Career Point (CPIL) IPO – Shady Management,Falling Margins,Regulatory Risk and Expensive Valuation

Career Point is coming out with an IPO to raise $25mm to fund its expansion plans.The Company is part of India’s Education Sector which is one of the hottest investment sectors till now.However the company is a major disappointment.The other Education plays like Everonn,NIIT seems miles ahead of this company.Career Point is essentially a Tutorial Based Company coaching Students to pass competitive exams like IIT,AIEEE and various other engineering and medical tests.This Competitive Exam Coaching Industry has become quite big in recent times with a number of players like Bansal,Akash and others.There is little value add or entry barrier in this business.It is now trying to enter the school business known as the K12 segment.Here are some of the features gleaned from their DHRP.This company reminds me of another Junk IPO Praskash Steelage which had its promoters convicted of Tax Evasion.Here are the Pros and Cons of the Company.Note I am loath to discuss a company with Dubious Management accused of Shady Dealings,but for investors who are willing to do so here is a feature list.Career Point Analysis – Shady Management,Regulatory Risk and Expensive Valuation.

Concerns

1) Shady Management – Income Tax Raids on the company and its promoters found $1.3 million in unaccounted cash and jewelery,cash and documents were impounded.The promoters have been accused of falsifying accounts,evading tax and Registrar of Companies (ROC) and Service Tax Department have also served notices.Here is the excerpt from the DHRP

“The income tax authorities have carried out search and seizure operations in the premises of  our Company and the residential premises of our Promoters and Mr. Shailendra Maheshwari. During these operations one of our Promoters, Mr. Om Prakash Maheshwari, inter alia, accepted unaccounted income of our Company, the Promoters and their relatives amounting to Rs. 60 million (approx.). These operations have resulted in notices being issued by the income tax authorities, service tax authorities and the RoC seeking certain clarifications and information from us. Any adverse outcome from such proceedings, may adversely affect our business, financial condition and results of operation.”

2) Regulatory Risk – The “Kota Model” of Coaching has come under heavy criticism by Top Institutes.Kota is a small town in India’s Desert State of Rajasthan.It has become famous as the Coaching Capital attracting students from all over the country.With IITs deciding on giving greater weightage on school exams,the Kota model might be finished.With more than 50% of the Sales and Profits derived from the Kota Centre,the company is a concentrated play in danger of a huge regulatory risk

3) Falling Growth Rates and Increasing Competition – Company has good margins of 33% Net margin but lacks strong growth growing around 20% in the last 2 years.The margins and sales growth have both been decreasing as competition increases and employee costs eats the profits.

4) Expensive Valuation – The company will come out with a valuation of P/E of 30-32x which is more expensive than  other listed education companies.At least Prakash Steelage with a corrupt management had the decency to come with a discount

Summary

The only thing to like about this company is the sector that it operates in.However Shady Management,High Valuation and Regulatory Risk makes this company a strictly no subscribe.However given the shenanigans being openly perpetrated in the Indian Stock Market don’t be surprised to see a 100% Listing Gain.