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Leo Muthu Educational Trust Leo Muthu Educational Trust January 18, 2019 Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Term Loan 25.12 40.00 [ICRA]BBB+ (Stable); Upgraded from [ICRA]BBB (Stable) Unallocated 20.26 5.38 [ICRA]BBB+ (Stable); Upgraded from [ICRA]BBB (Stable) Total 45.38 45.38 *Instrument details in Annexure -1 Rationale The rating upgrade factors in the Trust’s comfortable liquidity position as indicated by strong cash flows due to healthy margins, a substantial cash balance vis-a-vis debt, and alignment of cash flows to repayment timings. The rating also derives comfort from the strong capital structure and coverage indicators despite the on-going debt-funded capital expenditure. The rating also considers the established brand name of the Sai Ram Group, experience of the Trustees in the education sector and diversification of revenues across institutions. The rating is constrained by small scale of operations and limited revenue growth in the near term. ICRA notes the on-going debt funded capital expenditure towards construction of a new Central Board of Secondary Education (CBSE) school at Vengaivasal and expansion of Sai Ram Vidyalaya, Madipakkam (CBSE), which is likely to aid in revenue growth in the medium term. 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 to be seen. However, the healthy long-term demand for primary and secondary education in Tamil Nadu, especially for the CBSE curriculum, is expected to support revenue growth in the near to medium term. The rating is constrained by the highly regulated nature of the education sector in the state and intense competition in the sector, resulting in pressure to attract students as well as to attract and retain quality faculty. However, established brand presence of the Trust mitigates the risk to some extent. Outlook: Stable The Stable outlook reflects ICRA’s expectations that Leo Muthu Educational Trust will continue to benefit from the extensive experience of the Trustees in the education sector and the established brand presence of the Group, which has helped in attracting students over the years. The outlook may be revised to Positive if substantial growth in revenue and profitability strengthens the financial risk profile further. The outlook may be revised to Negative if cash accruals are lower than expected, or if any further capital expenditure weakens the capital structure and liquidity. Key rating drivers Credit strengths Financial profile characterised by healthy liquidity position, operating margins, capital structure and coverage indicators- The Trust has a healthy liquidity position, indicated by strong fund flow from operations which is likely to support the on-going capital expenditure and repayment of term loans. The net debt as on March 31, 2018 was minimal given the strong cash balance. The Trust’s margins have remained healthy over the years and stood at 48.9% at the operating level and 34.3% at the net level in FY2018. The capital structure and coverage indicators have remained strong 1 as indicated by gearing of 0.2 times as on March 31, 2018, Total Debt/ OPBDITA of 0.9 times, interest coverage of 9.4 times, NCA/Total debt of 103.0% and DSCR of 3.3 times in FY2018. Presence of the Sai Ram Group of Institutions in the educational sector for more than two decades– LMET was established by Thiru M.Jothiprakasam alias Mr. MJF Lion Leo Muthu in 1989 and the Trust runs six educational institutions in Chennai and Thiruthuraipoondi in Tamil Nadu. The management is actively involved in the operations of all the six institutions. Diversification of revenues across institutions– The Trust has three matriculation schools, one CBSE school, one polytechnic college and an ITI institute in Vedachandur, Tamil Nadu under its gamut. In FY2018, about ~59% of the revenues came from Sai Ram Vidyalaya, Madipakkam (CBSE) and Sai Matriculation Higher Secondary School, Madipakkam. Diversification of revenues across institutions lends stability to the revenues. Robust demand for primary and secondary education, especially for the CBSE curriculum, in Tamil Nadu to drive growth - While the preference in the secondary level is still for the state board syllabus, the preference for CBSE curriculum is increasing in the primary and secondary levels. This coupled with the established brand image of Sai Ram aids in attracting students. Credit challenges Trust undertaking debt-funded capital expenditure- The total project cost of the new school at Vengaivasal, Medavakkam is Rs. 36.5 crore, funded by Rs. 