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Leo Muthu Educational Trust: Rating Reaffirmed

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Leo Muthu Educational Trust: Rating Reaffirmed March 11, 2021 Leo Muthu Educational Trust: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Long-term Fund-based – Term 40.00 32.04 [ICRA]BBB+ (Stable); reaffirmed Loan Long-term – Unallocated 5.38 13.34 [ICRA]BBB+ (Stable); reaffirmed facility Total 45.38 45.38 *Instrument details are provided in Annexure-1 Rationale The rating reaffirmation considers the expected steady operational and financial performance of the Trust in the near term, supported by its established track record and brand presence. While the Trust’s revenues moderated in the current fiscal because of the pandemic, the expected recovery in the student enrolments and the likely increase in student strength in Sai Ram Leo Muthu Public School (the new CBSE school), will support is revenue growth by ~8-10% in AY2022. The rating reaffirmation factors in the conservative capital structure, despite debt-funded capital expenditure in the recent past. Further, the trust has deferred the debt-funded capital expenditure towards expansion of Sai Ram Vidyalaya, which has reduced the actual spend in FY2021 much lower than our earlier estimates. The rating, however, is constrained by the increase in debt levels, which has moderated the coverage indicators and has resulted in higher debt repayment obligation in FY2022 and FY2023. Nevertheless, the improvement in net cash accruals to greater than Rs. 10.0 crore expected during the period is likely to support the huge repayments. The scale has been impacted in the current fiscal because of dropouts across institutions and prolongation of the academic year caused by the pandemic. However, comfort is derived from healthy long-term demand for primary and secondary education in Tamil Nadu, especially for the CBSE curriculum. The rating factors 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 reflects ICRA’s expectation that the operational and financial performance of the Trust will continue to benefit from its established track record and brand presence, aiding in healthy student enrolments to support growth in revenues and earnings. Key rating drivers and their description Credit strengths Established track record and brand presence in educational sector – The Trust enjoys reputation and established track record of more than three decades in the school education sector. The Trust has a wide regional presence with five schools, one polytechnic college and one ITI institution in Tamil Nadu. Comfortable student enrolments across major institutes and a competitive fee structure lend visibility to revenues and cash flows. Financial profile characterised by healthy capital structure – Despite debt-funded capital expenditure towards the new CBSE school in the recent past and increase in debt levels because of availing Covid loans, the Trust’s capital structure is likely to remain comfortable with gearing of 0.2-0.3 times in the near term. Postponement in the capital structure towards expansion www.icra .in Page | 1 of Sai Ram Vidyalaya provides some comfort with no further requirement to secure term loans in the near term. This is expected to maintain the capital structure healthy. Revenue diversification across institutions – The Trust has three matriculation schools, two CBSE schools, one polytechnic college and an ITI institute under its gamut. In the current academic year, about ~55% of the revenues is likely to come from Sai Ram Vidyalaya, Madipakkam (CBSE) and Sai Matriculation Higher Secondary School, Madipakkam. In the next academic year, the revenue concentration is likely to moderate further with increase in revenue expected from the new CBSE school. The revenue diversification across institutions lends stability to its operating income. 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 the Sai Ram Group would help attract students. Credit challenges Increase in debt levels – The Trust had availed Covid loan to the tune of Rs. 6.67 crore, which has resulted in an increase in debt levels at present. This is likely to moderate the coverage indicators in the current fiscal, given the pandemic’s adverse impact on its scale and profitability. Further, this has led to huge repayment obligation of Rs. 8.23 crore and keeps pressure on DSCR in the next fiscal. However, with expected improvement in scale and profitability in the next fiscal and no debt-funded capital expenditure planned in near term, the net cash accruals are anticipated to improve, and this is likely to support the huge repayment. Modest scale of operations – The scale of operations has remained modest over the years. In FY2020, the revenue growth was driven by increase in average fees collected. However, the earnings were impacted by higher donations given to a group trust. In the current fiscal, the reduction in fees and the prolongation of the current academic year will impact the revenues by 15-20% and further affect the earnings. However, the cost reduction measures taken by the management is likely to support the margin to some extent. Going forward, with the expected increase in admission levels in all the institutions, the scale and earnings are anticipated to improve. 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 favourable cash accruals, cash balances and the Covid loans availed in the current fiscal. The fund flow from operations is likely to improve and is expected to support the huge repayments of the existing term loans. Postponement of capital expenditure towards expansion of Sai Ram Vidyalaya provides some comfort. Further, adequate moratorium period and tenure of repayment ensure that the liquidity position would remain adequate over the medium term. Rating sensitivities Positive factors – ICRA could upgrade the rating if there is sustainable growth in revenue and profitability. Negative factors – Negative pressure on the trust’s rating could arise if there is lower than expected cash accruals and/or any substantial debt-funded capital expenditure leading to DSCR lower than 1.5 times on a sustained basis. www.icra .in Page | 2 Analytical approach Analytical Approach Comments Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support Not Applicable For arriving at the rating, ICRA has considered the standalone financial Consolidation/Standalone statements of Leo Muthu Educational Trust 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 the Late Thiru M. Jothiprakasam alias Mr. MJF. Lion Leo Muthu. The Trust, at present, runs six educational institutions in Chennai, Thiruvarur and Dindigul in Tamil Nadu. For the academic year (AY) 2020-21, LMET has a total student strength of about 8,843 against 8,876 students in AY2019-20. Key financial indicators (audited) Prabha Industries FY2019 FY2020 Operating Income (Rs. crore) 34.6 35.2 PAT (Rs. crore) 12.1 8.0 OPBDIT/OI (%) 49.1% 37.4% RoCE (%) 18.4% 11.7% Total Outside Liabilities/Tangible Net Worth (times) 0.3 0.3 Total Debt/OPBDIT (times) 1.2 1.7 Interest Coverage (times) 8.4 5.4 DSCR (times) 2.7 2.9 PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest, Taxes and Amortisation; ROCE: PBIT/Avg (Total Debt + Tangible Net Worth + Deferred Tax Liability - Capital Work in Progress); DSCR: (PBIT + Mat Credit Entitlements - Fair Value Gains through P&L - Non-cash Extraordinary Gain/Loss)/(Interest + Repayments made during the Year) Status of non-cooperation with previous CRA: Not applicable Any other information: None www.icra .in Page | 3 Rating history for past three years Chronology of Rating History Current Rating (FY2021) for the past 3 years Amount Date & Rating Date & Rating Date & Rating Instrument Amount Outstanding Date & Rating in FY2021 Type Rated as of Dec 31, in FY2020 in FY2019 in FY2018 (Rs. crore) 2020 (Rs. crore) Mar 11, 2021 Feb 11, 2020 Jan 18, 2019 Jan 31, 2018 Long [ICRA]BBB+ [ICRA]BBB+ [ICRA]BBB 1 Term Loan 32.04 32.04 [ICRA]BBB+ (Stable) term (Stable) (Stable)
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