Education Sector+

8/8/2019 Education Sector+

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1 Edelweiss Securities Limited

Education

Executive Summary

Demand-supply gap; growth opportunities abound

The education sector currently faces a huge quality and supply gap at all levels viz.,

higher education, vocational and k-12 segments. While demand for quality educationsurges on demographics (both income and age) as well as a change in the GDP

structure, supply remains constrained on account of limited government budgets and

lack of accountability in the public education system. These pressures will force

regulatory changes that are likely to open up new vistas for the private sector.

Regulatory changes likely catalysts for growth

While the private sector plays an important role in the education space, it remains

constrained by regulations. Recent policy statements from the new education minister

give hope for a gradual acceptance of for profit education and a change in the

government role to a facilitator (from a licensor). We believe these changes will lead to

cleaner corporate structures and perhaps the presence of education chains. Further,

the new policy statement opens new vistas through the Public Private Partnership (PPP)

route. For instance, the model school scheme, which will allow private sector

management of government schools, is a potential USD 4.7 bn opportunity.

Market size estimated at over USD 21 bn

We estimate the size of the Indian education space at USD 21 bn, which is slated to grow

at a rate of 22% per annum. Growth is expected across segments, most prominently in

k-12 and higher education, which we value at USD 9.4 bn and USD 7.1 bn, respectively.

We believe, the growth rates could be higher incase regulatory changes are introduced.

Further, private sector players will benefit disproportionately as the size of the pie

available increases.

Educomp best placed but valuations a speed breaker

We initiate coverage on Educomp Soutions with a HOLD recommendation. We like the

company for its proven track record in project execution and strategic presence across

the entire education chain. However, we believe the upsides in the near-term are limited

on account of its high valuations (30x FY11E earnings). From a medium to long term

perspective, the company is likely to offer strong growth opportunities, we recommend

adding on dips.

Everonn Systems (Everonn) business focus is somewhat more narrowly defined with

fewer entry barriers. We initiate coverage on the stock with a BUY recommendation

largely on attractive valuations (it trades at a 60% discount to Educomp). Longer term

growth for Everonn though will be dependent on an expansion of its product offerings.


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Education

Contents

Education Sector: Poised for Big Leap ............................................................................ 3

Regulatory Changes to be Catalysts ............................................................................... 7

Market Opportunity at USD 21 bn ................................................................................ 12

Educomp Best Play but Valuations Expensive ................................................................ 24

Appendix I: Indian literacy rates below global standards ............................................. 26

Appendix II: Legislation governing setting up of schools/educational institutions ............ 27

Companies

Educomp Solutions .................................................................................................... 29

Everonn Systems ...................................................................................................... 47


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Edelweiss Securities Limited 3

Education

Education Sector: Poised for Big Leap

The Indian education sector is poised for a major tectonic shift, as demographic pressures,

coupled with an inefficient public schooling system, force a change in the regulatory

environment. Greater private sector participation (as witnessed in the proposal for 2,500

schools) through the PPP route, easing of restrictions and the possibility of legal profits in

the higher/vocational education space are some changes expected. Each one of these

measures throws up huge opportunities for existing players.

Yawning demand-supply gap

The education sector currently faces a huge quality and supply gap at all levels viz.

higher education, vocational and k-12 segments. While demand for quality education

surges on demographics (both income and age), supply remains constrained on account

of limited government budgets, lack of quality control and regulatory hurdles limiting

private sector participation.

Demand for education to rise

India being a young developing country, the demand for education, in general, andhigher education, in particular, is set to rise substantially over the next few years.

The demand will be led by changing demographics an increase in the student

population, shifting structure of the economy and higher income levels.

Increase in gross enrollment ratios: GERs in India remain extremely low

compared with global standards and the trend seems to be declining as one

moves up in various age groups. In India, at higher education levels, GERs are

at 12%, which is well below the worldwide trend of 23%. This ratio is closely

linked to the per capita GDP; as India develops economically, GERs are poised

to improve. Every 1% improvement in GERs leads to an incremental 2.3 mn

increase in the student population.

Chart 1: Indias GER remains extremely low

0.0

18.0

36.0

54.0

72.0

90.0

India Australia China France Germany UK USA

(%)

Source: Crisil, Edelweiss research

Population dividend: India is set to reap a demographic dividend, with the

population in the working group set to increase substantially. In many respects,

this mirrors the demographic trend of the US from 1970s to 2000, and is likely

to be visible in India over the next two decades with a large portion of the

population moving into the working age group. Coupled with low employability

Huge demand supply gap -demand drivers remainrobust


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Education

skills (studies indicate only 10% of graduates passing out of colleges are

actually employable), this will open up huge demand for courses/degrees with a

vocational tilt, targeted at working individuals.

Chart 2: US - % of population in work ing age group Chart 3: India - % of population in work ing age group

39.2

42.0

44.8

47.6

50.4

53.2

1970 1975 1980 1985 1990 1995 2000

(%)

Source: Edelweiss research

Change in GDP structure: The GDP structure is set to change over the next

few years with the proportion of agriculture in GDP likely to decline as the

economy grows. Similarly, the number of people dependent on the skill-oriented

industrial and services sector industry is at 28% (2006-07). This changing

structure creates the need for better education system, more so in the higher

and vocational segments.

Chart 4: Share of employment to change Chart 5: Breakup of GDP increase in services

Agriculture

60%

Industry12%

Services28%


Higher income levels: Increasing income levels lead to higher aspirations. The

middle-class population is expected to rise 10 fold over the next 15 years as the

income distribution sector moves from being a pyramid to a diamond. This leads

to a demand for not just education, but quality education. At the same time, it

leads to the creation of a population segment that has the capability and

willingness to pay for quality education.

0.0

12.0

24.0

36.0

48.0

60.0

2000 2005 2010 2015 2020 2025 2030

(%)

0.0

20.0

40.0

60.0

80.0

100.0

1975 1985 1995 2005 2007

(%)

Agriculture Industry Services


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Education

Chart 6: Classification of households (mn), 2000-01 Chart 7: Classification of households (mn), 2009-10

Deprived

Aspirers

Middle class

Rich

71.9

21.9

5.7

0.4

Source: NCAER, The great Indian middle class

Supply remains restricted

Contrary to the rising demand, supply of quality institutions remains restricted.

Government-run schools and institutions offer poor quality education on account of

lean financial support and lack of accountability. Education has been looked upon as

a notfor-profit enterprise, and various restrictions are placed across levels on

setting the fees and so on.

Further, while the private sector is involved in education, regulations remain hazy at

best. There are a multitude of authorities overlooking higher education (AICTE, UGC

and so on), while the k-12 space lacks a regulator.

Public education system has collapsed

India spends a mere 3% of its GDP on education, of which, nearly 80% is on

revenue expenditure. The expenditure on higher education is even lower at

merely 0.6% of GDP. Further, expenditure per student in the higher education

space has actually declined over the past few years.

Chart 8: GoI spend on secondary and higher education insufficient

0

180

360

540

720

900

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(%)

Elementary Secondary Higher


Deprived

Aspirers

Middle class

Rich

51.6

33.9

12.8

1.7

Private sector hampered bylegislation


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Education

While government-run schools account for nearly 86% of the total schools in

India, they often lack basic facilities and the quality of education imparted is

poor. On the infrastructure side, nearly 86% of schools do not have a computer,

37% lack common toilets and the student-teacher ratio is at 45. The impact is

clearly visible in the pass ratios of government schools, which is substantially

below that of private schools.

Table 1: Infrastructure in government schools remain below par

Infrastructure facilities in public schools (%)

Schools not having drinking water facilities 16.0

Schools not having common toilets 37.0

Schools not having a boundary wall 50.0

Schools without computer 86.0


Similarly, at the higher education level, while there are a few institutions of

strong repute, the vast majority of colleges fail to impart quality skills. As per

the National Knowledge Commission, a mere 1,500 of the 20,000 colleges can

provide quality education. In addition to lack of funding, some of the reasons

cited for poor education quality include high regulatory hurdles, poor teacher

quality and political interference.

Limited private sector participation

The private sector indeed plays an important role in the k-12 and higher

education segments. There are 183,737 schools and 17,250 colleges in the

private space. In medical and engineering, nearly two-third of the institutions

are run by private players. Nonetheless, as we discuss below, private sector

participation is restricted, preventing the emergence of cleaner chain-based

private institutions. The key debate and restriction hinges on whether the

education enterprise can be a for profit institution or merely a charitable

organisation.

