CL Educate Limited (CLEDUCATE) Earnings Call Transcript

So a very good afternoon, everyone, and happy Navratris. Welcome to CL Educate Limited special session today where we discuss our rationale for entering the digital assessments business, specifically through the acquisition of one of the leading players in this market, NSEIT DEX. My name is Arjun Wadhwa. I'm the CFO of CL Educate, and I'll be your host today. Joining me on this call is Mr. Satya Narayanan, Founder and Chairman of CL Educate. As always, this call will be recorded, transcribed and made available in the investor zone on our website within the next 48 hours. What we've done today is we've put together a short presentation for you, which should take about 20 to 30 minutes, following which we will throw the floor open to questions. [Operator Instructions] I'll start by requesting Satya, to say a few words about where we are right now and the road forward for DEX. Satya, over to you.

Yes. Thanks, Arjun. Good afternoon, everybody. This presentation, which we will take, as Arjun said about maybe 25 to 30 minutes max. We're covering it in 2 parts. The first one -- the first part of it is gives all of us a very brief summary about the transaction. You could stay on that slide itself, no problem. And then which means if somebody is really constrained for time and you have to rush to some other appointment or meeting, first 7, 8 minutes should give you the summary of it. And then we'll go a little bit deeper and get a greater texture about the industry segments and DEX itself with its business components, okay. That being said, let me start off by connecting a thread to the AGM presentation that you might have attended or watched the video later. There, I spoke about the important aspect of the future, I was talking in the context of next 30 years. And having spent 30 years now in this year. We are looking at how do we continue to nurture the ambition of emerging as a leading education technology player in India and from India. So that's the BHAG about. And if you recall, I also mentioned about our aim is perhaps to be more than a time teller, can we be the clock maker. And with a whole lot of changes happening in the landscape, in the policy, in the global education domain, India will emerge as a very important player. And when that happens, can CL be a part of that is an important guiding principle for us. And I also spoke about, and I'm again reiterating that if the Amrit Kaal the next 25 years is of any value, it's going to happen because India as a theme, education as a sector and technology has a capability of people from this geography can enable tech players from India to play a very significant role, not only in determining India's own progress in the next 25 years, but like India's contribution to various other nations or economies or societies as far as their higher education or school education or various other aspects of education are concerned. I will move forward. These 2 slides actually captures quickly the summary of this transaction. And Arjun, there is something which is obstructing in my presentation. Yes. Now, it's okay. So if you look at this particular slide, I'm covering here the financial and investment perspective of DEX as an asset. And I must say with a reasonable amount of confidence. And if you actually ask me, I'm trying to hold back a lot of excitement about this acquisition, but merely focusing on the numbers, this is a very rare asset built assiduously by one of the leading companies of India, which is known for its technology prowess because without that NSE couldn't be doing what it is doing at such scale. So DEX is built by the NSEIT, the technology subsidiary of NSE and for an asset of this size, what we have paid as a transaction, and that is what I'm focusing on in this particular slide is the -- we're paying -- we paid 1.2x of the last year's FY '24 revenues or 6.4x of the EBITDA that was accomplished last year, okay. If you take that the definitive agreement and the actual exchange of the keys and control will happen maybe by the 1st of December the latest -- and if you look at it from a trailing 12 months perspective, these multiples will look even lesser than that. Number two, like we have shared in the earlier presentation also, when we -- when I took the summary of it in the AGM, the DEX business is approximately a 17% EBITDA. So what happens to the overall entities, CL Educate, the restricted company is that we will move from 11.4% to 14% on an annualized basis. About the exact numbers, last year, we closed only CL without counting the X, we did about INR 38 crores. And please remember, this INR 85 crores that we are talking about is for the full period pro forma basis of April, March '24, '25, okay? Only about 4 months out of that DEX will accrue to us. So another way of looking at it is the trailing 12 months, if you see or you simply add what CL Educate would have done, what DEX will do, if you combine that, that will look like an INR 85 crore EBITDA on 1st March -- on 1st April 2025. Another very interesting, exciting and a very key part of this whole transaction is it is EPS accretive from day 1, and it also is affecting both ROE and ROCE in a very telling