CL Educate Ltd

NSE:CLEDUCATE

Earnings Call Transcript 2023-Q3

[Arjun Wadhwa, executive]

[Audio Gap]

Venues. Check out the art gallery. It's quite exciting what the metaverse has to offer us going forward. Joining me on this call today is Mr. Satya Narayanan. He's the Chairman and CEO of CL Educate; and Mr. Nikhil Mahajan, he's our Executive Director and Group CEO of our Enterprise business. This analyst call as always will be recorded, transcribed and we'll make it available on the investor zone on our website within the next 24 to 48 hours. I'd like to start this call by inviting Satya to share a brief update on where we stand from a 9 months perspective. Looking ahead to the calendar year 2023, we have ahead of us. After which, Nikhil will run us through the presentation, spending some time on the financials and business updates, following which we will take your questions. If you come up with any questions during our presentation, just type them in the chat box on the bottom right-hand corner of your screen, and we'll address them towards the end of the session. Satya, over to you.

[R. Narayanan, executive]

Okay. Thank you, Arjun. I hope I'm audible. Yes. Thank you. Good afternoon, ladies and gentlemen. I'm happy to be here. And maybe I'll just take about 5 minutes and share some of the broad thematically relevant big rocks that keeps us occupied as we finished our first 9 months, and we get into the last quarter of the current financial year. The first thing is that I think speaking from the perspective of an EdTech education company and also a MarTech company. The broad narrative that is working in our heads based on the market interactions is that perhaps we are at a reasonably good place in terms of the stuff that's happening on both sides.

I'll take up bullet or two under each as I move forward. Number one is on the tech side, there are 2 things that are keeping us very, very busy. One is network expansion, which also has got a good boost or it is seeing a good momentum because of the formalization and announcement of the dates of CUET, which is a Common University's Entrance Test to get from Grade 12 to college. So that's one thing on the tech side, when Nikhil covers more detail, some of those will come back at a greater detail. On the MarTech side also, like Arjun is saying, the very platform that we are using, Vosmos, metaverse, Meta-commerce, some of these are at very early stage, and our team is doing a good job, and we are also not pulling any punches as far as investments is concerned on the -- either the product development side or the go-to-market bandwidth in terms of team recruitment and so on. So that's point number one, good place in terms of demand and good work that we have for the next 24, 36 months.

Number two, just a summary. 9 months numbers you would have seen already that we got published yesterday. The revenue has grown upwards of 40%. EBITDA has grown by 24%. It is not proportionate, but we are mindful of it and making very mindful investments broadly in 3 areas: Marketing, people and technology. And in our own heads, we will continue to stay focused on growth without compromising on profitability. And we think that the EBITDA growth will catch up as we get 4 quarters from now. But we think we are at a good place even from that perspective.

Number three, Nikhil will cover it, just from the perspective of looking at these 2 businesses, EdTech and MarTech as 2 separate businesses, which could have a path which might be away from one another at some stage in the future. One thing that we have begun to do internally, and that's what we are bringing out to you is we are capturing the key performance indicators, financially speaking, of both the arms, and we will begin to go deeper and start sharing those 2 separately as well in addition to doing it in a combined manner. That's point number three. Point number four is, I'm sure all of you are fairly glued into the tech breakthroughs that we are seeing around us, including ChatGPT. And just as a summary headline thing, I'm happy to share with you that we have begun to deploy that proactively to begin with in some areas of marketing and in many areas of content development.

So with those 4 summary, broad pressures, I'll pause here and hand it over to Nikhil to move us through with the detailed presentation.

[Nikhil Mahajan, executive]

Thank you, Satya. Please confirm if I am audible, and my voice is clear. Okay. Satya gave a very brief update on how things have shaped up in the last 3 quarters for us. From a business perspective, I think we are rapidly beginning to move towards the period of pre-COVID and if we look at the 9 month revenues, we have shown a growth of about 42%, moving from about INR 160 crores to our INR 227 crores. This growth has happened across both business verticals, the EdTech and the MarTech vertical more or less consistently -- the EBITDA growth is turning up at around 24% from INR 21.6 crore to INR 26.7 crores. This is slightly lower than the revenue growth, but was anticipated as planned because revenue growth was driven by the world reopening -- moving back to the physical environment, which resulted in a significant enhancement of revenues. And as the delivery also moved back from the digital virtual era to physical delivery, the cost of delivery and the margins did get compressed a bit.