Expect regulatory changes


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Education

Regulatory Changes to be Catalysts

The yawning demand supply-gap for education has long-term social implications and also

affects Indias ability to benefit from the population dividend. While reforms will be required

within government-run institutions, the need for increased private sector investment seems

imperative. Private sector investment, in turn, will require major regulatory reforms, which,

in our view, will call for a shift in policy making on two key aspects: (a) profit motive of

education institutions, and (b) the role of government.

Fig. 1: K-12 and higher education spaces are regulated

Education sector in India

Pre-school K-12 ICT in schoolsVocationaleducation

Higher education +Post graduate

SSC

CBSE

ICSE

IB English coachingTest preparationOnline education

Teacher training

AICTE, UGC/Others

Autonomous

Regulated verticals


Policy shift no. 1: Gradual shift toward recognising for profit education

Education in India has been viewed as a charitable enterprise rather than a commercialone. This is due to the initial charitable or missionary-based schools that were setup in

the country, and, post independence, the socialist pattern of development.

Consequently, all education institutions are, by law, run by charitable trusts with a no

profit motive.

Whether or not a trust can make profits remains ambiguous. The judgments from

various courts seem to imply that schools can earn a reasonable surplus, but cannot

profiteer. The exact meaning of a reasonable surplus has, however, not been defined.

Technically, there is no restriction on the fees chargeable for unaided schools or those

that have not received subsidised land grants from any government agency.

The reasonable surplus must, however, be utilised for the development of the

institution; further, the Supreme Court has stated that the surplus generated cannot be

transferred for the development of another institution run by the same trust.

In higher education, for institutions recognised by any government agency, the fee

structure needs to be approved by regulatory authorities including the AICTE, UGC and

so on. This fees structure is based on costs that to be approved by the state level

regulatory body. The body looks at the expenditure of the past three years and

projections for the next three years. Based on these estimates, fees are decided. There

have been cases of private institutions charging illegal capitation fees as well as charges

under various heads. Even in this case, the surplus must remain with the trust.

For profit education needs tobe recognised


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Education

This has led to education institutions earning profits through a two-tier system, where

profits are earned by providing services in the form of rentals/ management fees and so

on to companies.

Fig. 2: Structure of a trust

Fees Educational Trust

LeaseRentals

ManagementFees

Salaries Expenses

Profits


While reports by various committees such as the National Knowledge Commission (NKC)

and the Yashpal Committee (YC), submitted in June, 2009, agree on the need for private

sector investment, they remain ambiguous or silent on the profit motive.

In the YC report on higher education, submitted in February 2009, there was a voice of

dissent by Dr Kaushik Basu, who argued in favour of a market mechanism for higher

education:

We should allow private sector money to come into higher education. Surreptitious

privatisation is already a fact of life. It will be better to let this happen openly; there can

be then also open monitoring. The purely private colleges should of course not be

subsidized by the state. They should be allowed to set college fees as high as they

choose (as long as this is made transparent). It is true that such private colleges will end

up teaching mainly commercially viable subjects and cater to relatively rich students.

There is no harm in this and some advantages, since the state will now be able to

allocate more money to the colleges and universities under its charge and provide good

education to the remainder at the lower cost.

As a rebuttal, another committee member argued thus:

Fees should be based on cost, or else our fees will become like US schools.

Signs of change: The debate is certain to continue, but over the medium term, profit

motive in education system will not be a dirty word. Some of the recent statements of

the education minister seem to indicate that a change is likely:

We could consider an amendment that allows private investors to take profit from one

education institution and invest it in another. At present that is not allowed, they have to

plough back the profit into the same institution. - Kapil Sibal, HRD minister

Impact on private players: There is little doubt that this would be a major catalyst for

investment into the space. We see two key effects on private players:

(a ) Education chains likely to emerge

Once the profit motive is recognised and the relevant laws changed, we expect

cleaner structures to emerge in the education space. Over a period of time, we are

likely to see investment initiative from larger corporates and probability of larger

educational chains in the sector. Even if the government permits shift of surplus

from one institution to another, education chains are likely to emerge.

Debate on for profit couldcontinue


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Education

(b) Market forces play out; quality providers earn higher fees

The de-shackling of fee structure for higher education could lead to playing out of

market forces, with quality education providers being able to charge higher fees

than others. This will provide an incentive for quality education providers,

particularly in the higher education space, enabling them to gain a foothold in the

sector.

Policy shift no. 2: Change in governments role to a facilitator than a licensor

The Indian higher education space seems to be afflicted by over regulation and under

governance. This is particularly true in the context of higher education, where there is a

plethora of government bodies, including AICTE, UGC, BCI, MCI and so on. As NKC and

YC observe, the current system of regulation keeps entry barriers at a high level,

regulates every aspect of the curriculum as well as capacity and fees.

For instance, a new college has two ways of being recognised: (1) through legislation (as

a university) or (2) as an affiliate college of a university. This has led to universities

expanding in size and being unable to monitor the academic activities of the affiliate

college, whilst impeding the growth/ setup of a new college (public or private). Further, a

college setup under AICTE needs to take an extension every second year, obtain

permission to increase intake of students and to add more courses. Further, the process

of granting approval remains arbitrary with widespread allegations of misuse.

Both YC and NKC reports have proposed the creation of an authority for higher education

that will replace multiple regulators. This central regulator to be created by an act of the

parliament will largely play a role in the policy decision making, whilst creating specific

conditions for the entry and exit of education institutions (effectively allowing for free

market movement) and rating the colleges/ educational institutions.

NKC proposes three alternate routes for new undergraduate colleges: (a) they could be

established as community colleges providing vocational education, which will serve the

needs of the local population; (b) creation of universities that will only conduct

examinations under an authority much like the CBSE, with curriculum guidelines; or (c)be affiliated to new universities that are set up. The YC report also talks about these

possibilities and refers to them as one of the first tasks to suggest a time frame for

eliminating the affiliation tendency.

Signs of change: There is general acceptance of the fact that the multitude of

authorities must be removed and that the government must focus on regulation rather

than licensing. We expect a stronger rating and accreditation system in place with fewer

entry barriers over the near term. The exact modalities of new college registrations could

continue to be a matter of debate.

Impact on private players:

(a) Clearer entry requirements; will pave way for corporatisation: With

possibility of the government setting up clearer entry norms, enforceable by a single

agency, private sector participation is bound to increase.

(b) Development of vocational colleges/ community colleges: A centralised

examination system provides clearer benchmarks as passing marks, percentage

marks and so on. This standardisation allows for scalability. There could be

standardised degrees for various courses (including plumbing, as Mr. Kapil Sibal,

minister for Human Resource Development, mentioned) with a centralised

examination, which could open up huge opportunities for the private sector.

Role of government will be afocus area


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Education

(c) Rating system encourages quality institutions: The rating system, if brought

into effect, will separate quality institutions from the substandard ones, allowing

students to make informed choices. In the process, chains of quality institutions

could develop.

Likely immediate policy changes

While the role of private sector in education will possibly be dependent on resolution of

the above debates, there are three key changes in the near term that could fructify given

the largely administrative nature of decisions.

Change 1. Public private partnerships to increase

Following the relative success of ICT implementation in the private sector, the

government seems inclined to expand the scope of public private partnership (PPP).

The HRD ministry seeks to establish 2,500 Jawahar Kendriya Vidyalayas on PPP

model, to impart quality education to 25 lakh underprivileged children. While the

exact details are yet to be finalised, some of the broad parameters are likely to

include a mix of social and financial commitments.

The scheme

Change 2. Relaxation in requirement for private schools

The current CBSE by-laws give detailed requirements for infrastructure required to

set up a school, including quantum of land etc. We expect easing of infrastructure

requirements, especially the land requirement in cities, allowing more schools to be

set up. This will lower the overall capex required, leading to higher profitability.

The Private players, including trusts, societies and non-profit organisations,

which will be given freedom in management and hiring of teaching staff, will

have to maintain infrastructure as per CBSE standards. The proposal

suggests that the government's role in ensuring reservation, quality of

education and setting the curriculum will continue in these schools also.

