India Higher Education Statistics - Part 2

A . Enrollment by Mode of Delivery

1.  In Class  - 46,430 institutions  - with total enrollments of 21.7 million
2. 197 institutions provide distance education - total enrollments of 4.2 million


B . Enrollment by level of Study

1. Graduate (undergrad)  - 16.2 million
2. Post Graduate  - 2.2 million
3. Phd Degree - 0.1
4. Diploma - 3.3

Everonn close to raising $100 Million from PE?

As reported by BS, Everonn may be close to raising $100 million from private equity players including Carlyle and New York Life capital partners. If true then this would be among the largest PE investments in education sector. At current market price of Rs 298, it has a market cap of about $115 million dollars. However, I would be surprised if Everonn is able to pull it off due to the following reasons

1. Carlyle has burnt its fingers in the past in another Indian education company, which it self has fallen out of favor due to fears on corporate governance. With Everonn's recent problems, including arrest of the former CEO and also deferring of the open offer and poor Q2 results, PE players won't get any where near the company

2. The open offer was to be at Rs 528, almost double the current price. The sharp decline in price would prevent any preferential allotment due to SEBI restrictions on pricing (higher of average of last six months or last two weeks)

Also, NIIT, which is a venerable Indian education training company, is three times the size of Everonn and is available at less than $100 million after adjusting for its 25% stake in NIIT Technologies. And, Educomp, despite concerns on debt is also available at a lower PE of 6.5.

The deferring of the open offer is really worrisome and could see the stock really tanking to lows seen in 2009. 

The Curious Case Of Manipal University!

Manipal University has inducted Mohandas Pai to help turn itself into a global business of scale. Only time will tell whether Mr Pai (former CFO of once revered Infosys) would be able to do that at Manipal only time will tell. However there are more than a few things that I am amused as well as curious about.

First the company (for profit) that is being talked about is Manipal Universal Learning (MUL) and not Manipal University (MU)(not for profit trust) so its amusing to find the two names being used inter changeably in common and business media.  Another curious thing and partly amusing is that the valuation of MUL (in every media report)  is still one billion dollars. I have been hearing about this for the past 4 years and it is still the same. During the period, Educomp rose from $ 0.5 billion in terms of market cap to over $2 billion in valuation and has come crashing down to less than $0.5 billion despite growing the business to over 5 times . Wonder what MUL has done during the period. But I guess being unlisted has some advantages in preserving valuation

Was reading a recent article on moneycontrol (http://www.moneycontrol.com/news/features/manipal-universitys-new-courseaction_585036-1.html) on Manipal's new course of action. What amuses me is that the very same things (capitation fee, NRI quotas, profit in education) that are derided elsewhere are very conveniently made to sound like panacea for the education sector. May be they are, I am not passing any value judgement however I am amused at the contrast of views expressed with such ease.

To be sure, for-profit companies in India still cannot legally (atlease not directly) run formal education institutes. Even MUL mostly owns universities outside of India (50% of the business on last count) . Of the remaining majority comes from running learning centers for Manipal Sikkim University (legal on paper but not sure if it is in the spirit of the law).

Also given the deficit of corporate governance in India's education sector wonder if MUL would gain more from Mohandas's clean image thanks to Infosys or Mohandas's image would be affected. I am curious if he would gain anything from speaking to a certain JJ Irani about his recent experiences at at the helm of  a listed  education company, that was increasingly being touted to be the next big thing.

PPP in Education

It has been reported that government wants to expand PPP in education (and healthcare) sectors in the 12th Five year plan. While increased focus and allocations are welcome, government must introspect what has happened to existing schemes. The ICT@Schools scheme is one of the most successful schemes to date with several thousand of schools being enabled with IT labs, lower teacher absenteeism and better academic performance due to participation by companies such as NIIT, Educomp, Everonn etc. However, lately these companies are staying away from such tenders as the scheme is marred due to excessive delay in payments by state governments. While these private players put in upfront capital to create infrastructure and take servicing responsibilities the least they can expect is timely payments. The average receivables/payment cycle for most of the companies is over a year with some states not paying for even longer durations leading to expensive capital being stuck in these contracts. In the last 12-18 months none of the large players has taken up new schools contracts. Even though some new players have emerged the pace is no where near what it used to be over the first half of the 11th plan.

