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Mahesh Shetty’s strategy for scaling up the usually ‘localised’ tutorials business is based on standardising teaching processes. And, to overcome the constraints of the brick and mortar model, he now has his eye on the digital classroom.

 

Mahesh Shetty was a worried man. The year was 2005, and it was soon after the sudden death of his accountant, Atul Dhaga, due to a heart attack. The tragedy of the loss of a 36-year-old who had worked with him for a decade was only compounded by this quandary: Dhaga’s demise had left the finance department at a standstill. What if something was to happen to him? Shetty feared his business would become rudderless as would the people who had been working with him for the last 17 years.

He decided it was time for Mahesh Tutorials, his coaching class business, to become a corporate entity that would survive independent of his presence. “As a corporate, the company would be taken care of whether I am a part of it or not,” says the 49-year-old.

His classes, a Rs 25-crore partnership firm at the time, had acquired cult status in the unregulated Rs 2,000-crore tutorial industry for Class 10 board exams (the industry size is as per company sources). This transition, as Shetty envisioned it, was based on building redundancies—not allowing anyone to become indispensable. This philosophy has carried forward to the super-standardised method of teaching that defines the success and growth of his tutorial business.

That strategy seems to have worked. Consider the growth trajectory.

In 2006, Mahesh Tutorials acquired businesses that led to it getting rebranded as MT Educare. And, in 2007, it finally became a corporate entity with Helix Investments as a private equity (PE) partner. Its turnover in 2008 was around Rs 44 crore; the PE firm invested around Rs 32 crore for a 30 percent stake. Five years on, for FY2013, the company has a turnover of Rs 154 crore with a net profit of Rs 18 crore and a market capitalisation of Rs 400 crore.

In April 2012, the company was listed at Rs 90 against an issue price of Rs 80, allowing Helix to sell 25 percent of its stake for a 2.5x return. Currently the stock trades at Rs 102 per share.

Marquee investors such as Shivanand Mankekar, with a net worth of Rs 355 crore and known for his early investments in Pantaloon and Radico Khaitan, picked up around five percent stake (along with his wife) at the IPO stage. The institutional shareholding has gone up to 27 percent as on September 30, 2013, against 23 percent last year, even though the share is underperforming the markets by around seven percent. Shetty is also buying back his stock from the market and has increased his stake from 43 percent to 45 percent since March 2013.

And the business has expanded beyond just teaching mathematics to Class 10 students; it has entered the commerce and science streams as well (these now account for 50 percent of the turnover).

Despite the apparent growth, some analysts believe that MT Educare has peaked as the business is very local and expanding into newer cities is not easy.

“Margins get sacrificed with growth, thus many competitors don’t want to scale upwards,” says a competitor who had worked with the company earlier. But the management is confident that MT Educare can become a Rs 500-crore business in the next five years. And institutional investors are biting.

Avendus Capital’s Fund III, an Alternative Investment Fund (AIF), has recently purchased a 2 percent stake in the company. “MT has an asset light business model with negative working capital and low capex. The business generates very good cash flows and has a high return on equity. We also believe that India is starved for good education institutes and supplementary education will continue to be in great demand,” says Manoj Thakur, CEO, Avendus Capital-AIF.

The opportunity is evident. According to the Department of Industrial Policy and Promotion, the market for India’s education sector is around Rs 3.41 lakh crore and has been growing at roughly 15 percent over the last five years. Crisil, a rating and research agency, says the coaching business is expected to expand at 17 percent CAGR, from Rs 40,187 crore in 2010-11 to Rs 75,629 crore in 2014-15, on the back of rising disposable income and infrastructural bottlenecks in the formal education sector. MT Educare is targeting board exams, engineering and medical entrance tests and CA exams.

The young teacher who couldn’t afford to pay the rent for his new business premises has indeed travelled a distance.

Shetty’s first teaching assignment was with Shetty’s Academy (no relation) in Mulund in 1984. He had completed his Bachelor’s from Ramnarian Ruia College in maths and statistics. The job did not pay well—he earned around Rs 500 a month.

Shetty, whose father worked with IDBI Bank, knew that if he took up a job with a bank, he would probably earn around four to five times more. But it was not about the money. He liked the idea of teaching, with all the associated problems.

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