Veranda Learning Solutions Limited - IPO Note

Educational Institutions

Veranda Learning Solutions Limited - IPO Note

Educational Institutions

Price range
Rs. 130 – 137
Issue Period:
Mar 29, 2022
Mar 31, 2022
Rating
Avoid
March 26, 2022

Stock Info

Sensex
57362.20
CNX Nifty
17153.00
Face value (Rs.)
10
Market lot
100
Issue size
Rs. 200 cr.
Public Issue
1.459 cr. shares
Market cap post IPO
735 – 764 cr.
Equity Pre - IPO
4.12 cr.
Equity Post - IPO
5.58 cr.
Issue type
Fresh Issue

Shareholding (Pre IPO)

Promoters
89.22%
Public
10.78%
Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Promoters
65.87%
Public
34.13%
Source: Ace equity, StockAxis Research

Key Strengths and Strategies

Diversified Course Offerings and Delivery Channels
Veranda offers a wide range of learning solutions to students and professionals through courses such as competitive exams, professional courses, short term up-skilling and re-skilling courses in various languages via online, offline hybrid, offline blended, campus in campus, and online live instructor led learning models. As a result, the company believes that its services give it a competitive advantage over other players who are more course-specific.

Technology-driven and Asset Light Business Model
Veranda's business model relies on technology to give self-paced digital courses. It offers a big library of digital content, study materials, and test series, which it plans to swiftly expand across India. All digital content is stored in cloud-based labs and may be viewed from anywhere in the world. The firm invests heavily in content, courseware, and technology, with only a little amount in actual assets. It is increasing its offline presence by partnering with Preferred Delivery Partners (PDPs), who will create and administer Preferred Delivery Centres (PDCs). According to the firm, this will allow it to quickly extend its network with minimal expenditure.

Acquisition of Edureka Provided a Boost to the Company and Brand
The company bought a 100% in Brain4ce Education Solutions Private Limited (Edureka) in September 2021. The company entered the market for instructor-led learning in the niche information technology (IT) field with the acquisition of Edureka. YouTube channel of Edureka has over 3 million subscribers, making it one of the most popular in the IT education business, according to the company. Customers from all over the world use Edureka, including those from the United States and the United Kingdom. The Company now has access to these worldwide markets and it plans to continue to grow its international customer base.

Addition of New Courses and Offerings
The company plans to offer early-age academic tech-infused courses, such as (a) engaging with educational institutions such as K-12 schools and colleges to deliver high-quality digital content in the form of video lectures, books, regular tests, and mock exams, and (ii) exam-oriented courses for various college entrance examinations. It also plans to expand its services to working professionals by offering new certificate courses, including those offered through university-affiliated programmes.

Such new offerings, according to Veranda, will increase brand awareness and market share. As a result, it intends to continue extending services throughout India, primarily through scalable business partnerships. It may also continue to examine strategic expansion opportunities that may arise in the future in this regard.

Risks

Highly Competitive Business Environment: The market for exam-oriented courses and training solutions is fiercely competitive, with small, unorganised players dominating. Each player competes for the same students in this extremely concentrated market.

Revenue Concentration: Edureka, a company that Veranda just bought in September 2021, generates a significant portion of the revenue (~97%). Cash flow may be harmed if students or IT professionals are not attracted.

Lower Retention Rate of Students: On a consolidated basis, the retention rate of Veranda in FY21 and H1FY22 is 21% and 18%, respectively. For Edureka, the three year average retention rate is 20.3%. If the company is unable to retain or attract students, it may have a negative influence on the company's operations and finances.

May Face Risks Associated with the NCD: Recently, the Company issued fully paid-up, secured, redeemable, NCD carrying a coupon rate of 4% per annum aggregating to Rs.73.8 crores to certain former shareholders and Promoters of Edureka. These are secured by way of pledge of Edureka equity shares which is 40.44% of the equity share capital of Edureka. If Verdana is not able to service payment obligations, the NCD holder will have the option to enforce the pledge on Edureka shares.

Company Description

Incorporated in November 2018, Veranda Learning Solutions (Veranda) is engaged in the business of offering learning solutions in online, offline hybrid, and offline blended formats to students and learners. It provides long-term and short-term preparatory courses for students preparing for UPSC exam, State Public Service Commission, Staff Selection Commission, Banking, Insurance, Railways and Chartered Accountancy. It also provides customised short term skilling courses, long term courses and other corporate courses.

Veranda offers services through four wholly-owned subsidiaries viz. Veranda Race Learning Solutions Private Limited (Veranda Race), Veranda XL Learning Solutions Private Limited (Veranda CA), Veranda IAS Learning Solutions Private Limited (Veranda IAS), and Brain4ce Education Solutions Private Limited (Edureka).

During 9MFY22, a total of 42,667 students and professionals have enrolled across courses, out of which 16,793 were in offline models and 25,874 in online model. Also, during the same period, Veranda had employed 8 student advisors, 166 mentors, and operate 25 Preferred Delivery Centres (PDCs) across 25 cities and towns in 2 states.

Valuation

We believe Verdana operates in a highly competitive industry, with several significant start-ups capable of quickly gaining market share thanks to their deep finances and higher rounds of funding. Furthermore, if we consider the unorganised side of the sector, there are several small players in every corner of the country that could act as roadblocks to the company's market share growth.

Edureka (hardly has a 20% three-year average retention rate) was bought in September 2021, and it has contributed 97 percent to the company's topline. Before recommending an investment in Veranda, we'd like to monitor the company's success, particularly revenue from Edureka.

It should also be highlighted that the company has commenced operations in December 2020, which gives us little faith in the company's ability to compete in the listed area. The company does not make any profits, and based on post-issue shareholdings, the issue is valued at 24.7x Price/Sales (Annualized sales based on H1FY21), which we believe is excessive given the company's lack of a track record of performance, as well as several risks and concerns that must be considered, and thus we rate the issue as AVOID.

Brief Financial Details

Particulars (Rs. in Crores) H1FY22 FY21 FY20 FY19 (05 Months)
Revenue 15.46 2.54 - -
EBITDA -15.05 -7.63 -0.20 -0.10
PAT -18.27 -8.28 -0.20 -0.10
RoNW (%) -80.46* NA NA NA
Cash and Cash equivalents 1.34 0.02 - -
Reserves -14.89 -7.06 -0.29 -0.10

* Not Annualized

Key Information

Use of Proceeds:
The total issue size is Rs. 200 crores, which is entirely a Fresh issue. From the net proceeds, the company is expected to use 1) Rs. 60 crores in repayment or pre-payment, in part or full of all or certain of the borrowings 2) Payment of acquisition consideration of Edureka or repayment of a bridge loan availed specifically for the purpose of discharge of such acquisition consideration of Edureka 3) Growth initiatives, and 4) General Corporate Purposes.

Book running lead managers:
Systematix Corporate Services Limited

Management:
Kalpathi Suresh (Promoter and Executive Director cum Chairman), Kalpathi Aghoram (Promoter and Non-Executive Director cum Vice-Chairman), Kalpathi Ganesh (Promoter and Non-Executive Director), and R Rangarajan (Chief Financial Officer).