On January 26, 2015, I had written an article on Tree House Education (TREEHOUSE, Financial) with a bullish long-term view on the stock. Tree House Education is India’s largest self-operated pre-school chain, and the company declared its 3Q15 results on February 6, 2015. The results were strong and there were several other positive points to note related to the future performance of the company. This article discusses the results and the reasons to be bullish on the stock for the next three years.
For 3Q15, Tree House Education reported revenue growth of 33.67% to INR53.11Crore. For the same period, the company’s EBITDA and net profit growth was also robust at 31.1% and 25.0%. While the EBITDA margin was lower by 117 basis points, the decline in EBITDA margin was due to higher number of new pre-school openings during the quarter. Therefore, all the key financial metrics were strong for the quarter and I believe that a stronger performance is coming for reasons to be discussed later in the article.
Coming to new pre-school openings, Tree House opened 24 new pre-schools during the quarter and the total number of pre-schools as of December 2014 was 562. The important point to note here is that 81.67% or 459 pre-schools were self-operated with the remaining being franchisee. The advantage with self operated pre-schools is that the company has more control over the cost and from a teaching perspective; there is uniformity across the pre-schools. With the company looking at having more self-operated pre-schools, this advantage will sustain in the coming quarters.
The big positive from a growth perspective is the point that Tree House successfully completed a INR200Crore QIP during the quarter. Further, during the quarter, Tree House also completed an asset sale worth INR17Crore. With INR217Crores in cash, Tree House is looking to accelerate growth over the next 3 years. While the company’s revenue growth has been 28% for the first nine months of 2015, I expect the company’s revenue growth to accelerate in the coming quarters as the funds are deployed in revenue growth projects. Tree House has also made 2 acquisitions in the past and I believe that the current funds can be used for further acquisition in the pre-school or the day-care space.
Another important point to note here is that the company’s revenue bump-up coming in the first quarter of any financial year when pre-school admissions are under way. Therefore, the company’s 4Q15 results will be in-line with 3Q15 and the company’s 1Q16 results will witness strong growth on the back of new admissions in the pre-school segment as well as the day care segment. I must add here that the day care segment is still gaining traction and can be a game changer in the coming years. Further, I believe that Tree House will cross 600 pre-schools by March 2015 and a strong pace of new school openings will ensure additional growth.
In conclusion, Tree House has strong growth coming in the next 2-3 years. The company’s funding plans are over and the focus is on accelerating growth. I believe that an acquisition is likely going by the company’s past record. Therefore, the stock is good to hold in a market that is still very under-penetrated.