Similarly, despite much fanfare the PPP scheme for model schools is floundering. Top areas for improvement for these PPP schemes are 1) tendering process b) timely payments c) recognizing that the private sector's main motivation is creating shareholder value

One excellent scheme that is doing well is the one for vocational skills. National Skills Development Corporation is a fantastic structure for encouraging private sector capacity creation. It has already given soft loans to over 30 projects including to Everonn, which aims to train 15 Mn people over 10 years. The aim of NSDC is to train 150 million people by year 2022 vs current total capacity of less than 5 million per year. NSDC's target is part of overall target of the government of creating 500 million skilled people by the year 2022. NSDC provides primarily soft loans to private companies with no further interference. No doubt, some of these  ventures would fail to achieve target capacity but NSDC would achieve large numbers at fraction of the cost otherwise required.

Everonn- NSDC Deal Analysis

Everonn recently announced a deal with NSDC to train 15 million people over the next 10 years. While one must congratulate them for being ambitious, there are a few things that we note




1. Reading most media reports leaves you thinking that NSDC will pay for the training. Incorrect! NSDC is not going to pay for the training; it is only providing low cost funding, as soft loans (and equity) to create capacity. The 15 million number is based on a 10 year business plan, which is largely an excel exercise at this stage. This is not a 15,000 cr contract with NSDC as reported in the media.

What must be noted that Everonn trained about 2000 people on vocational skills last year and aims to scale this up to 2.5 lacs in FY12 itself. Pretty steep climb in my view. Especially given that not too many people have been able to scale up vocational training, NIIT and Aptech being exceptions. And NIIT, over 30 years has only scaled up to training 5 lac/year.

2. Everonn is targeting an average fee of Rs 9000 per student. Though it sounds low, the propensity to pay (even this low amount) for training in the target population is likely to be a major challenge

3. 15 million means over 10 years implies that in the 10th year, they would be training at least 2-3 million. Given that India makes 30 million babies a year, this is 7-10% of the annual incremental population, implying 10% of population being trained by one company. Given that they are targeting service sector skills only, the implied share of target segment is huge

4. They hope to make profits in the first year despite a steep ramp up. Unlikely, given that initially the sales and marketing costs are going to be very high



That said, the fact that they can call themselves a government (or at least a semi government) organization is a huge positive and would give them credibility in the market. What remains to be seen is whether this advantage, comes with any baggage as well.

11th Five Year Plan - Plan Versus Actual Spending On Education

In one of my earlier posts, I had pointed out a 5x increase in allocation for education for the 11th five year plan (2007-2012), by the Government of India. This was a welcome change for a sector that had been severely lagging, despite everyone wanting to do something about it. With a progressive education minister, one hoped that things would improve and improve fast. However, while there is definite action, the pace still leaves much to be desired. Many of the bills introduced are still languishing, for a reasons best left unsaid on this blog. Perhaps a telling graphic is the one below, which plots the Planned outlay vs Actual expenditure for the 11th five year plan. The fourth year is coming to an end and has let a huge gap to be filled in the last year.

1. Of the total plan outlay of  Rs 273 K Crore, only 28% i.e. Rs 87 K Crore was spent in the first 3 year (2007-2010)
2. Planned expenditure by Central government during FY11 (as per budget) is another Rs 42 K Crore. 
3. Assuming all of this money is spent as planned, this leaves a gap of 186 K Crore for the 5th year, i.e. in FY12. This amounts to 58% of the total 5 year outlay, is almost one and a half times the spending in the first 4 years and more than four times the Planned expenditure for FY11. 

Government has ambitious plans for increasing reach of education in India.  It is aiming for universal education at the school level and for increasing the gross enrollment ratio to 30% for higher education by 2020 (vs 12% currently). One can already see that they are going to keep pushing these targets back. Many in the government hope that private sector would pick up the slack. However no one in the government is ready to provide clarity on allowing For-Profit Education. Philanthropy, the only legal model of private education currently, alone would not fill the gap.

Everonn - Appointment of JJ Irani and Nikhil Gandhi as Directors

Everonn, today, announced the appointment of JJ Irani as Director and non executive chairman and Nikhil Gandhi as director on the board of the company. Here are my thoughts on this

1. Nikhil Gandhi's appointment was expected and should have not effect (he has put in 200 cr into the company)
2. JJ's appointment is a positive development and potentially serves two purposes
    a) Gives an important face lift to corporate governance at Everonn. The company could be planning to raise further capital and JJ's presence would be a big confidence boost for potential investors
    b) Helps to counter NG's influence to push Everonn for benefit of SKIL

11th Five Year Plan - Planned Expenditure On Education In India

Public Private Partnerships: Why they may not be the solution?