manner when we complete this transaction and integrate NSEIT DEX into CL Educate. Moving forward, I'm now taking a minute to explain the business perspective. As you know, this is an assessment business, while Test Prep and Education has assessment as one of the components, DEX -- NSEIT DEX focuses exclusively on assessments and that's a 9 crore assessments of 9 crore individuals, TAM, which gets added to us. So there is a tremendous amount of TAM expansion. And as you know, Test Prep, they are all verticals, whereas NSEIT DEX is a horizontal that is needed in every segment, every subsegment and so on. I'll come to that a little bit more when we move forward. We see a whole lot of synergies, including expansion of distribution network at rapid speed, the content generation for assessment is that CL can be of great value in and also, it will create new revenue streams for both, for DEX as well as CL as we move forward and integrate the 2 entities. Number three, I think this is extremely important. This will find a lot more expression of it in terms of numbers over a 2- to 3-year period. But the fact of the matter is that NSEIT DEX is a very robust and proven model at massive scale when you compare it with the opportunity of taking it to other countries, can we take it to Singapore, Indonesia, Middle East, North America, which will also be a much higher margin business compared to what it is in India. Number four, 20% relative market share, second largest player and can be a very significant challenger if we get some of those things right. At an overall market level, the digital assessment is growing at 16%. So which means that this particular thing, if you look at it at 2028, can look twice of this number, 9 crores can go to 18 crores, the speed at which the market is growing and the decisiveness with which assessment is becoming more organized, formal and a lot more technology driven. I will come to that as we move further down the presentation. NSEIT DEX also enjoys wonderfully built moat, which comes from a technology backbone and the distribution network that it has created. And this can only get better as it scales further from here. So that -- those 2 slides comprise the summary of it. Please note down your queries and keep sending it. I'll take all of those at the end of the presentation. Moving forward. In summary, a third very important vertical called assessment is getting added to our education services or EdTech and MarTech. And as we move forward, again, they might become one integrated educational technology services, but that is for a later date and time. Let me move further. I'll cover some of these components as I move forward, recruitment, entrance exam, certifications and so on. Now I'm going to travel a level deeper and cover in the next 6, 7 slides the market opportunity and the DEX attributes quickly. Here, if you see that the overall assessment is approximately a INR 9 crore market which is likely to reach INR 13,000 crores -- INR 9,000 crore market, which is likely to reach INR 13,000 crores by 2028. And in this, while the overall CAGR of assessments is about 12%, the digital assessment is where the wind is growing. That's where the world is moving. That growth at 16%, as you can see here. And the amount that it represents is INR 4,400 crores -- and that is likely to move to about INR 9,500 crores, which is approximately 2/3 of the overall assessments business. A more important thing for many of you who are understanding or trying to understand assessments as a specialized area, I would like you to pay attention to these subsegments comprising recruitment and promotions, entrance examinations assessments, vocational certification, universities going digital and schools also will happen at a future date if you go by the NEP, professional certifications and employability related certifications in addition to individual employability exams. Okay? So these 7 of them are the subsegments and currently, DEX is present in 3 out of these 7. I'll cover those as we move forward, but this will give you a little bit of a sense of what are the subsegments and what are the relative sizes. And as I mentioned to you, NSEIT DEX is the second largest player in this market. Moving forward. The assessment itself, when you take it as a complete value chain, it has 5 very important stations or phases. The first one is about what is called as an item development or test development. This is where content development competency becomes key. Currently, 99% of excess revenue comes here, which is stage 2, 3, 4 and 5, application processing, test management and delivery, proctoring, while the exam is on, and the fourth is result processing and result publishing. When we come together at an appropriate stage, we will start looking at this also because CL has the internal content development lab, as we call it as a [ Hy-Lab ] here, a 100-member team and we have a huge library of assessments that has been built over the last 20, 25 years. So this is one of the significant places of synergies that we can draw upon and test development normally also is an even higher EBITDA business and fewer people are able to offer it, as you know, only the market leader offers content