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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 education
surges 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.
1 Edelweiss Securities Limited

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

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.
Huge demand supply gap -
demand drivers remain
robust
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, and
higher 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: India’s GER remains extremely low

90.0
72.0
54.0
(%)
36.0
18.0
0.0
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
Edelweiss Securities Limited 3

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 working age group Chart 3: India - % of population in working age group
53.2 60.0
50.4 48.0
47.6 36.0
(%)
(%)
44.8 24.0
42.0 12.0
39.2 0.0
1970 1975 1980 1985 1990 1995 2000 2000 2005 2010 2015 2020 2025 2030
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
100.0
Services
80.0
28%
60.0
(%)
40.0
Agricultur 20.0
Industry e
12% 60%
0.0
1975 1985 1995 2005 2007
Agriculture Industry Services
• 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.

Education
Chart 6: Classification of households (mn), 2000-01 Chart 7: Classification of households (mn), 2009-10
0.4 Rich 1.7 Rich
5.7 Middle class 12.8

Middle class
21.9 Aspirers 33.9

Aspirers
71.9 Deprived Deprived

51.6
Source: NCAER, The great Indian middle class
• Supply remains restricted

Contrary to the rising demand, supply of quality institutions remains restricted.
Private sector hampered by Government-run schools and institutions offer poor quality education on account of
legislation lean financial support and lack of accountability. Education has been looked upon as
a “not–for-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

900
720
540
(%)
360
180
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Elementary Secondary Higher


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.
Expect regulatory changes
• 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.

Education
Regulatory Changes to be Catalysts
The yawning demand supply-gap for education has long-term social implications and also
affects India’s 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
Vocational Higher education +

Pre-school K-12 ICT in schools education Post graduate
SSC IB English coaching AICTE, UGC/Others

Test preparation
Online education
CBSE Teacher training Autonomous
ICSE
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 commercial
one. 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.
For profit education needs to
be recognised
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.

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
Lease
Rentals
Fees Educational Trust Profits
Management
Fees
Salaries Expenses
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:

Debate on for profit could
continue
“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.

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 government’s 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
Role of government will be a examinations under an authority much like the CBSE, with curriculum guidelines; or (c)
focus area
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.

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

which will be given freedom in management and hiring of teaching staff, will
The model school scheme is a have to maintain infrastructure as per CBSE standards. The proposal
strong example of PPP 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 month
and 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.
• 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.

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 Approval only for establishment or administration
school should be of non-proprietary character 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 under
a corresponding law, if any, in force in a state
Land Must have about two acres (or as otherwise For degree level institution
requirements permitted measurement) of land and a building Rural area - 10 Hectares
constructed on a part of land and proper Taluk or District- 4 hectares
playgrounds on the remaining land. In Metropolitan Cities- 2 hectares
metropolitan cities with a population exceeding
25 lacs, the land should not be less than one acre
Fees Fees charges should be commensurate with the Tuition and other fees for a professional college
facilities provided by the institution.No capitation shall be determined by a State Level
fee or voluntary donations for gaining admission Committee.While calculating the fees, the
in the school or for any other purpose. No part of estimates of recurring expenditure shall be based
income from the institution shall be diverted to on at least the last two years audited figures of
any individual in the Trust/Society/School recurring expenditure of the college and
Management Committee or to any other person. projected requirement for next three years
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
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.
Single regulator expected
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.

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)

Current market
Segment size (INR bn) Key players Key success factors Key trends
Preschool 18 Euro Kids; Kidzee, Applekids, Franchising, location, Franchising, day care
Kangaroo Kids, Shemrock curriculum
K-12 471 DPS, Don Bosco, DAV Schools, Infrastructure, pedagogy, Development of chains,
Kidzee High, Educomp ICT, teachers international schooling
Higher education 357 Amity, NMIMS, Aptech, NIIT, Placements vocational courses,tie
Manipal 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 PPP's beyond just ICTs
governments, IT content
Teacher training 1 Academy of creative training, Tie ups with schools
Educomp, The teachers foundation,
International academy of creative
teaching
Pre schooling
Table 4: Unregulated with organised chains increasing presence

Market size USD 0.23 bn
Large chains emerging in the Key players Kidzee, Applekids, Kangaroo kids, Shemrock
space Key success factors Franchising, location, curriculum
Key trends 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

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

Enrollment No of Avg fees Mkt size Mkt size
Age Total population ratio students (INR) (INR bn) (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 USD 10.78 bn
Key players Delhi Public Schools, Don Bosco Schools, DAV Schools, Kidzee
K-12 schools is the largest High, Educomp, Jain Group of institutions
education segment
Key success factors Infrastructure, ICT, extracurricular activities, teachers
Key trends 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.

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

Name Scale of operations Business specific details
Delhi Public 115 schools inside and out CBSE affiliated schools with enrollment of more than 100,000 students
Schools of India
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 out The Dayanand Anglo Vedic College Trust and Management Society is a non-
of India 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 Primary, middle, secondary & sr. secondary schooling through a chain of
160 locations in India & schools across the country. The annual fee for the kids admitted to Kidzee
UAE would be between INR 30,000 and INR 50,000 depending on the centres
where they are located.
Jain Group of Has schools in Karnataka, Offers a wide variety of academic courses through a network of schools,
Institutions Hyderabad, Aurangabad, colleges and institutions spread across 6 campuses in and around
Nagpur, Kanpur Bangalore. A conglomerate comprising 12 entities and more than 7000
students and 350 faculty members
How the space will 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.
Multi structure schools to be We see signs of chains emerging as companies attempt to spread across
in focus geographies rapidly.
• Multi–structure schools to come to play: There is likely to be a hierarchy of

private schools from the same company/ trusts with different branding and fees
structures. 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.
Weighted
Avg fees Mkt size Mkt size
K-12 Age Total population Private (INR) (INR bn) (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

Education
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 INR 32.4 bn

Multimedia in schools
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,
ICT could lead to greater PPP
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:

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 USD 8.14B bn
Key players Amity, NMIMS, Aptech, NIIT, ZILS, Manipal University
Key success factors Placements
Key trends Vocation specific certificate courses, partnerships with foreign
universities
Vocational courses could Source: Edelweiss research

become increasingly important
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 INR 356 bn

Avg no of One time Avg fees
No of students per No of Total no of admission per year Mkt size Mkt size
Professional courses institutes batch years students fee (INR) (INR) (INR bn) (USD bn)
Engineering 1,200 300 4 1,440,000 50,000 150,000 234 4.7
Medical 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)

Education
2. Vocational education segment size
As per India Labor report 2007, 25% of world’s 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
IT / ITeS 500,000
Construction / Real estate 200,000
IT/ITES is the largest opportunity

Retail 200,000
Hospitality 140,000
Energy 12,000
Electronics /
75,000
manufacturing
Retail finance 100,000
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.

