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1
Unique subscription model is the business lever Target Price INR 200
BUY
We initiate coverage on MT Educare Ltd (MTEL), which is en-
gaged in support and coaching services for students of SSC, HSC,
graduation, CA and competitive exams such as JEE, Medical,
MBA, CFP etc. The company has over 25 years of experience in
coaching business and has presence in 138 cities with total num-
ber of 226 coaching centers across India.
MTEL has reported a significant YoY growth in past four quarters, with
the average YoY growth of over 30%. We believe that this pace would
continue in coming years due to rising aspiration of students for en-
trance exams. Company would be able to report over 25% YoY growth
in coming years, according to us.
MTEL is currently operating at TTM EBITDA and net margin of 21%
and 10.5% respectively. Company has managed to sustain profitability
due to its asset light business model and continued thrust for expansion
in new geographies with suitable offerings.
MTEL is a zero debt company and managed its financials well with the
use of internal accruals during the time of expansion. It has provided
the financial flexibility to the company for further expansion.
Improvement in profitability aided key metrics: Company reported
ROE and ROIC of 19% and 26% respectively, while total assets and
capital turnover ratios reported at 1.10 and 1.80 respectively.
MTEL is currently trading at P/E of 22.7x (TTM) and FY15 for-
warded P/E of 15.1x (FY15 estimated earnings of INR110.3 mil-
lion). MTEL has emerged as a strong player in a highly frag-
mented coaching industry and has the ability to deliver strong
operating performance; on the back of high operating leverage
business model. Despite continued organic expansion and strate-
gic acquisitions, MTEL managed its financials well and kept it
balance sheet debt free.
Despite competition from unorganized and local players, MTEL
managed to report consistent and sustained performance during
past several quarters and we expect the company to sustain and
improve key operating metrics on the back of strong cash flow, a
recurring theme in the past several quarters. We value MTEL on
traditional DCF method of valuation and are comfortable with
an FY15 P/E of 25x, with a fair value of INR200.
India Equity Research
Education
July 3, 2014
MT Educare Ltd
Last Price INR 120 Bloomberg Code MTEL.IN
Reuters Code MTED.NS
Avg. Vol. (3m) 2,784,840
52 -wk High/Low INR 127.5/66.9
M cap Full/Free float (INR mn) 46,960/25,830
Key performance 2013 2015 (E) 2016 (E)
Revenue (INR mn) 2,018 2,448 3,051
Growth (in %) 28.3% 21.3% 24.6%
EBIT (INR mn) 295 412 518
EBIT Margin (%) 15.5% 17.7% 17.9%
PAT (INR mn) 208 313 387
PAT Margin (%) 10.9% 13.5% 13.3%
Basic EPS 5.3 7.9 9.8
Price/EPS Ratio 22.70 15.15 12.23
(in %age) Mar—14 Dec—13 Sep—13
Promoter 45.34 45.34 45.34
FII 11.38 11.58 11.63
DII 3.75 3.94 3.74
Others 39.53 39.14 39.29
Tushar Pendharkar, +91 022 41002018 tushar.p@righthorizons.com
Right Horizons Score Matrix®
Quantitative Score 2.14 GOOD
Qualitative Score 1.32 EXCELLENT
3.46 GOOD Overall Score
For detailed Score Matrix report, write to us at Right Horizons
-40%
-20%
0%
20%
40%
Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14
MTEL vs Sensex
MTEL Sensex
2
Business and Outlook
MTEL started with one center in Mumbai during 1988 and
within the span of 25 years it has expanded its presence in
138 cities with total number of 226 coaching centers across
India. It is one of the largest and oldest player in Indian
coaching and the only listed player on stock exchanges in its
segment. Company offers its services for students in three
business verticals:
School Segment, which includes students from IX and
X standard. Company has also started INK Model for V,
VI, VII and VIII standard.
Science Segment, which includes students from XI and
XII standard, where the main focus is to prepare them
for Engineering and Medical examination.
Commerce Segment, which includes students from XI
and XII standard, where the center prepares them for
CA and CS entrance along with their B.Com studies
In addition, MTEL also provides coaching services for
CAT, MAT, Government Jobs, etc. While, company has the
total strength of over 80,000 students in its different formats
of coaching services, students from school segment contrib-
ute most with over 40% of the total strength, followed by
commerce and science, where the contribution is over 30%
and 18% respectively.