PPP’s have become the latest buzzword in town. Politicians and Babus hawk 'Public Private Partnerships' as a silver bullet to help Indian economy achieve breakneck development while upholding government’s inclusiveness agenda. Here are my views on the matter

• India needs a huge pile of cash to develop its infrastructure, both hard and soft. Funding these is well beyond the means of the government.  
• That does not mean that government is not spending. The government spends huge amount of meney every year. The problem is that most of the money is spent on salaries and other operating expenses with little left over for new capacity expansion 
• The hope is that PPPs would attract the private sector to made the deficit investments and drive capacity expansion. Private sector responds to incentives and is looking for return on its investment. Given the large opportunity, PPP is a very attractive concept for them  
• However, in reality, the government loses all concept of partnership and sharing of risk/rewards when dealing with the private sector. It carries a huge intellectual baggage when it comes to partnering with the private sector. Take education for example, government has been allocating money for PPP for model schools every year for two years now (has been talking about it a few more years). It still has to come out with the model for sharing rewards with the private sector. It expects private sector to put money. However, whenever a model is proposed, the politicos run for cover. How can anyone make profits from education or more importantly how can the government approve a scheme which legalizes profit making from education? Does the government expect to attract all the money required from charitable organizations?  
• The problem is not just confined to one sector. Pick up any education, railways, power, roads the story is the same. The best solutions is to allow privatization, create level playing field for private players , have an independent regulator and foster competition. Healthcare and Telecom are the two sectors that stand out. Government allowed for profit companies to enter these two sectors a few years back. While there is room for improvement both private players have made healthcare and telecom available to a large number of people who otherwise were left out of government ‘inclusive’ plans

 

Are PPPs the magic wand that government hopes they are? My short answer is ‘No’

 

Educomp Results Analysis

Educomp Solutions' consolidated revenues, EBITDA and PAT rose 37%, 86% and 92% YoY to Rs2.6bn, Rs1.33bn and Rs612mn respectively.


Educomp, as indicated in Q2FY10, initiated the process of securitizing its Smart_Class revenue through selling contracts to Edusmart (which borrowed from banks against receivables from schools and corporate guarantee of Educomp) where Edusmart is a non-Educomp company apparently owned by ex employees of Educomp and is independently run (Yeah right!!)

In Q3FY10, the company transferred 518 schools with contracts worth Rs980mn (on top of 300 schools in Q2FY10 with contracts worth Rs630mn). Educomp has received sanctions worth Rs4.15bn for securitisation of Smart_Class revenues from many leading banks and has received Rs2.45bn disbursement. Besides, securitisation proposal worth Rs2-3bn is under consideration.

The transfer of existing Smart Class contracts to Edusmart would be done in tranches over the next few quarters.

The apparent reasons given are

• The new Smart Class model would improve cashflow for the company
• Would address the issue of frequent equity dilution,
• Some convoluted tax saving logic (I have no idea how this is possible)


Here is my analysis of the situation


1. This is a more expensive form of debt structure except that ‘Financing cash flows’ appear as ‘Operating cash flows’ in Educomp’s books

2. People say it increases lumpiness; Incorrect. It gives them a perfect tool to smoothen earnings and show growth, as there is absolutely no logic to how many contracts are securitized in a quarter.

3. Of course this can last for a short while only. Once they have securitized all their contracts, they would have to rely on new additions every quarter(growth in which is slowing down due to increased competition and lower realizations as Educomp is forced to cut prices because it no longer has the best product in the market). After that, the growth at least if not revenues, are likely to fall off the cliff

4. Once there are no annuity revenues from smart class, they have to keep adding a large number of schools every quarter to remain at the same level. You are already seeing that in their Government Schools business (predictably, they have started to hide their Gov’t business numbers by clubbing it with the smart class segment)

5. However, I hope you would agree with me that value cannot be created (or destroyed) through accounting changes. Stripped of the accounting treatment, the organic growth in their smart class seems to be slowing

6. The fact is, that with high stakes on their stock price, Educomp simply must keep showing growth to survive. In securitization, it has found a legal way of doing so.

