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Tree House Education up Shit Creek & Down Market Big Time at Rs 169

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Tree House Education up Shit Creek & Down Market Big Time at Rs 169

Tree House Education up Shit Creek & Down Market Big Time at 20 % lower circuit today of Rs 169

70% of Wealth Destroyed in nine and a half months from 52 Week High of Rs 548 on BSE & Rs 559 on NSE recorded on February 16, 2015

No Kidding ! & Excuse the Pun !

It surely is a terrible Friday for Geeta & Rajesh Bhatia who created the Company

Trading Volumes are 10 times the daily average past two weeks indicating huge and relentless selling

52 Week High on BSE was Rs 548  mid Feb 2015 and today’s Rs 169 is the 52 week low…. NSE recorded a 52 week high of Rs 559 in mid Feb 200

Look at the the Irony! CARE has upgraded their long term debt rating from A- to A

But Markets have downgraded them big time!

So the Big Question ? Why this Big Sell Off today!?… BSE recorded 2.44 lakhs shares with 42% delivery while NSE recorded over 13 lakh shares with @ 50% marked for delivery!

It  must have to do with loan topping by the Bhatias 

The Company’s Long & Short Term Debts of Rs 59 crs & Rs 119 crs as on September 30,2015 are secured by Company Assets & September Networth is Rs 679 crs giving a Book of Rs 160 a share

Long Term & Short Term borrowings are secured by mortgage of Land, building, office premises, hypothecation of movable assets, book debts, both present and future of the Company.A part of the short term borrowings are also secured by a fixed deposit.Nowhere does the FY 15 Annual Report state that such borrowings are also secured by Promoter Pledge of Shares.So for what Loans have the Promoters pledged their shares ? Private?

PBV is heading below 1 from credible and solid levels of 3.5 earlier in the year.Company makes monies and raised dividend to 20% in FY 15 though there was some controversy on the high value of Receivables which was clarified by the Company as staggered payment by clients for K-12 Revenue Stream and accepted by Stakeholders Empowerment Services (SES) who had raised the query

So then what is the nature and purpose of the loans taken for which the pledge has been made by the Bhatias to the lenders like Ambit Finvest,Capital First,STCI Financial,Kotak Mahindra etc ?

Bhatias own 29.97% of the Equity of Rs 42.31 crs at September 30,2015 holding 12680069 shares of which they had pledged  5482000 or 43.23% with the lenders

Their latest notification to BSE reveals 6467000 shares pledged . As Tree House Share Price kept crumbling they were forced to provide additional security and create further pledges and encumberances on the same loan.In October & November 2015 an incremental 985000 additional shares were pledged .Now 51% of the shares Promoters hold are pledged …. Rajiv Bhatia has pledged nearly all his holdings and some held by  wife Geeta Bhatia

And the Price has cracked further this week  to close on lower circuit at Rs 169!

What will they do !? They will have to pay off or top up additional securities.The unencumbered ones are largely in Geeta Bhatia’s name in Tree House Holdings

On Red Alerts Such Lending will find it’s way  fast & furious to Lenders selling off into the markets the shares pledged to recover their loans

That’s what seems to be happening on the Exchanges ~ Lenders seem to be offloading pledged shares and with them panic sell off by other shareholders too …and there are no Buyers to absorb and hence Price is Cracking up!

Just in the last fiscal year of  FY 15 Tree House had made a QIP at Rs 440 to several FPIs and raised Rs 200 crs for expansion ! Shareholding pattern on September 30,2015 shows 37 FPIs holding 9007571 shares constituting 21.29% of the Equity….. they too must have got seriously unnerved and must be dumping

My single thought is what are the quantum of this lending given that Promoters had pledged 64.67 lakh shares to date, 51% of what they hold !?…. assuming a Price of Rs 250 last week it would amount to @ Rs 160 crs value and with a haircut would imply Loans taken of @ Rs 125 crs !…. the pledged shares at @ Rs 169 have sunk to a value of under Rs 110 crs…. This would mean another Rs 50 to Rs 60 crs of topping required and this would mean another 60 lakh shares & if done would mean nearly 100 % of Promoters holdings would have been pledged !…. however if Lenders have offloaded pledged shares into the market in the past few days like it does appear then loan outstandings would have come down and a full Promoter Holdings pledge may not be required

What were these loans used for !? Why cannot the Bhatias repay them? If Loans are for Company Operations,then have they got Cash Flow Issues as reflected in High Quantum of Receivables that had raised an alarm that was quelled for the time being then by being explained away…. is this a case of prebillings or at worst overbilling or phantom billing (floating around that the numbers of pre school centres don’t add up !) !… their explanation then was that K-12 Billings were in the Receivables that were contracted to be paid in parts over a longer three year duration!…. in which business does one render service or sell products now and collect some part after three years !…. their half year presentation has a separate slide for the Flow of Receivables,an addition surely because of the alarm raised in September 2015…. Another Issue  with this K-12 Revenue Stream is that it appears Tree House has been unable to expand the Number of Schools on this stream in the past few years. The number of Schools has remained static