Diversification of Services: Strong hold on
PCMB, while raising footprints in other for-
mats of competitive exams
MTEL has focus over national level examinations, such as
engineering, medical, CA, MBA, etc., which has unique cur-
riculum across India. Significant experience in PCMB
(Physics, Chemistry, Mathematics and Biology) segment
has provided an enviable position to the company over its
other competitors operating in similar segment. To diversify
the product line even deeper, company has made couple of
acquisitions during past few years – it acquired Chitale
Coaching Classes to make presence in MBA entrance
coaching market and also made acquisition of Lakshya
Coaching to target students for engineering entrance exams
in Northern India.
INVESTMENT RATIONALE
MTEL is a well established player in coaching indus-
try and consistently expanding its base across India.
Focus over localization of its businesses is the key of
its success
MTEL is a zero debt company and has a track record
of strong operating cash flow, which is expected to
continue further.
Diversification in product offerings aided the company
to expand its base in new geographies. Rather than
pushing its services in market, MTEL is focusing more
over ‘Customer Centric’ approach.
Inorganic strategic moves and tie ups in new geogra-
phies could be a strong trigger for coming years.
3
School segment has immense potential to grow and outperform in coaching industry. This segment has reported a better than
expected increase in per batch occupancy rate in past few years and it has also witnessed the willingness of parents to pay more
for quality coaching, which the students are not getting in schools. The INK model, which is a coaching through internet, is also
gaining wide acceptance due to easy accessibility and in house tuition. This model provides for personal coaching and parents
appear to have better control over their wards.
MTEL has recently started a PU (pre-university) college in Mangalore, Karnataka and has also forayed into direct education
over the past 12 months. The company has tie-ups with other colleges in Karnataka to provide test preparatory coaching and
management consultancy services. In the deal, MTEL shares over 15% of the revenue with the college for utilizing the college
infrastructure and in return colleges get extra income during their non academic sessions. Currently it has tie-ups with 9 opera-
tional colleges. Management is targeting over 30 college tie-ups by the end of FY18.
Geographical Diversification: Expanding pan India presence with focus over localization
To reduce single location concentration, MTEL is aggressively expanding its presence across new geographies such as Karna-
taka, Gujarat, Punjab, Tamil Nadu and Delhi, which would further reduce regional dependency over Maharashtra, where it is
currently operating 75% of the total centers. During FY13, MTEL acquired Lakshya coaching and made its presence in north-
ern India. Now the company is planning to expand Lakshya network in other parts of the country, especially western India,
where MTEL has strong presence. This move would not only strengthen the competitive position of the company; however, it
would also reduce operating pressure over MTEL’s existing infrastructure
‘LAKSHYA’ Acquisition: A strategic move to cater northern India
MTEL acquired 51% stake in Lakshya, which is one of the fastest growing coaching institute in north India for engineering &
medical entrance examination. The recent change in IIT JEE examination pattern has also aided the acquisition in favor of
MTEL. Unlike old system of one single entrance exam for IIT JEE, the new examination pattern conduct two exams – JEE
Mains and JEE Advanced. Only top candidates for JEE Mains are eligible to appear for JEE Advanced exams. Therefore, with
the acquisition of Lakshya, MTEL is well poised to provide right mix to prospective students who could attend coaching during
XI & XII from MTEL and prepare for JEE from Lakshya. Though that would require a significant expansion of Lakshya cen-
ters in areas where MTEL is operating, and company has already started doing CAPEX to make most out of the acquisition.
MTEL has started expanding Lakshya in Punjab, Haryana, UP, J&K and Himanchal Pradesh. The next leg of expansion would
be in western & southern regions of India. The recent expansion in Karnataka for XI and XII science aspirants through college
tie-ups could be a potential targets for Lakshya and is expected to work as strong foundation for growth.