Besides that, we have also been an aggressive spender in order to gain market share, a significant up-spend in marketing was done in the last 3 quarters. And also in terms of investment in people, so these 2 are the key investments which I've gone through. And I think the overall EBITDA growth will start mirroring the revenue growth in the fourth -- coming four quarters. The EPS has grown by about 125%. And the PAT or total comprehensive income has increased by around 140% from INR 9.3 crores to INR 22.4 crores as of December '22. This INR 22.4 crores is inclusive of net onetime exceptional income of INR 6 crores, which accrued due to the land sale at Greater Noida. So -- but even after netting that off that exceptional gain, we would still -- our apple to apple comparison -- the total comprehensive income would be somewhere growing from INR 9.3 crores to around INR 17 crores, which is roughly around a 90% increase.

So some of -- I've covered most of the P&L parameters. Here's a minute on some of the balance sheet parameters. We have significantly cut down our debt as compared to last year. Our current CCU limit utilization are close to INR 4 crores. We have around INR 94 crores of cash sitting on the balance sheet in form of various investments and mutual funds [indiscernible] as compared to INR 57 crores a year ago. Given a choice, we could kill our total borrowings are actually become a zero-debt company. But keeping it by long-term banking relationship with our existing bankers, we have chosen to keep the CC level at a very low utilization level to keep the banking relationship from a long-term perspective.

In terms of return ratios, we have seen our ROCE grow from 7.6% to around 10% and ROE increase of 5.3% to 9%. There has been a significant improvement in the last 4 quarters. I think the upward trend in their improvement will continue over the next 4 quarters. And we should very soon be aiming at the threshold desirable level of ROCE and ROE of around 14% to 15% in the coming time [indiscernible]. If you were to look at a slightly detailed segmental analysis, as I said, the 3 month year-on-year, basically, quarter 3 FY '23 versus quarter 3 FY '22, our revenue has grown by about 27%. But on a 9-month year-on-year basis, our revenues have grown by 44%. On a 3 monthly EBITDA, the EBITDA have grown by 34%, whereas on a yearly basis on a 9 month basis, it has grown by 26%. You will see the EBITDA growth in EdTech business is significantly higher.

There is a marginal contraction in the EBITDA in the MarTech business is predominantly driven by the significant or almost total movement from physical -- virtual events to physical events, which increased the revenue significantly, but our gross margins dipped accordingly. But I think over the next following 4 quarters, we will begin to see the EBITDA margin expansion in the MarTech business as well. One more thing, which I want to highlight is that MarTech EBITDA was impacted by the ForEx movements. Which are reflected not in the EBITDA, but in the other comprehensive income, that is significantly about INR 1 crore rupees. So if we were to club the other comprehensive income at EBITDA level that it would have been a growth of about 16%, 17% over last year.

As Satya has said, we have started tracking and -- since we started tracking, we also thought it is pertinent to share with you the independent ROCE and ROE figures for the 2 businesses. So if you look at the EdTech business, the ROCE for December '22 is at around 13% as compared to 6% last year. ROE is 9% and as compared to 4% last year. ROCE for MarTech business is about 10%. It has dipped slightly as compared to last year. The ROE also has because of a slight contraction in the margin, but I think that should get corrected in the coming quarters. Just to highlight one thing, these are -- these figures have been -- the return ratios have been annualized, so that they remain comparable. And the other thing is we have the -- these figures are reported basis, the capital which is directly employed in running off each of the 2 businesses and the corporate investment or the corporate surplus, which is in the balance sheet has not been taken into account.

Can you move to the deck. The slide detailed deep dive into the tech business. I think the Test Prep business has been showing a significant growth over the last 9 quarters -- 9 months. Our average ARPU has increased by about 26%. Our total billing is up 34%, which means our average volumes are up by about 8%. The significant increase in ARPU is a reflection of movement from the digital delivery environment to a physical environment, which basically enabled us to go back to almost the pre-COVID environment of being able to charge a significantly higher price.

