Leo Muthu Educational Trust: Ratings Reaffirmed

February 11, 2020

Leo Muthu Educational Trust: Ratings reaffirmed

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Fund-based – Term Loan 40.00 40.00 [ICRA]BBB+(Stable); Reaffirmed Unallocated Limits 5.38 5.38 [ICRA]BBB+(Stable); Reaffirmed Total 45.38 45.38 *Instrument details are provided in Annexure-1

Rationale

The rating reaffirmation continues to favourably consider the established brand name of the Sai Ram Group; the experience of its Trustees in the education sector; and the diversification of revenues across institutions. The rating further derives comfort from Leo Muthu Educational Trust’s (LMET) comfortable liquidity position, supported by its healthy cash flows and alignment of fee receipts to repayment timings. The rating continues to derive comfort from the robust capital structure and coverage indicators despite the on-going debt-funded capital expenditure.

The rating is, however, constrained by the small-scale operations, which is expected to remain similar in the near term. ICRA notes the on-going debt funded capital expenditure towards greenfield and brownfield expansion in school segment, which will support the revenue growth in future, despite exposing the Trust to risk related to timely project completion within budgeted costs and subsequent achievement of desired admission levels. However, comfort is derived from healthy long-term demand for primary and secondary education in Tamil Nadu, especially for the CBSE curriculum. The ratings also factor in the highly regulated nature of the education sector in the state and the intense competition in the sector. However, the established brand presence of the Trust and the proven track record mitigate the risk to some extent. The Stable outlook on the [ICRA]BBB+ rating reflects ICRA’s opinion that LMET will continue to benefit from the extensive experience of the Trustees and the established brand presence of the Group in the education sector. Key rating drivers and their description Credit strengths Two-decade long presence of Sai Ram Group of Institutions in educational sector - LMET was established by Late Mr. Thiru M. Jothiprakasam alias Mr. MJF Lion Leo Muthu in 1989. It runs six educational institutions in Chennai and Thiruvarur in Tamil Nadu. The management is actively involved in the operations of all the six institutions.

Financial profile characterised by healthy liquidity position, profitability, capital structure and coverage indicators - The Trust has a healthy liquidity position, indicated by healthy cash accruals, which is likely to support the on-going capital expenditure and repayment of term loans. The overall profitability of the Trust has remained healthy over the years and stood at 49.1% at the operating level and 34.9% at the net level in FY2019. The net worth of the Trust has remained strong, at Rs. 81 crore, against which the total debt stood at Rs. 20 crore as on FY2019-end. Further, the Trust has adequate cash balances of Rs. 4.8 crore as on FY2019-end (which increased to Rs. 12.6 crore as on September 2019- end). Consequently, the capital structure and coverage indicators have remained strong, as indicated by gearing of 0.2 times, interest coverage of 8.4 times and Total Debt/OPBDITA of 1.2 as on FY2019-end.

Revenue diversification across institutions - The Trust has three matriculation schools, one CBSE school, one polytechnic college and an ITI institute under its gamut. In FY2019, about ~59% of the revenues came from Sai Ram Vidyalaya, Madipakkam (CBSE) and Sai Matriculation Higher Secondary School, Madipakkam. The diversification of revenues across institutions lends stability to the revenues.

Robust demand for primary and secondary education, especially for CBSE curriculum, in Tamil Nadu to drive growth - While the state board syllabus is preferred at the secondary level, CBSE curriculum is increasingly gaining popularity in the primary and secondary levels. This coupled with the established brand image of Sai Ram would help attract students.

Credit challenges Small-scale operations and limited revenue growth in near term – The operating income of the Trust improved by 9% to Rs. 34.6 crore in FY2019 from Rs. 31.6 crore in FY2019, though the scale of operations remains small as the average fees per student has remained low. Going forward, addition of new schools under the CBSE board and higher fees in CBSE schools are expected to aid in revenue growth, which is likely to improve the scale of operations in the medium term.

On-going debt-funded capital expenditure leads to project implementation risk - The Trust is undertaking significant debt-funded capex towards construction of a new school at Vengaivasal, Medavakkam and expansion of Sai Ram Vidyalaya (CBSE), Madipakkan. The new school at Vengaivasal, Medavakkam is expected to be completed by April 2020 and the total expected project cost is Rs. 40.85 crore, which is to be funded by term loan of Rs. 18.07 crore and internal accruals. The total expected project cost for expansion of Sai Ram Vidyalaya, Madipakkam (CBSE) is Rs. 26.64 crore, funded by term loan of Rs. 8.6 crore and internal accruals. The land for the expansion was purchased for Rs. 15.14 crore, while the building approval is awaited. Besides, the Trust has also purchased another land adjacent to the existing premise of Sai Ram Vidyalaya for future expansions at an outlay of ~Rs. 17 crore. The ability of the Trust to commence operations and achieve desired admission levels in the new projects in a timely manner with limited cost overrun remains key monitorable.