4
25 years journey transformed a local business into a national coaching chain
BUSINESS SEGMENTS OFFERINGS: Suitable for students of all age groups
SCHOOL SECTION IX and X standard (which includes CBSE, ICSE and State Boards)
INK Model for V, VI, VII and VIII standard
SCIENCE SECTION
XI and XII standard
Preparation for Engineering and Medical entrance examinations (JEE Mains & Advanced
and NEET)
COMMERCE SECTION
XI and XII standard
CA-IPCC, CA Final and CA-CPT
CS-Entrance
B.Com and Graduation syllabus
Coaching for CAT, CMAT and GMAT
OTHERS Overseas coaching services, such as Dubai
Preparation of entrance exams for Government services
Sale of study material through various distribution channels
The regions where MTEL has presence are strategically evaluated by the company and the offerings are based on
growth prospects & preference of the students towards entrance exams. MTEL launched CA courses in Tamil
Nadu, Engineering in Karnataka, acquired Lakshya in Northern India, etc. Company is diversifying the offerings
and focusing more on scalability.
Recent initiative for UVA (University, Vocational & Affiliated) education model could be the EBITDA booster,
considering the network expansion with colleges. In this way of operations, colleges get extra revenue for provid-
ing infrastructure to MTEL during non academic sessions and MTEL uses a well established infra of colleges at a
nominal cost. We believe that it could be a strong trigger for next 3 years.
5
Income Statement and Balance Sheet
Coaching institutes operate mostly on fixed component cost and that provides them significant operating leverage. The factor
which influences the most is the total strength of the students, which could also be considered as occupancy of the batch. Over
the past several years, company has witnessed significant acceptance in the market due to rising aspirations for entrance exams
and continued diversification in product offerings. Growth at MTEL in past few years was the mix of organic as well as inor-
ganic and has comfortably drove revenue at a better than expected rate. Despite continued expansion and inorganic growth,
profitability at operating level has improved and would be able to expand further with expansion, according to us. TTM
EBITDA margin of the MTEL in past several quarters have been between 18-22%.
We believe that company has much more stabilized it at current levels and would be able to sustain it in coming years. MTEL
has improved its cash flow from operations and we believe that it would remain positive in coming years due to asset light
business model. Despite significant expansion in past ten years, MTEL managed to control its financials and kept its balance
sheet debt free. Strong cash flow from operating activities and fewer burdens of non operating expenses would be able to pro-
vide sufficient strength to the balance sheet, according to us.
Continuous improvement in profitability delivered strong cash flow
During past four years, MTEL’s operating revenue has grown at a CAGR of over 24% in past 4 years, which is commendable
considering the fragmented market of coaching industry. The company has managed to generate healthy ROIs over the period
of growth and reported ROE and ROIC between 15-20%, which is a respectable performance for a business which is expan-
sion. Cash flows from operations (CFO) and Free Cash Flows (FCF) has been positive in past several years and generated
enough cash for expansion activities.
TTM Performance Analysis Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Basic EPS (TTM) 4.54 4.67 4.82 4.95 5.29
Price to Earnings (TTM) 17.7 20.0 19.4 18.2 16.4
PEG Ratio (TTM) 0.9 2.9 1.7 0.2
Revenue Per Share (TTM) 38.93 42.03 45.90 48.45 50.58
Price to Sales (TTM) 2.1 2.2 2.0 1.9 1.7
Net Operating Revenue (TTM) 1,548.7 1,672.1 1,826.0 1,927.6 2,012.1
TTM Quarterly Growth 29.3% 8.0% 9.2% 5.6% 4.4%
EBITDA Margin (TTM) 18.9% 18.7% 19.2% 19.8% 21.0%
Net Profit Margin (TTM) 11.7% 11.1% 10.5% 10.2% 10.5%
Degree of Leverages (TTM)
Degree of Operating Leverages 0.29 0.76 1.15 1.43 2.83
Degree of Financial Leverages 1.20 0.49 0.31 0.33 0.55
Degree of Total Leverages 0.35 0.38 0.35 0.48 1.55
6
Ongoing network rollout and occupancy rate would continue the aid top-line momentum
Zero debt at balance sheet and high operating leverage model improves performance
Despite continued expansion, net margin improved and maintained positive CFO
7
Improvement in operating level performance delivered strong results
Despite continued expansion and fragmented market, especially from local coaching institutes; MTEL has managed operating
margins well and also expanded operations at a significant rate. EBITDA margins increased to above 20%, while expansion in
other formats of coaching improved profits in absolute terms. We believe that the numbers would continue to grow in next five
years due to rising career aspirations of students.
