Decoding the Veranda IPO

Veranda Learning Solutions IPO opened for subscription yesterday. Here’s a take on the company’s business and the merits of investing in it.

Some IPO Facts

● Issue Size: ₹200cr ($26.2m) (Entirely a fresh issue)

● Issue Type: Book-built

● Issue Price: ₹130–137 ($1.7) per equity share

● Market Lot: 100

● Issue Breakup: QIB (75%), NII (15%), Retail (10%)

● IPO Close Date: March 31st 2022

● IPO Listing Date: April 7th 2022

Objects of the Issue

Net proceeds are supposed to be utilised for (a) repayment/prepayment of borrowings, (b) growth initiatives.

All About the Company

Veranda was incorporated in 2018 and it is engaged in the business of offering diversified and integrated learning solutions in online, offline, hybrid and blended formats. It offers coaching services for competitive examinations such as UPSC, Chartered Accountant, Banking, Government Examinations etc. to students, graduates, professionals as well as corporate employees.

The company also offers short-term skilling courses. Most of these are offered to the employees of corporations via B2B offerings. Its tech-enabled online learning model allows students to take part in individual, customised, self-paced learning experiences without mandating presence in online classrooms.

The promoters — Kalpathi Aghoram, Kalpathi Ganesh and Kalpathi Suresh — have a combined experience of 40 years in the education sector. They are credited with the establishment of SSI IT Training Centres which were engaged in training students in the short-term computer software courses. Its franchise network gained massive popularity over the last two decades and it quickly expanded all across the country.

Now, despite the company’s interesting offerings and the promoters’ history of educational entrepreneurship, the Veranda IPO has largely attracted “avoid” ratings on the subscription. And, this is why:

Shaky Financials

In FY21, Veranda generated a revenue of ₹2.5cr ($328,410) and registered a loss of ₹8.3cr ($1m). This isn’t an isolated occurrence considering that this loss-making trend has been ongoing for some time. This is peculiar considering that the company has a technology-driven, asset-light and result-oriented method of teaching which has gained popularity especially in the states of Tamil Nadu and Karnataka. Nevertheless, there are a couple of key factors driving Veranda’s inability to turn a profit.

First, the acquisitions. In less than four years of operation, Veranda has indulged in two big acquisitions — Chennai Raceand Edureka — to widen its market foothold and improve its resources (pg. 30, RHP). However, these have turned into meaningful investments running through the opex (operating expense) line with a substantial drag on margins.

Although the acquisition of Edureka, in particular, has enabled Veranda to access international markets like the US and UK, the underwhelming financials for the company make it difficult to gauge whether the business expansion would be sustainable in the long run.

The second thing to consider is the highly-competitive industry in which the company operates. The Indian Edtech sector is one of the most promising segments to have gained traction over the past few years, thanks to the growing capitalisation of companies like Byju’s, Toppr, Vedantu, Unacademy, Doubtnut etc. The post-COVID world has presented immense room for the shift in private tutorship from offline to online modes. The freemium models employed by the new and emerging startups have attracted many users, with a particularly rising interest from the semi-urban and rural areas, that presents a promising opportunity but a highly competitive one.

Operating in such an industry requires the employment of pointed strategies and high opex, something which is reflected in the high Delivery Partner Fees and advertising expenditure. Also, the negative cash flow profile of the company raises questions about its existing IPO valuation which seems rather expensive on an absolute basis. Considering the FY21 annualised revenue of ₹2.5cr on a post-issue basis, the company is expected to list at an EV/Sales of a lofty 350x+. Based on FY22 numbers, EV/Sales would still be fairly steep at 50x+. This doesn’t paint a pretty picture especially when the company has a debt-to-equity ratio of 7.3x and no EBITDA generation in the business.

Even though there are no listed industry peers for Veranda at present, getting there first isn’t always the key to industry dominance, especially when some of your competitors have deep-pocketed financials and an ever-expanding presence.

Having said that, it is interesting to see that the IPO has already reached oversubscription on its second day of issue (1.21x). The retail portion has been booked 6.33 times which shows that the analysts’ overwhelming thumbs down to the issue has been largely ignored by the public.

Here’s why that might be.

The Characteristic Growth Arc

Yes, the acquisitions have been a drain on finances. But they have also given a boost to the company’s domestic expansion as well as to its overseas customer base.

Here are some facts to present a better idea. During the nine-month period ending December 31st 2021, Veranda has:

● enlisted 42,667 students and professionals across all its courses (16,793 in the offline and 25,874 in the online mode)

● employed eight student advisors and 166 mentors

● added 25 preferred delivery centres across 25 cities and towns

● received 53.4 million hits on its websites (all portals combined)

This shows that the company is in a nascent growth phase and is propelled to charge ahead. It also has a modest fee structure as compared to most other rivals and has a strong brand presence in the Southern states which is rapidly expanding.

Coming to the loss-making books, one shouldn’t fail to mention that the company has shown a good turnaround from over a year ago when it had failed to generate any revenue at all. Today, it stands on a more solid footing. Even though Edureka’s acquisition has been expensive, its contribution to Veranda’s overall earnings (97% as of 6MFY22) can’t be ignored.

The Edtech market size in India is poised to expand by 3.7 times with a 39% CAGR from $2.8bn to $10.4bn in 2025. Considering the ticket size of funding in the sector, India is only second to the United States and has a very promising future, especially in the K-12 (Kindergarten to 12th grade) segment.

The point is that there is a lot of fodder for the taking here for new and emerging entities like Veranda. The company has a sizable presence in the test preparation market and is planning to expand into the K-12 segment shortly. Despite having a low track record and muted financials, the market is ripe for growth. Going for a public issue at this point, therefore, might be good for giving a lift to the brand presence and scale.

However, before investing, one must remember that the company is forecasted to remain loss-making in the medium-term. Unless one’s criteria of investment is accommodative of overcast returns on an immediate basis, they would be better advised to avoid this issue.

(Originally published March 30th 2022 in the TRANSFIN E-O-D Newsletter)