development, nobody, including NSEIT DEX was offering test development as an integral part of the services as far as assessments was concerned. I'm skipping the next level of detail here and moving straight into another important macro aspect, which is how is the dynamics evolving in this industry. And many of you as professionals or even as parents must be tracking this or just as part of your current affairs update, you must track this, whether it is the NEET fiasco or some such fiasco that has happened in the past, a lot of them could be attributed to the lack of robustness of this and the government and all the nodal agencies, who are mandated to conduct assessments at the national scale are now besieged of these problems and what it has resulted in, as you know, is the Public Examination Act 2024. It has specifically broken down the entire assessments into very important sub-elements and each sub-element is getting tightened, formalized and all the stakeholders are coming together to make it a very robust process, because this affects efficacy of most reputed of examinations, whether it is for government departments, whether it's for higher education, also the corporates or any other public service. If you look at this, the vendor accountability that has been covered in the Public Examination Act, and the government and the agencies are also unbundling the entire thing into content creations facilities management, security, all of that and different specialized people or organizations are being roped in and the capacity building exercise is underway as we speak. And given the track record, parentage and the reputation of NSEIT, they figure very prominently in all of these consultative committee meetings, et cetera, as the Public Examination Act and the NEP 2020 are getting implemented. The third important thing is in order to make the process robust NRA, which got created after NEP, the National Recruitment Agency, it is coming up with specifications of NRA approved centers, and government itself is on its way to creating 70,000 seats that can go up to 150,000 over the next 5 years of centers that will then be available for any assessments player, who, along with their own capacity, can access the 7 lakh seats for implementation of examinations. Similarly, manpower processes, which needs to be audited, all of these are getting implemented at a very different scale beginning last year. What is the implication of this? Chances are that the large 2 or 3 players will get deeply embedded into this process, because the government is looking at building scale and making sure that examinations, assessments are all conducted by eliminating any form of unfair practices that can happen here. I'll move forward. Coming into the NSE DEX as a business entity, it is now among the leading players of scalable, and highly secure digital assessments. For instance, there is a control room that DEX has in its Mumbai office wherein all the centers where this examinations are getting conducted, the CCTV, live is monitored -- live input is monitored in one control room and whatever interventions are done or needs to be done, those are being done. So it is not anymore very local moment of kind of an operation. It is very, very formalized, very technology-driven real time and NSE figures there along with the market leader. As I said, we are present in 3 out of the 7 subsegments certifications, recruitment and promotion, and interest examinations, okay? What are the strengths that NSE has, maybe some of it is repetition, but end-to-end capabilities, technology platform. I'll take one separate slide talking about technology platform that is in custom built for Indian requirements, very robust and that perhaps can be portable if you open up other geographies. The leadership team, whether it's a business leadership, operational leadership or technology leadership, the leadership team is very seasoned. All of them have been with the team, a couple of them since inception, a couple of them for the last 12, 15 years. And the wonderful thing is that the entire team is moving in the business and they are very excited about the possibilities of scaling this from here over the next 5 to 10 years. As I mentioned, technology is very, very central. Stuff like data analytics, AI, ML, all of those are being used for a variety of services, which may not be visible, but for instance, computer vision, how is it being used. Those things at an appropriate stage, maybe we'll be happy to share. But security and technology as I mentioned earlier, is a very important differentiator and a strong point of NSEIT DEX. If you look at the bottom of the slide, these are some of the segments or industry sectors where DEX's operating insurance, banking, financial services, ICI, chartered accountancy, working with the testing and nodal agencies, corporates, probably for corporate training, for corporate recruitment and also for the industry examinations. These are the opportunity segments. We are not present in all for instance, universities as we speak, just 1 pilot with 1 university is underway. CA, which I'm going to take as a small, 2-minute case study for you to understand. It's a very new innovative method that has come into