Education
Table 14: Estimated market size of INR 51 bn
Current Jobs addition Market size Market size

Job type employment p.a Trained Fees (INR bn) (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 50,000 10.0 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 Scale of operations Business specific details
institutes
Amity 600 acres of hi-tech First and largest private university in India. First wireless campus. Present in 11
campuses. About 1000 locations in India. Faculty strength of 2500. Established over INR 500 mn worth of
seats on campus scholarships. 1,000 are picked from 40,000 applicants.
Courses offered: All professional and General graduate and post graduate
programmes.
NMIMS Located in the heart of NMIMS offers AICTE accredited programmes and is one of the leading private
Mumbai 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
Courses offered: MBA, B.Tech, M.Tech, Pharmacy, M.Sc, etc.
ITM Currently having 7 ITM is a private university that provides specialized management education
campuses across the The Institute for Technology and Management was founded with an academic
country. association with The Southern New Hampshire University (SNHU), USA
Courses offered: The ITM Group of Business Schools is currently
conducting 15 programmes, in a broad range of fields including financial
markets, retail, pharmaceuticals, healthcare, risk management, human
resources etc. ITM also has a separate school for hotel management.
IIPM - The Indian Institute of Planning and Management was established in 1973. It’s
headquartered in Delhi and has branches in Mumbai, Bangalore, Chennai, Pune,
Ahmedabad and Hyderabad
Courses offered: Full time & Integrated Programme in National Economic
Planning and Entrepreneurship and European Exchange Program with IMI
in Business management
Manipal It has over 20 It is amongst the first institutions to receive Deemed University Status in India.
University constituent institutions Enrollment of 15,000 students a year. Investing INR 1-1.3 bn for 4 more campuses
that provide over 180 and INR 4 bn to upgrade facilities in Manipal itself.
courses across 13
Courses offered: Medicine, Dentistry, Engineering, Nursing, Allied Health,
streams
Pharmacy, Life Sciences, Management, Mass Communication, Information
Sciences, Hotel Management, Regenerative Medicine. etc.
MS Ramaiah - Based in Karnataka. Gokula Education Foundation was started by Mr.M.S.Ramaiah in Karnataka in 1962
Gokula Runs a number of
Education institutions like – Courses offered: Engineering, Medicine, Management, General education,
Foundation Institute of Technology, Junior Colleges
Institute of Management,
Medical college, Junior
and Degree College

Education
Table 16: Key players operating in Vocational education

Vocational Scale of operations Business specific details
institutes
NIIT Offers learning and Set up in 1981, it pioneered the computer education market in India and is now a
knowledge solutions to 5 global training major and knowledge corporation
million students across
32 countries
Aptech Operates across 10 Aptech offers a wide range of long-term and short-term IT courses catering to each
business domains in over individual’s unique requirements by using the Blended Learning IIOM (Interactive
40 countries worldwide 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. Aptech’s courses are translated into Chinese, Russian, Turkish, Vietnamese
and Spanish
JetKing Over 100 training First institute for training non technical students set up in 1990. The course
centers, 2500 faculty comprises lecture and theory sessions, with a greater focus on active participation,
members 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
ICFP Student base of 4,500 It is promoted by Bajaj Capital group. Specializes in financial services education.
and 90% market share ICFP is authorised by the Financial Planning Standards Board (FPSB), India as an
education provider
Courses offered: Post Graduate Diploma in Financial Planning, Certified
Financial Planner. Also offers online courses
ZILS Operates through Wholly owned subsidiary of the Essel Group. an ISO 9001 certified education
Franchising as well provider company and is the education arm of Zee Network. Operates through a
number of divisions catering to multiple segments in education
Courses offered: Multimedia, Animation, Logistics, Accountancy, Digital
Arts, etc.
UEI Global Institutes across 17 An initiative of Berggruen Education - a venture of Berggruen Holdings Inc, New
cities. Plans 50 institutes York, USA
by 2010 Courses offered: 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
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.

Education
Fig. 3: Strategic groups
Amity
NMIMS ZILS
Broad line Manipal Univ.
NIIT, Aptech
IHM ICFP
Narrow line
ISB Great Lakes
Single Multiple
location locations
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
Certificate courses will emerge 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 to

spend 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

% who take Fees Mkt size Mkt size
Aspirants coaching (INR) (INR bn) (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 coaching—classroom
and distance coaching through learning material. Classroom coaching helps provide
valuable tips from teachers. Distance coaching helps in reaching aspirants across India.

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 Revenues Scale of Business specific details
coaching operations
IMS More than 80+ IMS India trains MBA aspirants prepare for the Indian B School
centres across entrance exams. Coaching through classroom courses and
India correspondence distance learning preparation options are
available. It claims to have students of 50,000 and more annually
Career Turnover of INR 700 mn in 130 locations Founded by a small group of young IIM graduates. Apart from
Launcher 2007. across India, US test prep education it also provides mainstream education
and middle east through growing network of play schools and secondary schools.
400 academicians and 50,000+ students
TIME Turnover of INR 1.5 bn and 151 offices in 81 3 management graduates set it up in 1992. Since then it has
has been growing at a cities across the grown into a specialist, multi-location, multi-programme training
CAGR of over 60% for the country provider running on corporate lines. Over 1,700 full time
last 5 years. employees
Career Career Forum conducts teaching and intensive sessions for group
Forum 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 Scale of operations Business specific details
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 for
IIT-JEE
Career Point 49 study centers across Career Point imparts education to students preparing for various
India competitive examinations, with major focus on IIT-JEE
Amity Institute of Started in 2001 with focus on engineering & medical entrance exams.
Competitive Exams Provides coaching for CBSE, IIT-JEE, AIEEE, DPMT

Education
Teacher training
India’s pupil teacher ratio India has the largest pupil-teacher ratio (PTR) amongst BRIC nations. Internationally
highest amongst BRIC nations
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 INR 0.6 bn

Mkt size Mkt size
No of teachers Trained (%) Target Cost (INR bn) (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 segment

Key players Scale of operations Business specific details
Academy of Creative Offshore branches ACT organises customised training programmes on various areas at different
Teaching in US & Germany levels –primary, secondary, higher secondary, collegiate, university and
and an office in professional colleges and also tailored workshops for corporate
Bangalore organisations
International Academy of Promoted by Jain Group of Institutions. Provides training to practicing
Creative Teaching 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 TTF launched projects targeting specific components of the educational
Bangalore, system such as school leaders, teachers and the curriculum. In the past 6
Mangalore and years it has worked with over 5,000 teachers from across the country. It is
Mysore managed by the Shraddha Trust, a registered public non-profit trust that is
committed to promoting the development of schools and educators
throughout India and the sub-continent
IECTEC – International Early Providing early childcare educators with the tools, resources and knowledge
Childhood Teachers’ to guide children. Expertise in the domain of preschool education. Has
Education Course launched offbeat courses like day care management, NGO management &
summer camp organisation.
Educomp - Quest Has been designed for teachers, students and parents. Includes professional
Programme development for teachers & their subject enrichment, Students
Empowerment Program and Smart Parenting Programme

Mkt size Mkt size
No of teachers Trained (%) Target Cost (INR bn) (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

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 size

Total Broadband Fees Market size Market size
population penetration (%) (INR) (INR bn) (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

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 widest reach

Everonn Educomp NIIT Aptech
Educomp well placed ….

Pre school 3
K12 3
Multimedia in schools 3 3 3
ICT 3 3 3 3
Higher education 3
Vocational 3 3 3 3
Tutoring 3 3
Teacher education 3
…but valuations are

expensive 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. Everonn’s 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. Everonn’s 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 a ‘HOLD’ and Everonn with a ‘BUY’ recommendation.

Education
Table 26: Global peer group comparison – Educomp expensive

EPS EPS EV/EBITDA P/E
CY08 / CY09 / Growth CY08 / CY09 / CY08 / CY09 /
Ticker Short Name
FY09 FY10E (%) FY09 FY10E FY09 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

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 rate (aged 15 years and
Literacy in highly populated countries
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 91.0
World 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

600
480
360
(mn)
240
120
0
Russia China Brazil United United India
Kingdom States
Upto Secondary / High Secondary Tertiary
India’s 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.

Education
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.

