CL Educate emerges healthier from FY21

FY21 didn’t turn out too bad for CL Educate. In fact, when it looks back at FY21 many years later, it may find that it was a key turning point in its corporate journey.

That is not to say it was a rosy FY21 for CL. The global scourge Covid did impact CL’s P&L. Revenue for the year was Rs 184 crore, down 40% from a year ago. However, CL was actually able to improve its operating EBITDA, both in absolute terms and certainly in margin terms. Adjusted operating EBITDA (reported, adjusted for write offs) was Rs 236m in FY22, as compared to Rs 219m in FY21, a gain of 8%.

The company achieved this incredible result due to 2 main reasons: One key factor is the flexibility of its business model. In its Test Prep (Consumer) business run under the brand Career Launcher, CL had around 70% of revenues coming from its franchisee network. Franchisee centres were shut the entire year, but the fixed cost of the network did not impact CL. Similarly, in its Enterprise business, a considerable part of delivery happens through external partners. So where revenue dropped, costs also dropped in similar proportions. CL’s business model, in other words, is not very fixed cost centric. The other factor, which helped margins was proactive management action on 2 fronts: cost rationalisation, and ability to switch quickly to digital mode of delivery, in both Consumer and Enterprise businesses.

Without going into nitty-gritties of several actions the company took during the year, lets focus on the key point: CL increased its operating EBITDA margin from 7.1% in FY20 to 12.8% in FY21, an incredible feat in a Covid year, and when topline was down 40%. This is also CL’s best EBITDA margin since its listing in FY17.

CL’s Balance Sheet also is now healthier. The company took around Rs 330m of writeoffs (which is why reported net profit looks negative at -Rs165m in FY21). The vocational receivable is almost written off, only Rs 36m remains, which CL is very confident of recovering in FY22. Some other write offs were also taken, making the Balance Sheet leaner.

Cash flow from operations was Rs 202m for FY21, again showing the underlying business did much better than reported numbers.

Coming to FY22 outlook, CL management does not give earnings outlook. However, they did made some important statements in the Q4 earnings call, that can have a bearing on the future outlook for shareholders.

  1. A key point to note is that the management has said that the spate of writeoffs is finally over. CL’s reported P&L has not reflected the true picture for the last 4 years, due to continuing write offs in the vocational business. Then in FY20, the company took a large write off on account of its partially exited school business. This means that if in FY22 the company reports a topline of say Rs 2.25B, at an EBITDA margin of 11%, then its operating EBITDA could be ~Rs250m, and counting other income, total EBITDA could be Rs 350m; i.e. reported numbers will reflect the true picture.
  2. CL had announced intention to raise funding in its Digital Test Prep business or Edtech business (CL Digital), and its Virtual Event business (Kestone Virtual). The progress here appears to be encouraging. The management said 10 NDAs have been signed, 6 for CL and 4 for Kestone. These are good numbers, chances of fund raise can be > 75% given this level of NDAs.
  3. The company has surplus real estate which it is trying to sell for sometime. One small transaction could culminate soon, which could give it Rs 70m pre tax.

In all, FY22 could be a year where CL financials start reflecting healthy profitability. That in itself can push the stock higher. Currently, the company quotes at ~6x EV/EBITDA, which does not reflect a strong recurring franchise business. Also, any successful fund raise in either CL Digital or Kestone could also have a strong positive impact on the price.

PS: Wisdomsmith’s Investor Relations team (WISDOM IR) advises CL Educate on Investor Relations.

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