Tree House Education Has Strong Upside

Author's Avatar
Jan 26, 2015

The Indian equity markets are surging higher on the back of several factors. The first factor is the change of government to a more investment friendly government and the expectation of big reforms in the coming months and years. The second factor is lower inflation on the back of lower oil prices that implies a series of interest rate cuts coming in 2015. Amid these bullish sentiments, there are several industries and stock that are positioned for strong growth in the coming years.

Tree House Education (TREEHOUSE, Financial) is one such stock that has immense growth potential, and this article discusses the reasons for being bullish on Tree House Education & Accessories.

Tree House Education is India’s largest self-operated pre-school chain with 538 pre-schools as of September 30, 2014, spread across 75 cities in the country. In addition to the pre-school business, Tree House Education also provides school management services to K-12 schools and the company is currently providing K-12 services to 24 schools in India.

While this is just an overview of the company, the first reason to be bullish on Tree House Education is the potential that the Indian pre-school market holds. According to the company’s presentation, the Indian pre-school market is expected to increase from INR80.4 billion in 2014 to INR164.7 billion by 2018. Therefore, the market size will double in five years and this provides big room for growth for Tree House Education.

One of the biggest company specific positives is that Tree House has a majority of self-owned pre-schools as compared to most competitors in India that has franchisee operated pre-schools. As of September 2014, the company’s owned pre-school was 80% of the total pre-schools. The advantage is that owned pre-schools provide a healthy EBITDA margin to the company and it also ensures that the teaching methods are common across company operated pre-schools. This has given Tree House an advantage over peers and the result is evident in the company’s revenue and EBITDA growth numbers.

The company’s total revenue has increased from INR412 million in FY11 to INR1, 589 million in FY14. During the same period, the company’s EBITDA has increased from INR169 million to INR892 million along with EBITDA margin expansion from 41% to 57%. Clearly, Tree House is on a high growth trajectory and I believe that this growth trajectory will continue considering the huge impending potential in Indian markets, the company’s self-operated growth strategy and the company’s entry into the day care business.

The company has still not discussed more on the day care business plans, but the founder believes that day care for Tree House can be as big as the pre-school market. If this scenario pans out for Tree House, the company’s revenue can witness strong growth in the coming 3-5 years.

I believe that day care will be a big business for Tree House as a majority of young Indian couple are working and this makes day care a necessity. Tree House has tied-up with corporate in order to provide day care services to their employees. Clearly, the company is making the right moves and this will help the company sustain its strong growth momentum.

I must also add here that Tree House recently raised INR200 Crore through the QIP route and I believe that the company will use these funds for expansion of the day care business along with potential acquisitions. In the last 2 years, Tree House has made acquisitions such as Global Champs and Brainworks Learning Systems. Therefore, the company is also active on the inorganic growth path and I believe that this will translate into stronger than expected growth in the coming years.

In conclusion, Tree House Education is a stock worth considering at current levels with a long-term investment horizon. The company’s management is also passionate about the pre-school business and the company’s growth has been backed by quality education service. Tree House aims to be one of the top 3 global brands in pre-schooling and day care on a self-operated basis. While this aim is still some distance away, the company has been making the right moves to achieve this.