Education
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India Equity Research | Miscellaneous Initiating Coverage

Education
EDUCOMP SOLUTIONS
In a sweet spot ; valuations a speedbreaker
Well positioned to capture new growth opportunities October 7, 2009

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
Reuters : EDSO.BO Bloomberg : EDSL IN
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
EDELWEISS RATING
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 company’s Absolute Rating HOLD
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 company’s 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
MARKET DATA
(63% of standalone revenues; 76% of PBIT for FY09). The product continues to CMP : INR 4,927
clock a 50% plus volume growth and could grow at a faster rate. The ICT space 52-week range (INR) : 5,085 / 1,331
remains strong, while the company’s plans for the K-12 segment are on track. Share in issue (mn) : 17.3
M cap (INR bn/USD mn) : 85.2/1,827.2
Avg. Daily Vol. BSE (‘000) : 459.0
Capex light model envisaged; multi-year growth in place
Educomp’s 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 SHARE HOLDING PATTERN (%)
the business, particularly the K-12 and higher education segments, remain capital Promoters* : 54.9
MFs, FIs & Banks : 3.1
intensive, the company will attempt to shift to a capital light structure with a
FIIs : 37.1
franchisee model in the K-12 space and outright sales for smartclass. The recent
Others : 4.9
capital raising reduces financing concerns as well. * Promoters pledged shares : Nil
(% of share in issue)
Outlook and valuations: Valuation speed breaker; initiate with ‘HOLD’

Educomp remains a longer term growth story with huge potential. However, there
RELATIVE PERFORMANCE (%)
may be limited upside in the near term as the stock trades at 40x and 29x FY10
Sensex Stock Stock over
and FY11 estimates. We initiate coverage with a ‘HOLD’ recommendation and Sensex
DCF-based target price of INR 5,169 implies a P/E of 31x FY11E. 1 month 10.8 17.8 7.0
3 months 16.9 27.7 10.8
12 months 31.2 79.8 48.6
Financials
Year to March FY08 FY09 FY10E FY11E
Revenues (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 Deepak Jain
Growth (%) 150.3 87.4 97.2 37.1 +91-22-6623 3313
Shares outstanding (mn) 18 18 20 20 deepak.jain@edelcap.com
EPS (fully diluted) (INR) 38.5 72.3 123.6 168.1

Nilesh Shetty, CFA
EPS growth (%) 113.6 87.9 71.0 36.1
+91-22-6623 3457
PE (x) 128.1 68.2 39.9 29.3
nilesh.shetty@edelcap.com
ROAE (%) 35.0 35.7 29.6 23.9
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EdelweissLimited
Edelweiss Securities Securities Limited
29

Education
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 consistently moved up the education value chain
Higher
education
K-12 schools
Educomp has steadily
moved up the value chain
In class room
multimedia
ICT
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 stakeholders–state 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 Educomp’s 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 government’s cards. Apart
from the 2,500 schools that are likely to be brought under the scheme, there are further

Education
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 Institutes: 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.
Already working with the • In addition, Educomp is already involved with various state governments for a large
government on various number of projects as highlighted in table 1.
projects
Table 1: Educomp working 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 IT
courses 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 Educomp’s total revenues, but could
lead to strong growth going forward. The company will leverage its long-term
relationships developed through the extensive ICT programmes.

Education
Table 2: Educomp- Relative position in key business segments

Estimated market opportunity Educomp's position Competition
Smart Was an incremental market created by Largest player in this space, reaching Primarily competing with
class merging technology to enhance out to ~1,737 schools Everonn Systems
learning. Primarily restricted to private
schools. We estimate the market size at
INR 32.4 bn
ICT Was market created by government’s Market leader with ~ 60% market Competition remains fierce with
thrust to ensure information technology share. Has implemented ICT projects main competetors being NIIT
reaches public school students. We in approx. 12,000 schools till date and Everonn Systems
estimate the market opportunity at INR
112 bn
K-12 Constitutes the largest pie of the Recently entered the schools space No major organised player in the
schools education market. We estimate the with three different formats aimed at private school space. Faces
current opportunity size for private different market segments. However, competition from indivdual local
schools at INR 472 bn. We estimate the may be restricted to expand in tier I schools
private school opportunity to grow at andII cities as land costs may prohibit
20% over the next five years setting up new schools in metros
Higher education: Strategic tie ups to help

Higher education is set to be the next major growth area for Educomp in addition to its
Higher education could be
existing market segments. However, the higher education space also suffers from serious
the next growth driver
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 INR
500,000 per student and it is targeting nearly 200 students per institute. The premises
are rented and, hence, capex costs remain low. It has planned about 15 such institutions
over the next few years. These education institutions seem to be stepping stones for
offering degree courses over the next few years when restrictions on the higher
education space are eased.
Opportunity is profitable
Even at current levels, the higher education space is a lucrative business without
considering overstatement of expenditure/illegal charging of fees

Education
Existing businesses on track; growth could be expected in future

Educomp’s existing businesses remain firmly on track with high growth in place. The
company’s key product–smartclass-continues to perform well with little competition. The
company won a few orders in the relatively low margin ICT business while tweaking its
strategy in the K-12 segment. It now plans to focus on growth through dry management
rather than direct ownership.
Multimedia smartclass: Growth unabated; entry barriers in place

As Educomp’s flagship product (63% of standalone revenues; 76% of EBIT), smartclass
continues to show tremendous growth potential. The company provides multimedia
educational content along with the hardware to several schools. Typically, Educomp
enters into a five-year contract with schools and receives a fee of INR
150/student/month. The company is the leader in this segment with 75% market share
and is present across ~1,737 schools as of FY09 (up from 331 schools in FY07).
Estimated size of the smartclass market is ~15,000 schools (with tuition fees in excess
of INR 1,000/month), which points to the possibility of strong multi-year growth over the
long term in this high margin (EBIT > 60%), albeit high capex business.
Table 3: Smartclass-Estimated market potential

Smartclass opportunity
Number of private schools (estimate) 15,000
Number of students per school 1,200
Smartclass continues to grow Total number of students (mn) 18
strongly Fees per student/month (INR) 150
Annual revenues (INR mn) 32,400
• A unique business model

Educomp’s product suite in smartclass consists of a number of multimedia
augmented teaching modules, targeted at the K-12 segment. For a contract of five
years, the company provides the school with all the necessary equipment, including
a local server interactive board and a digital projector. The average cost of setting
up a school comes to ~INR 2.23 mn (INR 85,000/class). In addition, the company
provides a person who maintains the hardware and provides technical support to the
school.
The company earns revenues either through outright sale (the entire cost is paid
upfront by the school) or a BOOT model (Educomp bears the hardware cost
upfront). In case of outright sale, the company earns a fee of INR
75/student/month, while in a BOOT contract, it earns ~INR 150/student/month. In
table 4, we have illustrated the difference between RoE and RoCE in case of these
two models.
Table 4: Smartclass-Comparative margins BOOT versus outright sale

(%) BOOT Outright sale
EBIT margin - 1st year 60.0 27.0
EBIT margin subsequent year 60.0 67.0
PAT margin 1st year 31.0 18.0
PAT margin subsequent years 31.0 44.0
ROCE 1st year 78.0 82.0
ROCE subsequent years 78.0 202.0
ROE 1st year 40.0 54.0
ROE subsequent year 40.0 133.0

Education
• Competitive advantage sustainable

While competition is slowly beginning to increase in smartclass, Educomp enjoys the
following key competitive advantages that are likely to sustain over the long term:
• Educomp has developed key competencies in the classroom multimedia model

with an IPR involving over 16,000 modules (against only 6,000 modules of its
closest competitor). Development of incremental modules is a time consuming
process and gives the company a distinct advantage.
• The company enjoys the first mover’s advantage in this segment. This makes
smartclass a standard for the in-class multimedia model and also locks in the
existing number of schools for a period of five years.
• Pricing power to continue