Our business partner billing is up roughly around 49%, 50%. Q3 is traditionally our lowest billing quarter because this is usually the examination quarter, both CAT and CLAT exams take place in this quarter. So this is usually a low billing quarter, but beginning January, the -- as the new enrollment season for the next exam start picking up, the billing again starts picking up. Just for your information, we have added 54 new centers between April '22 at December '22 in the 9-month period. So we are broadly on track to the indicated center accretion goal we had set for ourselves for the current year. If you recall, about a year ago, we had said we wanted to reach a center level of around 450 to 500 at the end of a 3-year period that is at March '25, I think with the number of new centers added in the first 3 quarters and the expected momentum which we are currently seeing, especially for center accretion with CUET. I think we should be broadly inline with the stated goals for a 3-year horizon.

Arjun, just go back, we also launched board helpline as a key student initiative in this quarter as a key marketing at an outreach even under Project Lakshya. And we see this becoming a significant tool of a significantly higher engagement for CL with students at grade 10 and 12, which will eventually lead to the business run-up for low CUET and other UG segment products. Arjun, we can move to the next slide. The publishing business has been steady and has been doing pretty well. It grew roughly around 20%. A couple of our titles, including JEE-Advance has been trending as the #1 sales title for over 30 days on the digital platforms, including Amazon and other ones. The other title, Ethics, Integrity & Aptitude also has been significantly turning out to be a great seller. We continue to add new titles -- select new titles, both in English and Hindi as per the market requirement and have moved significantly into sales driven predominantly by either institutional deals or through sales predominantly through digital platforms.

Of the institutional platform business -- this business has grown by about 37% year-on-year revenue from INR 7.7 crores to INR 10.5 crores. This business had showed a significant decline during the COVID era. But I think we -- as we aggressively move for new clients sign-up, which is reflected with 58 new customers signed up in the 9 month period. We are also seeing a good event and student outreach engagement happening, especially in the UG level in Q4, which will continue both with -- significant interactions happened in the month of January and will continue in the month of April post the board examination. I'll spend a couple of minutes on the MarTech business.

Vosmos, we-- as we shared, we have been investing significantly in the marketing outreach. And as a part of that, we took our products, both the virtual platform as well as the metaverse or the Meta-commerce platforms to GITEX, Dubai, as well as the CES 2020 through '23 Las Vegas forum. And we are seeing significant interest in the product offering, which we are showing. And from the GITEX, Dubai participation, we will receive the first order of building the Futuristic Muscat city. We are currently engaged in a significant number of live discussion with potential orders. And hopefully, in the next 2 to 4 quarters, some of those will materialize. This is still evolving and new tech will take some time for its acceptance to get adoption by corporates, governments or government agencies to be -- but once, it starts penetrating, I think the growth will be pretty steep.

In the services business, I think our APAC business has been showing a reasonable positive trend and resilience. Physical events, both in India and Singapore are continuing to increase by the day. As I had shared, we have completed the process of the company formation in Indonesia, and we are hopeful of launching the operations in the next 2 weeks. The core services mix in Singapore is now gradually pivoting to more and more high-value and high-margin businesses. And hence we expect a significant margin expansion to happen, especially in the APAC region, despite investments in the new market of Indonesia in the next 12 months. Arjun, we can move. That brings me to the end of the presentation, and we will now invite any questions, which anyone you might have...

[Arjun Wadhwa, executive]

Thanks, Nikhil. I'll jump straight into the questions. There's a whole bunch of them that have already come our way. The first question is from Vivek Joshi. He is a new shareholder. He is asking for a little bit more information about the seasonality that impacts our business. And why, from a sequential perspective, Q3 is so different from Q2.

[R. Narayanan, executive]

Yes. Arjun, am I audible now?

[Arjun Wadhwa, executive]

Yes. Please go ahead.

[R. Narayanan, executive]

Yes. Thanks. So I was saying that it was in my opening broad remarks also somehow it missed my -- it skipped my attention. So on the Test Prep EdTech business, Vivek, Q3 is always the lowest. And historically speaking, it is to do with the one -- the long-term programs, which start -- the enrollments which start by, let's say, February or March or something, they taper off by September, October, maybe September is the time. And then the crash programs, they pick up more right around or after the Board examination. So Q3 is the weakest in terms of enrollments. In terms of revenue recognition, that particular thing still at least gets a little covered. So that's something that is very noticeable if you look at it from our sequential quarterly numbers. On the MarTech side, maybe Nikhil, would you want to make some specific points on the MarTech side in Q3?

