A class act

Cracking the formula

MT Educare is banking on its asset-light model  to gain traction in the tutorials business

On a damp August evening in Mumbai in 1984, 20-year-old Mahesh Shetty was finding it hard to sleep. He looked at the train ticket to Chennai and thought of what a youngster had affectionately told him earlier that day. “Sir, we will miss you if you decide to leave.” The Chennai trip was for the final interview to join the armed forces; the alternative was to stay back in Mumbai and continue teaching at a local coaching institute. By the time Shetty closed his eyes, his mind was made up.

Nearly three decades later, Shetty says he’s never regretted giving up the armed forces. “I was keen on the army but things have turned out pretty well,” he smiles. They certainly have: Shetty’s company, MT Educare, has 68,000 students across 188 centres in 110 locations. It employs 2,500 people (1,000 are teachers) and earned Rs.130 crore in FY12. In March, the company got listed: currently, the stock is quoting at Rs.107.90 — 34% more than its offer price. That’s quite an achievement for someone who started teaching math as a stopgap arrangement at Shetty Academy in Mulund, at a paltry Rs.7.50 per lecture.

Four years at the coaching academy convinced Shetty that branching out was the only way to grow. But he had no money and could barely rustle up an advance of Rs.5,000 to buy a 400 sq ft room in Nahur, a central Mumbai suburb. Once he set up shop with help from his family, Shetty got a huge “confidence booster” — “hundreds” of students from Shetty Academy switched loyalties and joined him. Mahesh Tutorials was in business. In four years, it earned over Rs.30 lakh annually with over 1,000 students. “We were working on margins of 60%,” says Shetty. 

A serious setback wasn’t far away. Shetty learnt that 800 students were attending classes by bus, and concluded there was a huge market for coaching classes in adjoining suburbs. In 1992, he spent Rs.15 lakh on buying and setting up a centre in Chembur — what he didn’t realise is that the coaching business runs on word of mouth; Chembur hadn’t heard of Mahesh Tutorials. “That nearly drove us to bankruptcy,” says Shetty. A lesson was learnt — all new space would now be leased, not bought. “We became very asset light,” he points out.

Corporate coaching

By 2006, Shetty was ready to take his coaching business corporate. In 2007, Helix Investments invested Rs.32.8 crore for a 28.6% holding in MT Educare (the rechristening was part of the corporatisation exercise). “We were too small to be listed. We had to wait. At that point, our revenue was around Rs.36 crore,” says Shetty. When MT Educare was listed earlier this year, Helix made a return of 2.5x its original investment. The private equity player still holds 5.3% in the company, while Shetty has a 43% stake.

Cyrus Driver, who was at Helix then and is currently managing director of Partners Group, a Switzerland-based private markets investment management firm, says that the opportunity for MT Educare was a large, young population in India and inadequacies in the education system. “Besides, the fragmented but large coaching industry had demonstrated an ability to deliver high returns on capital,” he points out. Driver continues on the board of MT Educare as an independent director.

Going corporate meant expanding operations, not just in the number of centres but also courses offered. By 2007, MT Educare was operating in both science and commerce streams till graduation in addition to Chartered Accountancy (CA). The money from Helix was used to expand into states such as Gujarat, Karnataka (pre-university junior colleges), Andhra Pradesh and Tamil Nadu (CA final course). It wasn’t all organic growth.

Last February, MT Educare bought a 51% stake in Chitale’s Personalised Learning, giving it a foothold in the CAT and MAT coaching market. And in January 2010, it tied up with HT Education to expand into North India. Part of the Rs.99 crore raised in the IPO will be used to fund new centres and a pre-university college campus in Mangalore — barring half a dozen centres in Nashik, the company has shunned the franchisee route. 

Challenges ahead

Scaling up further isn’t going to be easy. “This is a people-intensive business, the company needs to spend time on recruiting, training and mentoring its teachers,” Driver says. “Besides, a new city will have a three year gestation period before the brand is established; this happens only after the first batch graduates.”

Currently, MT’s revenue sources are skewed toward Mumbai and high school coaching. Just 50 centres of a total 188 are outside the metro and 75% of revenue comes from Mumbai. While expanding its base is a slow process, the company has made better progress in de-risking its offerings: three years ago, 80% of the revenue came from coaching standards 8th-10th. That’s down to 45% now, with the share of junior college classes growing to 38%. The balance (about 17%) comes from pre-university classes in Karnataka, Gujarat and other markets. 

MT Educare’s fees are also on the higher side compared with similar coaching institutes. An engineering and medical combo for Class XI and XII, for instance, currently costs Rs.1.25 lakh, while a five-subject package for the CA final exam is Rs.61,410; there’s also an average 10% hike in fees every year. Still, its margins aren’t too impressive. Listed competitor Career Point (IIT coaching) has an EBITDA margin of 35%, while MT Educare’s is half that, at 17.69%.

One reason for that is capacity utilisation currently is just 45%, thanks to rapid expansion — from 80 centres in FY08 to 188 now. MT Educare director Chhaya Shastri says margins in most streams are healthy. “At the school level, we have margins of 45%, while it is 30-35% for college,” she explains. New projects are currently in investment phase, which is dragging margins down. “The key is having capacity utilisation of 80%,” Shastri agrees. 

For his part, Driver thinks valuation multiples for education stocks have reduced from the peak of 2010. “Growth rates of 80% per annum are unrealistic,” he says. “But a well-run education business can still grow at 20-40% and maintain a high return on equity.” If Shetty can keep that momentum, he will be even more reassured that he did the right thing by cancelling that train ticket to Chennai all those years ago.