Tree House Education and Accessories: Recommendation Review

For all of those who have kids aged between three and five at home or around, our recommendation of this company would certainly not have come as a surprise. With the kind of money that parents have to shell out on pre-schooling for their kids today, the commercial success of these companies is a given.

We had recommended Tree House Education and Accessories (THEAL) in DSIJ Vol. 27, Issue No. 16 (dated July 29, 2012). THEAL offers pre-school education services for children between the ages of one and half to six years, and was recommended by us based on its strong business model and the excellent execution capabilities of its management.

THEAL derives 91 per cent of its revenues from the pre-school business, while the rest comes from the K-12 school business. It focusses mainly on owned centres and less on franchised ones. Owing to this strategy, the company gets to exercise full control on its costs and revenues, while it also enjoys relatively more bargaining power compared to the individual players. This ‘asset light’ model has worked for the company, which currently has the highest EBITDA margins (45 per cent to 55 per cent) in the industry.

The company has been showing consistent growth in its topline as well as bottomline over the last four years. It has continued with this good performance in the first half of the current fiscal too, reporting a 65 per cent growth in its revenues to Rs 55 crore during this period. The EBITDA margins have improved further and stood at over 66 per cent in H1FY13. Its net profit was also up by 70 per cent at Rs 18 crore.

The company has added seven new schools in H1FY13. Currently, 243 of its centres are self-operated pre-schools. It has commenced admissions for the academic year 2013-14 and has seen a good traction in enrollments, according to the management.

We had advised our readers to buy the scrip when it was trading around Rs 224. At the current market price of Rs 264, the scrip has yielded more than 18 per cent returns to those who would have done so. This appreciation is in addition to the Re 1 dividend that the company announced on July 27, 2012. In the present scenario, some amount of profit booking would certainly be a good idea. Sell around 30 per cent of what you hold and hold the remaining part for further appreciation.