CL Educate Ltd

NSE:CLEDUCATE

Earnings Call Transcript 2024-Q4

[Arjun Wadhwa, executive]

Okay. Good afternoon, ladies and gentlemen, and welcome to CL Educate Limited's Q4 FY '24 Analyst Call. My name is Arjun Wadhwa. I'm the CFO of CL, and I'll be your host today. Welcome once again to our homegrown metaverse platform called Vosmos. By now, I'm sure everyone is familiar and comfortable with it. We've been using it for the last couple of years now for our investor and analyst calls.

This call as always, will be recorded, transcribed and made available in the investors zone on our website within the next 48 hours. [Operator Instructions] Joining me today on this conference call is Mr. Nikhil Mahajan, our Executive Director and Group CEO. Unfortunately, Mr. Satya Narayanan, our Chairman, cannot be with us today. He's got a touch of the flu.

I'd like to start by inviting Nikhil to spend some time walking us through the financials and the business updates, following which we would be happy to take your questions. Nikhil, over to you. One more request to everyone, if you could please make your screens full screen. That way, you'll be able to see the presentation a little bit better.

[Nikhil Mahajan, executive]

Good afternoon, everybody. I hope I'm audible and all of you can see the presentation. Let me give you a brief overview on the year gone by. The overall year has been a good year which has enabled that things are more or less back to normal after the severe downturn, which the business, especially ours, faced during the COVID years. So this year, we have seen our revenues grow by 12% over last year from INR 297 crores to about INR 332 crores. The growth rate of 12% is more or less in line with what we had anticipated at the beginning of the year.

So we are hoping to grow by at least 1 to 2 percentage points more than what we achieved. Our EBITDA has grown by 18% during the same period. So basically, due to the margin expansion, the EBITDA increase in absolute terms is outpacing the revenue growth, and we expect this trend to continue in the years to come.

Our PBT has grown by about 12%, and our business PAT has grown again by 12%. I just want to bring attention to everybody. Last year, we had an exceptional onetime reversal of deferred tax, which had -- of INR 7 crores, which had added to our net taxation. So our net taxation was a negative of INR 4 crores last year. As compared to that, this year, our net taxation is INR 6 crores. So basically, there is a INR 10 crore movement from last year to this year on the taxation thing, and that has, on absolute terms, might seem to indicate a lower PAT.

But net of that onetime deferred tax adjustment, our PAT has grown by about 12% this year. This year also has been a year of significant investment in terms of hiring and expanding our business leadership, not only in our edtech business, but also in our martech business as well as expanding internationally into newer geographies, especially Indonesia and U.S., where we restarted our operations last year, with me myself relocating to U.S. to give a greater push to our international operations.

And we expect that in the coming years, our international expansion will continue to drive an accelerated revenue growth as well as margin expansion. Our cash position currently seems to be pretty healthy despite a INR 10 crore buyback, which we affected during the year gone by. Our gross cash has increased by about INR 6 crores from INR 109 crores to INR 115 crores. And our net cash, though has decreased post buyback from INR 99 crores to INR 95 crores.

Our borrowings have increased, but that is predominantly towards the year-end. There were large chunks of big projects underway at institution, and some of the vendor payments have to be taken care of towards the end of the year. And our borrowings also increased due to the consolidation of 361DM, in which we increased our share from 11% to 39% in February. And now post the second phase of the transaction, we are now close to 54%.

And as a result of effective management control and Board control, the consolidation of financials resulted in an overall borrowing increase of INR 2.2 crores. Let me spend some time on the segment-wise business update.

As shared earlier, our revenues expanded by 12%, our EBITDA expanded by 18%. The margin -- the revenue expansion in EdTech and MarTech followed slightly different trends. In EdTech, our revenue expansion was 16%, while the EBITDA expansion was about 13%. MarTech showed a highly divergent trend with revenue expanding by about 6%, but margin expanding by a healthy 29%, which was predominantly driven by 2 parameters. One, the re-pivoting or the pivoting of the revenue mix to higher-margin business effectively increased our gross margin and hence, the follow-through into the business EBITDA.

Second, a rapid expansion in our international business portfolio in Singapore, Indonesia and the U.S., where we grew by about 35%, where the margins are significantly higher than the Indian operations. So that -- the combination of these 2 factors have resulted in an EBITDA increase by about 29%. I'll spend some time on broad business-wise update.

Let me come to Test Prep first. FY '24, we saw our volume expansion by about 10% in terms of enrollment. The billing also increased by 10%. That would basically mean more or less consistent or constant average realization per student. However, in different product segments, we saw different measures wherein some product segments saw ARPU expansion and in certain product segments in our endeavor to increase volumes, there were price rationalizations, which are undertaken, which broadly brought up a flattish ARPU.

