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Edited Transcript of CARU.NS earnings conference call or presentation 14-Nov-19 8:15am GMT

Q2 2020 CL Educate Ltd Earnings Call

NEW DELHI Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of CL Educate Ltd earnings conference call or presentation Thursday, November 14, 2019 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arjun Wadhwa

CL Educate Limited - CFO

* Nikhil Mahajan

CL Educate Limited - Group CEO of Enterprise Business & Executive Director

* Satya Narayanan Ramakrishnan

CL Educate Limited - Founder & Chairman

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Presentation

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Operator [1]

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Ladies and gentlemen, good day. And welcome to the CL Educate Q2 and H1 FY '20 Earnings Conference Call. We have with us today on the call, Mr. Satya Narayanan R., Chairman and Executive Director CL Educate Limited; Mr. Nikhil Mahajan, Executive Director and Group CEO, Enterprise Business from CL Educate Limited; and Mr. Arjun Wadhwa, CFO from CL Educate Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Arjun Wadhwa. Thank you, and over to you, sir.

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Arjun Wadhwa, CL Educate Limited - CFO [2]

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Thanks, Fred. This is Arjun here. I am joined on this call by Satya and Nikhil. I am going to get right into the presentation and move quickly to Slide #6. We'll open our remarks from here. I hope everyone's had a chance to download the presentation, and I'll just pause for a few seconds for you to join me on that slide. The slide is titled H1 Consolidated Financial Results, a Brief Snapshot.

Okay. Jumping right in, I'm delighted to share that the total enrollments for us on a year-on-year comparison has grown 43%, up from about 46,000 same time last year to about 66,000 so far this year. The bulk of this jump is on account of growth in our online business. A lot of these enrollments would be either in the digital or in sachet space, and we'll spend a lot more time on this when we come to cover our Consumer business segment. You'll notice that this number does not as yet reflect in a significant movement in the revenue from operations, that's largely on account of the small ticket size of these enrollments, and we should see future benefits coming from this in the months and years ahead.

Focusing on some of the other details in terms of a brief snapshot. Our adjusted EBITDA has grown 36%, and I'll spend more time explaining how this figure has been calculated, a couple of slides later. We've moved from about INR 21 Cr, September 2018 to a shade under INR 28.5 Cr so far this year. If I just look at the pure EBITDA figures that we've quoted, it's a movement from INR 24 Cr to INR 25.26 Cr, that's a 5.3% growth. But I'll explain a couple of slides down the line what the adjusted EBITDA is and how we've come to this value.

The slight dip in our revenue from operations has also resulted in a change in our net profit compared to last year, it's down 12%. Some of this is on account of the change in the revenue from operations. And if you join me on the next slide, Slide #7. You'll also notice that our other income is down from INR 6 crores to INR 4.86 crores.

So the difference in the impact from continued operations is largely on account of INR 1 crore from the revenue from operations and a little over INR 1 crore from the other income. You will also notice that our total expenses are virtually the same as they were last year so hence, the EBITDA figure is predominantly reflected based on the change in revenue and the other income. As shared in the last slide, the EBITDA itself has grown 5.3%, while the adjusted EBITDA has grown 36%.

Quickly covering how we came to that figure. The next slide, Slide #8, if you'll join me on. If I just take the EBITDA figures as they are, they were INR 25 Cr for this year versus INR 24 Cr for last year. You will remember that in our last call also, we spoke about the impact of Ind AS 115 on our business, especially in the publishing business, which is reflected across 2 of our organizations, CL Media and GK Publications. We had shared last time as well that the entire impact of -- in that 1 month time was taken in the fourth quarter last year, which makes a quarter-to-quarter comparison a little bit of apples to oranges. Hence, we have calculated this adjusted EBITDA figures for you to enable you to be able to compare the 2 numbers. So the impact of Ind AS 115 was about INR 0.5 crore. We add that back. This year, we've taken a vocational write-off of INR 2.75 crores in the first half of the year, INR 1.75 Cr in Q1 and another INR 1 Cr in Q2. At the same time last year, we had taken a vocational write-off of INR 1.2 Cr. So that explains partially what was the dip in the revenue figures that we showed in the previous slide and hence, it also gets reflected in the EBITDA and hence, the reason for giving you an adjusted EBITDA figure.

