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Braving the odds: In a sweet spot - Treehouse Education and Accessories

Meera Siva | Updated on January 24, 2018 Published on July 12, 2015

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Indian companies stumbled through FY 15, with sharp deterioration in performance in the second half. While revenue for CNX 500 companies contracted by 2.9 per cent in the six months to March 2015, earnings fell 25 per cent. But there were some companies that proved their mettle by recording strong numbers in this period.

The number of children attending pre-school facilities is increasing at a healthy pace. Crisil estimates that revenue in the pre-school segment would grow at an average annual rate of 20 per cent over the next two years. Treehouse Education and Accessories (Treehouse) is the only listed player in this segment.

The company, which started with one pre-school in 2003, now runs 612 pre-schools across 88 cities. In 2014-15, it added 122 pre-schools and forayed into 25 cities.

Healthy traction in the pre-school segment and the company’s growing presence has kept the growth momentum intact in 2014-15. Revenues and profit have grown at about 40 per cent annually in the last three years. In 2014-15, revenue increased 31 per cent to ₹207 crore and profit grew 39 per cent to ₹61 crore.

Eighty per cent of the company’s pre-schools are self-operated while the rest are run as franchises (primarily in tier-2 and tier-3 cities). The continuing high share of self-operated schools has aided operating margins, which are at over 50 per cent. Also, the pre-schools are run on multiple shifts and the space is also used for allied services such as art and other activity classes. Growth in the uptake of day-care services is aiding revenue and offers good potential.

Its Global Champs brand of pre-schools provides services at a lower price point. Besides pre-school, the company owns and operates five K-12 schools and provides management services to 19 schools.

Treehouse plans to add 150 pre-schools in the next two years and enter new markets such as the National Capital Region. The business is asset light, as the pre-schools are run on leased property. The company is debt-free and has raised ₹200 crore through a QIP in December 2014 and is well capitalised to fund its expansion plans.

Thanks to the sustained growth and the scarcity premium , Treehouse enjoys a premium valuation. The stock currently trades at 29 times its 2014-15 earnings. This is close to its three-year historical average of around 30 times. Given its consistent growth, high-margins and strong execution capabilities, the stock is attractively priced at current levels.

Published on July 12, 2015
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