The government will provide financial support for 1,000 students in every

school. While 50% of these 1,000 students will be from SC/ST/OBC groups,

the other 50% will be from economically weaker sections (parents not paying

income tax). Of the 1,000 students getting financial support, 25% will be

girls; 5% will be reserved as the government's discretionary quota. While the

private parties will be allowed to charge market fee from other students, the

proposal says the fee for SC/ST/OBC and girls will be just INR 25 per monthand INR 100 for students of non-income tax paying parents.

According to the plan, government will provide fee support of INR 1,400 per

month per student and rental or interest support of INR 400 per month per

student for 10 years. While the Centre will provide financial support for 12

years, the state government concerned will have to commit fee support for

the next eight years.

The model school scheme is astrong example of PPP


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Education

Table 2: Requirements for opening a school/ higher education institute

Key parameters Schools Higher education institutions

Management The Trust or Society/Management running the

school should be of non-proprietary character

Approval only for establishment or administration

of a professional college only for a society

registered under the Societies Registration Act,

1860 (21 of 1860), the Trusts Act, 1882 (2 of

1882), the Wakf Act, 1954 (29 of 1954), or undera corresponding law, if any, in force in a state

Land

requirements

Must have about two acres (or as otherwise

permitted measurement) of land and a building

constructed on a part of land and proper

playgrounds on the remaining land. In

metropolitan cities with a population exceeding

25 lacs, the land should not be less than one acre

For degree level institution

Rural area - 10 Hectares

Taluk or District- 4 hectares

Metropolitan Cities- 2 hectares

Fees Fees charges should be commensurate with the

facilities provided by the institution.No capitation

fee or voluntary donations for gaining admission

in the school or for any other purpose. No part of

income from the institution shall be diverted to

any individual in the Trust/Society/School

Management Committee or to any other person.

The savings, if any, after meeting the recurring

and non-recurring expenditure and contributions

to developmental, depreciation and contingency

funds may be further utilized for promoting the

school

Tuition and other fees for a professional college

shall be determined by a State Level

Committee.While calculating the fees, the

estimates of recurring expenditure shall be based

on at least the last two years audited figures of

recurring expenditure of the college and

projected requirement for next three years


This will lower set-up costs of schools, particularly in urban areas, benefitting return

ratios of the private sector in the K12 segment.

Change 3. Setting up central regulator for higher education

As pointed out earlier, the higher education segment faces a multitude of regulators.

There is a possibility of setting up a single regulator for higher education (referred to

as National Commission for Higher Education and Research, NCHER, by YC) and

Independent Regulatory Authority for Higher Education (IRAHE) by NKC. While it will

take some time to finalise the exact role of these committees, setting these up will

be a great first leap.

Single regulator expected


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Education

Market Opportunity at USD 21 bn

We estimate the market opportunity in the Indian education space at INR 1,043 bn, which is

slated to post CAGR of 22% p.a. Growth is expected across various segments, while K-12 and

higher education continue to remain the largest spaces by size.

Table 3: Market size of various segments of education ( 2009 estimated)

Segment

Current market

size (INR bn) Key players Key success factors Key trends

Preschool 18 Euro Kids; Kidzee, Applekids,

Kangaroo Kids, Shemrock

Franchising, location,

curriculum

Franchising, day care

K-12 471 DPS, Don Bosco, DAV Schools,

Kidzee High, Educomp

Infrastructure, pedagogy,

ICT, teachers

Development of chains,

international schooling

Higher education 357 Amity, NMIMS, Aptech, NIIT,

Manipal

Placements vocational courses,tie

ups with foreign

universities

Vocational education 48 NIIT, Aptech, Jetking Placements Specialised

courses,courses other

than IT

Test preparation 36 Brilliant, FIITJEE, Career point Success rate Diversification into

programmes

ICT in schools 98 Educomp, Everonn, NIIT Relationships with

governments, IT content

PPP's beyond just ICTs

Teacher training 1 Academy of creative training,

Educomp, The teachers foundation,

International academy of creative

teaching

Tie ups with schools


Pre schooling

Table 4: Unregulated with organised chains increasing presence

Market sizeKey players

Key success factors

Key trends

USD 0.23 bnKidzee, Applekids, Kangaroo kids, Shemrock

Franchising, location, curriculum

Franchising, day-care


Pre-schooling is an area that falls beyond the purview of the regulator. Growth will be

driven by an increase in enrollment ratio as parents look for that additional advantage

for students.

Given relatively low investments (INR 0.5 mn), brand build becomes a key differentiator.

With tremendous first-mover advantages, there is a strong need to increase presence

through a number of branches. Consequently, franchising is the route forward with

companies providing their brand name and training, whilst receiving a profit share from

the franchisee. Eurokids, Applekids, Shemrock, Kidzee, and Kangaroo kids offer franchise

opportunities.

Key trends likely in future

Franchising by companies to increase in tier II and III cities as they provide

tremendous market potential.

Companies to diversify into day care and K-12 education to leverage their brand

name. Applekids already provides day care programmes. Kidzee and Kangaroo kids

Large chains emerging in thespace


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Education

have diversified into K-12 education with Kidzee High and Billabong brand of

schools, respectively. Eurokids has diversified into dry management of a pre-school.

Local language content (along with English) will play an important role as pre-school

children are more comfortable in their mother tongue. Companies that develop more

local language content will succeed.

Table 5: Projections by 2013

Age Total population

Enrollment

ratio

No of

students

Avg fees

(INR)

Mkt size

(INR bn)

Mkt size

(USD bn)

Pre school 02-04 14,882,683 38% 5,655,420 2,000 11.3 0.23


i. An estimated CAGR of 31%; volume growth at 18.3%

ii. Urban population estimated after considering natural growth and migration

iii. Increase in enrolments assumed

K-12 education

Table 6: The largest pie in the education market

Market size

Key players

Key success factors

Key trends

USD 10.78 bn

Delhi Public Schools, Don Bosco Schools, DAV Schools, Kidzee

High, Educomp, Jain Group of institutions

Infrastructure, ICT, extracurricular activities, teachers

International schooling


This is the most attractive segment of the education market, primarily because a student,

once acquired, usually stays in the school for 12 years. The churn in students is very less,

although things are changing of late, with parents becoming more conscious and choosy.

The private sector schools are clearly attempting to differentiate themselves with better

quality infrastructure, pedagogy and so on. Newer schools face challenges in attempting

to shift students from existing well established schools, even though the demand-supply

scenario remains fairly benign.

The first-mover advantage is critical in this segment as well, particularly with a number

of schools attempting to increase their reach through the franchisee route.

K-12 schools is the largesteducation segment


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Education

Table 7: Key organised players in K-12 education market

Name Scale of operations Business specific details

Delhi Public

Schools

115 schools inside and out

of India

CBSE affiliated schools with enrollment of more than 100,000 students

Don Bosco Schools - The Salesians of Don Bosco is an international educational organization. It

is an unaided minority Christian institution

DAV Schools 500 schools inside and outof India

The Dayanand Anglo Vedic College Trust and Management Society is a non-government educational organisation covering a wide spectrum of

educational activities in the country and abroad - 600 educational

institutions which include 50 Graduate, Post-Graduate and Professional

Colleges, 400 Public Schools, 100 Secondary Schools besides Vocational,

Engineering and Technical Institutions

Kidzee High 375 schools, spread across

160 locations in India &

UAE

Primary, middle, secondary & sr. secondary schooling through a chain of

schools across the country. The annual fee for the kids admitted to Kidzee

would be between INR 30,000 and INR 50,000 depending on the centres

where they are located.

Jain Group of

Institutions

Has schools in Karnataka,

Hyderabad, Aurangabad,

Nagpur, Kanpur

Offers a wide variety of academic courses through a network of schools,

colleges and institutions spread across 6 campuses in and around

Bangalore. A conglomerate comprising 12 entities and more than 7000

students and 350 faculty members Source: Edelweiss research

How the space w ill evolve over next five years

Apart from the regulatory changes, discussed earlier in this report, some other changes

could be the following:

Franchising, particularly in tier II and III cities: Franchising and dry-run of

management are areas that are likely to emerge due to high capital investments.

We see signs of chains emerging as companies attempt to spread across

geographies rapidly.