Last year, we had also received a onetime revenue from our Science Parivar business in Mumbai, which was about INR 1.2 Cr in the first half of the year, and there would be a corresponding figure for the second half of the year as well. The onetime revenue finished off in April of this year so hence, that figure will not be there going forward. So hence, we've netted off that INR 1.2 crore from last year's EBITDA to be able to give you a clear business comparison of what the numbers are.

Also last year, the other income that I've shared with you on the previous slide as INR 6 crores included liabilities, which were written off of to the tune of INR 3 crores, which was, again, as I shared, a onetime thing. So hence, the comparable figure for last year in terms of EBITDA, if I look at it purely from a business perspective, would be about INR 21 Cr. And since there's no liability being written off this year, and hence the other income is a pure number, the adjusted EBITDA on a comparative basis is INR 28.5 Cr this year. Hope I've clarified that, and if you have any more questions on this, we can take it up after the call.

This is a quick snapshot of where we are from a segmental perspective. As I shared previously, our total revenues this year from operations are INR 188 Cr against INR 189 Cr last year, flat. The consumer business has contributed INR 125 Cr out of that, out of the INR 187 Cr of this year. The Test Prep portion of that is INR 106 Cr versus INR 106 Cr last year. The dip that you see has come on account of the Publishing business, which is down INR 4 Cr and that is, again, largely on account of the impact of Ind AS 115, though there has also been a slight slowdown in this business. Nikhil will cover this in more detail when we come to this third part of the presentation.

The Enterprise business is also quite flattish. Our Enterprise business is broken up into 2 parts: the work we do with corporates, which some of you would know would come under our Kestone brand; and the work we do directly with institutions, which is colleges, universities, et cetera. So those numbers are also there on the slide in front of you, that we will spend more time on these numbers in Nikhil's part of the presentation.

I now move over to the operational side of things, and I'll hand over to Satya to take you through Slide #12, which is our consumer operating metrics and then our consumer business.

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Satya Narayanan Ramakrishnan, CL Educate Limited - Founder & Chairman [3]

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Thanks, Arjun. This is Satya. So Arjun mentioned about the noticeable jump in the enrollments. Without getting overexcited, it is also important for us to acknowledge that the transitioning from a pure offline to an online has been a very continuous process at CL for the last few years. And we have gone deeper into that by doing a whole lot of reorganizing the products, programs and the productization into very small sachets. And that's what is -- the good news over the first 6 months of this year, they're in programs such as Civil Services, GATE and even MBA. They have seen excellent momentum from an initiative to productization, to go-to-market and consumer traction. These are going to be low-value and high-EBITDA businesses. And that is what I had indicated even in the last conversation -- last call, that when we go more and more inside, all the revenues accrue to us directly with EBITDA being high, volumes being high but the ticket size being low, that would be the biggest highlight on this slide.

I now move to the next slide, which says, key highlights in digital and sachet business, powering growth. This is what is the script that I was sharing a minute ago while in the previous slide. And to be very specific, GATE, which is about a 600,000 student market, ICE GATE, it is our acquisition a couple of years ago. It is getting integrated into CL. We launched the Gateflix as a digital sachet variant, and they've sold about 14,000 products. Our AI/ML internships, which we launched in partnership with AICTE and Intel, that has seen tremendous traction. And even our sachet products in our flagship MBA and Civil Services, they also have shown 4-figure volumes in this quarter.