7. Promoter holding is already down to 50 percent and may not want to dilute more. Debt is already at 1000+ Cr (excl unconverted FCCB of another 400 Cr and not counting off balance sheet guarantees for smart class securitization) despite diluting additional 35% post the IPO.

8. Of course, the hope is that some of their new initiatives (Own K-12 schools, online learning, and hundreds of other options that Educomp is buying with its overpriced currency …read stock) would by that time (when there are no more contracts to be securitized) begin to contribute materially.

9. For now, at least one will see their numbers grow at 100% over the next year or two, with a much smaller actual growth.

Educomp Results Update

Educomp today announced a ~95% jump in net profit in Q3 FY10 (year over year) to over 61 crores. That's a fantastic growth rate. What makes it more fantastic is that in terms of topline (at 260 crores) it has started to challenge the largest training company in India (NIIT Limited). However don't get taken in by the reported growth numbers.

Educomp had changed its accounting policy recently (to securitize its earnings in the smart class segment) in Q2. So it would be interesting to see how much of this growth is due to revenues profits being pulled upfront and therefore what will be the growth rate in the coming year. The grapevine is that Educomp has resorted to slashing prices for its smart class product to keep competition out of the market.

Remember, CLSA had already downgraded the stock after Q2 results due to the same reason.

Will put an update out post analysis...

IIM falters in CAT and Mouse game, on debut!

CAT 2009 got off to a disastrous start and despite huge efforts by the Prometric and its partners. The exam did not finish on schedule and is continuing to cause anxiety to students, parents, IIMs and even to the HRD ministry. However, what was has been most interesting is the clamor we have seen from the players not involved.

1. Media: Of course media had a field day. TRPs were up, confusion reigned and they kept adding fuel to fire. Well you could argue that It is their business to do so, even if media would say that they do this only in public interest (I’ll be damned if any of the coverage was inspired by concern for these students)

2. Other Online Testing Providers: Sore losers and vultures. You could almost see them laughing secretly and were happy to see Prometric fail. Are now clamoring that if they had been given a change they would have done a better job. Please guys, you were part of a bidding process, if you can do a better job, you should have done a better job at that time. (I can bet my shirt that Prometric and its Indian partner would do a much better job next time, what are these vultures betting?)

3. Coaching Institutes: Most vocal (after media). Want current exam to be scrapped, return to pen and paper format for this year (So they can charge students again for preparation). Act like they are acting in students' interest while a large silent majority was actually able to complete the test.

4. Other Xenophobes - Want contract to be given to an Indian company (yes, we have xenophobes in India too). These are racists, casteists, fascists in new avatar. There is no talk of merit.


Which brings me back to the organizers of the CAT exam. Poor show guys! You need to get your act together. You should make sure that every student who suffered is given another chance, and that this is not repeated the following year.

What is Jugaad? - And, do you need some of it?

The western world, it seems, has suddenly taken a liking for ‘Jugaad’. Indians have always held ‘Jugaad’ very close to their hearts. Jugaad may be trade-marked Indian, but the concept is not uniquely Desi. However, still, the current fascination of the developed world is amusing. Refer two interesting posts on Jugaad in Techcrunch by Sarah Lacy (who was in India doing research for her upcoming book on entrepreurship) and in Businessweek, which calls it Indian style of Innovation and Invention.

As a verb, Jugaad is the antithesis of ‘Process’. It is improvised (and sometimes very creative) problem solving and with the end result sometimes called a ‘Jugaad’ (noun) or described as ‘Jugaad’ (adjective). Which brings me to, why I find this amusing?

Over the past many years, the western (and pseudo western) trained managers have derided the ‘Jugaad’ solution. I remember an external speaker at the ISB, a few years ago, who was convinced that India is underdeveloped back only because of its ‘Jugaad’ mentality (everything else he said in his hour long speech was just gibberish).

Anyways, now, that the world is now discovering Jugaad, one must be careful not to over use it. Here are my thoughts on Jugaad

1. It provides an improvised quick fix but no long term warranty

2. It can certainly help you solve problems (especially if you are desperate)

3. Its gels perfectly with entrepreneurship, especially while starting out and want to ‘get it done’ ever which  

    way. Has a lot of overlap with 'Bootstrapping' in VC parlance

4. It is low ‘immediate’ cost, but long term costs may not be immediately apparent

PS: A person practicing Jugaad is called ‘Jugaadu’

PS, PS: The article in Businessweek mentions that TCS and Infosys gained world stature by having oodles of Jugaad. Having worked in one of these for over five years, I can tell you that while Jugaad had a role to play, do did 'Process'.