MTEL’s shareholders’ equity has reported a CAGR
of over 33% in past four years. We believe that the
momentum could sustain over the medium term, due
to continued expansion and marginal rise in occu-
pancy in batches
We believe that the shareholders’ equity could con-
tinue to grow at the CAGR of between 20-23% due to
consistent improvement in operating profitability,
thus keeping ROE above 20%.
High operating leverage kind of models improve as-
set quality and rise in occupancy keeps the momen-
tum in long run.
Network expansion would continue in future and
localization of the new centers would be the key in
future, according to us.
We believe that, for the long term, MTEL would be
able to keep ROTA near to 15%
MTEL is estimated at a WACC around 15%, and
with its ROCE close to 20%, appears better posi-
tioned on average as compared to similar growth
companies.
We believe that the company would be able to main-
tain its ROCE well above the level of 20% due to
continued improvement in profitability in past four
years
10%
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35%
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2011 2012 2013 2014 2015 2016 2017 2018 2019
INR
Bil
lio
n
Shareholders' Equity & ROE
Shareholders' Equity, LHS Return on Equity (ROE), RHS
10%
15%
20%
25%
30%
35%
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2011 2012 2013 2014 2015 2016 2017 2018 2019
INR
Bil
lio
n
Capital Employed & ROCE
Capital Employed, LHS Return on Capital Employed (ROCE), RHS
5%
7%
9%
11%
13%
15%
17%
19%
0
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2
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2011 2012 2013 2014 2015 2016 2017 2018 2019
INR
Bil
lio
n
Total Assets & ROTA
Total Assets, LHS Return on Total Assets (ROTA), RHS
8
Continued expansion could raise employee expenses; keeping other costs under control
Rise in employee expenses could be the concern for the company due to continued expansion of coaching centers and geo-
graphical risks associated with that. However, other expenses, such as direct expenses and material cost would be under control
due to its fixed nature and low variability. MTEL operates at an asset light business model, therefore it leaves the company to
focus more on student acquisition to reach maximum occupancy per batch.
We believe that the employee expenses could report notable growth in coming years due to additional hiring of staffs to work
on new coaching centers. Administration expenses would remain stable; however, control over non operating cost would be the
key for coming years, which we believe that it would remain in favor of MTEL due to rising acceptance of coaching studies in
Tier II and III cities, which would further increase the occupancy rate.
Operating & Non Operating Expenses 2011 2012 2013 2014 YoY Growth CAGR/Avg
Growth
(INR Million)
Gross Operating Revenue 1,055 1,306 1,573 2,018 28.3% 24.1%
ELEMENTS OF EXPENSES
Direct Expenses & Materials Cost 555 698 816 999 22.5% 21.7%
Employment Cost 135 180 219 286 30.4% 28.2%
Administration & Other Expenses 174 197 245 310 26.6% 21.1%
Total Expenses 865 1,075 1,280 1,595 24.6% 22.6%
PERCENTAGE IN GROSS SALES
Direct Expenses & Materials Cost 52.6% 53.4% 51.9% 49.5% — 51.9%
Employment Cost 12.8% 13.8% 13.9% 14.2% — 13.7%
Administration & Other Expenses 16.5% 15.1% 15.6% 15.3% — 15.6%
Expenses against Net Operating Revenue 82.0% 82.3% 81.4% 79.0% — 81.2%
CONTRIBUTION TO TOTAL EXPENSES
Direct Expenses & Materials Cost 64.2% 64.9% 63.8% 62.7% — 63.9%
Employment Cost 15.7% 16.7% 17.1% 17.9% — 16.9%