Multistructure schools to come to play: There is likely to be a hierarchy of

private schools from the same company/ trusts with different branding and feesstructures. These different schools could be geographically spread according to the

tier of the city and will have substantially different set-up costs. Educomp already

has such an initiative with three different brands.

International schooling: This is set to rise as there is little regulatory intervention

involved. There is a significant increase in the number of international schools that

have come up recently. As Indians become more affluent, the tendency to provide

children an opportunity to participate in foreign schools or universities at an early

age will increase. International schools address this need as they enable children to

be eligible for early entry into higher schools abroad.


K-12 Age Total population Private

Weighted

Avg fees

(INR)

Mkt size

(INR bn)

Mkt size

(USD bn)

Primary 05-09 108,669,751 29,653,184 5,055 150 3.3

Secondary 10-14 110,219,874 33,771,098 7,170 242 5.4

Higher secondary 14-19 52,537,747 22,086,660 6,656 147 3.3

Total mkt size 539 12.0


i. An estimated CAGR of 20%; volume growth of 8%

ii. Enrolments increased at trendline growth between 2000 and 2008

iii. Enrolment ratio also increased along with trendline growth

Multi structure schools to bein focus


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iv. There is significant scope for growth in the number of schools (in spite of low

volume growth in total enrolments) in K-12 education as there is a growing

preference for lower pupil teacher ratios (PTR) in schools (PTRs in India are

around 40, whereas in most developed and emerging countries, they are 25).

Multimedia in schools

Multimedia presents an innovative method of delivering education. It increases the

interest of students by enabling a visually improved presentation of key subjects through

usage of graphics. Companies like Educomp and Everonn have realised its immense

potential and developed suitable products. Key success factors in the segment include

the ease of content use as well as a strong first-mover advantage. The typical model as

used by Educomp locks in a school for a five-year period, a first sign up is a clear

advantage.

Table 9: Multimedia in schools - Estimated total opportunity of I NR 32.4 bn


Number of private schools (estimate) 15,000

Number of students per school 1,200

Total number of students (mn) 18

Fees per student/month (INR) 150

Annual revenues (INR mn) 32,400



Shift in billing towards one-time fees rather than per student.

Currently, multi-media charges are on a per student basis. However, going forward,

we expect fixed charge to be applied to each classroom/ school.

ICT in government schools

Even the government has acknowledged the importance of quality education in

improving enrolment rates and reducing dropout rates in schools. The government,under the Sarva Shiksha Abhiyan Programme, has announced a budget of INR 15 lakh

per district per year, to be shared by the central and state governments in the ratio of

75:25 during the Tenth Five Year Plan and 50:50 thereafter. It is also essential to train

teachers the usage of multimedia, to deliver content. There are three revenue streams

within ICT for schools:

Content related products

Teacher training

Sale and maintenance of IT infrastructure

Table 10: ICT- Estimated total opportunity of INR 112 bn

ICT opportunity size

No of govt. + local body schools 1.1

No of labs per school 1

Cost of lab per school (INR) 100,000

Total market size (INR bn) 112


The latest effort by the government is the report of the Committee on Technology in

Education (with representation from MHRD and DIT), finalised in 2005. This committee

made the following recommendations:

ICT could lead to greater PPP


17/66


Education

Out of total number of 10,00,000 schools in the country, the programme Technology

in Education will cover 6,42,600 schools, including 4,22,400 primary schools,

1,61,700 upper primary schools and 58,500 secondary schools. Every school will have a

server, five PCs, printer, internet connectivity of 256Kbps plus other consumables. The

entire programme is to be implemented in three years, starting from 2006.

An allocation of INR 5,000 crore has been recommended for the Eleventh Plan period at

the initial stage, for supporting programmes for use of technologies in education.

A key competitive advantage, in this case, is the relationship with the respective

governments, which will be crucial in bagging government contracts. Those with strong

relationships will be able to secure ICT contracts for government schools.


We expect the scope of ICT to spread beyond just ICT. There is clearly a scope for

larger private public partnerships, as we have previously highlighted.

Higher education: Professional and vocational

Table 11: Second largest education segment after K-12

Market size

Key players

Key success factors

Key trends

USD 8.14B bn

Amity, NMIMS, Aptech, NIIT, ZILS, Manipal University

Placements

Vocation specific certificate courses, partnerships with foreign

universities


Higher education starts after 12th standard and covers a number of professional and

vocational courses.

Of the above, professional and vocational education are areas where more money is

involved. These are the most sought after courses as they are more job-oriented.

To sustain overall growth rates of 8%, India will have to produce more number of

professionals. As per the government, current enrolment rates in higher education have

to double to meet the demand of qualified professionals. Thus, we see tremendous

potential for growth of higher education.

1. Professional education segment size

Table 12: Estimated market opportunity of I NR 356 bn

Professional courses

No of

institutes

Avg no of

students per

batch

No of

years

Total no of

students

One time

admission

fee (INR)

Avg fees

per year

(INR)

Mkt size

(INR bn)

Mkt size

(USD bn)

Engineering 1,200 300 4 1,440,000 50,000 150,000 234 4.7Medical 817 100 5 408,500 100,000 250,000 110 2.2

MBA 1,000 60 2 120 50,000 75,000 12 0.2

Total mkt size 356 7.1


Projections: 19% CAGR till 2013, a volume growth of 8% (Edelweiss estimates)

Vocational courses couldbecome increasingly important


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Education

2. Vocational education segment size

As per India Labor report 2007, 25% of worlds workers in the next four years will

be Indian. Nearly 300 mn Indians will enter the labor force by 2025 (CII

Employment report 2006). However, the incidence of vocational education is very

low in India. As per an NSSO survey, 93% of the employable youth do not have

vocational training.

As per Business Today, there will be a shortfall of 3.1 mn skilled people by 2010.

The skill gap by sector is shown below (based on data from NASSCOM and other

industry associations).

Chart 9: Highest demand in IT/ ITES segment

100,000

75,000

12,000

140,000

200,000

200,000

500,000

Retail finance

Electronics /manufacturing

Energy

Hospitality

Retail

Construction / Real estate

IT / ITeS

Source: Based on various sources from internet

As per MEtS (Ma Foi Employment Survey) survey 2008, the top six sectors with

maximum employment generation are:

Table 13: Top six sectors for employment generation

Sector Addition Growth rate (%)

Hospitality 426,668 6.9

Health 295,829 8.9

Education, training and consultancy 166,005 1.6

IT 74,693 7.3

ITES 56,221 7.2

Real estate and construction 47,401 6.1

Source: Mets survey 2008

We believe these are likely to be the key growth sectors over the next five years.

Although, there could be a temporary slowdown in recruitment in 2009 because of

the global slowdown, the employment situation will be robust starting 2010. We see

tremendous demand for training in hospitality, health and IT sectors. Other

sectors like education, training, ITES, real estate and construction are still to see

any formal certificate/training programmes in place.

As per skill gap numbers, telecommunications, retail and retail finance segments are

facing problems in the availability of skilled manpower. These sectors will also see

more certificate courses emerging.

IT/ITES is the largest opportunity


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Education

Table 14: Estimated market size of INR 51 bn

Job type

Current

employment

Jobs addition

p.a Trained Fees

Market size

(INR bn)

Market size

(USD bn)

IT / ITeS 1,096,000 74,693 80% 200,000 12.0 0.2

Hospitality 6,156,000 426668 50% 100,000 21.3 0.4

Telecommunications -- -- 200,000 50,00010.0 0.2

Retail -- -- 100,000 50,000 5.0 0.1

Retail finance -- -- 50,000 50,000 2.5 0.1

Total mkt size 50.8 1.0


Edelweiss estimates a growth of 30% CAGR till 2013 in vocational education (includes

volume growth of 17%).

Table 15: Key players operating in higher education

Professional

institutes

Scale of operations Business specific details

First and largest private university in India. First wireless campus. Present in 11

locations in India. Faculty strength of 2500. Established over INR 500 mn worth of

scholarships. 1,000 are picked from 40,000 applicants.

Co ur se s o ff er ed : A ll p r of essi on al a nd Ge ner al g r ad u at e a nd p os t g r ad u at e

p r o g r a m m e s .

NMIMS offers AICTE accredited programmes and is one of the leading private

universities in India. Under the umbrella of NMIMS, a number of schools are run

school of commerce, school of business, school of technology, etc.