existence. I'll take here. Many of us are familiar with Institute of Chartered Accountants of India, they have created a new process wherein they're asking this and it is viewed as a student beneficiary exercise. How does it benefit the student? And they are saying that before you take the main examination, you need to do 2 things and make a submission. Just visualize it, doing articles is a mandatory thing. Similarly, a 40-hour self-learning module has been introduced by ICAI and you finish all your preparation, whichever way you're doing, you go through the self-learning modules uploaded by us. And then you have to take a mandatory learning assessment, which once you qualify, you will be allowed to appear for the CA examination. So in common parlance, you can call it as mock CA exams of the mains that's getting conducted and that is being done by NSEIT DEX. This is a new introduction only this year, and they were anticipating that about 50,000 to 70,000 candidates or candidate assessments will happen. But in the first couple of quarters itself, they already run 2.5 lakh candidates. And if you look at downstairs, I'm not going to go through all of it. But 30% of the students are taking the exam again. There are 4 subjects. It is getting done in 270 locations. And this is an on-demand model, which means a student goes online, chooses the city, chooses the date that suits him or her, books the place, the seat is allocated in the nearest center in your city or town and then you go and take the exam that gets submitted to the ICAI. And once you do your submissions that are mandatory, you get to become a qualified candidate to write the CA main examination. So chances are that if this is a case study, there's no reason why one cannot argue that such a thing officially will happen for a bunch of other examinations as well, okay? But I thought I'll just take you through one case study. The 4 adjacencies that we are seeing in terms of segments are and NSE DEX is not yet present in these, major government examinations, the Big 5, which includes exams like RRB, SSE, all the NTA conduct examinations and so on. That is one subsegment. Test Prep assessment. For example, even as Career Launcher, we give mock tests to students all the time, so that we can give them a simulated environment experience. Such a thing is done by every single Test Prep company. And this is something that as a specialized player of assessment, NSEIT DEX can go and seek this business from all the organized Test Prep players. Number three, universities, examinations are slowly beginning to go digital. This could be the mid-semester exam, end-semester exam, not just the entrance exam. So that's a very massive number estimated to be 72 million in itself by FY '28. And lastly, deployability and corporate assessments. To get into IT sector, to get into BFSI, to become a stock broker to become an adviser, SEBI-approved advisers, all those kinds of examinations that you and I know, those are all assessments driven, and those assessments have to be very examinee centric, which means I should be able to choose the date and time of my choice to take an examination, very similar to how ETS does it for a GRE or a GMAT or an NSEIT. These are the 4 future-adjacent opportunities that we are looking at. One last slide before I wind up. This is perhaps the most important from a differentiator point of view for NSEIT DEX. It's a very sophisticated exam engine. It is a very sophisticated platform that integrates all the functions to deliver the service seamlessly to the student, right from registration, onboarding, fee collection, identity checks, giving you the allotment of seats. When you go there, we do proctoring and then results are generated. The entire thing is a fairly big deal as a platform development. Anybody wants to come into this. It's not easy. The last and the most important, which is what has made this as a super sensitive business, which nobody can enter unless you have a whole lot of credibility, track record, et cetera, is the security layer. How good are your systems of security, auditing capability, creating vigilance and surveillance and so on. So the team and the seasoned experience of building this from scratch and having fine-tuned it, mastered it over a couple of decades, is a very big plus as we get into the assessments business through NSEIT DEX. Just to close with the same set of thoughts, we are silently very excited about this. As you know, the binding agreement has been signed. The paper work, the legal work, et cetera, is all happening. We are hoping to close the entire thing maybe by the mid of November, though the internal target is maybe a week or 2 earlier. And then for sure, December 1 onwards is likely to be part of our business rhythm. And beyond that, we'll definitely organize a way of interaction for you with the leadership team of NSEIT DEX. So just to close the session, we continue to think that there are going to be such telling opportunities that will come our way, and we will hopefully be good to pick up some of those and keep changing the orbit of CL as we move forward. I'll pause there and hand it back to you, Arjun. And maybe you can facilitate any questions if they are with us.

