Advisory Firm IiAS Says Zee Learn Fails The Test

Institutional Investor Advisory Services raised concerns over governance, capital allocation, pledged shareholding and debt at Zee Learn Ltd., bringing another Essel Group firm into the spotlight over similar worries.

The operator of Kidzee preschools advocated an asset-light model but has ended up investing in heavy assets which have low margins and account for more than half of Zee Learn's standalone debt, the proxy advisory firm said in an April 30 note, referring to other educational institutes set up by the company. “An asset light philosophy with asset heavy balance sheet reflect lack of clarity.”

The Essel Group, the promoter of the operator of Mount Litera chain of K12 institutions, has pledged nearly 82.7 percent in Zee Learn and 50.74 percent of Zee Learn's stake in MT Educare Ltd., which the company acquired in 2018. Borrowing against shares in other group firms including broadcaster Zee Entertainment Enterprises Ltd. was one of the reasons for the trouble at the Essel Group, which eventually had to sell assets to pare debt.

IiAS said Zee Learn is not pushing ‘Robomate', an online learning platform it acquired with MT Educare. Amid Covid-19 crisis, all education has moved online and is likely to spur faster industry transition to virtual learning, the proxy firm said. The company has done little to develop Robomate platform after investing Rs 100 crore on device and content. The platform saw a significant decline in revenue and student enrollments in the last two years.

Zee Learn paid Rs 280 crore to acquire 59.48 percent in MT Educate in 2017-18 when the Essel Group firm's net asset value was Rs 130 crore. Later, MT Educare wrote off Rs 150 crore in provisioning against non-recoverable loans. Meaning, it acquired a company with negative assets.

IiAS also raised concerns over the integration of MT Educare and Zee Learn. Zee Learn is neither able to cross-sell nor has been able to merge the two companies to bring down overheads and administrative costs, the proxy advisory firm said.

IiAS also raised issue of related-party transactions. Zee Learn continues to provide loans and advances to group companies even when it hasn't reported positive cash flow for five years.

Multiple media reports have said citing unnamed people that Essel Group is looking to sell Kidzee business. IiAS said the sale will “hollow out” Zee Learn. Kidzee is a business with 50 percent operating margin compared to the overall 31 percent Ebitda margin of Zee Learn, it said.

KidZee is almost all cash as student fees is received in advance and there is negligible capex due to the franchise model, the proxy firm said. “Selling the asset-light high-margin Kidzee business to support debt taken for the six schools is in our view, a suboptimal decision.”

It also raised concerns over a relatively new board at Zee Learn and MT Educare after the erstwhile promoters and board of MT Educare quit.

Emailed queries to Essel Group on concerns raised by IiAS remained unanswered.