Given Educomp’s dominant position in smartclass, we expect its pricing power to
continue, at least for the next few years, backed by the ability (and willingness) of
the target consumer segment (15,000 schools) to pay for quality education. Also,
since the absolute amount to be paid per year is small, parents will continue to
prefer better (or widely used content) than purchase a possibly sub-standard
product. The company’s pricing power may, however, diminish eventually as it
penetrates the lower economic strata; though, this is at least four-five years away,
in our opinion.
ICT: Strong opportunity; strategic intent

The ICT segment is highly capital intensive and a relatively lower margin business for
Educomp, involving setting up of computer aided classrooms in schools run by state
governments across the country. Projects in ICT are awarded through tendering, terms
ICT has been a strategic
business of which vary from one project to another. While some government projects involve
setting up of computer labs, others involve teacher training, multimedia product
creation, and technical support. The company’s key competitors in this segment are NIIT
and Everonn Systems.
• Exponential growth possibilities

There are 1.1 mn government schools, of which, an estimated 40,000 have so far
been allocated under the government scheme for ICT. Of late, various state and
central governments have increased the allocation for IT expenditure in schools.
This excludes the potential from incremental opportunities from the PPP
discussed previously.
Table 5: ICT-Estimated market opportunity

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
With the opportunity exponential, we expect strong growth in the segment, though
margins may remain at low levels with product offerings being fairly commoditised.
However, the relatively stiff tender criteria should act as a reasonable entry barrier,
limiting competition over the next few years.

Education
K-12: Altering the model; focusing on dry management

Shortage of quality education at the school level provides an excellent opportunity for
private players. Educomp intends to fulfill this demand-supply gap with plans to operate
around 150 schools over the next four years (up from the current 20 operating schools).
The company has deployed a number of operating models across schools: (1) franchisee
model (where the company makes little upfront investment and earns approximately
15% revenues of total enrollments; (2) joint ventures with local schools; and (3) co-
branding (the company pays a revenue share to the school) and runs it directly.
In the recent past, Educomp has changed its strategy in the K-12 segment-it shifted
thrust from owning schools to dry management. This, in our view, has various
advantages:
Increasing number of schools
under dry management • The capital expenditure requirement decreases and improves return ratios.
• Faster expansion.
• Lower execution risks.
The company plans to launch schools, not just in metros, but also in tier 3 and 4 cities at
various price points. For this purpose, it will brand products differently across markets.
Table 6: K-12 portfolio of schools

Brand of schools month (INR)
Millenium 3,500
Takshila 1,500
Vidya Prabhat 750
Table 7: Educomp will have 43 K-12 schools by FY10

Type of schools No of schools Status
Owned or co branded (FY09) 16 Operational
Dry management (FY09) 4 Operational
New schools (FY10)
Millenium 5 Land acquired
Vidya Prabhat 3 Land acquired
Eurokids 12 Dry management
Takshila 3 Almost complete
Though the K-12 business is profitable and offers huge opportunities, we see a few
concerns on the execution of the business:
Brand building: It could take Educomp three-five years to establish the reputation of its
schools. Till then, the company could suffer sub optimal utilisation with so many schools
beginning operations at the same time. The management will attempt to differentiate its
schools from others through a unique and more interactive curriculum.
Land acquisition: Typically, a school requires 2 acres of land; hence, Educomp’s total
land requirement may be in excess of 300 acres. Delays in land acquisition are not
uncommon and this can push back the company’s plans. To address this issue, the
company has, however, secured tie ups with various builders including DLF and the Ansal
Group.

Education
Valuation
Expensive in the near term

Given its unique business model with a mix of schools as a potential option, a multimedia
Strong business but high teaching aid and a government sponsored ICT business, Educomp does not seem to have
valuations a clear peer set. Nonetheless, we compare Educomp to the educational peer set. The
company is trading at 39.9x FY10E, which is at 119% premium to the education group
peer set.
Table 8: Global peer group comparison – Educomp expensive

EPS EPS EV/EBITDA P/E
CY08 / CY09 / Growth CY08 / CY09 / CY08 / CY09 /
Ticker Short Name
FY09 FY10E (%) FY09 FY10E FY09 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

Education
Limited near term upside; initiate with a ‘HOLD’

Despite our belief in the companies the longer term growth opportunities, we believe the
near term upsides are limited on account of the expensive valuations. We initiate with a
‘HOLD’ recommendation given our one year horizon.
Chart 1: One year forward P/E band Chart 2: One year forward P/BV band
10,000 16,000
20x
60x
8,000 12,800
15x
6,000 45x 9,600
(INR)
(INR)
4,000 6,400 10x

30x
2,000 3,200
15x 5x
0 0
Apr-06
Apr-07
Apr-08
Apr-09
Oct-06
Oct-07
Oct-08
Oct-09
Oct-06
Oct-07
Oct-08
Oct-09
Apr-06
Apr-07
Apr-08
Apr-09
Source: Edelweiss research Source: Edelweiss research
Valuation on DCF basis

We value the company on DCF basis with a risk free rate of 7% and a market premium
of 6%. At our target price of INR 5,169, the stock will trade at a P/E of 41.8x FY10E.
Table 9: Estimating WACC at 12.7% Table 10: Value per share of INR 5169
DCF assumptions DCF value
Risk free rate (%) 7.0 Firm value (INR mn) 100,313
Equity risk premium (%) 6.0 Net debt (INR mn) (3,076)
Beta (x) 1.2 Equity value (INR mn) 103,389
Cost of equity (%) 14.2 Value per share (INR) 5,169
Cost of debt (%) 8.0
Debt/Equity 0.3
WACC (%) 12.7
No of share outstanding (mn) 20
Terminal growth rate (%) 3.0
Table 11: Sensitivity to WACC

Terminal growth (%) WACC (%)
5,169 11.7% 12.2% 12.7% 13.2% 13.7%
1% 4,585 4,536 4,488 4,443 4,399
2% 4,893 4,844 4,797 4,751 4,707
3% 5,265 5,216 5,169 5,123 5,079
4% 5,722 5,673 5,625 5,580 5,536
5% 6,297 6,248 6,200 6,155 6,111

Education
Key Risks
Capital intensive nature of business

Capital intensity is high Educomp’s business is capital intensive in two different aspects. First, upfront
investments required in the K-12 segment or BOOT model for smartclass. The capex
requirements are set to increase manifold, particularly if the company’s plans in K-12
schools materialise. Second, higher capital required to service working capital (debtor
days already high at ~158 days) which could rise further on account of the new ICT
contracts. The ICT contracts with Karnataka and Gujarat, which have been outright
purchases, have been paid upfront only to the extent of 30%; the balance will be shown
as debtor days.
However, it should be noted that the company has been mitigating the effect of the
highly capital intensive business by shifting towards dry management of schools as well
as encouraging outright purchases.
Execution concerns, particularly in K-12

With its aggressive entry into the K-12 segment, Educomp has taken a leap from being a
content/hardware provider to running/owning schools. While the company seems to be
successful initially, a ramp up will entail execution concerns–land acquisition,
construction, and more importantly brand creation.
Regulatory concerns
The school business, as per regulations, cannot be a profit making enterprise. Most
companies have avoided regulatory hassles by creating subsidiaries that charge schools
for infrastructure and services provided, while the schools themselves operate at
breakeven. Many state governments have set up regulatory bodies to regulate fees
charged by schools; any increase in fees will require such a body’s prior approval. We
expect strong resistance from such regulatory bodies to any increase in fees, which may
hinder Educomp’s profitability and expansion in the K-12 segment.
Pricing pressure may set in; renewal rates may decline