Intense competition from other reputed institutions in vicinity - The institutions run by the Trust face stiff competition from other reputed institutions in the vicinity, which puts pressure to attract fresh students. However, considering that the Sai Ram Group has an established brand presence and has been consistently producing academic achievements across all schools, the Trust is insulated from the competition to some extent.

Regulations in Indian education sector - The education sector is regulated, with the state government deciding on the student intake, fees, mandatory facilities, faculty strength, etc. Any adverse government regulations may impact the Trust’s operations, revenues and accruals. The student-teacher ratio is within the stipulated norms for all the institutions.

Liquidity position: Adequate LMET’s liquidity is adequate due to adequate cash accruals and cash balances of Rs. 12.6 crore as on September 2019- end. The fund flow from operations is likely to remain healthy and is expected to support the repayment of the existing term loans as well as the ongoing capex towards the expansion. Although the Trust has significant on-going capital expenditure, the undrawn line of credit is more than what is required by the Trust. Further, adequate moratorium period and long tenure of repayment ensure that the liquidity position would remain healthy over the medium term.

Rating sensitivities

Positive Triggers - ICRA could upgrade LMET’s rating if substantial growth in revenues and profitability leads to higher- than-expected cash accruals. Specific indicators that may lead to rating upgrade will be ROCE of more than 20% on a sustained basis.

Negative Triggers - Negative pressure on LMET’s rating could arise if any decline in revenues and profitability leads to lower-than-expected cash accruals, or any significant debt-funded capital expenditure impacts the liquidity. Specific indicators that may lead to rating downgrade will be DSCR below 2 times.

Analytical approach

Analytical Approach Comments Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not applicable. Consolidation/Standalone The rating is based on the standalone financial statements of the rated entity.

About the company Established in 1989, LMET is one of the well-established educational institutions offering primary, secondary and technical education in Tamil Nadu. LMET is one of the three Trusts which manage the Sai Ram Group of Institutions, the other two being Sapthagiri Educational Trust, Chennai and Sapthagiri Educational and Charitable Trust, Bangalore. LMET was established by Late Mr. Thiru M. Jothiprakasam alias Mr. MJF. Lion Leo Muthu. The Trust presently runs six educational institutions in Chennai, Thiruvarur and Dindigul in Tamil Nadu. For the academic year (AY) 2019-20, LMET has a total student strength of about 8,876 against 8,894 students in AY 2018-19.

In FY2019, the company reported a net profit of Rs. 12.1 crore on an operating income of Rs. 34.6 crore, compared to a net profit of Rs. 10.8 crore on an operating income of Rs. 31.6 crore in the previous year. Key financial indicators (audited) FY2018 FY2019

Operating Income (Rs. crore) 31.6 34.6 PAT (Rs. crore) 10.8 12.1 OPBDIT/OI (%) 48.9% 49.1% RoCE (%) 18.4% 18.4%

Total Outside Liabilities/Tangible Net Worth (times) 0.2 0.2 Total Debt/OPBDIT (times) 0.9 1.2 Interest Coverage (times) 9.4 8.4 DSCR 3.3 2.7

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years Current Rating (FY2020) Rating History for the Past 3 Years Instrument Amount Amount Rating FY2019 FY2018 FY2017 Type Rated Outstanding 11-Feb-2020 18-Jan-19 31-Jan-18 10-Apr-17 [ICRA]BBB+ [ICRA]BBB+ [ICRA]BBB [ICRA]BBB 1 Term Loan Long Term 40.00 19.98 (Stable) (Stable) (Stable) (Stable) Unallocated [ICRA]BBB+ [ICRA]BBB+ [ICRA]BBB [ICRA]BBB 2 Long Term 5.38 - Limits (Stable) (Stable) (Stable) (Stable) Amount in Rs. crore

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument details Date of Issuance/ Coupon Maturity Amount Rated Current Rating and ISIN Instrument Name Sanction Rate Date (Rs. crore) Outlook NA Term Loan NA 11.4% NA 40.00 [ICRA]BBB+(Stable) NA Unallocated Limits NA NA NA 5.38 [ICRA]BBB+(Stable) Source: Leo Muthu Educational Trust

Annexure-2: List of entities considered for consolidated analysis: None

ANALYST CONTACTS K. Ravichandran Srinivasan R +91 44 4596 4301 +91 44 4596 4315 [email protected] [email protected]

Mayank Agrawal Anurag Bhootra +91 79 4027 1514 +91 79 4027 1526 [email protected] [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.

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