However, going forward, we are reasonably confident of a 3% to 5% ARPU expansion in the current fiscal year. MBA volumes have increased, the billing has increased by 11%. In the UG segment, our billing increased by 9%. Enrollments were up 19%, with IPM and BBA showing a significant expansion. Law numbers decline predominantly because of the change in the testing calendar. Earlier, the exam used to happen in the month of May. However, the last 2 times, the exam has now moved to December, which resulted in the total number of test takers declining by close to 30% because a lots of Grade 12 students felt that they would not be able to effectively compete in after adequate preparation if they were to write exam in December.

So a lot of maybe who would have written the examination if the exam was to be held in May, actually, chose not to write and hence, did not probably come forward for some kind of preparation. Over the last 6 to 9 months, we have undertaken significant leadership bandwidth enhancement in the test prep team. And those will start reflecting in terms of higher business in the coming fiscal year.

Just to add, the new centers -- added was the number was 25, and we expect somewhere between 30 to 40 new centers to go live in the current fiscal year. Now the other part of our edtech business, which we -- which is basically either platform monetization or institutional business and the publishing business, our platform business increased by about 42% with a very healthy 70 new client addition. We launched a new addition of common application form, which I had updated in our last investor call.

So in the first 4 months, between November end, when we launched the platform and March end, we have on-boarded 40 institutions. And during this period, about 3,000-plus forms were sold. We are extremely positive about the direction this new initiative will take in the coming years, and we are expecting a multiple fold increase in the revenues through form sales through the platform.

On the publishing business, it's been a steady business. Publishing revenues increased by about 19%. There was a significant margin expansion because of moderation in paper prices. As I had shared about 12 months ago, paper prices had hit the roof, but they have now pulled down by about 25% in the last 6 to 9 months, have been pretty stable in the last quarter or so, and we expect that the price stability will hold and the enhanced margin should only get better in the new season because of price hikes, which we will go through with in certain select title segments.

Our online sales through our own channel has been increasing sequentially quarter-on-quarter. And now roughly around 40% of our sales comes through online platforms, whether from portals like Amazon, Flipkart, Meesho, et cetera, or through our own product sales website. Over the last couple of years post COVID, we had pivoted significantly from retail and distribution channel led to a B2B and a institutional model, and we are now going deeper and deeper via that model.

Our distribution-led sales have now declined to just about 15-odd percent -- 15% to 20% of our total sales with online and B2B and institutional sales accounting for closer to 80%, and we expect that this percentage will not increase marginally in the coming years. Now a brief update on the MarTech business.

The business increased by about 10%. The growth in total revenue was about 10%. We had 56 new clients. There was a significant enhancement in EBITDA, predominantly driven by a positive change in the revenue mix towards higher-margin businesses and also a larger chunk of revenue getting contributed from international markets, predominantly Singapore, Indonesia and U.S., where the gross margins are significantly higher and better, and we are able to [indiscernible] lower cost from of delivery from India.

Certain sectors where we have some of our prime customers, the marketing spends have been muted because of overall environmental factors, especially in IT and FMCG. As you might be aware, IT has been going through a leap expansion phase. FMCG has seen flattish volume expansion. So there marketing spend through us have been slightly on the downward side, but that has been more or less balanced out by addition of some of the new notable clients like SBI, Nike, Deloitte, Hewlett-Packard, et cetera. We continue to add new and new customers, and we expect going forward, the customers, which were added last year, will contribute about 10% to 15% of the revenue in the coming year, and we'll continue to expand our customer base in the current year.

There's a brief snapshot I would want to -- we have been focusing on our international expansion over the last couple of years. And so if you look at our international revenues have grown by about 32% in the year gone by. The MarTech revenue increase internationally has been 34%. And in the EdTech segment, that revenue expansion has been about 28%. Indonesia and U.S. have contributed to 50% of the growth internationally in the MarTech business. And we expect that these 2 markets will contribute significantly in the next couple of years in our international revenue expansion.

In the EdTech side, we have started, as I had shared in the last couple of conversations, we have started to tie up for direct university partnerships. We are currently in the process of running a pilot program with 7 top U.S. universities. And we expect more and more direct partnerships to come our way in the next 2 years. Our premium admission consultancy grew by about 58% over the previous year. Our [indiscernible] business in the Middle East has been growing steadily with a 20% volume expansion and a 16% billing expansion. So we currently have 6 locations operational there, and we are looking to double that number in the next 12 months.