Educomp has had a first mover advantage in smartclass and has been able to move
quickly to establish itself in schools. Though margins are attractive in smartclass, with no
strong barriers to entry we expect competition. Competition has already eroded margins
significantly in ICT, forcing out a few players from the market. Further, contracts in
smartclass are typically for five years and come up for renewal thereafter. If renewal
rates are lower than expected, our thesis could be at risk.
Cash management remains a challenge

As of March FY08 and March FY09, the company had cheques of INR 540 mn and INR
278 mn, respectively. These formed nearly 20% of the company’s turnover in FY08 and
5% of consolidated revenues in FY09. We understand from the company that these are
caused by geographically diverse location of its customer base resulting in a significant
time lag in actual collection of the cheque and realisation of the same. We believe
effective cash management will continue to remain a challenge for the company in the
near future
Conflict of interest
Educomp’s stake in Educomp Infrastructure and Management is just under 69%, with
significant portion of balance held by promoters. However, we note that even after an
incremental capital infusion of INR 125 bn by Educomp, the valuation and Educomp’s
share in the subsidiary has been pending for some time

Education
Company Description
Incorporated in 1994, Educomp is one of India’s leading providers of technology-enabled

education solutions and services for the K-12 (Kindergarten to Class 12) segment. It has products
targeting both schools and students. The company’s product portfolio includes animated course
content for the K-12 segment to aid teachers in instruction, computer literacy programmes and
professional development courses for teachers, and retailing of educational products.
Table 12: Educomp- Company evolution
Company timeline
INR 1,994 Incorporation
INR 1,999 Launched PlanetVidya.com- an online education system
Launched professional development programmes
INR 2,000 Started India's first K12 content development centre
INR 2,002 Established US subsidiary- Edumatics Corporation
INR 2,003 Launched smartclass content solution
INR 2,004 Entered Asia Pacific with pilots in Singapore
Set up R&D division
INR 2,005 Launched online tutoring service
INR 2,006 Entered preschool market thorugh under 'Roots to wings" brand
Raised USD 25 m via FCCB's
Launch of Mathguru.com
Public issue
INR 2,007 Investment in EduInfra & EduManage to set up private schools
Acquired AsknLearn, Three Bricks E-services, Savvica Inc (71.5%) Authorgen
Tech(81%)
Raised USD 80 m via FCCB's
INR 2,008 Acquired 51% stake in learning.com
Jt venture with Raffles Education Corp for profession education in India and
China for K-12 segment
INR 2,009 Acquired 50% stake in Eurokids the largets preschool chain in India
Merged EduInfra and EduManage
Fig. 2: Educomp- Key business segments
Educomp Solutions
Business to business initiatives Direct initiative
Professional
Smart-Class Edureach Online initiatives Offline initiatives
Development
Authorstream Learning TechLiterary www.smarcla

Mathguru Wiziq.com com Hour LearnHub EasyTech Assessment Aha!Math Aha! Science ssonline.com Vocational
Learning K-12 Higher

Pre-schools Schools Education Vocational Distribution
Centres
Source: Company, Edelweiss research

Education
Table 13: Educomp’s wide product portfolio

Educomp other business Description
Professional Development This segment primarily involves upgrading teacher skills and training to integrate
technology into the school curriculum as well as training in skills in areas of inquiry-
based learning, creative thinking, and building problem solving skills among
students and communication & assessment strategies
Preschools Educomp entered the preschooling market by launching Roots to Wings. It

currently operates approx 160 centers across India. The ramp up in preschools has
been through the franchise route, hence, capex has been low. It has also bought a
50% stake in Euro kids the largest preschool player in India with over 450 centers.
Educomp has recently indicated it may hive off its preschool division into a
separate subsidiary
Key online ventures Description

Mathguru Mathguru provides solutions to all problems in NCERT books. Mathguru teachers
explain the concepts and key ideas required to solve each problem, and explain the
solutions
wiziq.com Wiziq is a web learning platform that connects students and teachers all around the
world regardless of their age, nationality or school/ college. WiziQ not only
facilitates the connection between learners and teachers around the globe but it
also provides a channel of communication between them
authorstream.com Authorstream is a web platform for sharing power point presentations on blogs and
websites. It currently has approx 315,000 registered users
Learninghour.com Learning hour is an online portal providing online tutoring from grades 6-12
currently catering to 5,000 students
Key overseas ventures Description

Learning.com Learning.com is the premier provider of web delivered curriculum and assessment,
and partners with schools and districts throughout the United States of America to
improve student learning outcomes.Through learning.com Educomp offers learning
solutions like EasyTech,Techliteracy Assessment, Aha!math,Aha!Science etc
AsknLearn Founded in 2000, AsknLearn is Singapore’s largest e-learning company which

provides web based e-learning solutions, content and services to over 130
institutions
Learnhub.com LearnHub is a social learning network. It is a set of tools that make learning online
fun and engaging, and teaching online easy and effective

Education
Financial Outlook
Top line likely to post 47% CAGR over next two years
We expect the strong top line growth reported by Educomp over the past three years
(CAGR of 125% over FY07-09) to continue. However, growth is likely to be lower due to
significantly higher base it both its key business segments-ICT and smartclass.
Chart 3: Revenues to grow at CAGR of 47% over FY09-11E

15,000
12,000
(INR mn)
Robust revenue growth over 9,000

FY09-11E
6,000
3,000
0
FY07 FY08 FY09 FY10E FY11E
Smartclass to remain key growth driver; ICT growth to slip

Educomp’s smartclass division has posted a robust CAGR of 160% over the past two
years. We estimate its growth to slow down to 59% CAGR over the next two years on
account of a significantly higher base. The ICT segment reported robust 94% CAGR over
the past two years, though most of it was in FY08 when revenues grew 210%. In FY09,
ICT growth dipped to just 22%. The key reason behind the slip, despite the number of
schools serviced almost doubling from 6,004 to 12,012, was the change in structure of
contract from BOOT to outright sale in FY08; in an outright sale model the sale of
hardware is booked upfront, resulting is a substantial jump in FY08 numbers, but a
significantly lower growth in FY09.

Education
Chart 4: Smart class will continue robust growth Chart 5: ICT growth likely to slip
4,500 9,000 30,000 2,000
3,600 7,200 24,000 1,600
18,000 1,200
(INR mn)
2,700 5,400
(No.)
(INR mn)
(No.)
1,800 3,600 12,000 800
900 1,800 6,000 400
0 0 0 0
FY07 FY08 FY09 FY10E FY11E FY07 FY08 FY09 FY10E FY11E
Revenues No of schools Revenues No of schools
We estimate ICT to report a CAGR of 26% over the next two years. We assume 85% of
the new ICT contracts will continue to remain outright sale. If the ratio of new contracts
skews towards the BOOT model, reported ICT revenues are likely to decline as hardware
sales in BOOT are booked over the contract period rather than upfront.
EBITDA and net margins to expand

Margins to move higher We estimate Educomp’s consolidated EBITDA margins to expand from 47.79% in FY09 to
48.99% in FY10, as higher margin segments of smartclass and K-12 schools increase
their share in overall revenues. However, we estimate PAT margins to expand from
20.85% in FY09 to 22.76% in FY10, also aided by large other income on recently raised
cash of INR 6 bn through a QIP. We estimate a CAGR of 63% and 59% in EBITDA and
net profit respectively over the next two years.
Chart 6: High margin businesses to increase share Chart 7: Margins to expand