Sure. Thank you so much, Satya. That was extremely insightful and useful, and I hope our investors learned a lot about the newest member of the CL family. As you rightly mentioned, we look to have this as a part of our portfolio from Q3 onwards. There are a host of questions as you can well imagine that have come our way. I will keep picking them up one at a time and I'll address some of them myself and threw a few your way, Satya.

Sure.

First of all, there's a host of people congratulating us on doing a fantastic deal. Lots of people saying that it will be a very valuable asset for us and what better time to do this session than at the start of the Navratras to get some sort of auspicious tailwinds behind us. So thank you, everyone, for your good wishes. And we hope to continue to build on this over the months and years ahead. Specifically, there are certain overview questions. One of them is, will the NSE brand name be changed? Yes, this will come as a part of the CL portfolio. So the brand name will need to be changed, but there is a grace period that we have negotiated with the National Stock Exchange, where we will continue to use this as something which is formerly NSEIT so that there is some level of continuity. And just to add to that, the good news, as Satya mentioned, the entire team that has been handling all the clients and all the operations of NSE over the last 18 years continues to be as a part of this project moves to CL as a part of the entity that we are acquiring. And so due to the business continuity that will happen from having the team as a part of CL, we envisage no real challenges in terms of brand name. But yes, as a brand, obviously, NSE is the owner of the brand. We will have usage of that for a limited time period post the acquisition. There are, as I said, a host of questions, so I'll just keep running through a few of them. Madhur is asking who is the leader in the assessment space right now? And how large are they? Specifically -- I'll just take that question very quickly, Satya. The current leader in that space is TCS iON. Obviously, it's a Tata company. And currently, our estimation is that it's in excess of about INR 1,200 crores in this space. In terms of market share, there's a follow-up question that we've spoken about the market size being INR 4,500 crores, but our business size is INR 200 crores, whilst the market share 20%. Just to reiterate, Satya was talking about the relative market share in the business segments that we operate in. That is where our market share is 20%. Specifically, moving forward, there's a question in terms of why is the business revenue flat for the last 3 years? And what gives us confidence to grow this going forward? Good question. A number of reasons for that, one of which of course was COVID. But also this entity NSEIT, as you're all aware, has been on the block for about a year now. We ourselves have been in negotiations with the team looking to purchase it for the last 9 to 12 months. So as you can probably imagine a business of that nature, the mandate from the organization was to focus on what they're doing at present and to look to sell the business as is without necessarily looking to add any new business lines or any new study centers and to avoid additional CapEx, et cetera, in this business. So the focus was on getting the organization ready for sale and handover, which is why for a couple of years, the revenue stayed fairly stagnant at about INR 200 crores. The good news is FY '25 continues to look exceptionally robust. It looks very positive. And we have every reason to -- be that the reason -- to see that there will be growth in FY '25 over FY '24, and that has factored into our pricing as well as you're aware, we are buying this business for an initial consideration of INR 230 crores -- with the potential of it rising to INR 305 crores based on certain business goals being achieved. So no one will be happier than us to actually pay the additional INR 75 crores if the business grows the way we have imagined and the way the business team has presented to us that they expect it to grow over FY '25. So huge optimism from an immediate FY '25 perspective. And looking further ahead, Satya spoke about significant adjacencies that exist for us in this business. We already are seeing significant movement from the business teams ever since the talk started formulating and the enthusiasm is there on the ground to get new businesses. Just to give you an example, the case study that Satya took ICAI, is a contract that has been signed in FY '25 and it is a 3-year deal. So we expect that revenue to add not just this year, but also over the years ahead. And similarly, there are a lot more new lines of business that we hope to add over the months and years ahead, lots of additional contracts that the team is chasing, and we imagine that it will add significantly to both the top line and the bottom line in FY '26 and '27. More questions, and I'll throw 1 or 2 your way also, Satya, so that it's not just me talking. Why didn't the erstwhile DEX management expand internationally and what gives us the confidence that we would be able to do the same?

Do you want me to pick that up, Arjun?

Or I can either?

No problem. I'll pick it -- so one of the things that we have learned during the course of last 9 to 12 months of conversations is that being a part of NSEIT, they also were significantly constrained about what are the things that they could do, what are the things they were discouraged from doing and especially after NSE announced its plans to go public. International businesses, they were scanning about 3, 4 years ago, just before COVID happened. And then COVID did a significant amount of recalibration of priorities and so on. And as you know, it took -- for every company, it took 1.5 years to 2.5 years to get back the core stuff. And now they are looking to be in a place where both readiness and this transition might just make that happen over the next couple of years. Even we are not going to rush too hard in any direction, our aim also would be to solidify, reinforce and then make a very calibrated 3- to 5-year plan, wherein we think that DEX can go and make a significant difference of contribution, not only to our top line but also in being a very important strategic player, infra player in the countries that we get to.

Right. Thanks, Satya. More questions, as you can imagine, and I'll continue going for another 10, 15 minutes or so. Are the contracts tender-based? And what is the competitive intensity as the market looks very fragmented. I'll take this, Satya. Yes, it goes through an RFP process. But as Satya specifically spoke about on the technology slide, putting together an exam engine and a security level of this nature, and to add to that, the distribution that DEX offers gives it unparalleled -- gives it an unparalleled moat in this business. It is virtually impossible for a new player to enter this market and be successful right away, the quantum of investment required to build technology platform of this level of excellence and the distribution level of excellence will take an enormous amount of time. So which is why the 2 largest players in this segment, TCS and DEX are dominant players as a result. And the rest of the players operating in this space are all at a sub-7% market share -- from a relative market share perspective. So there is an opportunity for people to come in lowball on bids and compete, but those tend to be more ad hoc assignments and tend to be of a nature where they will not necessarily survive beyond the first year and especially where reputation is critical, you need to have the security backing of a company of the quality of DEX to make it work. Satya, you want to add something?