And we are extremely positive that our international business will continue to grow much faster in pace as compared to India business at a much faster plan. I think with that, I come to an end of the presentation. We'll be happy to take any questions.

[Arjun Wadhwa, executive]

Thanks, Nikhil. I don't see any questions yet on my board. So we'll just wait a couple of minutes to see if anyone has any specific queries. Also just pause a minute and leave our contact numbers on the screen in case you need to get in touch with me. That's my e-mail ID and my phone number. My colleague, Amit, who is an integral part of our finance team and has been with us for 10 years, is also mentioned there. So you can write into either of us or to our IR team at Wisdomsmith, and we'd be happy to come back to you with any queries that we have.

Okay. There's a couple of questions here so far, Nikhil. The first question is what the potential revenues that we lost due to the change in the law examination and can we regain them in FY '25? And then there are more questions in other domains.

[Nikhil Mahajan, executive]

See, due to the change in the academic calendar of the test, the number of test takers dipped by about 30%. Now what as marketer in the segment, we have increased our focus on outreach. We are going into more and more schools, talking about law as a career, how attractive it is. So while it might take a couple of years for the test takers to come back, there is also a campaign independently running, requesting the CLAT consortium to probably move back the exam back to the May season.

But keeping that possibility aside, we expect that the number of test takers will go back to its original numbers in a couple of years. And CL being a market leader, a large chunk of that increased test takers segment will proportionately fall into us and our enhanced marketing spend, enhanced student connect, enhanced penetration in the schools will help us increase our market share and hence, increase our law volumes in the coming couple of years.

[Arjun Wadhwa, executive]

And just to add to that, from a total revenue perspective this year compared to last year, our law numbers in terms of total billing was actually flat despite the decrease in the number of students who enrolled. So we managed to maintain similar revenues to where we were last year.

But yes, we are about 8 crores to 10 crores short of where we would like to be and where we were in the pre-COVID years before the law market was impacted. But as Nikhil said, we see this as a temporary phenomenon, and we hope that things will return to some semblance of normalcy in the months ahead.

There are a few more questions now related to student growth in CUET, our numbers. So just I see a lot of questions on number of enrollments, growth in numbers, number of students in category A versus category B. Just to share with you, just from an overall perspective, we are one of the very few listed entities who operate in the test prep space. And the data that you seek is predominantly competitive intelligence, and we are a little wary of making that so easily available on a call of this nature for our competitors.

We have to work hard to get information on market share and how much our competitors grow on a year-on-year basis. So we're a little wary of making those kind of numbers available from a specificity perspective. But what we're happy to share is how we grow from a -- on a general perspective without getting into specific numbers.

So from a CUET perspective, we'd be happy to share that we had increased our student numbers by close to about 50%. Our focus in CUET specifically this year was to see if we could focus on growing market share rather than necessarily focus on growing revenues and to see how much we could push the envelope in terms of getting more students to enroll.

CUET, as you're all aware, is still at a very nascent stage of its introduction. The exam is practically brand new, and it is also at a stage where the exam is exceptionally easy. Because of the nature of the exam right now, coaching is not really necessary for you to clear the subject domains. So people tend to join coaching more for the English preparation and for the GAT, which is the general aptitude test.

So we've seen a significant growth in numbers across those segments. We've done this in some cities at the cost of ARPU, as Nikhil mentioned, with a specific focus on growing numbers. So our CUET student growth was in the range of about 50%.

There are more questions in terms of how many students have enrolled with us this year? Just to share, our numbers would be in the 75,000 to 85,000 range. And as I said, we'll stick to sharing ranges rather than going into specifics.

There are questions about our CUET and our international business revenues this year. Those will be in the INR 18 crores to INR 25 crores range. Again, we're not getting into specifics, but just to go into some sort of numbers so that you have an idea about the same. Okay.

There are a few more questions. We recently transferred our Africa subsidiary to our Singapore subsidiary. Was that done as a precursor to a demerger? No, [ Rahul ], when we have plans to share any specifics about a demerger, we'll go into those details in due course. Right now, the objective was very simple.

Our Africa business focuses specifically on the education side of our business with an emphasis on growing Africa as a continent for us. We've got a couple of centers that we've partnered with a couple of locations in Kenya. We're exploring Tanzania as a market. We're looking at Nigeria, where we've got a first partner center as well. So the CL Africa business owns that side of the business. And so we've set up a second subsidiary in Singapore, a CL subsidiary. The original subsidiary that used to exist in Singapore was a Kestone subsidiary.

So to ensure that there is specific focus, both on the edtech and the martech business driven through 2 different domains and 2 different streams, the Africa business was transferred from the Kestone Singapore subsidiary to the CL Singapore subsidiary. And we will continue to manage our test prep and our edtech growth ambitions through the Singapore subsidiary for our international market growth.

