Tree House Education & Accessories (THEAL)’ 2QFY2016 results underperformed
our estimates on all parameters. The top-line growth was decent mainly due to
strong addition of 73 new pre-schools. On the operating profit front, the
company reported flattish growth yoy which resulted into lower growth in
Top-line grew ~15% yoy: The company’s top-line grew ~15% yoy to ~Rs57cr,
mainly due to growth in existing pre-schools and addition of new pre-schools. The
company added 73 pre-schools in various cities like Ahmednagar, Goa,
Gurgaon, Jalgaon, Noida, and Ratnagiri, during the quarter.
Poor operating performance drags down Net profit growth: The operating profit came
in at ~Rs30cr, up ~2% yoy. However, operating margins contracted by 700bp yoy
to 52.7%, as the company opened 73 new centres during the quarter, which is the
highest ever in the history of the company in a single quarter. The reported net
profit grew by only ~1% yoy to ~Rs13cr, due to the poor operating performance.
Outlook and Valuation: We continue to remain positive on the stock, as we
believe THEAL will continue to register robust growth going ahead. The growth
would come on the back of consistent expansion of pre-schools and repayment of
debt which would boost earnings. We expect the company to report a CAGR of
~23% in the top-line and ~21% in the bottom-line over FY2015-17E. We
recommend a Buy rating on the stock, with a target price of Rs314.

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