First business school to be awarded a 5 STAR rating and a Grade A by the

NAAC

Cour ses of fer ed: MBA, B.Tech, M.Tech, Pharm acy, M.Sc, e tc .

ITM is a private university that provides specialized management education

The Institute for Technology and Management was founded with an academic

association with The Southern New Hampshire University (SNHU), USA

Cou r ses o f f er ed : Th e I TM Gr ou p o f Bu sin ess Sch oo ls i s cu r r en t ly co nd uct in g 1 5 p rog ram m e s, i n a b ro ad r an ge o f f ie ld s in cl ud in g f in an ci al

m a r ket s, r et a il , p h ar m a ce ut i ca ls, h ea lt h ca re , r isk m a n ag em e nt , h u m an

resources e tc . I TM a lso has a separa te schoo l fo r ho t e l managem ent .

The Indian Institute of Planning and Management was established in 1973. Its

headquartered in Delhi and has branches in Mumbai, Bangalore, Chennai, Pune,

Ahmedabad and Hyderabad

Co ur se s o ff er ed : Fu ll t i m e & I n t e gr at ed Pr og r am m e i n N at i on al Eco no m ic

Pl an n in g a nd En t r ep r en eu r sh ip a nd Eu r op ea n Ex ch an g e Pr og r am w i t h I M I

i n Bus iness management

It is amongst the first institutions to receive Deemed University Status in India.

Enrollment of 15,000 students a year. Investing INR 1-1.3 bn for 4 more campuses

and INR 4 bn to upgrade facilities in Manipal itself.

Co u r se s o f fe r ed : M ed i ci n e, D en t i st r y , En g in ee ri n g, N u r si n g, A ll ie d H ea lt h ,

Ph a rm a cy , Li f e Sci en ce s, M an a ge m en t , M as s Co m m u n i ca t io n , I n f or m a t i on

Sciences, Ho te l Management , Regenera t i ve Med ic ine . e tc .

Gokula Education Foundation was started by Mr.M.S.Ramaiah in Karnataka in 1962

Co u r se s o f fe re d: En g in ee r in g , M ed i ci n e, M an a ge m en t , Ge ne r al e du ca t io n ,

Junior Col leges

IIPM -

Manipal

University

It has over 20

constituent institutions

that provide over 180

courses across 13streams

MS Ramaiah -

Gokula

Education

Foundation

Based in Karnataka.

Runs a number of

institutions like

Institute of Technology,

Institute of Management,

Medical college, Junior

and Degree College

Amity 600 acres of hi-tech

campuses. About 1000

seats on campus

NMIMS Located in the heart of

Mumbai

ITM Currently having 7

campuses across the

country.



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Education

Table 16: Key players operating in Vocational education

Vocational

institutes


NIIT Offers learning and

knowledge solutions to 5

million students across

32 countries

Set up in 1981, it pioneered the computer education market in India and is now a

global training major and knowledge corporation

Aptech offers a wide range of long-term and short-term IT courses catering to each

individuals unique requirements by using the Blended Learning IIOM (Interactive

Instructor-led Online Mentoring) approach

Aptech offers its globally-accepted Aptech Certified Computer Professional (ACCP)

programme across the world

Strategic alliances with global leaders such as Oracle, Microsoft and Red Hat and

Sun. Aptechs courses are translated into Chinese, Russian, Turkish, Vietnamese

and Spanish

JetKing Over 100 training

centers, 2500 faculty

members

First institute for training non technical students set up in 1990. The course

comprises lecture and theory sessions, with a greater focus on active participation,

through Smartlab Plus, that focuses on audio-visual and learning with hands-on

training and equips students with an in depth domain knowledge that is technical

It is promoted by Bajaj Capital group. Specializes in financial services education.

ICFP is authorised by the Financial Planning Standards Board (FPSB), India as an

education provider

Courses o f fered: Post Gradu ate D ip lom a in F inanc ia l P lann in g, Cer t i f i ed

F inanc ia l Planner . A lso o f fers on l ine courses

Wholly owned subsidiary of the Essel Group. an ISO 9001 certified education

provider company and is the education arm of Zee Network. Operates through a

number of divisions catering to multiple segments in education

Courses o f fered: Mul t im edia , An imat ion , Log is t i cs , Account ancy , D ig i ta l

A r ts , e tc .

An initiative of Berggruen Education - a venture of Berggruen Holdings Inc, New

York, USA

Courses o f fered: Hospitality Management, Retail Management, Life Skills &

Persona Development, English For Communication, Aviation and Travel & Tourism.

Programmes have been developed under the academic supervision of and also

validated by The Hotelschool The Hague, The Netherlands one of the top three

hospitality management schools in the world

UEI Global Institutes across 17

cities. Plans 50 institutes

by 2010

Aptech Operates across 10

business domains in over

40 countries worldwide

ICFP Student base of 4,500

and 90% market share

ZILS Operates through

Franchising as well


Key success factors in the segment

Placements: Placement is the key success factor that defines the demand for

higher education. Students apply to higher education institutes in the hope of

getting employed at the end of the course. To this end, the trend is more to provide

job-oriented courses. Thus, vocational institutions are gaining popularity nowadays.


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Education

Fig. 3: Strategic groups

Broad line

Narrow line

Singlelocation

Multiplelocations

NMIMSManipal Univ.

AmityZILS

NIIT, Aptech

IHMISB

ICFPGreat Lakes


How the space will evolve in the next five years

Vocation-specific certificate courses will emerge: It is widely understood that

there is a huge gap between education and employability of students who graduate.

To bridge this gap, a number of job-oriented vocational courses are emerging. IT

has already shown the way. Finance, retail, hotel management and aviation will see

growth, going forward.

Partnerships with foreign universities will increase: We do not see much direct

operation of foreign universities minus collaboration with Indian counterparts. As

regulations are not very conducive in higher education, we do not see independent

participation of foreign universities.

Twinning programmes: The current trend is to provide students an opportunity tospend a portion of their study period with foreign universities. This is essentially a

statement by institutes saying that the students are globally exposed and are being

prepared to be globally competent.

Test preparation

Higher education institutes typically have an entrance examination to screen applications

to select only eligible candidates. Most of these exams are for engineering, medical or

MBA streams. There is a big market for coaching students for these entrance

examinations.

Table 17: Test prep market estimated at INR 36 bn

Aspirants

% who take

coaching

Fees

(INR)

Mkt size

(INR bn)

Mkt size

(USD bn)

Engineering & Medicine 1,500,000 80.0 25,000 30.0 0.6

MBA 500,000 80.0 15,000 6.0 0.1



The success of test preparation is solely determined by the success of students in

passing the competitive examination. There are two components to coachingclassroom

and distance coaching through learning material. Classroom coaching helps provide

valuable tips from teachers. Distance coaching helps in reaching aspirants across India.

Certificate courses will emerge


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Education

Online coaching is also envisioned by companies to reach more students. The key

success factor in coaching is to prepare students for all patterns of tests. Examinations

like IIT-JEE or CAT keep innovating in terms of test patterns. Coaching institutes that

keep providing the best preparatory tests will do well in the long run.

How the space will evolve in the next five years

Online coaching to increase: To reach a large number of people in tier II cities,

there will be additional delivery channel of internet that will be exploited by coaching

companies.

Franchising could increase: To leverage the existing brand and to reach remote

towns and cities, coaching companies will resort to franchising, wherein they will

train people and share a percentage of revenues of the franchisee.

Table 18: Key players operating in MBA entrance exam test prep market

MBA

coaching

Revenues Scale of

operations

Business specific details

IMS More than 80+

centres across

India

IMS India trains MBA aspirants prepare for the Indian B School

entrance exams. Coaching through classroom courses and

correspondence distance learning preparation options areavailable. It claims to have students of 50,000 and more annually

Career

Launcher

Turnover of INR 700 mn in

2007.

130 locations

across India, US

and middle east

Founded by a small group of young IIM graduates. Apart from

test prep education it also provides mainstream education

through growing network of play schools and secondary schools.

400 academicians and 50,000+ students

TIME Turnover of INR 1.5 bn and

has been growing at a

CAGR of over 60% for the

last 5 years.