[ Akshat ] is asking, have you closed any centers this year? Yes, Akshat, we have. As it is a part of every business, there will always be numbers added and numbers which will reduce. And also, there will be renewals of contracts.

So just to share with you if Akshat, of course, you've been around here for a long time. You've attended a number of calls. But for those of you who haven't, typically, our centers are on a 3-year contract with us. And every 3 years, they go through a renewal process. So we've had a bunch of renewals, a few exits and about 25 new additions.

So just to give you an estimate, that number would have been about -- between renewals and additions that number would have been in the 40 to 50 range and another 10, 15 would have shut over the course of this year. Okay.

As the buyback would not be completed, is the company looking for any other avenues to reward the shareholders? Nikhil, would you like to pick this up?

[Nikhil Mahajan, executive]

So we are always at the lookout for maximization of shareholder wealth. As and when any corporate action is deemed appropriate from a shareholder perspective, we discussed during our Board meeting every time. And as and when the Board takes a final decision, the manner, nature, whatever decision, we will communicate it and share at an appropriate stage.

At this point of time, no specific action has been decided. But we are always on the lookout for maximization of shareholder wealth and rewarding the shareholders through various mechanisms, and we'll keep you posted as and when any final decision does take place.

[Arjun Wadhwa, executive]

Nikhil, there are questions that I'll provide you. There are queries about the revenue breakup in the MarTech segment between physical and virtual for FY '24 from [ Ishan ]. And while I have you for a minute on Kestone, I'll also just -- there's a question [ from Akshat ] on the market profitability in this quarter, how it has varied and what has been the impact mostly on the martech business this quarter specifically? .

[Nikhil Mahajan, executive]

See, let me answer the first question first. The total virtual revenue to both the virtual events platform and some bit of [ Metaverse ] transformations into 3D environment would be currently in the range of 6% to 7% of the total revenue.

Going forward, we see this percentage increasing marginally every year by 1 to 2 percentage points of the total revenue every year. And we are hoping to hit that in 3 to 5 years, 20% of our total revenue comes from the technology-enabled business and the remaining 80% to come from the physical events and the current other services. So as of now, as I said, 6% to 7% is what comes from the virtual events technology business. What was the second question, Arjun?

[Arjun Wadhwa, executive]

The profitability in Q4.

[Nikhil Mahajan, executive]

See, the profitability in this -- gross margin of most of our businesses in the martech side are more or less stable. However, there are different cycles, which this business follows. Because in East Asia, especially Singapore, because of -- and Indonesia to some extent, you have the Chinese New Year, which shuts down that part of the world for about 4 weeks. Indonesia went through election. So there was a large period of lull in business.

So Q4 in certain terms was slightly muted. However, the opening for the current fiscal year has been reasonably strong. Usually, because different multinationals in different geographies have different year endings, at the start of the new fiscals, the budgets are released at different points of time. Usually, our best quarters are Q2 and Q3 with Q1 and Q4 being slightly muted.

However, since they contribute larger chunk revenues, hence, the profitability. Broadly, there were some onetime adjustments of older projects, et cetera, older cost, which we closed, which flowed in from Q3 and into Q4. And hence, there was slight mutation of profitability in Q4.

But overall, I think we are on track to maintain 10.5%, 11% EBITDA on that business going forward, at least in the coming year.

[Arjun Wadhwa, executive]

Nikhil, while I have you, [ Sameer Kirmani ] is asking, what are our plans? Do you see INR 100 crores cash that we have? And if there are any M&A opportunities being right now?

[Nikhil Mahajan, executive]

[Mr. Kirmani], we are always on the outlook of inorganic opportunities, both in the edtech, martech and associated areas. Right now, there are initial discussions, which are evaluations of opportunities happening. If and when we take a final decision and we get the Board approval to proceed forward, we will come back and share. Till then, we are happy to have that cash in books kept securely in fixed deposits. But there are active opportunities, both in edtech as well as martech space being evaluated, and we are hopeful that something would come through in the next 2 to 4 quarters.

[Arjun Wadhwa, executive]

Thanks, Nikhil. I'll take the next set of questions. There are a whole bunch of questions on our ARPUs and why they don't match with our fees numbers that are listed on our website?

Just to give you a little bit of context in terms of how our products are priced. We operate across 3 segments. There's the premium segment, which includes classroom programs. There's the pouch segment, which is more like a middle category segment, where products are priced between INR 1,000 and INR 9,000. The premium segment is typically INR 9,000 to INR 10,000 plus.

