Evaluating a Growth Equity Deal in India

Executive Summary
Surya Tutoring was a fast-growing tutoring academy for high school students aspiring to gain
admission to the prestigious Indian Institute of Technology (IIT).The Academy was situated in
Kota, India. Kota in Rajasthan had become the centre of the IIT prep school industry and home
to tens of thousands of students studying for the rigorous IIT entrance exam.
R.K Sharma, the founder & CEO had a strong belief that there was vast untapped potential in
the teeming Indian metropolises of Mumbai, Chennai, Delhi, and Bangalore, as well as in
foreign markets such as Dubai and Australia.
In order to expand Surya Tutoring, he needed investments and had received investment
proposals from two private equity firms in this regard.
1.) Blackgem: A big bulge bracket fund with international reputation
2.) Zencap: A small indian firm based in Mumbai.

Background:
RK Sahrma was born & raised in a small village in the outskirts of Kota, he faced a lot of
hardship while preparing for IITJEE. But still he could manage admission in IIT Madras then got
job in Germany where after office he used to tutor his co-workers children. Eventually he
decided to come back to India and concentrate on supporting his mother & siblings.
During initial phase he worked with prestigious Bansal Classe for 6 years and in 2001 he
decided to form his own academy Surya.
Despite intense competition, Academy had done very well in terms of business. By 2009 year
end, academy had more than 22,000 student strength as well as 280 teaching staff strength.
In terms of successful conversion of students also the academy had a very good record. Each
year 1,600 to 1,700 students from the academy successfully passed the IIT examination.

Private Equity scenario in India

Private Equity in India was clustered into three geographic centers- Mumbai, New Delhi and
Bangalore & was divided into three main groups of firms:
1. Big bulge bracket firms: These were mainly based in the United States or Europe &
generally hired Indians who had grown up in the United states or Europe but wanted to work
in India. Some firm in this category included Apax Partners, Blackgem, KPMB, etc.
2. Large Indian corporate conglomerates: These corporate private equity players such as
Reliance and Tata invested across the board in various industries and technologies in India.
3. Independent Indian firms: These firms were smaller in both fund size as well as partners
and generally invested in much smaller transactions than the big bulge bracket firms.Firms
such as Tano,Avigo and Zencap came under this category.

Current Problem
Though there was a slow but sure shift occurring in the education tutoring sector and the
demand for the same was steadily growing all across the nation & demand potential could not
be tapped by being restricted to Kota and hence expansion was required. Many tutoring
institutes had already started offering their services in metros by opening branches
Mr. R.K Sharma was also enticed by the expansion plans but did not know how to arrange for
funds. Apart from ZenCap he also hired an investment bank to scout for other Private Equity
firms.

Description
Revenue
Course Fees
Sale of Learning Material
Entrance Exams
Total Revenue
Operating Expenses
Salary Expenses
Short-term lease rentals
Long-term lease rentals
Marketing/Sales
Other operating expenses
Administration
Total operating expenses
EBIT
(-) Interest expense
(+) Interest revenue
EBT
(-) Expected Tax @ 35%
EAT

Surya Tutoring Financial Projections

2010
2011
2012
2013
All figures in Crores INR
133.67
180.45
243.60
304.51
6.60
9.90
14.85
22.28
3.38
4.56
6.15
8.30
143.65
194.91
264.60
335.09
59.23
2.35
7.53
14.40
1.40
7.57
92.48
51.17
0.00
5.23
56.40
19.74
36.66

NPV (@ 8.19%)

74.04
2.94
9.41
17.28
1.68
9.08
114.43
80.48
0.00
5.75
86.23
30.18
56.05

92.55
3.67
11.77
20.74
2.02
10.90
141.65
122.95
0.00
7.23
130.18
45.56
84.62

115.68
4.59
14.71
24.88
2.42
13.08
175.36
159.73
0.00
8.42
168.15
58.85
109.30

2014
380.63
33.41
11.21
425.25
144.60
5.74
18.38
29.86
2.90
15.70
217.18
208.07
0.00
9.57
217.64
76.17
141.47

323.81

Alternative Solution
There are 2 alternatives available:
1. Investment in equity by Zencap

2. Investment in equity by Blackgem

1.PE Investment offer by Zencap

Features of Zencap investment offer can be summarized as follows:
i) Valuation : Rs.440 crore post money @12 times PAT for Audited FY 2010.
ii) Investment offered: Rs.44 crores maximum accounting for 12% sharholding.
iii) Type of Stock: CCPS
iv) Director on Board: The investors will have a right to nominate one director on the Board of
the Company.
vi) At the time of closing the Brand of Surya presently held by the Promoter personally will
be transferred to the company for a consideration of Re.1.

Share structure of the company:

Zencap
Security
Common Founder
Family
Series-A
Preferred(Zencap)
Total

Pre-financing
No. of
shares
%
15,00,000 100

15,00,000 100

Post-financing
(pre-warrants)
No. of
shares
%
13,36,955 82.0
1,63,043 10.0

Post-financing
(post-warrants)
No. of
shares
%
13,36,955 78.4
1,63,043 9.6

1,30,434 8.0
16,30,432 100

2,04,545 12.0
17,04,543 100

2. PE investment offer by Blackgem

Features of Blackgem Investment offer can be summarized as follows:
i) Valuation: Rs.600 crore post-money @ 16 times PAT for Audited FY 2010
ii) Investment offered: Rs.150 crore for 25% shareholding.
iii) Type of stock: Series A preferred stock .
iv) Drag-along Right: If holders of the majority Series A preffered approve a proposed sale of
the company, Mr Sharma will agree to approve the proposed sale (Subject To Customary
Expectations).
v) Directors on Board: The holders of Series A preferred stock will be entitled to elect two
directors. Any additional director will be elected by the holders of preferred stock and
common stock voting together.
vi) The Preferred stocks may be converted at any time at the option of the holder, into
common stock shares.

Share structure of the company:

Blackgem
Security
Common-Founder
Series-A Preferred(Blackgem)
Total

Pre-financing
No. of shares
%
15,00,000 100
15,00,000 100

Post-financing
No. of shares
%
15,00,000 75.0
5,00,000 25.0
20,00,000 100

Conclusion:
Though the offers made by both the firms are lucrative considering NPV of Surya Tutorials, but
the conditions mentioned in the Term Sheet of both the Investors is dettering factor. On one
hand we have Zencap, an Indian Firm having expertise in dealing with smaller Indian

firms & also had prior experience related to education sector and had good
connections with numerous small and mid-level businesses in India.
On the other hand we have Blackgem, a significantly bigger PE Investment firm
compared to Zencap having international Repute. It can help the Company cater to its
international aspirations Dubai etc. Moreover It is offering very high investment
amount compared to Zencap.
Hence keeping Mr. Sharmas wish to expand in Indian as well as international markets
and apprehensions to excessive dilution of his stake in the company and willingness to
expand in the Indian markets first, we suggest to with Zencap offer.
Though Blackgems investment offer is more so is its stringency in controlling the
company like 2 Directors on board, any further (apart from pre-selected 4) will be with
joint consent of Blackgem & promoters and Drag-along clause are big detterent.