16.0-crore term loan (total sanction of Rs. 22.5 crore) and the remaining through internal accruals. The approvals are in place and about 84% of the project has been completed as of January 2019. The total project cost of the expansion plan of Sai Ram Vidyalaya, Madipakkam (CBSE) is Rs. 23.33 crore, which is planned to be funded through Rs. 11.20-term loan (total sanction of Rs. 17.50 crore) and the remaining through internal accruals out of which land purchase for Rs. 12.90 crore has been completed, while the building approval is awaited. The ability of the Trust to commence operations and achieve admission in the new projects in a timely manner with limited cost overruns, and thereby increase its revenues and profitability will remain key rating factors. Small scale of operations and limited revenue growth in the near term- The scale of operations has remained small as the average fees per student has remained low despite a large number of students. 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. Intense competition from other reputed institutions in the vicinity; however, the established brand presence helps attract students to some extent- The institutions run by the Trust faces 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 has been insulated from the competition, to some extent. Education sector in India is highly regulated; any adverse government regulations may impact revenue growth and accruals- The education sector is highly regulated with the government deciding on the maximum student intake, fees, mandatory facilities, faculty strength and even faculty salary to an extent. Any adverse government regulations may impact the Trust’s revenue growth and accruals. The student-teacher ratio is within the stipulated norms for all the institutions. Liquidity position 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 pending construction in both the projects. Although the Trust has significant on-going capital expenditure, the undrawn line of credit is more than what is required by the Trust, given its strong cash accruals and healthy cash balances, indicating a healthy liquidity position. Adequate moratorium period and long tenure of repayment ensure that the liquidity position would remain healthy over the medium term. 2 Analytical approach Analytical Approach Comments Applicable Rating Methodologies Corporate Credit Rating Methodology Parent/Group Support NA Consolidation / Standalone Rating is based on standalone financial statements About the company Established in 1989, LMET is one of the well-established educational institutions offering primary, secondary and technical education in India. LMET is one of the three trusts which manage the vast Sai Ram Group of Institutions, the other two being Sapthagiri Educational Trust (SET) – Chennai and Sapthagiri Educational and Charitable Trust – Bangalore. LMET was established by Mr. Thiru M. Jothiprakasam alias Mr. MJF. Lion Leo Muthu. The Trust runs six educational institutions in Chennai, Thiruthuraipoondi and Dindigul in Tamil Nadu. For the academic year (AY) 2018-19, LMET has a total student strength of about 8,894 against 8,890 students in AY 2017-18. Key financial indicators (Audited) FY2017 FY2018 Operating Income (Rs. crore) 28.7 31.6 PAT (Rs. crore) 10.1 10.8 OPBDIT/ OI (%) 50.2% 48.9% RoCE (%) 18.1% 18.4% Total Debt/ TNW (times) 0.3 0.2 Total Debt/ OPBDIT (times) 1.1 0.9 Interest Coverage (times) 14.0 9.4 NWC/ OI (%) 2.2% 3.9% Status of non-cooperation with previous CRA: Not applicable Any other information: None 3 Rating history for last three years: Chronology of Rating History for Current Rating (FY2019) the past 3 years Amount Date & Amount Outstanding Date & Rating Date & Rated as on Sep 30, Rating in Rating in (Rs. 2018 Date & Rating in FY2018 FY2017 FY2016 Instrument Type crore) (Rs. crore) Jan 2019 Jan 2018 Apr 2017 - Jan 2016 1 Term Loan Long 40.00 18.0 [ICRA]BBB+ [ICRA]BBB [ICRA]BBB - [ICRA]BBB term (Stable) (Stable) (Stable) (Stable) 2 Unallocated Long 5.38 [ICRA]BBB+ [ICRA]BBB [ICRA]BBB - [ICRA]BBB facility term (Stable) (Stable) (Stable) (Stable) 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 4 Annexure-1: Instrument Details Date of Amount Issuance / Coupon Maturity Rated Current Rating and ISIN No Instrument Name Sanction Rate Date (Rs. crore) Outlook NA Term Loan 1 Jan-2016 - Dec-2023 22.50 [ICRA]BBB+ (Stable) NA Term Loan 2 Apr-2018 - Dec-2024 17.50 [ICRA]BBB+ (Stable) NA Unallocated facility - - - 5.38 [ICRA]BBB+ (Stable) Source: Leo Muthu Educational Trust 5 ANALYST CONTACTS Mr.
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