120% 60.0
96%
48.0
72%
36.0
(%)
48%
24.0
24%
0% 12.0
FY08 FY09 FY10E FY11E

Smart class ICT 0.0
FY07 FY08 FY09 FY10E FY11E
Professional development Edu Infra & Management
Others EBITDA PAT

Education
Balance sheet deleveraged, but debtor days remain high

The high capex intensity of Educomp’s key business segments (smartclass, ICT, K-12
schools) saw significant leverage build up in the company’s balance sheet with debt-
equity ratio of 2 as on FY09 (including INR 4.0 bn worth of FCCBs; excluding FCCBs it
Balance sheet strength has
improved
was 1:1); However, the company has taken a series of steps to deleverage its balance
sheet which includes:
• Raising INR 6 bn through a QIP placement, a dilution of ~9.4% of pre diluted equity.
• Increasing the proportion of outright sale contracts in smartclass, lowering upfront

capex.
• Moving to a dry management model in K-12, significantly lowering future capex

requirements.
• The rise in the share price closer to the estimated effective conversion price of INR
4,844 (assuming USD/INR of 48) increases probability of conversion, lowering strain
on the balance sheet.
We estimate Educomp’s debt–equity ratio to dip to 0.7 for FY10, including FCCBs;
excluding FCCBs, it will slip to 0.4.
The company’s business model leads to high debtor days. This is on account of the
payment cycle. In the smartclass business, debtor days are around 120 days (given the
quarterly cycle of billings from schools), while for ICT the cycle tends to go beyond 180
days, given the delays in payments from the government. We expect debtor days to
increase in the coming years on account of a higher proportion of outright purchases in
the ICT business. The new ICT contracts involve a prepayment of a mere 30% by the
government; the balance is likely to lead to higher debtor days.
Chart 8: Debtor days remain high

180
170
160
(Days)
150
140
130
FY06 FY07 FY08 FY09E
Debtor days
However, on the positive side, we do not expect substantial defaults of debtor days.

Education
Financial Statements
Income statement (INR mn)

Year to March FY07 FY08 FY09 FY10E FY11E
Income from operations 1,101 2,861 6,371 10,097 13,831
Total operating expenses 594 1,587 3,326 5,150 6,538
Cost of goods sold 304 798 1,110 1,676 1,777
Employee cost 126 488 1,155 1,765 2,404
Other expenses 164 302 1,061 1,709 2,357
EBITDA 507 1,273 3,044 4,947 7,294
Depreciation and amortisation 97 339 814 1,437 2,172
EBIT 410 934 2,230 3,510 5,122
Interest 14 48 268 316 330
Total other income 59 178 147 709 591
Profit before tax 454 1,064 2,109 3,903 5,382
Provision for tax 170 351 773 1,268 1,771
Core profit 285 713 1,336 2,635 3,611
Prior period adjustments 1 - - - -
Profit after tax 285 713 1,403 2,635 3,611
Minority Interest (3) 7 74 163 249
Profit after minority interest 288 705 1,328 2,472 3,363
Shares outstanding (mn) 16 17 17 19 19
EPS (INR) basic 18.0 40.9 76.9 130.7 177.9
Diluted shares (mn) 16 18 18 20 20
EPS (INR) diluted 18.0 38.5 72.3 123.6 168.1
Dividend per share (INR) 2.1 2.5 3.1 3.0 3.0
Dividend payout (%) 11.5 6.5 4.3 2.4 1.8
Common size metrics- as % of net revenues

Operating expenses 54.0 55.5 52.2 51.0 47.3
Material cost 27.6 27.9 17.4 16.6 12.8
Employee cost 11.5 17.1 18.1 17.5 17.4
Other expenses 14.9 10.6 16.7 16.9 17.0
Depreciation and amortisation 8.8 11.8 12.8 14.2 15.7
Interest expenditure 1.3 1.7 4.2 3.1 2.4
EBITDA margins 46.0 44.5 47.8 49.0 52.7
Net profit margins 25.9 24.9 21.0 26.1 26.1
Growth metrics (%)

Revenues 98.3 159.9 122.7 58.5 37.0
EBITDA growth 89.2 151.3 139.1 62.5 47.4
PBT 106.4 134.2 98.2 85.1 37.9
Core net profit 101.9 150.3 87.4 97.2 37.1
EPS 104.5 113.6 87.9 71.0 36.1

Education
Balance sheet (INR mn)

As on 31st March FY07 FY08 FY09E FY10E FY11E
Equity capital 160 172 173 189 189
Reserves & surplus 988 2,712 4,030 12,315 15,440
Shareholders funds 1,148 2,884 4,203 12,504 15,630
Minority Interest 128 194 804 968 1,216
Secured loans 183 622 4,689 4,889 4,889
Unsecured loans 1,072 3,151 4,206 4,200 4,200
Borrowings 1,255 3,773 8,895 9,089 9,089
Deferred tax (Net) 59 210 439 439 439
Sources of funds 2,590 7,061 14,342 23,000 26,375
Gross block 949 2,890 6,499 10,277 13,603
Depreciation 226 548 1,335 2,771 4,943
Net block 723 2,342 5,164 7,506 8,660
Capital work In progress 108 372 2,962 1,908 1,885
Intangible assests 137 280 1,225 1,225 1,225
Investments 102 36 729 7,229 7,229
FCMITDA 346 173 -
Inventories 33 18 316 316 316
Sundry debtors 496 1,157 2,765 4,241 5,754
Cash and bank balances 1,106 2,911 1,901 1,665 2,581
Loans and advances 110 490 1,138 1,817 2,490
Other current assets 16 62 32 32 32
Total current assets 1,761 4,638 6,152 8,072 11,173
Sundry creditors and others 185 517 1,995 2,867 3,551
Provisions 57 92 256 259 259
Total current liabilities & provisions 242 610 2,251 3,126 3,810
Net current assets 1,519 4,029 3,903 4,947 7,364
Misc expenditure 1 1 13 13 13
Uses of funds 2,590 7,061 14,342 23,000 26,375
Book value per share (INR) 72 167 242 661 826
Free cash flow

Year to March FY07 FY08 FY09E FY10E FY11E
Net profit 288 705 1,328 2,472 3,363
Depreciation 97 339 814 1,437 2,172
Deferred tax 42 151 278 - -
Others (3) 8 74 163 249
Gross cash flow 424 1,203 2,495 4,071 5,783
Less:Changes in working capital 274 705 884 1,280 1,501
Operating cash flow 150 498 1,612 2,791 4,282
Less: Capex (752) (2,348) (7,055) (2,724) (3,303)
Free cash flow (602) (1,850) (5,444) 68 979
Cash flow metrics

Operating cash flow 150 498 1,612 2,791 4,282
Investing cash flow (834) (2,282) (7,748) (9,224) (3,303)
Financing cash flow 1,181 3,590 5,159 6,196 (64)
Net cash flow 498 1,806 (978) (236) 915
Capex (752) (2,348) (7,055) (2,724) (3,303)
Dividend paid 39 51 61 64 64
Share issuance/(Buyback) (3) 991 98 6,067 -