151 offices in 81

cities across the

country

3 management graduates set it up in 1992. Since then it has

grown into a specialist, multi-location, multi-programme training

provider running on corporate lines. Over 1,700 full time

employees

Career

Forum

Career Forum conducts teaching and intensive sessions for group

discussion and interview training, for entrance exams. Bennett

Coleman, the largest media house in the country, is a strategic

investor in the company.


Table 19: Key players operating in engineering entrance exam test prep market

Engineering test

coaching


Brilliant 13 centers in India Brilliant Tutorials, provides the entire range of coaching courses, from

engineering to medicine, MBA and civil services. Contact Programmes are

held in 15 cities and towns, while Model Tests are conducted in as many as

30 centres across India. Company claims every year, well over 60,000 boys

and girls join. At any point in time, there are at least 100,000 students

pursuing various careers. Brilliant has no franchisees.

FIITJEE 35 centers across India FIITJEE is primarily an engineering test prep brand. Currently the faculty

strength is nearly 300. Company concentrates on training students only forIIT-JEE

Career Point 49 study centers across

India

Career Point imparts education to students preparing for various

competitive examinations, with major focus on IIT-JEE

Amity Institute of

Competitive Exams

Started in 2001 with focus on engineering & medical entrance exams.

Provides coaching for CBSE, IIT-JEE, AIEEE, DPMT



23/66


Education

Teacher training

India has the largest pupil-teacher ratio (PTR) amongst BRIC nations. Internationally

accepted best PTR is around 1 teacher for 25 pupils; in India, it is around 40.

As the demand for better education increases in India, PTRs are set to dip, at least in

urban areas. Also, the teaching profession is not amongst well-paid professions in the

country. With other industries growing, there is a severe shortage of talent in the

teaching profession. Thus, there is need for educating teachers in India.

Table 20: Estimated market size of I NR 0.6 bn

No of teachers Trained (%) Target Cost

Mkt size

(INR bn)

Mkt size

(USD bn)

Primary 2,161,000 10.0 216,100 1,000 0.2 0.004

Middle 1,589,000 10.0 158,900 1,000 0.2 0.003

Secondary 2,083,000 10.0 208,300 1,000 0.2 0.004


Source: See appendix for detailed market sizing

Table 21: Key players operating in teacher training segmentKey players Scale of operations Business specific details

Academy of Creative

Teaching

Offshore branches

in US & Germany

and an office in

Bangalore

ACT organises customised training programmes on various areas at different

levels primary, secondary, higher secondary, collegiate, university and

professional colleges and also tailored workshops for corporate

organisations

Promoted by Jain Group of Institutions. Provides training to practicing

teachers, teachers-to-be and research students at all levels. Fees for its

graduate programme is INR 50,000

Course offered: Graduate Programme in Creative Teaching

The Teacher Foundation Has offices in

Bangalore,

Mangalore and

Mysore

TTF launched projects targeting specific components of the educational

system such as school leaders, teachers and the curriculum. In the past 6

years it has worked with over 5,000 teachers from across the country. It is

managed by the Shraddha Trust, a registered public non-profit trust that iscommitted to promoting the development of schools and educators

throughout India and the sub-continent

IECTEC International Early

Childhood Teachers

Education Course

Providing early childcare educators with the tools, resources and knowledge

to guide children. Expertise in the domain of preschool education. Has

launched offbeat courses like day care management, NGO management &

summer camp organisation.

Educomp - Quest

Programme

Has been designed for teachers, students and parents. Includes professional

development for teachers & their subject enrichment, Students

Empowerment Program and Smart Parenting Programme

International Academy of

Creative Teaching



No of teachers Trained (%) Target Cost

Mkt size

(INR bn)

Mkt size

(USD bn)

Primary 2,161,000 10.0 216,100 1,000 0.2 0.004

Middle 1,589,000 10.0 158,900 1,000 0.2 0.003

Secondary 2,083,000 10.0 208,300 1,000 0.2 0.004

Total mkt size 0.6 0.012 Source: Edelweiss research

Indias pupil teacher ratiohighest amongst BRIC nations


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Education

i. An estimated CAGR of 15%; volume growth of 4%

ii. Assumes a marginal reduction in pupil teacher ratios

iii. Assumes some amount of migration to urban areas also

Online education

Internet is not only a new channel of delivery of services, but also a complementary

channel to existing channels of delivery. Thus, online teaching is used not only for

delivering courses, but also for delivering tuitions and extra classes at home to students.

The growing penetration of internet and the affinity of students to usage of technology

increase the attractiveness of online teaching. India ranks fifth in the world in terms of

internet usage, although internet penetration is only 3.7%. Internet penetration has,

however, been growing at a fast pace in the past decade, from 0.1% in 1998 to 3.7% in

2007.

Owing to increase in broadband penetration, we see improvement in online tutoring and

online courses, going forward.

Table 23: Segment sizeTotal

population

Broadband

penetration (%)

Fees

(INR)

Market size

(INR bn)

Market size

(USD bn)

K-12 271,427,372 0.4 2,000 2.17 0.04


Projections by 2013

An estimated CAGR of 50%; volume growth of 36%

Table 24: Key players operating in the online education segment

Online tuitions Business specific details

Extramarks.com Extramarks.com is an online after-school educational support system for Indian students. It is

based on NCERT curriculum for classes VI to XII. It is promoted by Cleave Global e Services, a

BPO organisation. It charges INR 100 - 1000 based on the package selected

Mathguru.com Mathguru is math-help program for students following the NCERT math curriculum. Math experts

behind Mathguru use a virtual notebook and pen to explain the solution in their own voice. It is an

offering of Educomp Solutions Ltd. There are over 10,000 solutions available on the Mathguru

website.

100percentile.com 100percentile.com provides online examinations and analysis. It has tied up with Vidyamandir

Classes for IIT-JEE and AIEEE test preparation. With focus on IITJEE preparation, its charges range

between INR 600 - 3000. For medical exams test coaching, it has tied up with Allen Career

Institute (Kota) in Rajastan

Tutorvista.com TutorVista Global (TutorVista) is a global education services company. Charges USD 100 per

month for tutoring. They have around 100,000 registered users. The tutorials can be accessed by

individual users or even schools

learninghour.com LearningHour is the school tutoring company of India, tutoring thousands of students across the

world including India, UAE, UK, US, Singapore. It is owned by Educomp Solutions Ltd. Learning

Hour is an online educational service, conceptualised by ThreeBrix e-Services

24/7 Guru 24x7guru.com is an assessment platform that gives students between classes 3 and 10 the

opportunity to assess their proficiency in maths and science subjects. It is an offering from

LearnSmart India. It is the coming together of technology partner, Bodhtree and content partner,

Unified Council. Its packages cost from INR 1000 - 1500



25/66


Education

Educomp Best Play but Valuations Expensive

There are only a handful of listed entities in the Indian education space Educomp, Everonn,

NIIT and Aptech. Even amongst these companies, NIIT and Aptech remain at least partially

focussed on the export market. This makes Educomp and Everonn possibly the only two

India-specific players.

Table 25: Educomp has w idest reach

Everonn Educomp NIIT Aptech

Pre school

K12


ICT

Higher education

Vocational

Tutoring

Teacher education


Amongst the two companies, Educomp is currently trading at a substantial premium to the

peer group, whereas Everonn is at a substantial discount. We recognise the two factors which

seem to account for the valuation differential.

Breadth of products: Educomp has demonstrated its strategic intent to enter the larger

and fastest growing segments in the Indian education space namely the K12 and

higher education space, whereas Everonn seems to have restricted itself to the ICT and

distance education platform, thereby missing out on the key segments that would beneift

from a change in regulations.

Barriers to entry: Even for its existing products namely Smartclass, Educomp has been

erecting entry barriers in the form of long-term contracts. Everonns business model, on

the other hand, necessiates the need to acquire consumers on a regular basis and allows

for the entry of new players.

While we believe the higher valuations for Educomp are justified over the medium term, the

near term upside seems to be capped. Everonns business model, though not robust, allows

for reasonable growth in near future (CAGR of 47%) and in that context seems to be

undervalued.

We initiate coverage on Educomp with aHOLDand Everonn with aBUYrecommendation.

