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Institutional EYE

Commentary on Corporate Governance Issues

ZEE Learn: Waiting for an answer key

ZEE Learns response to the stock exchanges on a previous IiAS report entitled, “ZEE Learn fails its tests”, provides no answers. A company spokesperson addressing the media, in response, can hardly be construed as a meaningful answer to questions the raised.

ZEE Learns response to the stock exchanges on a previous IiAS report entitled, “ZEE Learn fails its tests”, provides no answers. That a company spokesperson addressed the media in response can hardly be construed as a meaningful answer to questions raised.

In its previous advisory, IiAS raised concerns over ZEE Learns acquisition of MT Educare: ZEE Learn had spent Rs.2.8 billion in acquiring MT Educare, which was coupled with write- off’s and provisioning of certain assets. ZEE Learn and MT Educare have not been able to leverage synergies to expand revenues nor control costs – a promise of which was made to investors at the time of the acquisition.

IiAS also raised questions on asset allocation – ZEE Learn continued to invest in asset heavy businesses. The asset-heavy businesses (Digital Ventures Private Ltd.’s total assets on 31 March 2019 aggregated Rs. 6.9 bn) have low returns and more than half of the ZEE Learn’s debt (excluding MT Educare) is attributable to the six schools owned by them. This is in sharp contrast to their belief that having an asset-light model is a critical driver of its profitability – which is, indeed, demonstrated by the profitable and cash generating franchisee-led business model of Kidzee and other pre-school business.

Media reports suggest that the company proposes to sell the Kidzee business, which the company neither confirms nor denies – the management has given vague responses to this question in investor calls. IiAS contends that if the Kidzee business is sold, it will hollow-out most of the business, and even if part of the proceeds are used to retire debt, the company will still be left with asset-heavy business that have limited ability to generate strong cash flows. Once again, the promoters’ pledged equity and a leveraged business seems to drive decision making of yet another ZEE / Essel Group company.

Only seems to has published a response from ZEE Learn to our report. We believe the responses do not directly address any of the questions we have raised. ZEE Learn has claimed that our report carried a factual inaccuracy saying that the write-offs in MT Educare took place before the acquisition, which happened in May 2018 – that is in FY19. Based on the filings on the stock exchanges, we understand that the first round of Rs. 2.0 bn in equity infusion took place in February 2018 (FY18), which triggered an open offer that was completed by May 2018 – therefore, we continue to contend that MT Educare’s write offs took place during the acquisition period and after.

IiAS also raised concern over leadership at both ZEE Learn and MT Educare. Board resignations and frequent changes in management plague both companies over the past 12 months (Exhibit 1 and Exhibit 2). Investors believe Ajey Kumar, ZEE Learns Managing Director, the only long-standing KMP, has been ineffective in being able to navigate the business.

Parents of students in the pre-school and primary school businesses who see their children as being at risk from COVID-19, are likely to move them towards home schooling or online schooling to the extent possible. Despite having invested over Rs. 1 bn (including tablet device and content), Robomate has been losing ground and student enrolments have declined significantly. The management has failed to develop digital offerings to compete in this space that would have helped to sustain its business model in these times.

Lenders stirred Zee Entertainment and effected change in ownership and management. Dish TV, from the same stable, may now well go down the same path. The current attrition in management at Zee Learn and MT Educare is unlikely to inspire confidence among investors. They can borrow from the same playbook and begin by recrafting the board and management. Of course, the best option for all stakeholders is to bring in a strategic investor who can establish control and steer the business.

To read full report click Here

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