Public Finance

www.indiaratings.co.in 23 January 2013

Rating Outlook

S T A B L E

Education

2013 Outlook: Indian Education Sector Slow Enrolment Growth and Credit Indiscipline

Outlook Report

Rating Outlook

Stable Outlook: India Ratings has a stable outlook on the Indian education sector which

includes both school and higher education (HE). The low ratings of small and less established

education institutes already factor in the negative impact of enrolment slowdown, which is

mitigated by India’s demographic advantage and low literacy rate. The agency expects market

size to be INR6,024.10bn (USD109.84bn) by FY15, driven by robust demand.

Liquidity Issues: In 2012, the sector faced liquidity issues due to a fall in enrolment growth

and delays in HE students’ fee reimbursements by a few state governments. However, lenders

have shown flexibility by allowing loan repayments even after the due date with no penalties,

protracting the moratorium period or rescheduling loans. In some cases, they have allowed a

combination of the above concessions.

However, during the course of rating review, if the debt is restructured or rescheduled, India

Ratings would assess it under ‘Distressed Debt Exchange’ criteria and take appropriate rating

action.

Credit Indiscipline: Irrespective of an institutes’ size, loan repayments depend on its

relationship with lenders. Due to tightly-regulated operations such as restrictions on student

intake, fees and infrastructure, an institution’s autonomy is restricted, leading to weak finances

and credit indiscipline. In India Ratings’ opinion, the upcoming regulatory changes could

possibly provide autonomy and enhance the credit quality of the issuers.

Capex with Heavy Debt: An entity needs to utilise 85% of its gross income to retain its tax

exemption status. Therefore, it plans expansion by taking huge debt as debt obligations,

including principal, is permissible for tax deduction. This disproportionate increase in debt

against revenues reduces coverage levels and constrains ratings.

Evolving Structures Positive: The ‘not-for-profit’ stipulations for choice of entity and

regulators’ restriction on entry of foreign investments have led to formation of new structures.

These structures involve institute’s associates managing infrastructure and charging fees to

plough back profits and collaborating with foreign universities for twinning programmes.

Shortage of Trained Teachers: A sharp increase in the number of education institutes in

FY11 and FY12 led to a shortage of skilled and trained teachers. India Ratings predicts an

unfavourable picture as most organisations will find it challenging to comply with the prescribed

student teacher ratio (STR) in the coming years.

What Could Change the Outlook?

Policy Support, Credit Discipline: The federal government’s Twelfth Five Year Plan to propel

the gross enrolment rate across levels, establish new entities, liberalising the sector (allow

private universities and foreign players) and take other measures including access

enhancement, might revive the demand for the sector. These measures, combined with

adherence to contractual provisions, would result in a positive outlook.

Figure 1

Analysts

Siva Subramanian +91 44 4340 1704 siva.subramanian@indiaratings.co.in Neha Agarwal +91 11 4356 7255 neha.agarwal@indiaratings.co.in Bryan Alan Munzey

Public Finance

2013 Outlook: Indian Education Sector

January 2013 2

Issuer Credit Concerns

Individual Players Struggle to Tackle Enrolments Slowdown

Some segments in the education sector face enrolment slowdown due to macro-economic

factors, lack of industry appeal and employability issues. However, this phenomenon is specific

to less established institutes and in streams such as medical, engineering and management

courses. Medical colleges attached to their own reputed hospitals draw comfort from their

diverse faculty experiences and continue to see moderate to strong enrolment growth.

Management institutes with less or no industry association witness low enrolment and

revenues leading to loan defaults or closures. India Ratings does not expect enrolments for

these entities to rebound in the short term. However, institutes with low acceptance rates have

tackled the enrolment crisis and have remained financially sound. The agency expects its

portfolio to not see major credit impairments since the rating case scenario incorporates some

of these risks and could provide cushion.

International schools are less in demand than Indian educational boards in the country as they

are new entrants in the education system. However, increasing income levels of the urban

class are likely to drive the demand for international schools in the medium-to-long-run.

Bankers’ Adjustments

Fee ceilings in HE institutes (both for the government and management quota) and schools

curb the financial prowess of the entities. Even though the fee reimbursements scheme

(applicable only to HE) propelled enrolments and made education affordable to certain

educationally disadvantaged sections of the society, delays in reimbursements by a few states

tightened the liquidity for education institutes.