Educomp well placed .

but valuations areexpensive


26/66


Education

Table 26: Global peer group comparison Educomp expensive

EPS

Ticker Short NameCY08 /

FY09

CY09 /

FY10E

Growth

(%)

CY08 /

FY09

CY09 /

FY10E

CY08 /

FY09

CY09 /

FY10E

US

STRA US Equity Strayer Educatio 7.5 9.3 24.0 15.59 12.8 28.0 22.6

ESI US Equity ITT Educational 7.8 9.2 18.9 7.54 6.5 13.7 11.5

APOL US Equity Apollo Group-A 4.2 5.2 24.6 8.36 6.9 16.9 13.5

CAST US Equity Chinacast Educat 2.9 3.9 33.2 9.91 8.3 16.3 12.2

DV US Equity Devry 2.3 3.0 30.3 13.1 10.3 23.3 17.9

EDU US Equity New Oriental-ADR 1.7 2.3 34.5 35.92 25.4 45.3 33.5

LINC US Equity Lincoln Educatio 1.5 1.8 24.0 6.92 5.5 15.5 12.5

APEI US Equity American Public 1.3 1.7 39.2 12.34 8.8 27.1 19.4

CECO US Equity Career Education 1.1 1.7 61.0 8.45 5.3 22.6 14.1

COCO US Equity Corinthian College 0.8 1.3 71.8 8.15 5.6 22.8 13.3

BPI US Equity Bridgepoint Educ 1.0 1.4 36.6 6.82 4.8 15.7 11.5

DL US Equity China Distan-ADR 0.1 0.3 135.7 48.52 19.3 53.6 21.7

REVU US Equity Princeton Review 0.1 0.3 333.3 13.23 9.5 80.2 17.3

LOPE US Equity Grand Canyon EDU 0.7 1.0 47.1 12.83 8.8 25.2 17.0

LRN US Equity K12 INC 0.4 0.6 38.1 10.67 7.9 39.1 28.1

LTRE US Equity Learning tree 0.3 0.5 71.4 8.06 5.7 39.0 23.2

CPLA US Equity Capella Educatio 2.4 3.0 28.1 12.12 10.0 26.9 21.0

NED US Equity Noah Educati-ADR 2.3 2.9 26.7 18.36 8.9 14.8 11.7

Average 59 .9 29.2 17.9

Others

072870 KS Equity Mega Study 10856.3 13587.7 25.2 15.9 13.2 22.8 18.3

067280 KS Equity Credu Corp 1397.0 1974.9 41.4 21.9 15.0 31.3 22.2

100220 KS Equity Visang Education 1335.0 2249.0 68.5 4.4 3.1 8.5 5.1

096240 KS Equity Chungdahm Learning 1321.3 2558.0 93.6 5.5 3.4 13.5 7.0

057030 KS Equity YBM SISA.COM 1025.8 1200.5 17.0 3.6 3.2 8.0 6.8

040420 KS Equity JLS Co 846.7 1177.0 39.0 5.6 4.1 8.7 6.3

NVT AU Equity Navitas 0.1 0.2 21.4 17.2 13.7 28.0 22.0

RLS SP Equity Raffles Education 0.0 0.0 33.3 13.7 12.8 15.9 15.0

Average 42 .4 17.1 12.8

India

EDSL IN Equity Educomp Solutions 72.3 123.6 71.0 30.0 18.9 68.2 39.9

EEDU IN Equity Everonn Systems 14.6 26.8 83.6 12.3 7.2 29.2 15.9

NIIT IN Equity NIIT 4.6 4.4 (4.3) 11.7 9.4 16.3 16.1

Average 50 .1 37.9 24.0

EPS EV/EBITDA P/E



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Education

Appendix I : Indian literacy rates below global standards

GoI has emphasised the importance of education right from independence and has been

allocating funds necessary to improve literacy rates. While reasonable progress has been

made, the country is still far from reaching the literacy rate desirable for a growing

nation. A comparison of BRIC nations on literacy rates, as per the Global Poverty

Research Group, shows that literacy rates in India are over 60%, while those in Brazil,

China and Russia are 88%, 91% and 99%, respectively. If India aims to be an economic

giant like China, much needs to be done to improve the state of affairs.

Table 27: Literacy rate for key nations

Literacy in highly populated countriesLiteracy rate (aged 15 years and

above) in 2004 (%)

China 91.0

India 61.0

US 100.0

Indonesia 90.0

Brazil 89.0

Russian Federation 99.0

Japan 100.0

Mexico 91.0World 82.0

Developed countries 99.0

Developing countries 77.0

Source: Based on data published in Education for All (EFA) Global Monitoring Report 2007

Drop-outs at the secondary level are much higher. Also, the base population that gets into

primary education is low (because illiteracy is 47% in the age group of 15 years or older).

A comparison of the school going population amongst BRIC nations shows that India has

the highest population. It is also estimated that India will have 35% more school and

college going population compared with China by 2025

Chart 10: Estimated school going population, India dominates

0

120

240

360

480

600

Russia China Brazil UnitedKingdom

UnitedStates

India

(mn)

Upto Secondary / High Secondary Tertiary


Indias gross enrolment ratios (GERs) are the least amongst BRIC nations. For the

growth momentum to sustain, India desperately needs to improve these ratios. GoI has

recognised this need and has started a number of programmes as part of its five-year

plans. In fact, education has been declared a fundamental right and various government

initiatives are underway to provide education to all till the age of 14.


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Appendix II: Legislation governing setting up of

schools/ educational institutions

Education in India is considered a service for public good and not just a commercial

enterprise. With these intentions, there are a lot of restrictions on who can operate as an

educational institution and how one could operate.

Schools / educational institutes have to be registered as societies / trusts.

The management / ownership of the trust should not vest with a single person.

The major constraint is that educational institutions should operate in not-for-profit

mode. Schools / educational institutions are not allowed to distribute profits. Profits

generated have to be utilized for the development of the school itself. In fact, this is

one of the major deterrents for foreign / institutional participation in education.

However, there have been cases where the Supreme Court has passed a judgment

that profits generated in one school cannot be used for the development of another

school within the same trust (a three-judge bench of the Supreme Court, comprising

Chief Justice VN Khare, Justice SB Sinha, and Justice SH Kapadia, in a 2:1 majority

judgment delivered on April 27).

Schools are governed by School Education Acts prevalent within each state or union

territory in which they operate.

Higher education institutions are governed by the UGC Act, 1956 (modified in 1985).

Higher education institutions can also be set up under Section 25 of the Company

Law as companies. However, under this section, dividends cannot be distributed to

shareholders.

There are laws governing sale of an educational society / trust. And it is not a simple

straight forward exit.

Schools, as per government regulation, cannot be a profit enterprise; regulations force

any surplus to be ploughed back into the running of the same school. However, services

being provided to schools remain out of the purview of government regulations with no

cap of charges or profitability. Hence, a structure has evolved where private players

charge schools for services provided like infrastructure (land, building etc) and

management services.


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Education

Well positioned to capture new growth opportunities

Educomp Solutions (Educomp) has steadily moved up the value chain-from an ICT

provider to one of the largest school chains in the country. The company has proved

its execution skills and is well placed to take advantage of the new opportunities in

the education sector. The ICT business gives it access to PPP projects envisaged for

government schools, smartclass has helped it develop a differentiated pedagogy for

its K-12 schools and proven execution in the K-12 lays the base for the companys

future expansion into the vocational/ higher education space.

Growth of key business continues; smartclass to remain steady

While opportunities in the higher education space will fructify over the medium

term, the companys currently operational businesses are growing at a fast clip. As

a pioneer with first mover advantage and a strong IPR, Educomp enjoys a virtual

monopoly in the highly profitable multimedia segment with its smartclass product

(63% of standalone revenues; 76% of PBIT for FY09). The product continues to

clock a 50% plus volume growth and could grow at a faster rate. The ICT space

remains strong, while the companys plans for the K-12 segment are on track.

Capex light model envisaged; multi-year growth in place

Educomps earnings have been posting an 111% CAGR over the past three years

and we project earnings to post a CAGR of 59% over the next two years. While

the business, particularly the K-12 and higher education segments, remain capital

intensive, the company will attempt to shift to a capital light structure with a

franchisee model in the K-12 space and outright sales for smartclass. The recent

capital raising reduces financing concerns as well.

Outlook and valuations: Valuation speed breaker; initiate with HOLD

Educomp remains a longer term growth story with huge potential. However, there

may be limited upside in the near term as the stock trades at 40x and 29x FY10

and FY11 estimates. We initiate coverage with a HOLD recommendation and

DCF-based target price of INR 5,169 implies a P/E of 31x FY11E.

