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Education sector: fail marks this year

Edupreneurship, Finances & Budgets, For-profit education, Licenses and Regulations, Private Equity

Everonn Education Ltd’s corporate governance troubles have thrown the spotlight on education services stocks. Given the much talked about demographic dividend, the shortage of employable people and the government’s thrust on vocational skills training, it would seem there was easy money for the taking in this sector.

But the reality is far different in the listed stock universe. While the recent troubles may have seen the Everonn stock losing some 42% over the past three trading days, the sector as a whole has underperformed the broader markets for quite sometime now. Even before these allegations came to light, the scrip had shed 23.6% since the start of the current fiscal, against the 12.7% fall in the BSE-500 Index of BSE.

Rival Educomp Solutions Ltd lost half its market value in the same period (though that was partly due to a Securities and Exchange Board of India consent order on alleged insider trading by the promoter). Others such as Career Point Infosystems Ltd and Zee Learn Ltd, too, have fallen behind the BSE-500.

The primary reason these stocks are lagging is that the financials—which may look good in isolation—are not meeting Street expectations, say brokerages. Many of the stocks had listed at high price-earning multiples of up to 100 times, which implied growth rates of 50-60% for investors. That hasn’t happened.

The latest new share sale in this sector, Tree House Education and Accessories Ltd, listed at some 50 times fiscal 2011 earnings and has declined since.

Secondly, while there is strong demand in this sector, the potential has meant that competition has grown strongly in the past few years leading to saturation and driving down margins.

In the case of Everonn and Educomp—to name the two most visible stocks in this sector—high capital intensity in their preferred segment of multimedia education has led to wobbly balance sheets.

“Like Educomp, Everonn’s cash burn from capex has risen substantially, which has begun to meaningfully impact PAT (profit after tax) as interest costs almost tripled in the last quarter,” Ambit Capital Pvt. Ltd said in a recent note.

Thirdly, firms have to deal with a fragmented market, and for some, geographical concentration risk. For Career Point, which is mainly in the business of test preparation, nearly half its revenue comes from one city—Kota, in Rajasthan. While it is expanding into schools and private universities, these are more regulated segments.

Firms operating in this segment have to come up with smart capital structures to beat the not-for-profit clause, and it will be quite sometime before the results show.

These problems may not go away overnight, but those who have lots of patience may do well to remember that education is the biggest middle-class household spend after food.

Mint, September 6, 2011

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Play schools scout for Private equity investors

Finances & Budgets, Private Equity

Growing sector estimated to double business to $1 billion in 2 years.

Rishi Navani, co-founder and managing director of Matrix Partners India, says what the organised retail sector went through in the past five years, education will go through in the near future.

Navani should know. His investment firm with Rs 1,500 crore of assets under management, has invested Rs 59 crore in Tree House Education, a pre-school and K-12 education entity. The investment was done in two tranches — Rs 50 crore in 2008 and Rs 9 crore recently. Last July, Matrix Partners India had also invested Rs 100 crore in FIITJEE, a company which helps students prepare for the IIT-JEE test, crucial for seeking admission into top engineering colleges. Matrix is closely watching the space for future investments.

Another key investor in Tree House is the US-based Foundation Capital, which has over Rs 11,000 crore of assets under management. It invested Rs 31 crore in Tree House Foundation Capital had recently invested Rs 20 crore in Aspire Human Capital Management, a Gurgaon-based employability-enhancing firm.

“Not much attention has been paid on the importance of pre-schooling in India. However, we want to focus on this age group. The capital raised would be used for expansion,” said Rajesh Bhatia, chairman and MD, Tree House Education. Tree House currently operates 135 pre-schools. It also takes up management contracts and currently manages 12 schools under the K-12 brand.

More and more pre-schools or play schools are looking at private equity funding to expand. Sources say other players in the industry that are in talks with PE funds include Kangaroo Kids Education (KKEL), Hyderabad-based DRS Kids and Zee Learn.

While KKEL’s founder and chairperson, Lina Ashar declined to comment on the funding her company was seeking from the PE players, she agreed it’s important for expansion and growth.

“We are looking at active expansion across the country, especially the northern and western regions. In the next three years, we are aiming to set up around 25 Kangaroo Kids and 25 Billabong High Schools in Tier-I cities and key metros. We are also looking at building our overseas presence; expanding into developing countries that have a similar cultural/demographic make-up like India. We also plan to have about 25 teacher education institutes, considering the huge unmet demand for good quality teachers,” said Ashar. At present, KKEL has around 57 Kangaroo Kids franchisees.

The pre-school segment, according to the Kaizen Education Report, released by Kaizen Mgmt Advisors, is worth an estimated $500 million as of now and is expected to grow to $1 billion in the next two years.

The sector is growing at a compounded annual rate of 30 per cent. This growth is led by low penetration (one out of 100 children enrolled), of the 119 million children between the ages of 0 to 4.

“Growth of the sector is also led by low penetration (one out of 100 pre-school aged children enrolled) and corporate activity that has gathered pace. Increasing awareness among parents about the benefits of a quality pre-school education has been driving the penetration levels and price discovery in the segment. Led by these factors, the market is expected to expand over two-fold by 2012,” said the Kaizen Education Report.

The sector is highly fragmented, with 11 major chains, including KidZee, Euro Kids, Tree House, Bachpan, Mother’s Pride and Sunshine. Around 10 smaller players are also active in this space.

PE investment in pre-schools is also prompted by low regulations, low-entry barriers and weak penetration. PE players say the pre-school market is not regulated and there is a low upfront investment requirement to expand and establish a new branch, as rentals, which form the major part of expense, can typically be offset against monthly receipts and upfront admission fees.

In the past five-six years, the pre-school market has seen a shift toward organised players. KidZee (renamed Zee Learn) — India’s largest pre-school chain — has set up 623 pre-schools in just five years since inception and plans to add another 1,000 over the next two years.

Organised players have largely scaled up using the franchisee route — 1,700 schools catering to 200,000 students. While Kangaroo Kids is primarily a premium brand at an average annual fee of Rs 35,000-45,000, Tree House charges an average annual fee of Rs 18,000. Further, Educomp has launched a brand ‘Roots to Wings’ (60 pre-schools at present) and has also acquired a 50 per cent stake in Euro Kids (484 centres) for Rs 39 crore.

Hyderabad-based DRS Kids says it is in talks with PE players for possible fund raising, but refuses to divulge further details. “We are in talks with PE players for raising funds which would be used for further expansion,” said a company official. Zee Learn’s Chief Executive Officer Sumeet Mehta says while his company has not firmed up plans yet regarding fund raising, PE players offer easy finance for scaling up.

“Currently, there’s a lot of money chasing the education sector. Investment in pre-schools is likely to grow with importance to childhood education. PE players find pre-schools feasible to invest in, as there are very little regulatory issues involved,” says Mehta.

Kalpana Pathak, Business Standard, May 26, 2010

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