Leo Muthu Educational Trust

January 31, 2018

Summary of rated instruments Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Term Loan 27.88 25.12 [ICRA]BBB (Stable); reaffirmed Unallocated facility - 20.26 [ICRA]BBB (Stable); reaffirmed Total 27.88 45.38

Rating action ICRA has reaffirmed the long-term rating of [ICRA]BBB (pronounced ICRA triple B) to the Rs. 25.12-crore term-loan facility and Rs. 20.26-crore unallocated facility of Leo Muthu Educational Trust (LMET)1. The outlook on the long-term rating is ‘Stable’. The rated amounts have been enhanced from Rs. 27.88-crore to Rs. 45.38-crore.

Rationale The reaffirmation of the rating factors in the increase in revenues as well as the healthy operating margins witnessed by the Trust in FY2017 and the current fiscal, driven by increase in fees, coupled with growth in student base in Sai Ram Vidyalaya, Madipakkam and Sri Sai Ram Polytechnic College, West Tambaram. The rating also considers the established brand name of the Sai Ram Group, experience of the Trustees in the education sector, diversified geographical presence of the institutions and comfortable student-teacher ratio of the institutes. ICRA notes the healthy long-term demand for primary and secondary education in Tamil Nadu, especially for the CBSE Board. ICRA also notes the on-going debt funded capital expenditure towards expansion of Sai Ram Vidyalaya, Madipakkam (CBSE) and construction of a new CBSE school at Medavakkam, which is expected to support revenue growth in the near to medium term. However, the significant addition of debt is expected to impact the capital structure and coverage indicators of the Trust to an extent in the near to medium term. The rating is constrained by the highly regulated nature of the education sector in the state, intense competition in the sector resulting in pressure to attract students as well as to attract and retain quality faculty. However, established brand presence mitigates the risk to some extent. ICRA also takes note of the irregular cash flows against more periodic repayment obligations, which necessitates prudent cash-flow management to ensure regular debt servicing. Going forward, the ability of the Trust to achieve healthy revenue growth while sustaining its profit margins will be critical in generating strong cash flows to meet significant debt obligations in the near to medium term.

Outlook: Stable ICRA believes Leo Muthu Educational Trust will continue to benefit from the extensive experience of the Trustee 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 generates strong cash flows and strengthens the financial risk profile. 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.

1 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications

Key rating drivers

Credit strengths 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) Shri. MJF. Lion Leo Muthu in 1989 and the Trust currently runs six educational institutions in Chennai and Thiruthuraipoondi (Tamil Nadu). The management is actively involved in the operations of all the six institutions.

Diversified location of schools lends stability to revenues– The Trust has two schools in Madipakkam, a school and a polytechnic college at West Tambaram, a school at Thiruthuraipoondi and an I.T.I institution at Vedachandur under its gamut. Diversified geographical presence of schools and colleges lends stability to the revenues.

Robust demand for primary and secondary education, especially for the CBSE board, in Tamil Nadu to drive growth going forward- While the preference in secondary level is still for the state board syllabus, the preference for CBSE is increasing in the primary and secondary level. This, coupled with the established brand image of Sai Ram aids in attracting students.

Financial profile characterised by steady growth in revenues and healthy operating margins- During FY2017, there was a ~4.5% increase in revenues due to increase in fees collected in all the institutions under LMET except Sai Ram Polytechnic College, West Tambaram. The Trust’s operating margin stood at 50.2% in FY2017 (though the same declined from 52.6% in FY2016) and the net margin at 35.1% in FY2017.

Credit weaknesses Trust in the midst of significant debt-funded capital expenditure, - The total project cost of the new school at Vengaivasal, Medavakkam is Rs. 36.5 crore (funded by Rs. 22.5-crore term loan and the remaining through internal accruals) of which work worth Rs. 22.5 crore has been completed as on March 31, 2017. The remaining Rs. 14.0 crore (to be funded through Rs. 13.19-crore term loans) is expected to be completed by March 2018. 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. 17.50-term loan and the remaining through internal accruals) out of which Rs. 12.91 crore is towards land and the remaining is towards construction of building and furnishing. Land purchase has been completed at a cost of Rs. 12.99 crore and the construction is expected to be completed by December 2018. Thus the debt levels are expected to rise in the near to medium term and would impact the capital structure and coverage indicators. However, the same are expected to remain comfortable given the healthy accruals of the Trust.

Demand for polytechnic courses remains subdued- The demand for polytechnic colleges remains subdued, impacting revenue growth for the Sai Ram Polytechnic College, West Tambaram. However, the intake in AY2018 witnessed a slight increase from 865 in AY2017 to 894 on account of decrease in fees charged for each of the courses.

High 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.

Lumpiness in cash flows could lead to misallocations- LMET has repayment obligations of about Rs. 3.18 crore in FY2018 and the same are expected to increase from FY2019 with additional loans expected to be secured for the new school at Vengaivasal and the expansion at Sai Ram Vidyalaya, Madipakkam. ICRA notes the irregular nature of cash flows against more periodic repayment obligations, which necessitates prudent cash-flow management to ensure regular debt servicing.

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.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria:

Corporate Credit Rating Methodology

About the group: 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 Thiru M. Jothiprakasam (alias) Shri. MJF. Lion Leo Muthu. The Trust runs five educational institutions in Chennai and Thiruthuraipoondi (Tamil Nadu). For the academic year (AY) 2017-18, LMET has total student strength of about 8,890 against 9,004 students in AY 2016-17.

Leo Muthu Educational Trust reported a net profit of Rs. 10.1 crore on an operating income of Rs. 28.7 crore in FY2017 compared to a net profit of Rs. 9.6 crore on an operating income of Rs. 27.5 crore in the previous year.

Key Financial Indicators (Audited) FY 2016 FY 2017

Operating Income (Rs. crore) 27.5 28.7 PAT (Rs. crore) 9.6 10.1 OPBDIT/ OI (%) 52.6% 50.2% RoCE (%) 20.3% 18.1%

Total Debt/ TNW (times) 0.3 0.2 Total Debt/ OPBDIT (times) 1.1 0.5 Interest coverage (times) 14.0 17.7 NWC/ OI (%) 16.8% 2.2%

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years:

Current Rating (FY2018) Chronology of Rating History for the past 3 years Date & Date & Date & Date & Amount Amount Date & Rating in Rating in Rating in Rating in Rated Outstanding Rating FY2018 FY2017 FY2016 FY2015 Instrument Type (Rs. crore) (Rs Crore) Jan 2018 April 2017 - Jan 2016 Nov 2014 1 Term Loan Long 25.12 14.09 [ICRA]BBB [ICRA]BBB - [ICRA]BBB [ICRA]BBB- term (Stable) (Stable) (Stable) (Stable) 2 Proposed Long 20.26 - [ICRA]BBB [ICRA]BBB - [ICRA]BBB [ICRA]BBB- 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

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-2018 2.62 [ICRA]BBB (Stable) NA Term Loan 2 Jan-2016 - Dec-2023 22.50 [ICRA]BBB (Stable) NA Proposed Limit - - - 20.26 [ICRA]BBB (Stable) Source: Leo Muthu Educational Trust

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

Ms. Dharanija R Ms. Ankita Vasa +91 44 4297 4311 +91 80 4922 5513 [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:

+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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