PS, PS, PS: There is a blog detailing list of Indian 'Jugaads'

Educomp: Securitization?

Secutization Debate: How Educomp is turning its Financing Cash Flows into Operating Cash Flows? But isn't that a good thing?

India's largest education company by market capitalization, Educomp Solutions, has been the "Darling" of investors since its IPO days. And for good reasons, many would argue. It has consistently maintained an explosive growth, the profit margins have been excellent and growing at an even faster rate and of course, more importantly, has given its investors over 30x returns since its IPO (despite falling over 25% from its high). Educomp has had a near "Dream Run" in the markets ever since it debuted, in fact rallying 100% on day 'One' of its listing.

However since its last results, Educomp has suddently lost favor with the "Investment Experts". To be fair, there were enough people who privately and not so privately expressed doubts about this company from the beginning. However, never have I seen another company being panned like this, and "rather rudely" in public. At least not a company which had a 9000 crore market cap and certainly not in India. I mean they have had had their share of controversies in the past. But which company, growing at an explosive rate, does not?

To be sure, its Q2 FY10 results were just as "stupendous" and the management upped the guidance for FY10 and FY11. So what changed, that a large swathe of investors and analysts suddenly did an about turn and are now calling it "... a very unique and strange company." or "..the only company I would short in the Indian market.."

Almost every one now blames, their newly announced securitization policy. This is what they have done

Educomp "Smart Class" Model

Before Securitization

With a high "upfront" capex model, their operating cash flows have always been low, putting a constraint on their growth. Therefore they have had to constantly borrow or raise equity to maintain the high growth rate. Now, one of the ways to ensure scalability is to securitize your investment/receivables which privide a company with enough liquidity to fuel its growth without the need to dilute equity. Which is what Educomp did, in last quarter.

New "Securitization" arrangement

Where Edu-SPV is an "unrelated" entity, apparently floated by ex-employees of Educomp

Now, "Securitization" is not a bad thing and sure it does turn Financing CF into Operating CF and the management should have been applauded for this, but there are curious angles to this peculiar case and apparently are the source of discomfort for the investors. Can you guess, why?

Mind you, nothing is illegal here, just what some people may call "smart" and "innovative" structuring

Mobile Blogging

Whoa! this is my first blog post from my E71 handset. Not every thing works, but its not too shabby! Meanwhile, KS decided to come out and issue a clarification on the issue of cutoffs for IIT-JEE saying revising it was the sole perogative of the IITs themselves. Kudos to the minister for not dragging his feet orver this.

Cutoffs for IIT-JEE to be raised?

IIT JEE cutoffs could be raised. Minister for HRD, Kapil Sibal announced yesterday that, he would like to see 80 -85% marks in Class 12 board exams as minimum cutoffs for eligibility to appear in IIT-JEE. The reason given for this is to stem the huge (and ever increasing) importance of tuition centers, that have become a necessary evil in the process of gaining admission to the prestigious engineering institutions. While this is desirable, I am not sure if the suggested move would have the intended impact. On the flip side, it is very likely that the following effect would be dominant.

This would lead to increase in stress levels that students have to bear as there would be two hurdles that they have to cross, instead of one. This is certainly not desirable. The minister's earlier decisions on making class 10 exams optional and moving to a grading system, aimed at reducing the stress that students have to face.

There are other problems. If the cutoffs are imposed, the system would have to find a way to normalize cut off scores across multiple boards. (though the Minister in the past has indicated a need to move to a single board). Then, there are other questions like ensuring uniform standard of marking scores, especially in subjective questions, what would be the cutoffs for the reserved categories etc adding to the complexity. We need to simplify not overly complicate the system.

Overall, however, the direction is good. The positive intent for reforms is visible. This is a huge positive for the education sector in India. This does not mean that India is ready for 'For-profit' education yet, which seems to be the only way to transform education in the country. But, we hope that steady pace of reforms would continue. This would ensure the human capital is available to fuel India's continuous growth and prosperity.

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.