The challenge here is going to be -- or continues to be the MBA numbers for us to improve our revenue growth and Law also can do a little better, which currently is suffering from increased localized competition offline. And that is something that we are working upon, on the MBA and the Laws tracks. IPM, most of you would know, is something -- it's a integrated 5-year program in management offered by IIM Indore and IIM Rohtak. This will have more institutions coming into the fold of offering IPM. And CL has established a very clear leadership. There are no one -- no players who have shown interest in this segment. This is doing year-on-year comparisons with doing a CS in terms of volume numbers, but it's a small segment. This could emerge as significant as the Law and bolster the MBA basket over the next couple of years.

Publishing is the next slide. I'll hand it over to Nikhil to take us through the next couple of slides.

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Nikhil Mahajan, CL Educate Limited - Group CEO of Enterprise Business & Executive Director [4]

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Good afternoon, everybody. Let me start with the Publishing business. We are on Slide #14. So as Arjun has shared, we have seen about an 18% fall in revenue as compared to last year. And that is driven predominantly by 2, 4 factors. One, yes, there is a slight slowdown in the market in terms of where the market is absorbing and the throughput of the marketing is absorbing. What we won't -- what I'll express is also that there is a significant change in terms of the way revenue has been accounted for under the new accounting standard. So strictly speaking, the H1 numbers for FY '20 and FY '19 are not comparable.

So number two, GATE, which was the flagship product in terms of the book sales, in the last 5 years has seen a gradual dip from about close to a million test takers to around 650,000 test takers. And this gradual reduction in number of test takers of GATE has also seen a slight downward absorption of the books of GATE, which usually account for close to our 33% to 35% of our total books. So our core focus has been on 2 things. One, reduce the inventory, which we are holding. Number two, improve the payment cycles within the industry where the average ticket cycle is close to 8 to 9 months, and in the current circumstances that has got even further extended. So at the current time, we are focusing on -- for faster collection cycle by deliberately reducing the stock we are purchasing in the market. So that the turnaround of stock in the market and the cash is much faster.

Now let me move to the Enterprise business. I am going to Slide 16. This -- as you know, one of our biggest properties for institutional and corporate engagement goes by the name Melting Pot. We had done the first event of this year in Bangalore in the month of January, and we launched our first event in the U.S. market in Silicon Valley in October 2020 -- or 2019. The Silicon Valley event was an extremely positive event with over 80 participants from corporate, academia and start-up community. And we are seeing a reasonable positive interest in terms of what we are offering across all 3 segments.

Coming to the overall business. On the operating side, you will see the business in terms of revenue has been more or less flat. The corporate revenues, more or less, absolutely flat while institutional revenue has seen a slight dip. Let me add one point in terms of the institutional business sales where we see a slight dip of about INR 75 lakhs, INR 80 lakhs. So one of the core reasons for that is, last year, we had a business from one of our partners in terms of the media releasing for a select activity, which was a long-term activity. However, this year, we have chosen to deliberately not get into the client because the payment cycle in that line of business was slightly delayed and affected our working capital. So apple-to-apple comparison that media release last year was about INR 2.5 Cr, which we have chosen not to do this year. So net of that, you will see that the business this year in H1 has still grown by about 12%, 13%. We are sitting on a pretty healthy pipeline from institutional business in terms of the marketing services, the go-to-market and student engagement, and I see a clearly positive H2, which we are likely to see.

On the organizational update, I'll get back -- I will hand over to Arjun, again. He will update you on the next slides.

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Arjun Wadhwa, CL Educate Limited - CFO [5]

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Thanks, Nikhil. Just briefly on the merger, I'll actually go one slide down, and then I'll come back to this slide. Slide #20 shows you what we will look like post the merger. So for those of you who are joining us for the first time or who have not been following our merger update previously, basically CL Educate has a set of wholly owned subsidiaries, 5 of those are listed on this slide here. All of these are merging into the parent entity, and this process has gone through necessary approvals from the stock exchanges. And post that has now moved -- if I go back to the previous slide, Slide #19, has now moved to the NCLT stage. Our filing with the NCLT happened earlier this year, and we had our first hearing on that matter on 15th October, our second hearing is scheduled today. And later today, we'll have an update on this. As far as things go, just very briefly, the merger is on track. We are expecting to get a date for our shareholder meeting sometime around January. And we hope to complete the merger process by May or June of 2020. The merger's effective date will be 1st April, 2019. So that's the update on the merger for now. If you have any more questions on this, I can take them up later on, after we're done with the presentation.

