In today’s volatile market conditions, value investors are on the lookout for opportunities among undervalued stocks with strong fundamentals. CL Educate Limited, a prominent player in India’s EdTech and MarTech sectors, offers one such compelling investment case, at a share price of Rs 80. At current values, the stock offers attractive risk reward balance.
A Strategic Step Forward: The NSEIT DEX Acquisition
CL Educate has taken transformative steps in recent quarters, the most important of which is the acquisition of the Digital Exam Assessment (DEX) business from NSEIT Limited. This deal looks like a good move due to two reasons:
- Propels CL Educate into the rapidly expanding ₹7,000 crore test assessment market, and should boost its overall topline growth rates.
- This deal looks value accretive, given the conservative valuation paid. The acquisition involves an initial cash consideration of ₹230 crore, with a provision for an earn-out of up to ₹75 crore. The implied EV/EBITDA is under 6x over the entire range of valuation, including earnout, indicating strong scope of value accretion.
Market Leadership Across Segments
It is important to note that CL is No 1 or No 2 for most segments of its revenue. Consider this:
- EdTech: The company remains the undisputed leader in Law and CUET preparation and ranks second in MBA coaching.
- MarTech: Kestone, its MarTech division, is the largest organised player in the business of bespoke corporate events. The recent launch of Kestone Utsav, focusing on luxury weddings and social events, has opened avenues in India’s ₹1 lakh crore luxury wedding market.
- Test Assessments: DEX is the second largest player in the digital assessment market, after TCS.
Overall, CL is in the top two of the relevant market segments for ~90% of its revenues.
Positioned for Long-Term Value Creation
The company’s robust presence across EdTech, MarTech, and Test Assessments, combined with strategic initiatives, positions it well for sustainable growth. Here’s why the current valuation represents an attractive opportunity:
- Diversified Revenue Streams: The integration of DEX enhances CL Educate’s revenue mix, reducing dependency on any single vertical. The test assessment business alone is expected to account for a significant portion of future revenues.
- Potential for Margin Expansion: The DEX business is high margin, with scope of further improvement in EBITDA margins in the medium term.
- Strong Financial Health: Before taking on ₹200 crore debt for the acquisition, CL Educate remains net debt-free with ₹62.3 crore in net cash as of December 2024. Internal accruals are expected to support debt repayment within 4-5 years.
Growth Drivers to Watch
- MarTech Expansion: Kestone’s foray into luxury weddings and international markets (Middle East, Southeast Asia, and the US) could drive exponential growth.
- EdTech Diversification: Broadening offerings to include new professional courses like CFA, CPA, and journalism, along with an increased focus on platform monetization, sets the stage for growth.
- Test Assessment Leadership: Leveraging the market moat of technology and distribution, CL Educate is targeting lucrative international markets in addition to consolidating its leadership in India.
Understanding CL Valuations
At current market price, the EV/EBITDA works out to 8.2 on the underlying full year EBITDA of Rs 70 crore. This is cheap for a company with strong presence in most of its business segments.
Also, all the three business segments will throw up positive operating cash flows, and can enable CL to reach net debt free status in 4-5 years.
For discerning value investors, CL Educate presents a rare combination of growth potential, attractive valuation, and market leadership. This is a stock that deserves your attention as it transitions into its next phase of growth and innovation.
(Wisdomsmith advises CL Educate in Investor Relations)