Indian Education Sector
January 2009Nikhil Vora Shweta Dewan
Long way from graduation!
Class of 20??
INDIA RESEARCH
Indian Education
ong way from graduation!
“Over-regulated and under-governed” best describes the largest sector in India –Education (IES). In a failed public education system,
aspirations
are meeting
affluence
and taking private IES through a phase of Price Discovery. Ironically, the gargantuanpotential (estimated private spend of US$50bn; $80bn by 2012) is trapped! The ‘not-for-profit’ nature of the $40bn formal IES has deterred for-profit private participation whileinability to transform education into a ‘process-driven’ model curtails scalability in non-formal IES ($10bn). Our investment thesis in IES rests on 4Cs – players with Credibility(management intent & ability), Capital (built to last), Creativity (to ‘manage’ the over-regulated environment) and Content (to differentiate and build annuity). We see limitedvalue creation potential in the space, mainly due to scale issues. However, EducompSolutions and Manipal Universal Learning (unlisted) exhibit the 4KSFs with strongpricing power as indeed ability to create an annuity pool and are our bets in the sector.
IES – the ‘Largest’…inefficiencies the ‘Highest’:
IES is by far the largest capitalizedspace in India with $30bn of government spend (3.7% of GDP; at global average), anda large network of ~1m schools and 18,000 higher education institutes. Yet, the publiceducation system is ‘insufficient’ and ‘inefficient’, leading education-hungry and affluentIndians to spend $50bn on private education (14% CAGR over FY08-12E).
Investability Quotient – the ‘Lowest’:
The ‘not-for-profit’ diktat, a poor regulatory framework and low risk-appetite have discouraged for-profit participation in thelucrative private formal IES. With no structural change in sight (rampant corruptionand low political will), IES has attracted limited capital. Meanwhile, non-formal IES – while non-regulated and faster-growing – fails the scalability test (barring a few pockets).
Betting on mavericks:
Though a few smaller players have attracted some capital, we seelimited value creation potential in IES due to regulatory and scalability issues. Armed with creativity, certain for-profit players are using innovative two-tier structures tounlock the ‘surplus’ generated and, more importantly, plough it into scalable (as alsotransparent) business models. Exhibiting the 4Cs, we like Educomp Solutions andManipal Universal Learning (unlisted) --- players with scaled-up and annuity businessesas also strong pricing power.
Valuations
FY10ECompany Price Mkt Cap Reco PER RoCE ROE Target Upside(Rs) (Rs m) (x) (%) (%) (Rs) (%)
Educomp Solutions 1,936 33,389 Outperformer 15.8 28 38.7 2,800 45Everonn Systems 199 3,008 Neutral 8.4 20.3 16.4 238 19NIIT 23 3,755 Neutral 7.2* 9.5 16.7 27 18
Prices as on 15 January 2008; *Valuing NIIT on core earnings ex-share of associate
16 January 2009BSE Sensex: 9047INDIA RESEARCH
S e c t or r e p or t
“ForPrivateCirculationonl”“Imortantdisclosuresaearatthebackofthisreort”
Nikhil Voranikhilvora@
idfcsski.com
91-22-6638 3308Shweta Dewanshweta.dewan@
idfcsski.com
91-22-6638 3290
IDFC-SSKI Securities Ltd.701-702 Tulsiani Chambers,7th Floor (East Wing),Nariman Point,Mumbai 400 021.Fax: 91-22-2204 0282
ANUARY 2009
3
IDFC - SSKI INDIA
Contents
Investment Argument.........................................................................................4
IES: The ‘largest’…..........................................................................................................5
…yet IES a long way from graduation..............................................................................8
Low
IQ
of IES, but we are betting on mavericks.............................................................13
Preschools: Play time.......................................................................................22
Preschool market: Multifold growth...............................................................................22
Organized market: Supply creating demand...................................................................24
…but, the business not a child’s play..............................................................................26
IQ: High (subject to benign lease rentals).......................................................................28
K12 (schools): A no brainer? not yet!...............................................................29
K12: The largest in IES..................................................................................................29
The ‘big bad’ corporate: Ruled with an iron hand...........................................................32
Economics in school: Healthy margins...........................................................................36
IQ: High........................................................................................................................38
Multimedia in K12: Beyond chalk & talk.............................................................39
IQ: High........................................................................................................................42
ICT in public K12: Gain but with pain...........................................................43
IQ: Low.........................................................................................................................45
Higher Education: Time to ‘degree shop’?..........................................................46
Higher Education: Higher private spends.......................................................................46
Higher Education: Rules, rules and more rules...............................................................49
High hopes from innovative structures...........................................................................51
IQ: High (but long-gestation period)..............................................................................52
Vocational training: New vistas........................................................................54
Vocational training providers: New kids on the block.....................................................54
IQ: Low (still to scale)....................................................................................................58
Coaching classes: Is the ‘coach’ scalable?...................................................................60
The quality conundrum: Genesis of coaching class market..............................................60
IQ: Low.........................................................................................................................66
Books: Less free play, low growth....................................................................68
IQ: Low.........................................................................................................................70
Companies......................................................................................................72
Educomp.....................................................................................................................................73Everonn.......................................................................................................................................91NIIT..........................................................................................................................................103Manipal Universal Learning (MUL)..........................................................................................113Navneet Publications.................................................................................................................120ETCN (Zee Learn)....................................................................................................................123EuroKids....................................................................................................................................126Kangaroo Kids Education..........................................................................................................128Tree House................................................................................................................................131Mahesh Tutorials (MT Educare Pvt Ltd)..................................................................................133IMS............................................................................................................................................136Career Launcher........................................................................................................................138Tutor Vista................................................................................................................................140VETA........................................................................................................................................142Liqvid........................................................................................................................................143Russell Spoken English..............................................................................................................144Shloka Infotech..........................................................................................................................145Hurix.........................................................................................................................................147Excel Soft...................................................................................................................................148
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