I'll now hand back over to Satya to talk about the second point on the organization updates, the Wain Fund.

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Satya Narayanan Ramakrishnan, CL Educate Limited - Founder & Chairman [6]

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Thank you once again, Arjun. So this one is, in many ways, continuation of what we actually have done over the last 15 years, wherein CL has constantly been looking at young startups in the space of education, ED tech, integrated them into CL as an entity and grown from one-product, one-city company to multiple-products and multiple-cities, multiple-geographies company. So this one -- at the IPO, discontinued because as part of the [city] guidelines, we need to set aside some money for inorganic, that continued. Now we have come to a point post our recent investments in companies like ICE GATE and so on, where we are having to create this fund or a pool, which we are intending to do with one slight additional new initiative, which is coming from WainConnect. And as you know, WainConnect is finding traction with young startups, entrepreneurs, universities and corporates. And you could -- you can go look up the website, there are about 75,000 innovators on the platform. We have been able to get about $4 million of projects funding from corporates, which has been diverted into innovation projects inside universities. There have been 33 corporates, which have corporates funds, et cetera, that have put out many challenges here that gets us revenue for WainConnect. And then there are independent funds both in India and the U.S., who are our partners of Wain, who look at the startups that come out of this as their own pipeline. So the 200 in this slide refers to the sigma of our University and corporate partners on the platform.

Now the -- I'm now going to slide number -- this is Slide #21, which talks about -- how does this operate? Right now, if you look at the front side of the slide, which is titled the 3-stage value prop of Wain Fund. We already have wainconnect.com as a platform, which is part of our institutional product portfolio. And what we are adding are the layers 2 and 3 in the next calendar year, beginning Melting Pot 2020 in Bangalore, wherein while we have been shortlisting startups from various universities and giving them awards and directing them through funds until last year, we now intend to bring them into our 1-year accelerator program called the Wain Accelerator Program, wherein we will do coaching and mentoring for them as a platform.

And we will take a cohort of 25 to 30. And this -- a small part of the money that we are putting aside from our yearly profits, we intend to give as small incubation capital to select startups that we choose from this. It could be anywhere between INR 5 lakhs, INR 7 lakhs to INR 20 lakhs, INR 30 lakhs. And we will try and have a very strong bias for those startups, which have relevance to us, which is -- expect for Career Launcher and the Enterprise task for Kestone. That is what is something that we are adding. It is almost like if you're thinking of a funnel, which is about 4 stages, 3 stages were live, research was live, Innovation was live, startup duration was live. We are adding a fourth layer called a little bit of an incubation capital of small amounts, which we will bring from sales profits as a Wain Fund, and we will have other universities participating -- universities and corporates participating in this, and we have had interest surety of them, we'll keep you updated as we move along. An update on this in the form of a press release also would have gone up by now on the site, you can go and look that up. Any more questions that you have, we'll be happy to answer on this. The link where the press release is live is shown on the presentation on slide number, I think, 19, okay? That's what is about this Wain Fund initiative. I'll hand it back to Arjun to take us to the next phase of the call.

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Arjun Wadhwa, CL Educate Limited - CFO [7]

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Thanks again, Satya. We'll move straight away into the Q&A side of things. Zaid, as if you could line up any questions that have been received at your end. I also see on the website that a few people have texted in some of their questions. Let me start with those, Zaid, before while you line up people who want to ask a few specific questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Sir, you may proceed with the questions from the web, while the questions on the audio call assemble.