Administration & Other Expenses 20.2% 18.3% 19.1% 19.4% — 19.3%
9
Income Statement (INR Million) 2011 2012 2013 2014 2015 (E) 2016 (E) 2017 (E)
Net Revenue 1,055 1,306 1,573 2,018 2,448 3,051 3,900 Revenue Growth 23.8% 20.5% 28.3% 21.3% 24.6% 27.8%
Direct Expenses & Material Cost (555) (698) (816) (999) (1,151) (1,432) (1,827)
Employment Cost (135) (180) (219) (286) (337) (423) (545) Administration Expenses (174) (197) (245) (310) (372) (464) (593)
Depreciation & Amortization (83) (78) (86) (128) (176) (214) (260)
EBIT (Operational Profit) 107 153 207 295 412 518 676
Operating Margin 10.4% 12.0% 13.8% 15.5% 17.7% 17.9% 18.2%
Other Income 21 40 47 24 70 77 87 Reported Tax (48) (64) (76) (111) (169) (208) (267)
Profit After Tax 80 128 178 208 313 387 496 PAT Margin 7.8% 10.1% 11.8% 10.9% 13.5% 13.3% 13.4%
Basic EPS 2.4 3.8 4.6 5.3 7.9 9.8 12.5
Balance Sheet (INR Million) 2011 2012 2013 2014 2015 (E) 2016 (E) 2017 (E)
Net Tangible & Intangible Assets 328 307 665 878 893 911 902
Capital WIP 9 164 122 65 61 47 55
Non Current Investments 6 6 6 135 135 135 135
Goodwill on Consolidation 18 33 21 8 13 14 18
Deferred Tax Assets 31 41 41 47 0 0 0
LT Loans & Advances 104 139 302 197 160 168 215
Other Non Current Assets 1 0 1 0 0 0 0
Cash & Cash Equivalents 207 176 242 98 394 793 1,213
Current Investments 227 107 153 113 120 126 161
Inventories 0 0 0 1 1 1 1
Trade Receivables 52 64 100 89 105 123 148
ST Loans & Advances 74 260 122 197 240 252 323
Other Current Assets 3 0 1 3 3 3 3
Total Assets 1,059 1,298 1,777 1,829 2,123 2,571 3,173
Other Long Term Liabilities 34 53 84 30 47 58 74
Long Term Provision 10 7 6 12 16 20 26
Short Term Borrowings 45 0 0 0 0 0 0
Trade Payables 11 11 20 38 47 58 74
Other Currnet Liabilities 396 516 490 394 419 522 667
Short Term Provisions 81 138 167 243 279 348 445
Minority Interest 5 1 (2) (7) (7) (7) (7)
Equity Share Capital 344 352 395 398 398 398 398
Reserves & Surplus 133 219 616 722 924 1,175 1,496
Total Liabilities & Equity 1,059 1,298 1,777 1,829 2,123 2,571 3,173
Continued expansion in new
geographies and strong product
offerings improved top-line per-
formance in a fragmented and
ultra competitive market
EBITDA margins are expected
to remain above 20% due to
rising occupancy and high oper-
ating leverage business model
Growth in assets was significant
in past several years due to both
organic and inorganic expan-
sion across India.
Despite continued expansion in
new markets, company managed
to report debt free balance sheet
10
Continued expansion and high operating leverage, justifies higher multiples
We have used ‘Price to Earnings’ and Discounted Cash Flow method of valuation to value MTEL; and both methods of valua-
tion lead us to assign a target price of in the range of INR 200. We have modeled MTEL using 15% long term market return
and 8% risk-free rate; and got the Cost of Equity at 15%, and due to zero debt at balance sheet Weighted Average Cost of
Capital (WACC) also reflects 15%. MTEL’s
TTM basic earnings per share was reported
at INR 5.3 and it currently trades at 23.6x
P/E multiple. Due to push on network ex-
pansion, strong revenue growth and wide
presence across India, we would value
MTEL at 25x FY15 P/E at INR 200 per
share, given the improving outlook.
At the expected terminal value growth of
5% and the WACC of 15%, our sensitivity
analysis on the price movements at different
stages are as under. We arrive at a price
target of INR 200 based upon a blend of
the two approaches that we have used to
arrive at a fair value for MTEL.