Nevertheless, bankers understand these problems (fee reimbursements delays and temporary

reduced occupancy levels), extend concessions and accommodate payment of instalments

even after due date without any penalty. They also protract the principal moratorium period and

reschedule the amortisation schedule in certain cases. This accommodation, to some extent,

resolves the liquidity constraints.

Credit Indiscipline

Although the tax-free status and stable operating cash flows support the credit quality, it is

constrained by indiscipline in loan obligations payment. In India Ratings’ view, notwithstanding

the size of the institution, adherence to contractual provisions is based on its relationship with

lenders. In the agency’s opinion, this credit indiscipline might regularise in the medium term.

Debt-Funded Aggressive Expansions

The issuers’ initial success and the tax exempt status for debt service payments drive them to

engage in forward/backward integration or diverse expansion with high debt loads. The

bankers’ eagerness to fund capital expansion although at a higher interest rate as opposed to

year earlier instills confidence in the market players. However, in the event of thin coverage

due to less cash flow or less equity infusions, the ratings will remain low.

New Players Encounter Low Margins

Intrinsic quality of strong operating margins lured many private players into the arena.

However, players with no expertise could encounter low margins due to a) premature debut

without adequate infrastructure leading to low occupancy levels b) dilution in admission

standards to fill seats eventually losing student and industry appeal c) high cost acquisition of

skilled and trained teacher talents d) high land prices in prime location driving the institution

base away from city resulting in high administrative costs e) cost overruns in construction.

• No major credit impairments are

expected in 2013.

• Relationship with lenders allows

flexibility in debt service payments.

• Thin cash flow coverage available for

debt service would lower the rating.

Related Criteria

Rating Criteria for Colleges and Universities

School Rating Criteria

Non-Profit Institutions Rating Criteria

Public Finance

2013 Outlook: Indian Education Sector

January 2013 3

Key Sectoral Issues

Expanding Market Size

Indian education sector’s market size in FY12 is estimated to be INR3,411.8bn (USD71.2bn).

India Ratings expects the market size to increase to INR6,024.10bn (USD109.84bn) by FY15

due to the expected strong demand for quality education.

The market grew at a CAGR of 16.5% during FY05-FY12. The HE segment was at 34.04%

(USD17.02bn) of the total size in FY10 and grew by a CAGR of 18.13% during FY04-FY10.

Inadequate Educational Infrastructure

Although the government’s (centre and states) spend on education increased to 3.35% of the

GDP in FY12 Budget Estimates (BE) (FY05: 2.62%), the infrastructure, for both school and HE,

needs to be upgraded to provide better quality education and absorb new enrolments. The

existing institution’s (schools and colleges) capacity is not fully utilised and notwithstanding the

enhancement of access (99% of rural population has primary school within 1 kilometre as of

September 2010), the quality of infrastructure is poor.

Figure 3 Infrastructure and Intake Particulars Number of institutions Students (m)

Kindergarten to Twelfth (K-12) - Government (m) 1.11 K-12 – Private (m) 0.31 Total (K-12) 1.42 243.2 HE (both private and public) (numbers) 33,500 Universities (both private and public) (numbers) 634 Total (HE, numbers) 34,134 20.7

K-12 data is for FY11, HE and universities numbers data - end December 2011 Source: Ministry of Human Resource Development (MHRD), District Information System for Education, India Ratings

Under the model schools scheme, launched in November 2008, it is proposed that the state

governments build 3,500 schools and another 2,500 schools under public private partnership

(PPP) framework. The government also intends to build additional public school infrastructure

through its funding and in PPP model. India Ratings views this as a positive factor,

nevertheless the execution delays portend a slip in targets.

Private spend on the education increased by a CAGR of 3.23% during FY04-FY11 and stood at

INR361.74bn in FY11. However, private sector building schools in rural areas is unlikely in the

short-run. This allows the government to diligently invest in Tier 3 cities and rural areas. At end-

November 2012, 20 states had permitted formation of 145 private universities.

Quality of Education

Prolific growth in HE institutes resulted in the challenge of offering quality education and

employability to students. Many technical institutes also run courses without approval from the

regulator All India Council for Technical Education (AICTE). This is because AICTE does not

recognise them due to various reasons including absence of infrastructure and STR. Although

the Eleventh Five Year Plan mandated accreditation of all the HE institutes, the National

Accreditation Regulatory Authority for HE Institutions awaits the parliament’s approval.

