Irrational price movement raises concerns
Pre-school chain Treehouse Education and Accessories went public in august 2011. The IPO was priced at Rs135-153 a share. Education is a sunrise sector and the stock was well-received. Its net profits were steadily moving up over the quarters. From a reported Rs5.22 crore in June ’11, net profit jumped to over Rs8 crore in June 2012, to Rs12.30 crore in June 2013, to over Rs16 crore in June 14 and then to Rs18 crore in June 15. June is the best quarter for the company. This remarkable growth was not matched by stock price growth, though. The stock made a high of Rs161.50 in August ’11 when it was listed. Despite huge growth year after year, the stock was languishing. In February ’14 it was just at around Rs224. From this point, the stock suddenly started shooting up and in just seven months it doubled after which it stagnated. In February it made a high of Rs548 sand started declining, despite rising profits, falling to around Rs340 by August 2015. Thereafter the stock simply collapsed as happens if a company is hit by a scam. On 30th November the stock was at a lower circuit, hitting Rs152.10, a crash of 60% in three months. All the gains of the four years were wiped out.
The stock had made a 52-week high at Rs548 in February and a 52-week low at Rs138 in December. Immediately thereafter, the share price jumped from an intraday low of Rs138.10 on 1st December 2015 to Rs233 on December 7 2015 – a huge upmove of more than 50% in a matter of five trading sessions. And then the company suddenly announced a merger with its competitor, Zee Learn, its main competitor, becoming the largest pre-school chain in India. However, the news of the merger was not taken kindly by the street. The shares of Treehouse had fallen back to Rs171 after the deal was announced. Interestingly, Treehouse founders Geeta Bhatia and Rajesh Bhatia sold off 9.5% stake in the company, which around one third of their holdings, on December 3, 2015, at around Rs202. The promoters held 29.97% in the company on 30 September 2015. This brought down the promoter stake to a little more than 20%.
The shareholding pattern on September 30 2015 revealed that the total number of pledged/encumbered shares was at 54,82,000 amounting to 43.23% of the total promoter holding. The number of pledged shares increased later. Subsequently, promoters have released 1,01,20,300 shares out of 1,01,47,000 pledged shares on December 17 2015, as per filing with BSE.
There are many unanswered questions about this company. Why was the share price stagnant for years despite excellent results? Why did the share price shoot up in seven months? Why did the price crash by 60% for no apparent reason? Why had promoters pledged more than 43% of their holdings? Why did they sell of a third of their stake at such a low price? Is there a problem with Treehouse’s declared financial results?
A few months ago Business Standard had reported high levels of trade receivables. The receivables had increased from Rs29 crore on March 31, 2014 to nearly Rs43 crore on March 31,2015. Out of these Rs43 crore, Rs17.6 crore were overdue for more than six months. Proxy advisory Stakeholders' Empowerment Services (SES) contended that given the nature of the business, this amount was too high. Treehouse responded to these concerns raised by SES and subsequently others. However, JN Gupta, the Managing Director of SES, was not satisfied with the explanations and indicated that there was more scope for transparency.
Many analysts are baffled as regards to the terms of the merger. Treehouse shareholders will receive 53 equity shares of Re1 each in Zeelearn for every 10 shares of Rs10 each in Treehouse. The networth of Treehouse was Rs644 crore on March 31 2015 as compared to the networth of Rs234 crore. Analysts believe that the terms of the merger are prejudicial to the interests of minority shareholders of Treehouse, based on the reported numbers. However, maybe the promoters of both the companies know something about Treehouse that outsiders don’t.