Weighted Average Cost of Capital (WACC)
Capital Structure Value Type Current Mkt
Price Book Value/Market
Value (INR mn) Weight
Debt Book Value NA — 7.0%
Equity Market Value 120 4,774 15.0%
Cost of Equity (COE) Cost of Debt (COD)
Total return 15.0% LT Int rate 10.0%
Tax Rate 30.0%
Risk free rate 8.0% COD 7.0%
Beta 1.00 WACC 15.0%
CAPM (COE) 15.0% ROIC 17.2%
Continuing value 2015 (E) 2016 (E) 2017 (E) 2018 (E) 2019 (E)
FCFF (INR mn) 291 441 593 785 1,067
Discount factor 0.87 0.76 0.66 0.57 0.50
PV of Explict Cash flow 253 333 390 449 530
PV of cash flows (INR mn) 1,955 Valuation
Value of Operations (INR mn) 7,524
Gorden Growth approach Value of Cash & Cash Eq (INR mn) 535
Growth in FCF 5.0% Non Equity claims (INR mn) —
Gorden Growth approach (INR mn) 11,200
PV of CV (INR mn) 5,568 Value per share 200
Sensitivity Analysis Between WACC and FCF growth rate
FCF Growth
200 1.0% 3.0% 5.0% 7.0% 9.0%
WACC
13.5% 180 204 241 299 410
14.0% 172 194 227 277 368
14.5% 165 185 214 258 333
15.0% 159 177 200 241 305
15.5% 153 169 192 226 281
16.0% 147 162 183 213 260
16.5% 142 156 175 201 242
11
Quantitative Performance 65%
BUSI-NESS
MATRIX
Net Operating Revenue 7%
Profitability Ratio
EBITDA Margin 5%
Net Profit Margin 3%
OPERAT-ING MA-
TRIX
Return on Investments
Retun on Equity 3%
Retun on Invested Capital 3%
Return on Capital Employed 3%
Return on Total Assets 3%
Activity Ratios
Total Asset Turnover 3%
Fixed Asset Turnover 3%
Capital Turnover 3%
Debtors Turnover 3%
Working Cap Turnover 3%
Solvency Ratios
Debt to Equity 3%
Interest Coverage Ratio 2%
Liquidity Ratios
Current Ratio 2%
Cash Ratio 2%
Cash Conversion 2%
VALUA-TION
MATRIX
Valuation Parameters
PEG 4%
Price to Book Value 4%
EV to EBITDA 4%
RIGHT HORIZONS SCOREMATRIX®
35% Qualitative Performance
SHARE-HOLDING PAT-TERN & CORPO-
RATE ACTIONS
Shareholding Pattern
Promoters' Holding 5%
Institutional Holding
Mutual Funds / UTI 2%
Financial Institutions / Banks 1%
Central / State Government 1%
Insurance Companies 1%
Foreign Institutional Investors 1%
Qualified Foreign Investor 1%
Public Holdings
More than 1% 3%
More than 5% 2%
OTHER PA-
RAMETERS
Market Volume
Average Trading Volume 3%
Delivery Volume Percentage 3%
Independent Director / Investor
Any Prominent Name 3%
Pledging
Promoters' Share Pledging 3%
Auditors
Name of Auditor 3%
Qualification of Auditor 3%
RH ScoreMatrix® is a proprietary tool to measure total risk of
the business on two broad parameters. The unique Score-
Matrix® builds on the difficult to measure qualitative metrics
which are extremely important to gauge total business risk at
any given point.
The rating system has been developed on the businesses
analyzed over the long period performance (7 years annual
and past 10 quarters). Rating scale of 1 to 5, with 1 indicat-
ing highest risk and 5 indicating least risk. Each weight indi-
cates relative dispensation of the parameter. Quantitative
performance holds 65% (or 2/3rd weight) and the balance on
Qualitative indicators. This composite rating thus developed
is a fair indication of the overall risk to the business and out-
look on the company over the medium term. For individual &
detailed ScoreMatrix® on companies under review; please
reach us at Right Horizons to the respective analyst.
SCALE Rating
OUTSTANDING >=4.00
EXCELLENT >=3.50
GOOD >=3.00
SATISFACTORY >=2.50
BELOWPAR <2.50
I, Tushar Pendharkar MBA(Finance), Business Analyst author of this report, hereby certify that all of the views expressed in this docu-
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of our compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document.
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we have policies in place to identify, consider and manage potential conflicts of interest and protect the integrity of our relationships with investing and
corporate clients. Employee compliance with these policies is mandatory. Any comment or statement made herein are solely those of the analyst and do
not necessarily reflect those of Right Horizons.
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