Regulatory Challenges

The HE segment is tightly regulated by multiple agencies as opposed to K-12 segment which is

regulated mainly by state education boards or the two national boards. State governments’ fee

ceilings, fee reimbursements and intake restrictions constrain institutions’ autonomy. That said,

the remarkable growth in the last decade and government’s plan to create an apex regulator at

arm’s length are positive developments.

Although the institutes were formed as ‘not-for-profit’, they plough back profits through

associates. Associate companies provide facilities management and charges management

Figure 2

Figure 4 IB and Cambridge Schools (Nov 2012) Worldwide India

IB Schools 3,483 99 Cambridge 9,000 300

Source: IB and Cambridge

• Only 30% of universities and 45% of

the colleges are ranked at ‘A’ level by

National Assessment and

Accreditation Council (June 2010).

• 332 technical institutes remain

unapproved/derecognised by AICTE

(end November 2012).

Public Finance

2013 Outlook: Indian Education Sector

January 2013 4

fees, lease rentals and other fees. India Ratings views the structure evolvement as a positive.

Although, foreign investment is allowed under automatic route in education, there are

regulatory issues. Nevertheless, twinning programs with foreign institutions are recognised by

the regulators.

Enrolments – Fire Power for Future Growth

The gross enrolment rate (GER) in HE was at 18.8% in 2011 and the government aims to

increase it to 30% by the end of the Twelfth Five Year Plan period (FY17).

K-12 – Schemes Enrich Enrolments

Sarva Shiksha Abhiyan (SSA) scheme

aims to universalise elementary education.

Also, the Right to Education (RTE)

empowers Indian citizens to demand eight

years of quality education for children.

These measures propelled the enrolment

levels at primary (GER - FY10: 116.25%,

FY01: 95.7%) and upper primary levels

(GER - FY10: 81.83%, FY01: 58.6%).

Despite high enrolments at primary and

upper primary levels, enrolment in

secondary level (FY10: 65%) and senior

secondary level (FY10: 37%) remained low.

HE – Increasing Enrolments Provide Impetus to Segmental Growth

The HE segment sees lower enrolments and growth rates than K-12 levels but consistent

growth provides some comfort. Engineering is the most preferred course for enrolment and is

likely to grow strongly. Despite upsurge in eligible enrolment rates to 60% (FY08) from 50%

(FY94), due to the absence of strong links with school education, HE enrolments remained low.

Dearth of Competent Teachers and Faculty

The Indian education sector needs trained and quality teachers and staff. The historical STR

marginally improved in the primary and HE segment during FY01-FY10. India Ratings predicts

moderate growth (below 10%) in the HE teachers’ strength in FY14 based on the historical

CAGR of 7.91% during FY01 to FY11. In the agency’s opinion, the sector will be unable to

achieve STR proposed by the regulator in the medium term (UGC STR 1:15).

Demographic Advantage

In India, over 500 million fall in the age group of five to 25 years. This provides immense

opportunity for the education sector. India Ratings believes demand for education and

improved accessibility to educational institutions will help improve literacy rate.

Education Loans

Easy credit availability is instrumental for increase in HE enrolment. India Ratings expects

credit availability for the HE segment to continue and be similar to that for white goods sector.

Education loans grew at a CAGR of 26.96% during FY07-FY12 and their contribution to non-

food credit increased to 1.17% (FY12) from 0.87% (FY07).

Figure 5 Deficiency in Enrolments (m)

Segments

Eligible student

population (2010)

Actual enrolments

(2010) GapGER

(%)

Primary 116.64 135.60 18.96 116.25Upper primary

72.59 59.40-13.19 81.83

Secondary/senior secondary

98.28 48.20-50.08 49.04

Total 287.52 243.20-44.32 84.59

Source: CSO, MHRD and India Ratings

Figure 6 Future STR Achievability Test (HE) (M) 2011 2016

Students 16.98 25.94a

GER (%) 18.8 22b

STR 1:21

Teachers 0.82

Assumed STR 1:15c 1:20

Required teachers

1.13 1.30

Deficit 0.31

Annual additional teachers requirement until 2016

0.10

Achievability Difficult

a Calculated on the basis of projected

population of CSO b Assumed rate

c As per UGC norms for HE

Source: CSO, MHRD, India Ratings

• Although primary level enrolments

are robust, drop outs and

infrastructure bottlenecks mar the

secondary and senior secondary

segments.

• Government schools lack

infrastructure and quality pedagogy.

• Private institutions catered to 58.9%

of the total enrolments in HE (FY12).

Public Finance

2013 Outlook: Indian Education Sector

January 2013 5

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