Education
Ratios
ROAE (%) 28.2 35.0 35.7 29.6 23.9
ROACE (%) 23.5 19.6 21.6 23.9 29.3
Inventory (days) 15 6 18 22 18
Debtors (days) 125 105 112 127 132
Payable (days) 82 81 138 172 179
Cash conversion cycle 59 31 (7) (23) (30)
Current ratio 7.3 7.6 2.7 2.6 2.9
Debt/EBITDA 2.5 3.0 2.9 1.8 1.2
Interest cover (x) 28.5 19.4 8.3 11.1 15.5
Fixed assets turnover (x) 2.4 1.9 1.7 1.6 1.7
Total asset turnover(x) 0.6 0.6 0.6 0.5 0.6
Equity turnover(x) 1.1 1.4 1.8 1.2 1.0
Debt/Equity (x) 1.1 1.3 2.1 0.7 0.6
Adjusted debt/Equity 1.1 1.3 2.1 0.7 0.6
Du pont analysis
NP margin (%) 26.1 24.7 19.8 24.5 24.3
Total assets turnover 0.6 0.6 0.6 0.5 0.6
Leverage multiplier 1.8 2.4 3.0 2.2 1.8
ROAE (%) 28.2 35.0 35.7 29.6 23.9
Valuation parameters
Diluted EPS (INR) 18.0 38.5 72.3 123.6 168.1
Y-o-Y growth (%) 104.5 113.6 87.9 71.0 36.1
CEPS (INR) 21.4 51.8 104.0 206.7 292.7
Diluted P/E (x) 273.7 128.1 68.2 39.9 29.3
Price/BV(x) 68.7 29.5 20.3 7.5 6.0
EV/Sales (x) 71.6 30.0 14.4 9.2 6.7
EV/EBITDA (x) 155.5 67.4 30.0 18.9 12.7
EV/EBITDA (x)+1 yr forward 61.9 28.2 18.5 12.8

India Equity Research | Miscellaneous Initiating Coverage
Education
EVERONN SYSTEMS
Moving up the learning curve
Early-mover advantage in Vitels; near-term outlook strong October 7, 2009

Everonn Systems (Everonn), through usage of VSAT-based technology in
education, has made distance and quality of teaching in classroom irrelevant
Reuters : EVSI.BO Bloomberg : ESIL IN
through its Vitels segment. The company has used the same technology platform
to service multiple markets, be it schools, colleges or retail. As at FY09, the
EDELWEISS RATING
company was servicing 557 schools and 800 colleges. In the near term, we do not
foresee any serious competition for Everonn, especially in its college segment and Absolute Rating BUY
estimate revenues to post CAGR of 57% over the next two years in this segment
(iSchools+colleges combined)
Ranks third in ICT; to continue to corner a share of new tenders

Everonn is the third largest player in ICT in the schools business, following
Educomp and NIIT (these two are substantially larger players). Currently, the
company has implemented ICT projects in 4,442 schools, which contribute 33% to MARKET DATA
overall revenues. We expect the company to continue to remain a key player in CMP : INR 426
ICT projects; it is likely to post CAGR of 30% in school additions and 33% in 52-week range (INR) : 477 / 79
revenues over FY10-11E. Share in issue (mn) : 15.1

M cap (INR bn/USD mn) : 6.4 / 138.1
Avg. Daily Vol. BSE (‘000) : 485.1
Operating leverage to kick in post investment phase in Vitels
Vitels, as a business, is in early stages of its lifecycle. As the segment’s
investment phase nears completion and becomes relatively mature, the business SHARE HOLDING PATTERN (%)
Promoters* : 25.6
model has a built in large operating leverage delta, which could spur significant
MFs, FIs & Banks : 11.5
margin expansion. We expect the college segment to be a key margin driver as
FIIs : 20.4
student enrollment per college (40 for FY09) remains low. Increase in student
Others : 42.5
enrollment per college or average fee per student will spur disproportionate rise in * Promoters pledged shares : 3.8
(% of share in issue)
EBITDA.
Outlook and valuations: Inexpensive; initiate coverage with ‘BUY’ RELATIVE PERFORMANCE (%)
We estimate a consolidated topline CAGR of 47% and net profit CAGR of 68%, Sensex Stock Stock over
Sensex
over FY10-11E. The stock is currently trading at 15.9x FY10E and 10.2x FY11E. 1 month 10.8 9.4 (1.3)
Despite the dominance of low value-add businesses in overall revenues, we 3 months 16.9 15.6 (1.3)
believe stock valuations provide comfort. We initiate coverage on Everonn with a
12 months 31.2 38.4 7.2
‘BUY’ recommendation.
Financials
Year to March FY08 FY09 FY10E FY11E
Revenues (INR mn) 916 1,447 2,184 3,101
Growth (%) 112.9 57.9 50.9 42.0
EBITDA (INR mn) 334 512 909 1,360
Net profit (INR mn) 138 221 405 629 Nilesh Shetty, CFA
Shares outstanding (mn) 15 15 15 15 +91-22-6623 3457
EPS (INR) 9.1 14.6 26.8 41.6 nilesh.shetty@edelcap.com
EPS growth (%) 184.2 60.0 83.2 55.4
Diluted PE (x) 46.7 29.2 15.9 10.2 Deepak Jain
EV/EBITDA (x) 17.6 12.3 7.2 5.0 +91-22-6623 3313
ROAE (%) 21.0 14.3 17.3 22.0 deepak.jain@edelcap.com
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EdelweissLimited
Edelweiss Securities Securities Limited
47

Education
Investment Rationale
Vitels: Making distance and teacher quality irrelevant in education

Everonn, through the usage of VSAT-based technology in education, has made distance
and quality of teaching in classroom irrelevant through its Vitels segment. The
technology primarily involves setting up of a tech-enabled classroom equipped with VSAT
(receiving terminal), computer system and a projector, where live and interactive classes
are conducted via a studio. Two key features of this unique delivery mode are likely to be
Using VSAT technology to the driving force behind acceptance of this technology: (1) distance will cease to be a
break the distance barrier
barrier to quality education; with VSAT, students in remote locations can be hooked up
in education
to the module, learning alongside their peers across multiple geographies; and (2) one
quality teacher will be able to teach multiple schools at a time via VSAT technology.
Fig. 1: Vitels- Using VSAT technology to connect classroom to Everonn studios
Instructor Audio & Presentation Satellite

in studio video server uplink
Satellite
AV & data
VSAT Classroom
receiver
Leveraged VSAT-based technology across multiple target markets

Everonn has used the same technology platform to service multiple markets. Its Vitels-
ischool segment (19% of FY09 sales) is targeted at schools, blending server-based
content and educational and live sessions via studio. Its ‘learning academy’ segment
(11% of FY09 sales) is targeted at colleges where the same technology platform is used
to conduct professional programmes.
Table 1: Vitels- Servicing multiple markets through same technology platform

ViTELS segment Target market Key Features
Tech enabled classrooms with NCERT content

is loaded on server coupled with live sessions
iSchools K-12 schools
via a studio. Everonn charges INR 18,000-
20,000/ classroom/month
Tech enabled class rooms in colleges with

varied courses offered. Student enrollment will
be responsibility of Everonn. Charges vary for
the kind of courses selected. Colleges may also
Learning Academy Colleges
have a share of revenues. Courses are also
offered to non college students post college
hours using the same infrastructure (classified
as retail business)

Education
Table 2: Vitels- Existing courses offered in Learning Academy (INR)

Courses offered Course fee
English enhancement course 1,800
Personality aptitude development programme 2,000
Advanced diploma in information technology 7,500
Advanced diploma in financial services 7,500
Everonn appin security expert 7,000
Advanced diploma java / J2EE programming 25,000
Business communication 1,800
Bio informatics 5,500
Software testing course 6,000
Certificate in financial services 10,000
Post graduate certificate in banking and finance 15,000
Advanced diploma in software testing and quality management 25,000
Advanced diploma in internet security 30,000
NET 5,000
Vitels also includes a retail segment comprising prometric testing, other courses offered to
non-college students post college hours, corporate training, placement support, amongst
others, which together contributed 21% to FY09 sales.
Ischools and Learning Academy in colleges driving high growth in Vitels

