Education companies cannot ask for a better set of macro drivers than they can find in our country. A large target population — 41 per cent of people in India, the world’s second most highly populated country, are under 20 years of age — and a growing middle-class with improving affordability and willingness to spend on education. This is expected to boost the school segment market from $96 billion in 2015 to $144 billion by 2020; about 36,000 higher education institutes will be added, which will create the second largest graduate talent pipeline by 2020.
But the story of listed education companies has been far from enviable. The average market cap of these players is ₹300 crore and many of the companies, such as Everonn Education, which listed about nine years ago, have seen their share prices slashed — from a high of ₹1,200 in 2008 to about ₹20 currently. Why, with every fifth person in the 10-24-year age group in the world being an Indian, do investors give the education sector the cold shoulder?
School services
Education companies do one of many things. Some offer services to the school segment; this is also known as the K12 segment, meaning Kindergarten to 12{+t}{+h} standard. This used to be the main focus of companies earlier, and services range from setting up computer labs in government schools to school administration software. Examples of listed players in this segment include CORE Education and Educomp.
Schools being what they are — lots of unbendable rules and lack of rewards — they have turned out to be a tough and testing experience for these companies. The sales cycles were long, as schools were not keen to learn new ways to do things. Receivables, especially from the Government, were large. Products and services also became quickly outdated as technology moved on very fast. Imagine creating and sending educational CDs in a world of Khan Academy and instant video downloads. Debt turned out to be a huge problem for many, and servicing it with uncertain cash-flows became a problem.
Others, such as Zee Learn and Tree House Education and Accessories, for instance, decided to catch the students very young — in pre-schools. This would seem like a great place to be — given that, unlike the K12 segment, where Government is everywhere, there are no such regulations and differences in rules across States. This has helped the rapid expansion of these players. Tree House started with one pre-school in 2003, and now operates about 720 pre-schools in 103 cities; Zee Learn, which uses a franchise model, runs about 1,300 pre-schools.
Non-school services
Coaching and test preparation are other popular services offered by education companies such as MT Educare. The company has been hugely successful — doubling its profits in the last three years — and its stock price has also doubled since its IPO in 2012. The test preparation market in India is estimated at $8 billion, so there is a lot of scope for growth with innovative solutions in this space. But here, again, the barrier to entry is low and there are multiple choices, with many online and offline class providers.
Skills education is another category that is chugging along steadily, albeit there are no spectacular stories to tell. For instance, NIIT, which offers computer training, has been clocking sales of around ₹1,000 crore annually in the last three years. Profits have been elusive, but things seem to be improving lately. NIIT also offers corporate training and this division has been doing well. India will be adding about 1 million people to its labour force every single month for the next 20 years till 2030, says a report from Deutsche Bank.
Tough market
While there are a lot of favourable factors, there are some rather tough issues that have derailed many players. For one, there are many regulatory worries in the K12 space; fears of the Government intervening and making the business unviable. In the past, poor Internet connectivity killed many delivery models; and fast evolving technology (such as mobiles which replaced special learning tablets) made it difficult for companies to develop education technology hardware and earn returns.
In the pre-school segment, setting up a centre is no child’s play as you need high capital investments. For instance, private player Hippocampus, which targets the rural market, has been on a fund-raising spree to sustain growth — ₹7 crore in 2012, ₹3.5 crore in 2013 and ₹14.4 crore in 2014. Going with a franchise model may reduce costs but may dilute margins. Tree House, with over 80 per cent of self-operated pre-schools has operating and net profit margins of over 50 and 20 per cent respectively. In contrast, Zee Learn, with a franchise model, had best operating and net margins of 23 and 8 per cent respectively.
And, given that there are no regulations, the barrier to entry is low in this segment and competition is high. As a result, companies offer sweet deals such as generous payment terms, leading to mounting receivables. Tree House Education and Accessories, for instance, had over ₹62 crore of receivables as of September 30, 2015, as against a quarterly revenue of ₹57 crore. The company is merging with Zee Learn and trades at half its IPO listing price of ₹135 currently.
Poor show by education companies is not an India-specific phenomenon. A big exit globally was that of Lynda.com, which offers online learning and was acquired by LinkedIn for $1.5 billion in April 2015. College book rental provider Chegg, which went public in 2014, is only worth less than $500 million.
In India, TutoVista, which offered online tutoring and was acquired by Pearson for ₹980 crore in 2013, was a noteworthy exit. Companies have little or no interest in going for an IPO — MT Educare’s 2012 listing was the biggest in a while; Sylph Education Solutions’ listing in February this year, was small (market cap of ₹15 crore) and the company now trades below the IPO price. Coaching company Resonance Eduventure has postponed its listing plans due to tepid market conditions while CL Educate may go ahead with an IPO soon.
Growth aplenty
Still, it is hard to ignore the growth drivers in India. For one, the problem of quantity — getting education within reach of every child — has only partially been achieved. Data from the annual ACER survey on education shows that enrolment in higher classes is improving. But there is lack of quality — only 47 per cent of children in Std 4 could read a Std 2 text. Finding ways to improve the quality of education, especially in the rural segment, in a cost-effective way could be the holy grail for success in the sector. This could involve using data analytics to capture and analyse and improve learning, offering personalised teaching for each student, multi-dimensional learning using online, classrooms and practical training as well as sharing platforms to keep the learner engaged.
Likewise, conducting exams is no less difficult than preparing for one. Preparing and distributing questions, proctoring, grading and ensuring there is privacy and transparency — all these take up time and resources. Finding ways to improve efficiency in this process can help a company come out with flying colours.