October 7, 2009

Reuters : EDSO.BO Bloomberg : EDSL IN

Absolute Rating HOLD

MARKET DATACMP : INR 4,927

52-week range (INR) : 5,085 / 1,331

Share in issue (mn) : 17.3

M cap (INR bn/USD mn) : 85.2/1,827.2

Avg. Daily Vol. BSE (000) : 459.0

SHARE HOLDING PATTERN (%)

Promoters* : 54.9

MFs, FIs & Banks : 3.1

FIIs : 37.1

Others : 4.9

* Promoters pledged shares : Nil

(% of share in issue)

RELATIVE PERFORMANCE (%)

Sensex Stock Stock over

Sensex

1 month 10.8 17.8 7.0

3 months 16.9 27.7 10.8

12 months 31.2 79.8 48.6

Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Deepak Jain

+91-22-6623 3313

[email protected]

Nilesh Shetty, CFA

+91-22-6623 3457

[email protected]

India Equity Research | Miscellaneous Initiating Coverage

EDUCOMP SOLUTIONS

In a sweet spot ; valuations a speedbreaker

EDELWEISS RATING

Financials

Year to March FY08 FY09 FY10E FY11ERevenues (INR mn) 2,861 6,371 10,097 13,831

Growth (%) 159.9 122.7 58.5 37.0

EBITDA (INR mn) 1,273 3,044 4,947 7,294

Net profit (INR mn) 705 1,328 2,472 3,363

Growth (%) 150.3 87.4 97.2 37.1

Shares outstanding (mn) 18 18 20 20

EPS (fully diluted) (INR) 38.5 72.3 123.6 168.1

EPS growth (%) 113.6 87.9 71.0 36.1

PE (x) 128.1 68.2 39.9 29.3

ROAE (%) 35.0 35.7 29.6 23.9


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Investment Rationale

Strategic vision in place; higher education could be the next growth driver

Educomp has steadily evolved in line with its long-term vision of being a complete

education provider. The company has evolved from being a mere ICT provider to

transforming itself into one of the largest school chains in India.

Fig. 1: Educomp has cons istently moved up the education value chain

ICT

In class roommultimedia

K-12 schools

Highereducation


The company has proved its execution skills and is now well placed to take advantage of

the new opportunities in the education sector. It now has strong relationships with the

government education machinery on account of being the leading ICT provider; the

execution skills acquired in the K-12 segment will be valuable as Educomp expands into the

vocational/ higher education space.

Key competitive advantages

Apart from the current businesses (smartclass, ICT, K-12) that have been growing at a fast

clip, there are two additional areas where we see a strategic thrust for Educomp, viz.,

public private partnerships and the higher education space. We believe Educomp will utilise

its three key competitive advantages in the space, viz.:

Proven execution skills: The company has consistently moved up the value chain

over a relatively short period of time. It has not only successfully widened the reach of

smartclass and become the largest player in the ICT segment, but, most importantly,

it has been able to set up a large chain of K-12 schools in less than two years.

Presence/ relationships in strategic segments: Educomp has had the first mover

advantage in various sub segments of the education space and has developed

relationships with various stakeholdersstate and central governments. It has

emerged as the largest ICT provider, which augurs well for the company as PPP

projects flourish.

Strategic tie ups: The company has a number of strategic tie ups, including one with

Raffles Education and Pearsons, that will allow it to enter the higher education/

vocational space which offers huge growth potential.

Public private partnerships: Leveraging relationships

While the ICT business is low margin, it has been in sync with Educomps long-term strategy

of being involved in the entire education chain. With these contracts in place, the company is

well positioned to take advantage of the new PPP ventures on governments cards. Apart

from the 2,500 schools that are likely to be brought under the scheme, there are further

Educomp has steadilymoved up the value chain


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possibilities of the PPP being expanded to other areas. Educomp will be one of the key

contenders in this segment. Some possibilities include:

Upgrade of 1,400 Industrial Training I nstitutes: These institutions, which provide

specific industrial training, need to be upgraded. As of now, Educomp is actively

involved in managing about 16 ITIs, mostly on a no profit no loss basis.

Utilisation of government schools to impart vocational training: The

opportunities for vocational training in India are huge, but require a large number of

touch points to be able to access the huge market. Educomp could use its access to

the government to provide training through the government infrastructure in evenings

when schools are closed.

Tie ups with government universities to provide specialised education

courses: Educomp is already doing so with IGNOU to offer english speaking courses

which can be utilised further.

In addition, Educomp is already involved with various state governments for a large

number of projects as highlighted in table 1.

Table 1: Educomp w orking on various state government projects

DEGT Punjab Initiative of Directorate of Employment Generation and Training

Vocational training on modular employability skills course

guidelines

Currently operational in Patiala, Ludhiana and Mohali

200 candidates have already passed

GIDC Gujarat GIDC programmes aim to impart industrial training

Targeted at unemployed youth including school drop outs, semi

& unskilled workers

Educomp has been assigned 10 GIDC locations in Gujarat

MPRLP MP Madhya Pradesh Rural Livelyhood Programme

To impart livelihood training across 1 district in Madhya Pradesh

on a pilot basis

RKCL Rajasthan Rajasthan Knowledge Corporation has partnered with Educomp

to provide IT training to govt. officials and unemployed youth

80 students across 1 district currently in the programme

Plans to expand to 5 districts

RMOL Rajasthan Rajasthan Mission on Livelihoods is a sponsored government

programme to upgrade the skills of unemployed youth

Imparting livelihood training and various services oriented

courses

Currently present in 5 districts of Rajasthan; plans to add

another 5 districts

1,500 students have successfully passed out till date

GKS Gujarat Gujarat Knowledge Society has indentified 19 IT and 19 non ITcourses which have a duration ranging from 50-150 hrs

Educomp is implementing this progam in the 14 districts of

Gujarat


These projects still form a negligible proportion of Educomps total revenues, but could

lead to strong growth going forward. The company will leverage its long-term

relationships developed through the extensive ICT programmes.

Already working with thegovernment on variousprojects


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Table 2: Educomp- Relative position in key business segments

Estimated market opportunity Educomp's position Competition

Smart

class

Was an incremental market created by

merging technology to enhance

learning. Primarily restricted to private

schools. We estimate the market size at

INR 32.4 bn

Largest player in this space, reaching

out to ~1,737 schools

Primarily competing with

Everonn Systems

ICT Was market created by governments

thrust to ensure information technology

reaches public school students. We

estimate the market opportunity at INR

112 bn

Market leader with ~ 60% market

share. Has implemented ICT projects

in approx. 12,000 schools till date

Competition remains fierce with

main competetors being NIIT

and Everonn Systems

K-12

schools

Constitutes the largest pie of the

education market. We estimate the

current opportunity size for private

schools at INR 472 bn. We estimate the

private school opportunity to grow at

20% over the next five years

Recently entered the schools space

with three different formats aimed at

different market segments. However,

may be restricted to expand in tier I

andII cities as land costs may prohibit

setting up new schools in metros

No major organised player in the

private school space. Faces

competition from indivdual local

schools


Higher education: Strategic tie ups to help

Higher education is set to be the next major growth area for Educomp in addition to its

existing market segments. However, the higher education space also suffers from serious

shortfalls. The demand is strong and growing on account of the demographics, more

noticeably the change in the employment structure of the economy that requires a

differentiated skill set. Consequently, even though the number of private colleges has

increased substantially, demand still exceeds supply. If eventually, regulations are

relaxed and clean profits are allowed, growth is likely be much faster.

Tie up with Raffles in place

For the higher education space, Educomp has entered into a 50:50 JV with Raffles

Education Corporation (Singapore) to offer professional courses in creative arts, design,lifestyle, and business management. The JV currently offers courses in fashion design,

product design, interior design, interactive media design, and fashion marketing. The

company plans to introduce courses on business management, tourism, and hospitality

management.

Educomp has already set up two colleges with the Raffles Group and expects to set up

another four by the end of the year. Currently, the new projects offer a diploma in

fashion designing. These are not yet under the purview of AICTE and, hence, the

company faces no restriction on the fees it can charge. Current fees are around

Documents

Education Sector+