Tree House also needs to be more accountable and transparent  in the Rs 140 crs interest free deposit given to a Trust for 30 years in return to provide education services to all it’s schools….what sort of arrangement is this ! ?  Name the Trust in the Annual Report and disclose how much income on services provided has Tree House earned from this arrangement ? It has to be substantial to justify such a huge Deposit and definitely should be much higher than Rs 14 crs assuming even a 10% return on such funds which would see the EPS jump by Rs 3.3 and net post tax a tad lower …FY 15 Tree House showed a PAT of Rs 60 crs and an EPS of Rs 15 + on Equity of Rs 42 + crs . Here’s the extract from their FY 15 Annual Report on this….is it one trust or more than one trust  as the wording below uses both singular and plural for trust ? Also the wording states exclusive rights for ‘ALL” schools but also states  the company is rendering services to ‘MOST’ schools of the trust !…ALL or MOST ?…also important is to know what the trust id wih the deposit to remove suspicion of  any route back

“The Company has entered into an exclusive facilitation service agreement with various educational trusts in accordance with which the Company has exclusive rights for a period of 30 years to provide various facilitation services for schools/ courses to be set up by these educational trusts. The Company has paid one time fixed fee to the educational trusts towards such exclusive rights. The fee paid is recognized as an intangible asset and accordingly capitalized as ‘Business Commercial Rights’ in the financial statements. During the financial year 2011-12 the terms of payment for these Business Commercial Rights has been modified with the ‘one time fixed fees’ being replaced with combination of ‘one time fixed fee’ and ‘interest free refundable deposits’. The said deposit has been given under an agreement with the trust for securing exclusivity in rendering services to all the schools operated by the trust. Pursuant to the aforesaid arrangement the Company has given a refundable interest free deposit aggregating to Rs 140 Crores to these educational trusts. The Company is rendering services to most of the schools run by such educational trust. The aforesaid deposits have been classified as ‘Security Deposits’ under the head ‘Long Term Loans and Advances’ of Note 2.14. The aforesaid deposit are good and shall be refunded on the expiry of the tenure or termination of the agreement”   

Big Shareholders & Big Lenders are not waiting to figure this out… when in doubt, Get out!

Tree House being uprooted is unnerving to say the least !... it can happen to the best of us…. one buys it on strong growth potential and sound financials and acceptable  valuation…… a well known fundamental advisory had strongly recommended this repeatedly and even a month ago at Rs 300 levels had advised to hold and not worry…many leading broking houses have been recommending Tree House to their clients…… and do recollect that just under a year ago in December 2014 a host of well known FPIs like Macquarie subscribed  at Rs 440 in a QIP Placement if Rs 200 crs.. as on September 30, 2015 Macquarie continues to hold 2.7% of the Equity &  most of the shares alloted in the QIP

Valuation & Company Financials do not always reveal in time  alarming situations developing  like continuous pledging of Promoter Shares   leading to virtually full pledging of such Promoter Shares and that too not for company borrowings!

Feel Bad for the 6121 Shareholders, including Promoters, as on September 30, 2015…. even if many moved out in time, they sold off to unsuspecting others !

BSE & NSE should ask Tree House to declare current Shareholding Pattern immediately…. in fact such powers should be build into the Listing Agreement rather than wait for quarterly disclosures…. we need to know real time how the September 30,2015 Shareholding Pattern has been disturbed

Rishi Navani is on the Board as a nominee of Matrix Partners India Investment Holdings, LLC  which holds 5097753 or 12.05% of the Equity.He’s the MD of Matrix India Asset Advisors Pvt Ltd  …surely he must be a worried man & surely must know the reason for this fast evolving alarming situation…. Interestingly Matrix had offloaded 3.23% & 1367000 shares  @ Rs 384 on June 1,2015  to reduce their holding from 15.28%.Last year in May 2014 they had sold at Rs 280 levels.One of the Buyers on June 1. 2015 was another FPI, Mondrian who had also subscribed in the QIP and have kept increasing & decreasing their holding right through 2015 as noticed in their notifications and quarterly holdings.Just look at this handwritten June 1,2015 Purchase Notification from Mondrian! How can BSE even accept this!… It is not properly filled up and a signature scratched across with no name from some one in London

These FPIs are playing in and out of Tree House in the short term ~ are they hand in glove ? ~ is there a nexus?  

