that our Oman operations are likely to be finally launched sometime in middle of March. We had incorporated CL Educate Africa, based out of Mauritius, earlier this month. And the Melting Pot Mauritius event, which is on 14 and 15, is the launch event for the launch of this organization as well as for the business. We are expecting participation from about 30 to 40 universities, not just in Mauritius, but also from other countries in Africa. And we expect some business lines to get quickly activated over the next 2 to 3 quarters. Just on Slide 20. This is just a summary capitulation of how CL will look post the merger goes through. Post the merger, we'll only have 2 business operations in only 1 entity, the one capturing the Consumer segment, other the Enterprise segment. That will make the business operations lean, the reporting easier and will bring in much more focus as we kick in the operation over the next fiscal year. With that, I come to the end of today's presentation and will throw open the ground for any Q&As which you might have. Thank you.

[Operator Instructions]

Lisan, I've received one of the questions via e-mail. It's from [ Anil Bakhshi ]. Actually, there's a series of 2 or 3 questions. So while you wait for the participants to get back to you and get the queue ready, I'll just take up some of the early questions.

All right, sir. You may please proceed.

Yes, [ Mr. Bakhshi ] from Fair Val Capital asks, the test-prep enrollment numbers have shown good growth, your slight sales, MBA, Law, IPM, engineering, et cetera, showing growth. And why are the revenue flat? Or are we beginning to see the first green shoots of return of top line growth to test-prep? Mr. Bakhshi and for those of you who've also joined in a little late, just to share with you, our enrollment numbers are up 37%. Our revenue for the corresponding 9-month period is down 1.5%. I shared in the presentation earlier also that a couple of areas that we're looking to grow in are through the digital and sachet mode of adding more product variants and deepening our product line to ensure that we cater to a larger base of students going forward. This has impacted the average pricing for our business. But it is -- but it has also contributed towards higher billing. The change in billing has affected our revenue mix marginally. And so hence, our revenue is on a quarterly basis is down by a couple of crores. But over the long term, we see digital as an area which will continue to grow well. It's an area we continue to be bullish on, and we will focus our energies. We will also continue to focus on the sachet sized products as an area for growth. So the multiple of P versus Q, the product versus -- the pricing of the product versus the volumes, I beg your pardon, will result in a higher billing over the long run. So we feel that while the revenue is down marginally or flat in a number of areas, that is fairly temporary. And the enrollment growth is the area that we're focusing on. Volume growth, market share, these are the 2 significant areas that we continue to focus on for the test-prep business going forward. [ Mr. Bakhshi's ] second question is, vocational does not appear to see any recovery so far this year. What is the outlook on the same? Yes. That is correct. We have not received any payments yet from the government so far this year. Our current vocational outstanding is about INR 26 crores, out of which we've got provisions of about INR 3.5 crores. And we bought an ECL of about INR 3.7 crores. So while yes, there is continued -- while there continues to be an outstanding on the vocational front, the nature of the business is such that we cannot put a time line to when we expect the money to come in. But we continue to be hopeful that in the next 3 to 5 months, we should see some movement on this perhaps in the region of about INR 5 crores or so. Okay. There's a question from [ Mohan Prasad ], who's an independent research analyst. He's written in, we understand Q3 FY '19 had some one-off items. Hence, expenses look depressed. Compared to Q3 FY '18, that is 2 years ago, total expenses appear less by about 10%. Is there any further scope of cost rationalization in this business? There is always the possibility of some level of rationalization in the business. And on account of the merger, we do hope to see some operational and business synergies kick in as the entities get merged together. So there would be some cost benefits of that as well. We also hope to see some tax benefits on account of that. So from an expenses perspective, yes, there will be some downside on that front. But we also have to be realistic that there will be an inflationary increase corresponding to this year's figures for next year. And as we continue to invest in businesses, our focus remains on growth. So when you focus on growth, you have to also make investments to enable that growth. So we will continue to do that as well as we deem appropriate at the right juncture. Are there any other questions?

Should I open up for questions on the audio bridge?

Yes, please feel free. Yes.

The first question is from the line of [ Muthu Kumar ], an independent researcher.

My question is to Nikhil, is that, can you give some clarity on the Enterprise corporate business? You had mentioned about the business being linked to the GDP growth rates and the corporate has been very cautious in that sense. So can you let us know like what is the kind of margins you are -- your margins have also been lesser around the corporate business. So can you give us a little perspective on the margins? And then also a little bit on Slide 16, which you mentioned about expanding monetizable inventory, if you can just give a little clarity on that.

See what you are seeing is that if for a particular activity, corporate was spending INR 100 last year, they are not discontinuing the execution of the activity. They're only tempering down the scope and the size of the activity. So they'll come back and say, "Instead of INR 100 this year, I will only give you a budget of INR 80." And see, on the economy of scale, as the budget keeps coming down, the ability of earning certain gross margins also keeps coming down. So this year, while our revenues have -- there had been growth in certain accounts, certain revenue items. But because of downsizing of certain marketing activities by various corporates, and these include some of the largest ones, like Dell, Google, AWS, Britannia. So these guys have continued to spend but on a slightly muted manner. And they have also tried to squeeze in a couple of percentage points on the gross margin, which has a view of the overall profitability in this line of business. And I think this is a cyclicity we always go through every 3, 4 years. As the business begins to pick up in these coming years, I think this will begin to come back to normal stage beginning second or third quarter this year and will also result in a marginal expansion on the margin. Coming to the second point, which you asked about the monetizable inventory...

Yes, sir.

See, in the institutional business, there are 2 or 3 core services which we offer, which basically offer a platform for institutions and corporates to reach out to their target audience in various forms. Some are we do large ticket events, there are events where colleges and universities or corporates go out and interact with our set of students. There are digital mediums, where they reach out through to e-mailer activity, SMS activity or remarketing through Facebook, LinkedIn, et cetera. And then there are still a lot of -- our delivery is now digital, where sessions are deemed either live or students have the flexibility of relooking at the recorded versions of the live session, that's the kind of a monetizable inventory which we are now beginning to give some airtime to participating institution. So there are new and new kind of inventories, which are coming to the fore for institutions and even some for the corporates to be able to reach out to their relevant target audience. And I think over the next couple of years, these new inventories will begin to garner a larger space from our revenue basket. And since they're largely digital and/or electronic, they will carry a much higher gross margin as compared to a physically interactive or a center -- a physical center-student exchange model.