Surya Tutoring: Evaluating a Growth

Equity Deal in India Case Answers

Executive Summary – Surya Tutoring

Surya Tutoring’s growth strategy is based on Mr. Sharma’s vision of
opulent opportunities in other markets that have yet to be tapped.
This is where he needs funds and expertise from investors to help fund
the growth of his business.

In order to determine the amount of money used for the expansion

strategies, we can roughly estimate the amount of initial capital that
Surya Tutoring needs to put in in order to establish a presence in
particular cities, which is around Rs. 120 crores.

Sharma managed to attract two private equity firms, ZenCap and

BlackGem. Firstly, we determine which one we should choose based
on the fair value of Surya Tutoring. We value the firm based on the
value of the other four comparable companies.

We get the suggested value of Rs. 419 crores, which is in line with the
valuation from two private equity firms. The total amount that ZenCap
would fund Surya Tutoring in all rounds of financing across all
securities is Rs. 44 crores, while Blackgem offers Rs. 150 crores in one
round of funding using a single type of securities.

Before the warrant is exercised, the ownership part of ZenCap

represents an 8% stake in the firm, and once it is exercised, the
percentage would change to 12%. In comparison, Blackgem would
own a share of 25% in a single round of funding.

Secondly, we have to consider other advantages and disadvantages of

both private equity firms. Surya Tutoring gains a competitive
advantage from ZenCap as ZenCap understands the local market and
business culture more than BlackGem.
This allows ZenCap to target the right customers and create better
assumptions on business analysis, which enables it to make expansion
more easily. However, ZenCap values the firm lower than Blackgem
and provides less capital. For an analysis of BlackGem, as it is an
international company with a relatively larger size, it lacks local
market knowledge.

Furthermore, Blackgem has acquired a majority stake, while Sharma

is not interested in giving up control of his firm. However, besides
offering more capital, the main advantage of Blackgem is that it has
more experiences and connections worldwide, which will offer a great
opportunity for Surya Tutoring to expand abroad.

At the end of the day, Mr. Sharma should select BlackGem for 2 main
reasons:

First, in order to achieve his goal of expansion into 4 main cities, Mr.
Sharma will need approximately 119 crores, and BlackGem is willing
to offer 150 crores. He could also use the excess amount of funding
money for international expansion.

Second, as Sharma has been in this industry in India since he was

young, he already understands the local industry. Thus, choosing
BlackGem would allow Surya Tutoring to explore international
markets in which the firm has no experience.

Case discussion

1. Company Overview

Surya Tutoring is a company providing college admission coaching

institutions based in Kota, India. It was founded and managed by R.
K. Sharma, who used to be an instructor at another coaching
institution, Bansal Classes.

The school provides coaching services for students who aspire to be

admitted into the prestigious Indian Institute of Technology (“IIT”) by
taking the joint examination exam (“IIT-JEE”). Despite the intense
competition among schools, Surya Tutoring has managed to stay
competitive and become one of India’s leading tutoring schools.

Even with a vast amount of students already attending these tutoring

institutions, Sharma still sees the potential untapped market where he
can expand his business. This is where he needs funds and expertise
from investors to help fund the growth of his business. As the sole
owner of the business, Sharma does not wish to dilute his equity from
the private equity deal.

Some of the future plans to tap the potential market involve

expansion. As Kota is currently a center for tutoring business in India,
while the city itself is not one of the most populous cities, there are
several other big cities with potential where Surya Tutoring can
expand. Sharma also looks for international expansion into countries
like Dubai and Australia.