CL Educate’s weak listing reinforces investing basics
No matter how buoyant the markets are, the weak listing reinforces the importance of investment basics such as price in conjunction with sector risks, say analysts
With an estimated Rs20,000 crore worth of initial public offerings (IPOs) set to hit the market in the coming months, investors would do well to decipher the factors that led to CL Educate Ltd’s disappointing listing. Last week, the stock listed at a 20% discount to the issue price.
No matter how buoyant the markets are, the weak listing reinforces the importance of investment basics such as price in conjunction with sector risks, says Daljeet Singh Kohli, head of research at IndiaNivesh Securities Ltd.
Siddhartha Khemka, head, equity research (wealth) at Centrum Broking Ltd, points to the importance of business model and track record. “Any company with weak financials and weak fundamentals is not expected to do well upon listing,” he says.
Ankit Tikmany, an analyst at IIFL Wealth and Asset Management Ltd, points out that the weak listing is a lesson in disguise for normal investors.
So what led to the dismal listing? A few things stands out. One is valuations. The Street is replete with reports of how expensive the stock was priced. The issue price pegged the stock valuation at 27 times the current fiscal year earnings per share estimates, substantially higher than its comparable peer MT Educare Ltd.
Of course, Avenue Supermarts Ltd’s (D-Mart) IPO proved that investors do not mind paying a premium if the company is generating superior financial performance. But CL Educate did not tick this box either. Revenue growth in recent years has been volatile, and profitability and return ratios are trailing peers by a wide margin.
The second set of reasons pertains to the industry. Despite its lure, the education sector has proved to be a wealth destroyer for equity investors till now. Tree House Education and Accessories Ltd, Educomp Solutions Ltd, and Career Point Ltd are way below their listing prices. Trading in Everonn Education Ltd is suspended. MT Educare, which did relatively better, is only 5% higher than its IPO price. “Majority of the listed companies in this sector have failed to live up to the expectations,” adds Khemka of Centrum Broking.
According to Sahil Nandkumar, an analyst at Choice Broking, the sector has few entry barriers and is highly competitive. This makes it difficult for the companies to maintain competitive advantages. Almost half of CL Educate’s revenue comes from competitive exams preparation business, which is prone to changes in examination patterns. As an example, Choice Broking points to the sharp drop in enrolments for CL Educate’s civil service preliminary examination in 2016. Career Point is also a case in point. Enrolments at its tutorial business fell sharply a couple of years back when entrance exam patterns for engineering courses were changed.
That brings us to the pertinent question. What makes for a successful IPO investment then? Fundamentally sound firms with strong business prospects at a reasonable valuation will always earn investors good returns in the primary market, says Nandkumar of Choice Broking.
Tikmany of IIFL Wealth adds, “The successful ones have usually shown solid investor appetite on the back of a robust business model and tremendous future earnings potential.”
Perhaps CL Educate’s weak listing was a foregone conclusion, since the issue was subscribed less than two times.