And Promoter Rajesh Bhatia has been buying too from the markets through Motilal Oswal ! Look at this notification to the Exchange  It says he bought 6000 shares on May 8,2015.The Volume on BSE that day was just 7157 shares with 44% delivery and price opened the day at Rs 394 touched Rs 407 and closed at @ Rs 400. On NSE this day the Volume was just 11248 shares with 45% delivery and the share price opened at Rs 390 touched a high of Rs 409 and reverted to close at Rs 400.Most of the Delivery was taken by Rajesh Bhatia….. Such Purchases by Promoters may be legitimate on paper but raise several questions on creation of volumes and prices!… and he then goes and pledges to the lenders !…. how was he funding such purchases!? from the lenders themselves!?

Goddess Sarawati symbolises Education  & Learning while Goddess Laxmi stands for Wealth…. Wealth Follows Learning…. one need not earn it though the Markets !

So was the Markets just a Valuation game being played out in a nexus and the bubble is bursting!? 

What’s the story of a director resigning and a change in company secretary & CFO earlier this year? Normal Churn!?…. and was the change in statutory auditors from Mumbai based Jogish Mehta & Co till FY 15 to Kolkata based Agarwal & Associates merely to comply with new provisions in the Companies Act 2013 that requires rotation of auditors… and why Kolkata based !?

Phew ! …. this wealth destroyed on the bourses in Tree House has opened a Pandora’s Box it seems!

Am sure the truth will unfold quickly as to what really is the situation !…. and I hope Tree House survives this crisis …. India can only emerge as a superpower if our next gen is educated well right from infancy… Tree House’s has embarked on an objective for this…. just need to have more transperant higher ideals & propriety

Significant  Update on Saturday Afternoon, November 28, 2015

Just connected with one of the Chiefs of the Lenders and what has been conveyed is that No Lenders have offloaded shares but are demanding more margin as the Share Price has dropped.Loan has been taken by Rajesh Bhatia for personal purposes that included creeping acquisition,subscription to company’s warrants and even property.The Pledge Value of Rs 110 crs currently even after the drop more than adequately covers the total lending of @ Rs 65 crs but RBI norms are that at least twice cover should be there for lending against shares

Then who sold off to create this drama?

One or two FPIs apparently have sold off…. Curiously the delivery % on both NSE & BSE  yesterday as pointed out in th beginning of this blogpost is 42% on BSE & 50% on NSE and the share price was hovering over Rs 180 at 2 pm with above normal but just a few lakhs volume….. this would imply that the last 90 minutes triggered off a delivery sell off in which those in the know of big selling coming up must have shorted till 2 pm and then squared off in the last 90 minutes against the huge delivery selling ~ this is clear case of Insider Trading and SEBI needs to investigate!

Sadly our dependence on FPIs continues even as their shareholding can both create and destroy value in havoc situations like this

Rajesh Bhatia has put himself into a vulnerable position and a paradox of sorts…. his company has monies but he does not & thus will not be able to support the price in the market if more FPIs begin to sell off like this !… and he needs to reduce personal loans or top them up coming week

Can Tree House consider a Buy Back ? Well, Sec 68 to 70 of the Companies Act 2013 govern buy back in India and Sec 68(1) clearly states that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.So QIP Proceeds of Rs 200 crs of December 2014 cannot be used and fresh funds will have to be raised or retained earnings has to be the source 

Buy Back is restricted to 25% of the Networth which would compute to @ Rs 175 crs today with Networth @ Rs 700 crs

Company can pass an enabling resolution for buyback over a year. Rajesh Bhatia needs to seriously consider this to reassure all stakeholders not just Shareholders

 Of Course it may be perceived comically that the Company  sold shares in the QIP at Rs 440 and is now seen squaring of at Rs 150 to Rs 200 levels ! even if other funds are used for the buy back than the QIP Proceeds…. FPIs held 90 lakh shares at September 30,2015…. not all will want to exit

But first figure out if Tree House indeed has Genuine Value ~ Objectively it’s Operations suggests it does ~ Subjectively is another matter !

A Mountain of  Immediate Challenges ahead for Rajesh Bhatia :

  1. Top up Securities with Private Lenders
  2. Stabilise & Revive Share Price of Tree House
  3. Assure All Stakeholders of the continuing strength and growth of Tree House & not just it’s survival and genuity

All the best Rajesh !

Disclaimer : Have no other Interest in Tree House other than commenting as above on how the unfolding drama on the bourses has destroyed not just shareholder value in Tree House but also raised questions on motives, mindsets and manipulations that affect the credibility and sanctity of our markets and destroy investor confidence & conviction and wealth !  

Update on Monday Afternoon, November 30, 2015

Treehouse is on lower circuit of 10% since morning on both BSE & NSE at Rs 152.10 & Rs 151.75 respectively

I am told this blogpost in trending on whatsapp groups and message boards on moneycontrol etc without acknowledging credit

Here’s what has been posted by a platinum member chilax on the moneycontrol message board with a disclaimer that it has simply been posted from what’s circulating on whatsapp ! …..this is a huge extract from my above post

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