[Nikhil Mahajan, executive]

See, usually, on the seasonality Q2 and Q3 are usually the larger months though it keeps varying because most corporates follow different calendars. Some companies have June ending, some have July ending, some have Jan ending. So I think that seasonality has more or less got neutralized. Though January is usually a low month because of the Chinese lunar calendar -- Lunar New Year. So the first 6 weeks of opportunity in APAC region generally dwindles down, starting from Christmas and it reopens only the first week of February. Post that, I think more or less, it is the normal business seasonality other than that doesn't change too much.

[Arjun Wadhwa, executive]

And Nikhil, I'll quickly move ahead to the next question. This is from [ Anitya Shah ]. She's -- Satya, maybe you'd like to take this up. She is asking about our teacher staff attrition rates, what are the number of teachers we have? And do we plan on hiring any star teachers or celebrity teachers to attract more students?

[R. Narayanan, executive]

There isn't anything remarkable that I need to mention about the attrition. CL teachers also count among the star teachers across the segments where we are leaders. And that's the case with most of the EdTech or Test Prep companies. As far as recruitment, training, certification is concerned, in at least 1 or 2 windows every year. For instance, right now, we're going through that window of recruiting, training and certifying teachers for the '23, '24 academic season, which kicks in after the board exams are over for the entire season of 9 to 12 months. So there is no specific plan to hire or [indiscernible] for star teachers. We are a lot more dependent on systems-driven, process-driven and take youngsters and groom them into becoming effective leaders because that's -- that has stood in good state for us.

And also since we are fairly distributed as a model, and it is run by a local entrepreneur in each city, their antenna is always up and they always keep track of good guys that they need to hire either laterally or get youngsters and nurture them into becoming star faculty over a period of a couple of seasons.

[Arjun Wadhwa, executive]

Thanks, Satya. There's a question from Manan Patel about the 1% divestment in CLPL and the sale of the investment of -- in B&S to CLPL, can you explain the details and rationale for this transaction.

I'll take this up. Manan, the divestment in CLPL and the sale of the investment was -- we had taken a write-off of about INR 41.5 crores of that investment of 3, 3.5 years ago and there was about INR 6 crores still lying on our balance sheet of that investment. The B&S transaction relates to us to the sale of our school business, which we have exited. And unfortunately, that business hasn't taken off. It got impacted by COVID and the management team that was running it wasn't doing a great job either. So we decided to clean up that investment from our books.

And from a tax perspective, it made sense for us to transfer that to CLPL, for which it needed to be not a wholly owned subsidiary. So that's the rationale behind it. And currently, that investment sits in our books at a consolidated level at a value of 20 lakhs. We continue to have a INR 4 crore receivable from B&S, which has been awarded to us through an arbitral proceedings, and we continue to pursue that through legal means to recover that. I hope that addresses your question.

Next question is from Rahul Bhansali. Satya, if you'd like to take this up? Can you share some numbers regarding CUET movement, ARPU and market share and how many centers currently offer CUET?

[R. Narayanan, executive]

For the season that's getting underway, there are a couple of bullets, Rahul. Number 1 is the notification about the exam dates are out. Though the students are, as you know, busy with their board examinations. Fortunately, for us, because of the work that we did in the last season, there is a constant trickle of anywhere between 5 to 15 product enrollments that's happening on an everyday basis. But it is still very early days for us to calculate or estimate market share, those kind of stuff. But what we are estimating is that from the last year registrations of approximately 14 lakhs and at a 10 lakh takers, we think that the registration numbers might go to anywhere between 20 lakhs to 25 lakhs, and the exam takers numbers also could go up upwards of 15 lakhs, 17 lakhs. That's the TAM, if you will, the total addressable market or serviceable market that becomes relevant for us.

And we are looking at this being offered in at least 30, 35 cities, especially in the Northern and Eastern Belt, where leading central universities or leading top universities have already subscribed to CUET. However, over the next few weeks, when more state governments will start announcing enrollment into CUET, I think that's where the next kicker will come. So we're just putting our head down and looking at the market and executing some plans, Rahul. It might just be too premature for me to make any statements about estimations where will we end up. I would rather say it -- once it is done, I can only tell you that we are the only company that would be offering it in so many cities physically and online and across 16 out of the 25 relevant subjects.