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Arjun Wadhwa, CL Educate Limited - CFO [2]

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Thanks, Zaid. There's a question from Anil Bakshi from [Fair Vale] Capital. I'll read out the question here for everyone's benefit.

It's: our vocational business receivable has reduced by less than INR 2 crores, what is the recovery expected in the next couple of quarters? And what do you expect happening in this business in the quarters ahead?

Very quickly, for those of you who followed our vocational business over the last few years, we've -- we had an outstanding receivable of about INR 50 crores a couple of years ago. That number is now down to a net outstanding of about INR 21.8 Cr from the government. This is after taking into account an ECL provision of INR 3.5 crores. We have already taken a write-off of INR 2.75 crores so far this year as I shared previously. And as we've shared continuously over our investor calls in the past, we're looking to either collect all the money that is due or take relevant write-offs by September 2020. So over the next 4 quarters, this INR 21.8 crores will be virtually negligible. We're expecting portions of that to come in, in Q3 and Q4, and which doesn't will hopefully come in by Q1 and Q2. And we'll take the necessary write-offs. In the meantime, we've taken INR 2.75 crores so far this year, and we continue to do necessary provisions over the months ahead.

There's a second question from Mr. Bakshi. There is an 8% drop in your employee expenses, how would you achieve that? And what are the other items? What -- sorry, my apologies, what are the items and other expenses, which have gone up?

The 8% drop in employee expenses, as you rightly pointed out, sir, this is largely on account of rationalization of resources on account of businesses that we acquired over the last 2 years. That includes the ETEN business that we bought from Pearson and the [ACME] hire we did from Vista Mind. So the dip is largely on account of rationalization of manpower, where 2 people were not required largely to do 1 specific role. While we have done this, we have stayed true to our requirement of continuing to add people to -- on the sales and business development side to ensure that business gets the necessary muscles to continue to grow. There has also been a dip in the employee expenses on account of franchising out a few of our company-owned centers in the last couple of -- in around the same time last year.

What are the items and other expenses that have gone up? Largely, the bulk of that would be the franchise expenses, which have gone up by about INR 4 crores. And actually, that is explainable by what I just said previously, which is just that we chose to franchise out. That has resulted in a greater share going out in the form of franchisee payments.

Okay. I'll move on to the next question. Rahul Agarwal has asked what is the total cash, which the company has on September '19 across mutual fund investments, fixed deposits and banks? And how has this moved in comparison with March '19? How much do you specifically have in mutual funds?

Our mutual fund balance as on date is INR 43.69 crores. You can find that figure on our consolidated balance sheet. Yes, INR 43.69 crores. My apologies. Thanks, Nikhil. The relative comparative figure for the same time last year was about INR 36 crores. And for March '19, it was about INR 27.5 crores. Our total cash in hand is about INR 78 crores as compared to INR 64 crores in March. And again, the comparison for same time last year was about INR 69 crores, give or take, some change.

I'll just go back and see if there are any more questions. Given -- there's a question from M Krishnan. You have announced an acquisition in [Muscat], what is the long-term thought behind this? Can you also talk a little bit about how your foreign businesses are doing?

I'll hand back over to Nikhil for this.

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Nikhil Mahajan, CL Educate Limited - Group CEO of Enterprise Business & Executive Director [3]

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Let me first give you a broader picture. We -- our international business comprises of 3 components. One, the corporate business based out of Singapore. We have our construct and training business based in Dubai. And our U.S. international business, which we kicked off earlier this year. As of last year, the total international business was around close to over $2.2 million. And our first milestone to change that business from $2.2 million is to take it at close to $5 million in the shortest span of time. To achieve that, there have been multiple steps. Our Singapore business has been growing significantly well.