And then the sachet segment, which is sub INR 1,000. So we operate across all these segments. We compete with players across all these segments, whether it's through a test series program or an interview GD prep personality development program, or whether it's someone who is operating only in the material space or the video program space. So that is what impacts the ARPU, and that is what impacts fee, but also gives us significantly greater number of enrollments and helps us improve our market share and compete across multiple levels. I hope that answers your query on the -- on why our ARPUs are different and not matching with our different fees quantums.

There are specific questions on how does the CapEx work for our business? Specifically, just to share on the edtech side, we largely work on a negative CapEx kind of model. We haven't added any physical new study centers for our own offline business at all over the next -- over the last couple of years or so. We've predominantly focused on adding more franchisee locations, and the franchisee business works on the franchisee -- yes, on the franchisee taking -- paying a product license fee and a brand license fee. So the brand license fee is to put up the Career Launch board outside the center and a product license fee is for the specifics in terms of the -- whether you're going to run an MBA program or a CUET program or a law program and so on and so forth.

So we predominantly work on a negative CapEx model as far as our core test prep business goes. Where we do continue to make investments are 3 specific areas. We invest in product, we invest in people, and we invest in technology. And our investments in product and technology especially and in content development in our test prep business. And in the metaverse in the Vosmos, on the technology platforms that we use for the martech business get classified under the head of intangibles on our balance sheet, and you can access those kind of figures there.

They would be in the INR 13 crore odd range for this year. And we see that those kinds of investments, those are typically amortized anywhere between 5 to 10 years on an average of 7 years. And we will continue to make such investments over the years ahead, but probably at a reducing rate of about 15% to 20% compared to what we did this year. I hope that answers your question.

I'm just looking through the questions to see if there's anything else which we haven't answered as yet. Nikhil, may I throw it back to you. Gentleman is asking if we can share a little bit of information about the test prep industry as a whole and how things will move? And if we have any plans to enter in the NEET or the JEE examination space?

[Nikhil Mahajan, executive]

So see, the test prep industry can broadly be classified into 2 segments: one, which is aptitude centric and one which is knowledge centric. So JEE, NEET, civil services, et cetera, would largely follow what we call as the knowledge-centric thing, while MBA, law, bank and study abroad, international education, BBA, IPM, it is more like aptitude, mathematics, English, reasoning-based examinations, which we call as aptitude-based test.

As of now, we are predominantly present in the aptitude-based testing. We used to have small portions of our product offering in JEE and NEET in very select markets. For now, as of now, we do not have any plans to get into JEE and NEET on a pan-India and national level. So we will continue to focus on our products where we are market leaders, like MBA, law, IPM, BBA and CUET. And the markets for some of them are large and big enough for us to expand our market share and keep growing for the next couple of years. If anytime in the future there are appropriate right value in organic opportunities which come across, really we'll evaluate them on merit.

[Arjun Wadhwa, executive]

Thanks, Nikhil. Last 2, 3 questions that have come in. Expected revenue growth and margins for FY '25. Where do we see ROCE heading in the near future? And when will EBITDA start getting the benefit of operating leverage?

[Nikhil Mahajan, executive]

As an organization, we do not give very specific revenue and margin guidance ever since we have been listed for the last 8 years. So I will desist from giving you any specific guidance on that. More generically, my expectation is that we should be able to grow at a level slightly better than what we grew this year from the previous year.

Margin expansion in terms of EBITDA should reflect our endeavor, which I've outlined a couple of years ago to have our EBITDA margin increase by 100 basis points every year for the next couple of years. And I think that should hold.

I think the last couple of years after physical reopening post COVID, we have been in a significant reinvestment mode to get students back into the classroom environment, and that had warranted significant investments in infrastructure, people and marketing. I think a significant chunk of those investments and reestablishment of on-ground facilities and premiumness is more or less done and behind us. And some bit of operational leverage should begin to kick in, in FY '25 and significantly large chunk of it should start reflecting in FY '26 because most of the centers, newer centers which have got signed up in the last 12 to 18 months, will start reaching a certain threshold and start contributing both in revenue growth and profitability at CL level almost 24 months after the start.

Their takeoff has been slightly slower in terms of the revenue growth, predominantly of the comeback from the COVID era. But I think things are now more or less back to where we were pre-COVID. And going forward, I think things are going to be significantly smoother in terms of both revenue growth as well as EBITDA margin expansion.

[Arjun Wadhwa, executive]

Right. Thank you so much, Nikhil. And thank you, everyone, who joined in the call today. I appreciate you giving us your time and look forward to catching up with you really soon when we meet again for our Q1 FY '25 investor interactions. Thank you once again, and have a good day.