Yes, Arjun?

[Arjun Wadhwa, executive]

Thanks, Satya. There's a related question related to franchise expansion. Vivek [ Turaga ] is asking, given our EdTech growth is primarily based on franchise expansion, can you elaborate more on how you are making sure that franchisees stay with us that their businesses are profitable and how we get the best students of that region to study with us? In short, what goes into making our franchisees stick?

[R. Narayanan, executive]

Okay. Vivek, that's a long question asking for trouble, a very long-winding answer, but I'll try and capture the essence of it in essentially 2 words. The magic potion of the franchisee-led model is that exceptionally good, bright entrepreneurs come into our fold. I think if that comes, who have the ability to straddle both business and academics with equal ease, that's when the chance of success goes up significantly. And our systems, our processes, our [indiscernible] during selection of entrepreneurs, it is considerably driven by these parameters that we look for. That's number one.

In this era, it is also very, very important that we look at people who can invest capital in the market and have the ability to attract talent who can be both on the business side as well as the servicing side, okay?

If these are in place, then the local raw material is good. And then the CL know-how, the CL brand, the help from the regional managers who are mandated with the success of these franchisee partners that come into play, okay? I think there are 2 ways in which we ensure or we have been reasonably successful at retaining them with 5, 7 and more renewals, which happens every 3 years, which is: number one, make sure that the systems and policies are all very predictable, very institutional and it is not run by the wins and fancies of the Lala Gs, which has been seen by partners and other companies. So CL's institutional processes, the brand, the technology support, all of those are a very, very, very, very remarkable differentiators, which others -- our competition will perhaps not be able to copy quickly, that's number one. Number two, we continuously have to work on their growth only when they keep growing would they feel the joy of continuing the partnerships with us. I'll pause there.

Happy to take any more detailed responses or questions off-line from anybody, and then share that answer for the benefit of everybody on the investor zone.

[Arjun Wadhwa, executive]

Thanks, Satya. Nikhil, there's a question on the Vosmos virtual platform. Maybe you would like to take this up. Vivek [ Turaga ] again. He is asking for a general business update and any specific use cases where we are gaining traction and any positive business updates on Vosmos or VEP?

[Nikhil Mahajan, executive]

See virtual platform is now becoming more and more integrated into the physical events on a more regular basis. So while -- for 2 years in '21 and initial part of '22, even used to be largely virtual and hence, at low value, but very high margin. But as physical events come back, a smaller portion of them continues to remain integrated with the virtual thing. That's continuing to remain as an integral part of the product portfolio.

The other thing is we are now beginning to deploy the DIY version at a reasonable affordable rate for the small and medium enterprises. And it just got launched about a week-or-so ago. We are seeing positive traction, I think, we'll have to wait for 2 quarters and to see how the offtake in terms of volume and sign-ups are for us to be able to say, if any tweak on the pricing, product offering, or any service offering needs to be tweaked.

But I think basis the initial response both in the freemium and the initial paid model. The signals are looking extremely positive.

On the Vosmos, the Meta-commerce and the metaverse thing, I think it is still early days. We have got about 10, 12 stores operational. And though some of those stores, you can -- when you were coming into this meeting room, you can go along the mall and look at the stores, which are operational, including a couple of beauty products, the art gallery, a couple of corporate offices and things like those. So yes, it's beginning of adoption at a low key level. How quickly this will transition into commercial transactions beginning to take place and how quickly this scales up, I think this is an evolving tech and it will take some time.

I don't have any definitive time or road map for it to do that. For example, I said a Futuristic Vosmos city of Muscat. We just picked up an order. It's an order close to something like $40,000 -- $35,000, $40,000. And there are significant discussions and engagements happening in both Middle East as well as the customers out of the CES Vegas event.

And I think the next 2 to 4 quarters will clearly show us the path on how things unfold on both the platform as well as EdTech.

[Arjun Wadhwa, executive]

Nikhil, while I have you, a quick follow-up question from Rahul Bhansali. With our international expansion, would the VEB revenues significantly increase going forward?

