The public shareholding in Tree House Education & Accessories is 79.5%. With such a high investor interest, the dwindling stock market fortunes of the preschool operator would be a cause of worry for investors. The stock hit lower circuit on Monday morning after Zee LearnBSE 1.17 % withdrew its proposed merger with Tree House last Friday. Over the past year, Tree House has lost over 90% of its market capitalisation following the lacklustre financial performance.
The company has been struggling to grow revenue and profit in the past few quarters. In the first six months of FY17 (April-September 2016), revenue fell to Rs 38.2 crore from Rs 126.3 crore in the corresponding period of the previous fiscal. Expenses, on the other hand, continued to increase year on year. This resulted in an operating loss of Rs 49.9 crore as against the operating profit (EBIT) of Rs 54.7 crore in the year-ago comparable period. It reported a net loss of Rs 93.1 crore compared with the net profit of Rs 30.8 crore by similar comparison.
The company stated in a note to stock exchanges dated August 17, 2016, that it was trying to overcome challenges by bringing down costs along with the closing of non-profitable centres. A merger deal with Zee Learn approved in September was considered as a major positive trigger for Tree House at the time given the benefits of synergies for investors.
Now that Zee Learn has called off the deal, the future path once again becomes cloudy for Tree House. On a positive side, its reported balance sheet has not yet started looking stretched. At the end of September2016, its total debt-equity ratio was 0.2, which was similar to that at the end of March 2016. However, if the company continues to report a net loss in the coming quarters, it will eat into reserves and surplus thereby eroding total shareholders’ equity. This may make matters worse for the company and also for investors.
