CL Educate IPO gets weak response on Day 1

The initial share sale of CL Educate Ltd opened to a weak response on Monday after brokerage analysts said the share price was too high.

Investors bid for a fifth of the shares on offer on the first of the three-day sale. At the upper end of the price band of ₹500-502, the Delhi-based education services provider expects to raise ₹239 crore. The company will sell 2.18 million new shares to raise ₹109.4 crore, while promoters and investors will sell around 2.57 million shares worth around ₹129.5 crore. CL Educate is backed by private equity investor Gaja Capital.

The offer comes at a time when investors have turned away from companies in the education sector. Many of the key stocks in the sector are sharply down from their record highs as investors become wary of high debt and dwindling profits.

Ravi Sundar Muthukrishnan, co-head of research at ICICI Securities Ltd, said CL Educate generates a return on equity (ROE) of around 8.92%, while the initial public offering (IPO) price translates to a price-to-earnings multiple of around 27 times fiscal year 2016 earnings.

“It sounds heavily stretched on the price front. The valuation is far ahead of justifiable ROE,” said Muthukrishnan.

According to Motilal Oswal Securities Ltd, the company’s ROE and ROCE (return on capital employed) for fiscal year 2016 are sub-par at around 10% as compared to closest peer MT Educare Ltd, which has ROE of around 22% and ROCE of around 30%. In a note dated March 20, Motilal Oswal said the company’s business is also working capital-intensive.

CL Educate’s business comprises test preparation and training services under the Career Launcher brand; publishing and content development; vocational training programmes and operating K-12 schools under the Indus World Schools brand.