[Nikhil Mahajan, executive]

Yes, that is one of the key focus. Now there will be segments where VEP will become more and more hybrid and integral to the physical event. So that portion will, obviously -- and our endeavor is to have the virtual component in any event enhanced to the extent possible because it improves our margins.

We also expect this -- the VEP revenues to scale up as the DIY version in the SME world and SME space garners more and more adoption. So to what extent and how quickly it ramps up -- so if I want to just give you a sample, in 2021, the virtual events platform revenue was about $4 million. It came down in '22 -- calendar year '22 to about $1.5 million, simply because the physical events came back and they became -- the ticket size of the physical event enlarged, but the virtual even component in that came down. But I think sooner or later, we should again be tracking the number which we had achieved in 2021 in terms of whether it is hybrid or DIY. I think sooner or later, we should be tracking that kind of a revenue number on that -- on the VEP.

[Arjun Wadhwa, executive]

Thanks, Nikhil. There is a question from Vivek Joshi. Are some centers company-operated or all partner-led?

Vivek, I'll just answer that quickly. We have about nearly 30 company-owned company-operated CoCo centers. The rest of our centers, about 150 plus, are FoFo, are partner driven.

He also has a follow-up question. Are all teachers on CL roles or on partner roles?

Again, here, Vivek, our CoCo centers have teachers on CL roles. We also have a large teacher pool who works on our content development teams. But on -- at the partner level, all costs belong to the partner, including the teachers who are on their roles and a lot of them themselves are also teachers.

There are some more follow-up questions about the franchise business. Rahul Bhansali and Manan Patel have both asked about the center additions in Q3 versus Q2.

Satya, would you like to take that up?

[R. Narayanan, executive]

Yes, Arjun. Okay, the overall numbers, Nikhil has already mentioned in the presentation and -- the -- again, in the franchisee additional businesses, the numbers that happened in Q3 -- on Q3 are slightly lesser than what happened in Q1 and Q2. It picks up again in Q4. The way we are looking at it is significantly driven by Tier 2, Tier 3 strategy for product expansion but also in the main Tier 1 towns like a Delhi or Bombay or a Bangalore, because now of a greater focus, both on the UG segment, India as well as the IE segment, International Education segments, we see more centers coming up. So the specific month-wise quarter-wise predictability of this is a little bit of a difficult thing to do, Vivek, on this. But we look at the healthiness of the pipeline, which is how many application forms? How many of them are at what stage of selection process? How many of them have signed it? How many of them have put the money in the bank?

So that pipeline looks reasonably good and healthy because of some holidays, some Diwali, some Christmas break, et cetera, the -- within a particular fortnight or a month, it could go up and down. So it's not so much predictable, but Nikhil has given you a broad sense of what kind of milestones we want to cross in a 1-year, 2-year, 3-year perspective at large.

[Arjun Wadhwa, executive]

Thanks, Satya, and we'll close with one last question. Nikhil, maybe you would like to take this up. With back-to-back good quarter numbers, when can the shareholders expect to be rewarded?

[Nikhil Mahajan, executive]

Shareholders have been, I think, rewarded in the last 6 to 8 quarters. We have done a series of corporate action. The share price, value accretion has itself increased from March '20 low to -- of about INR 8 equivalent to something like INR 60. So it is already about 10x, 11x growth in price. We did a bonus issue last quarter. So corporate actions will happen at an appropriate stage -- coming at an appropriate stage in the coming year as well. I think there is no definite timeline.

And beyond that, I would refrain from making any forward-looking comments at this stage. I think we are cautiously aware of creating greater and greater value and wealth for the shareholders. And we will take all necessary steps as required to achieve that goal.

[Arjun Wadhwa, executive]

Thanks, Nikhil. On that note -- what could be a better note to wrap this up, shareholder wealth creation is primarily our goal, and we will continue to work towards that. We look forward to catching up with you again at the end of the financial year. And if you have any queries, of course, my team and I are available. Our contact numbers, we'll share with you on the slide right now.

Please feel free to get in touch with us for any queries or any follow-up questions you might have. Thanks, Satya. Thanks, Nikhil, and thank you very much to all the shareholders and the analysts who joined in today. Wish you a good evening, and have a great week ahead.

[R. Narayanan, executive]

Thank you. Thank you, Arjun. Thank you, everybody.