The recently announced acquisition of the digital examination – called DEX for short – from NSEIT, a subsidiary of India’s leading exchange National Stock Exchange (NSE), could be a good deal for CL Educate shareholders.
DEX conducts digital, multiple-choice type of exams. The tests are mainly of 2 types – certifications and recruitments. It has around 230 own centres. It also has arrangements with 3000 centres to hire them on demand. This allows DEX to deliver pan India. These are computer based online tests. In certain remote centres, DEX has developed tech to allow table-based tests.
Some highlights of the DEX business:
- In FY24, the business reported revenue of around Rs 200 crore.
- It is the second largest player in this business with a roughly 20% market share of the digital exam market. The leader is TCS iON with over 40% market share. The other competitors like Meritrac and Aptech have all less than 10% market share, suggesting DEX has a secure spot in the business.
- The business has healthy EBITDA margin, in the mid-teens.
- CL mentioned it is getting this as a zero-debt business and cash accretive, i.e., generates free cash flows.
- The business is expected to grow in double digits. According to the exchange release announcing the deal, DEX has an order book to exceed its FY24 revenue that in FY25, with an EBITDA Margin in excess of 17%. The business is currently zero.CL
Now coming to why we think this may create value for shareholders: the price CL has agreed to pay appears to be based on 8-9x EV/EBITDA. The EBITDA for FY23 was around Rs 27 crore, which results in EV/EBITDA of 8.5x at the lower end of the acquisition price of Rs 230 crore. CL’s announcement mentioned that an additional consideration not exceeding Rs 75 Crores is payable subject to achievement of certain business milestones. This means that at the top end the acquisition price could go to Rs 305 crore.
Now let’s say in FY25, the business does a revenue of Rs 225 crore with 17% EBITDA margin (the company has guided towards growth). This could result in an EBITDA of Rs 38 crore. While we don’t know what are the terms that guide the upside, an EBITDA of Rs 38 crore implies an EV/EBITDA of 8x at the top end price of Rs 305 crore.
Prevailing valuations in India, these days for just about any listed company – big or small, good or shady – are much more than this. So, unless the DEX business drastically underperforms, CL could create tremendous value going forward. Check these scenarios:
Let’s say in FY25, the DEX business delivers an EBITDA of Rs 35 crore. CL’s own business has posted an EBITDA of Rs 25 crore in each of the last two years. To be conservative, let’s say this remains unchanged. In other words, CL’s total EBITDA could be Rs 60 crore for FY25. It had a net cash for Rs 100 crore before the DEX deal. We also assume DEX deal gets done at Rs 305 crore (peak value). To finance this, let’s say by Mar’25 CL has a net debt of Rs 200 crore. Now what EV/EBITDA do you want to give CL?
- At 15x, the EV becomes Rs 900 crore, subtract debt and you get Rs 700 crore. The current market cap is around Rs 650 crore.
- At 20x, the EV becomes Rs 1200 crore, and the market cap becomes Rs 1000 crore.
Now consider a 3 year out horizon. In FY28, if the company delivers an EBITDA of Rs 100 crore, you are looking at an EV of Rs 2000 crore at 20x, which could be a fair assumption of the company really does grow its EBITDA. In three years, the debt could be substantially paid off, suggesting the market cap could be close to this figure.
The key risk factor will be if DEX, instead of growing, loses business. Making an acquisition work is not easy. More acquisitions go bad, rather than working. Let’s see how this one goes. Given that DEX is a strong number two, we hope DEX does not flounder after the management changes hands.
Please note, the deal is yet to get done formally. CL has made a binding offer. The execution and ultimate consummation of the Proposed Acquisition remains subject to such approvals, accounting and legal clearances and representations as may be required, and the execution of binding agreements between the parties.