Wednesday, September 30, 2009

Equity Research

Recently, I came across a report on the Education sector in India, by a leading brokerage house. This was by far the best report in terms of data collection effort and presentation style that I have seen in recent months. Just under the skin of this report, it is clearly a very successful effort to create interest in the Education Sector in India and especially in the largest education company in India, by market cap. The conclusions derived in this report have this goal in mind.

Sample this. It says Educomp’s business is mapped to the most attractive segments in Education. (Educomp, for those who do not know already is opening its own ‘for profit schools’. Schools as we know have to be necessarily not for profit bodies. However they have devised a clever structure to pull all profits out of schools.

The report puts the K-12 market segment size at $20 Billion. It is easy to get blinded by this, unless you look deeper in the report. According to the report, the private schools market is as follows
1. Unaided Premium = 15000 schools , monthly fee average Rs1250 = 6.7 Billion dollars pa
2. Unaided standard = 29400 schools, monthly fee Rs 750 = 7.9 Billion dollars pa
3. Aided = 30660 schools, monthly fee average Rs 450 pa = 4.9 billion dollars pa
Total of $ 20 billion. Therefore the K-12 schools initiative by Educomp is mapped to the most attractive segment. Really ??

Now consider the following: Assume that I sell liquor. Total sales in the country of liquor are Rs 100 Cr So, I can say my market is 100 Cr. Really ? What if, I all I manufactured was a foreign brand liquor at Rs 3000 per bottle. Would my target market still be Rs 100. It is more like 1% of the above

Now Educomp charges, Rs 3000 – Rs 4000 as tuition fee for these schools. Clearly it is a subset of 1 as above. And, 200% away from average. Even with best case distribution, it is not likely to be more than 10% of these ‘Premuim’ schools (In normal distribution, if std error equals half mean and fee 2.5x mean this would be less than 1%). So even if there are 10% schools with fee > 3000, it implies that they are playing in the market of $2 Billion.

At one percent, it would be $200 million market

Anyways, $2 billion vs. $20 billion is nearly not as attractive, is it?

  • Consider the following
  • Building a school is capital intensive. More so for Premium Schools.
  • For ‘For Profit schools’, land is not exactly going to come cheap in the form of subsidized land from the government.
  • On top of this, there is also a regulatory risk. Nowhere, in the world is School education allowed to be run by ‘for profit’ enterprises.
  • Educomp’s schools are in India. Given Indian sensitivity to education and the jumpy unpredictable regulation track record in India, what if, one fine day an overzealous regulator wakes up and dictates that this is all illegal. They would not be able to close down the school and liquidate their investment.
  • The one billion dollars includes the Scindia and Doon schools of the world which have decades of heritage and brand name going for them.

The report either ignores or brushes these issues aside. I don’t blame the writers. The brokerage (as all brokerages) does not get paid for research. The research department is only designed to get investors to buy in, even if it means buying it at 20 times LTM revenue, and then to sell. Churn is what keeps them going. Soon enough, the very same brokers would be pointing these out and asking you to sell, if you haven’t already. You may have made your profit or suffered 50% loss. But the brokerage house would have made their money both ways for executing your trades.


Anonymous said...

Interesting post. I think you raise some great points, particularly about the size of the premium unaided market in India. Many reports state that the universe for Educomp's Smart Class product is 14,000 -15,000 schools. I would question whether all these schools can truely afford Smart Class.
By the way - do you know what the source of the data was for the size of the unaided premium segment of the private shcool market?

equity said...

Thanks for your comment!

The data source mentioned in the report is "Broker Research" and "discussion with profesionals in education industry"

My personal belief is that the number should be larger 25-30 K schools for the smart class product. A number of other things should be kept in mind

1. There are a number of other companies who are digitizing content. Not all all of them have an understanding of education and will fizze out as market matures, but some like NIIT have a great product (eGuru) now. So Educomp may not have the kind of free run it had in the last 2-3 years.

2. Increased competition would put pressure on pricing, though some of this can be countered with increased innovation.

3. Cost of hardware (projectors, computers, plasma TVs) etc keeps coming down. Some of this can be passed on to the schools to increase affordability

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