Middle East, we have added a couple of locations, and it was in that context, we now have fixed operational centers in Middle East, almost all of them enduring. We are looking at getting into the other geographies into Middle East, like Oman, Saudi Arabia, Qatar, which have a significant need and requirement of the courses, which we offer. It was in this context we have been in talks with an educational training company, which has been operating in Muscat, Oman for the last 8, 9 years in the area of team product training like CFA, CMA, diploma in our products and associated products. In the Indian market also, we have been contemplating. We have launched our own [film] school and data school about 6 months ago. And partnership and alignment of interest, bringing -- they are very, very solid products, which we have been successfully running for 8 -- 12 to 8 years in that market. And the features are of high international repute. And also partnering with them to take our education products into Oman. We chose that partnership was the best way and that was the reason of making this investment and acquisition. And I think our international business as it is today is going to be one of our core prescursors and drivers in the next couple of years in terms of our [responsive] job.

I'll hand it back to Arjun for any other queriers.

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Arjun Wadhwa, CL Educate Limited - CFO [4]

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Thanks, Nikhil. Zaid, if you have anyone, bring them on your -- in our queue.

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Operator [5]

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From the line of Amit [Chitnis] from Banyan Tree Capital.

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Unidentified Analyst, [6]

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I just have a couple of questions. First of all, with respect to the business transfer agreement between CLIP and I-Take care. So at this point, I believe it is still pending. Could you please throw some light on how much share do they owe us?

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Satya Narayanan Ramakrishnan, CL Educate Limited - Founder & Chairman [7]

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Basically they don't owe us anything for the simple reason because the amount we had agreed to, a business rental agreement as a part of asset sale, I-Take care could not complete their length because they had some funding issues. And so we have formally not yet terminated the agreement but it's as good as terminated. At this stage, there's -- surely there's nothing receivable or owed on that account from them. Just an update, on that, we are currently in specific discussions with 2 other parties who are real estate players -- sorry, school players. And ours, as you might be aware, in such discussions, till we reach a reasonably conclusive case. We don't have anything specific, which we can share at this case, other than something concrete is agreed upon. We'll get back and share it in public domain.

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Unidentified Analyst, [8]

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Okay. I just have 1 more question. Could you tell us if you are taking advantage of the new tax rates?

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Arjun Wadhwa, CL Educate Limited - CFO [9]

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Yes. Hi, Amit. Arjun here back again. We're in the process of evaluating that. The current tax rate that we're on is 27% and the new tax rate is 25%. So the benefit available there is about 2%. But we have matched credit sitting on -- in our books of CL Media to the account of INR 3.6 Cr. So in all likelihood, we will use that this year when the merger comes through, and we will take advantage of the new tax rates in the next financial year. But we will be in -- that is the plan of action at this point in time, but we will evaluate that as we come closer to the end of the year, and we have a clear picture in terms of where we are in terms of the merger as well.

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Unidentified Analyst, [10]

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Okay. And one last question, if I can squeeze in. Could you let us know what was the latest profit on [by ICMA]? I believe it has been in business since last 8 to 9 years, which we kind of know.

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Nikhil Mahajan, CL Educate Limited - Group CEO of Enterprise Business & Executive Director [11]

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See, they follow a calendar year conditions. Their last audited accounts are for calendar year '18 wherein they had done a revenue of close to about $425,000, and they had a reported -- they reported a profit of approximately $48,000 approximate, okay?

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Arjun Wadhwa, CL Educate Limited - CFO [12]

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Zaid, is there anyone else?

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Operator [13]

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No, sir. No one in queue.

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Arjun Wadhwa, CL Educate Limited - CFO [14]

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All right. So thank you so much for your time here, and thank you, everyone, for joining our call today. We continue to be available at the e-mail addresses and phone numbers provided in our deck, and should you feel free to -- please feel free to send us any queries you might have.

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Operator [15]

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Thank you very much, Mr. Wadhwa. Ladies and gentlemen, on behalf of CL Educate Limited, that concluded today's conference call. Thank you for joining us, and you may now disconnect your lines.