Ischools and Learning Revenues from the Vitels segment have been growing at 79% over the past three years.
Academy increase share in
Vitels Even though Vitels revenues continue to be dominated by its retail and others segment
that have grown at 45% over the past three years, their relative share in Vitels has
reduced from 66% in FY07 to 41% of FY09. iSchool and Learning Academy together have
increased their relative share in the Vitels segment from 34% in FY07 to 59% in FY09,
growing at a combined rate of 111%. The high growth has been driven by a low base as
well as willingness from schools/ colleges to implement the technology as they are also
part of revenue share agreement. Everonn services 557 schools and 800 colleges as at
FY09, under the Vitels segment.
Chart 1: Break-up of Vitels revenues (FY06) Chart 2: Break-up of Vitels revenues (FY09)
iSchool &
Learning
Academy
34%
others
41%
iSchool &
Learning
Academy
others 59%
66%

Education
ICT in schools: Everonn a key player

Everonn remains one of the three key players, along with Educomp and NIIT, dominating
ICT in schools business. So far, the company has implemented ICT projects in 4,442
schools, which contributed 33% to its FY09 revenues. We believe Everonn will continue to
remain a key player in ICT projects; it is likely to post CAGR of 30% in school additions and
33% in ICT revenues over FY10-11E.
Will continue to get a portion

of new ICT tenders Chart 3: Estimated growth in ICT revenues
1,000
800
600
(INR mn)
400
200
0
FY08 FY09 FY10 FY11
ICT revenues
Leverages on existing ICT infrastructure

Margins in the ICT project are low due to the limited value add in projects and strong
competition within existing players. However, the direct presence amongst consumers (in
this case students in government schools) allows companies to leverage the existing
hardware infrastructure to cross sell other courses/educational aids at virtually no
incremental cost. Everonn has been leveraging IT infrastructure in government schools
where it has executed ICT projects primarily in three ways:
a) Offering additional courses to students/outsiders for a fee, post school hours. The
courses range from simple awareness courses to specialised job-oriented diploma
courses. In some cases, the company pays a rent of INR 1,000/month to offer these
courses.
b) Partnering with companies like Microsoft, Tally Solutions, etc; or Sikkim Manipal
University to offer training to students and school teachers.
c) Sale of education hardware/educational aids to students.

Education
Fig 2: ICT infrastructure used to generate additional revenues

Offers additional
courses during post
school hours by paying
nominal rent
Tie up with corporates

Existing ICT
like Microsoft, Tally etc
infrastructure in to offer them at govt.
govt. schools
schools
Sale of educational
hardware and software
in existing schools
Work underway for innovating new financing models for ICT
Trying to lower burden on A typical ICT contract works on a BOOT model, with the developer executing the project by
balance sheet due to ICT making upfront capex with assets on its books, and payments are received from the
projects
government on a quarterly/half yearly basis. The large upfront capex, coupled with funding
costs for hardware as well as receivables, raises fund requirement considerably.
Table 3: Estimated capex per school for a typical ICT contract (INR)
ICT: Breakup of capex per school Units Cost/Unit Total cost
Computers- Thin clients with TFT monitors 10 17,300 173,000
Computer- Server with tft monitor 1 42,000 42,000
UPS 1 50,000 50,000
Software packages 11 5,000 55,000
Equipment, pheripherals & networking 1 30,000 30,000
Furniture & fixtures 50,000
Total capex per school 400,000
With significant upfront capex in ICT projects and large tenders due, Everonn has been
working on innovative financing models to fund the ICT projects, including hardware
component to be financed by the vendor (who will later get a share of the periodic
payments from the government). The innovative financial model is expected to reduce the
overall strain on the balance sheet in future ICT projects.
Other business ventures still in incubation; marginal option value

Other business segments Everonn has ventured into other segments of education like test prep and online education.
still at a nascent stage These ventures, however, remain in very nascent stages and are likely to have a marginal
impact on the company’s revenues over the next two years.
Ventured into test prep through acquisition of Toppers Tutorials

Everonn entered the highly competitive and fragmented test prep market through the
acquisition of Toppers Tutorials in FY08. Toppers Tutorials specialises in training IIT and
engineering aspirants, with revenues at INR 4.3mn for FY09.

Education
Leverages cross selling opportunities through Edures

Everonn has set up a subsidiary Everonn Educational Resources Solutions (Edures) to focus
on cross selling educational products to students and educational institutions where it has
established its presence.
Vitels –Web products still at a nascent stage

Everonns portal classontheweb.com allows it to leverage its content developed for the
ischools segment. The content is uploaded on the website and is offered to students for a
fee. Even though it registered 680% growth in traffic in FY09, its contribution to revenues
remains marginal.

Education
Valuation
Contribution from Everonn’s higher value-add segments (ischools and colleges, which
contributed only 30% to FY09 revenues) is estimated to rise to 35% in FY11. Everonn is
trading at a P/E of 15.9x FY10E and 10.2x FY11E. Even adjusting for the company’s
aggressive revenue recognition policy (refer key risks on next page) the company trades at
22.4 x FY10E and 11.9x FY11E. Despite the dominance of low-value add businesses in
overall revenues, we believe the stock’s valuations provide reasonable comfort. We initiate
coverage on the stock with a ‘BUY’ recommendation.
Chart 4: One year forward PE versus average PE Chart 5: One year forward PE Band
100 1,500
40x
80 1,200
30x
60 900
(INR)
40 20x
600
20 10x
300
0
0
Oct-07
Dec-07
Oct-08
Dec-08
Oct-09
Jun-08
Jun-09
Apr-08
Apr-09
Aug-07
Aug-08
Aug-09
Feb-08
Feb-09
Dec-07
Dec-08
Apr-08
Apr-09
Aug-07
Aug-08
Aug-09
Feb-08
Feb-09
Oct-07
Oct-08
Oct-09
Jun-08
Jun-09
PE Average PE

Education
Key Risks
Entry barriers remain low in Vitels

Entry barriers in Everonn’s Vitels segment remain low with technology easily replicable.
Hence, despite Everonn being the first player to make use of VSAT-based technology,
unless it establishes a strong brand recall and is associated with certain key courses, we
believe the model’s scalability could be at risk. In fact, NIIT, another key player in the
Indian education space, has already tied up with prestigious B-schools like IIM
Ahmadabad, IIM Calcutta, IIFT Delhi, amongst others, to offer programmes to working
executives, using a similar VSAT-based platform.
Substantial working capital investment in ICT

ICT is a tender-driven business, requiring upfront capex, which is recouped via payments
from the government (received quarterly or half yearly over the contract period). This
results in substantially high debtor days (~180 days). As the ICT business scales up, we
believe funding debtors is will be a substantial issue. We believe most companies in the
ICT space may look at securitisation to lower the funding cost.
ischools: Cashflows significantly lag revenue recognition

Aggressive revenue Everonn tends to book 40% of the sum total of revenues to be received from schools over
recognition five years upfront as content charges. The balance 60% is recognised evenly over the
contract period. However, cash flows received from schools are even throughout the
contract period (20% p.a. for a five-year contract), resulting in significant mismatch
between reported revenues and actual cash flows in the first year of implementation in a
new school.
Table 4: Revenues significantly higher than cash flows in first year (%)
Year1 Year2 Year3 Year4 Year5
Revenues recognised
Content 40.0
Balance 12.0 12.0 12.0 12.0 12.0
Cash flows 20.0 20.0 20.0 20.0 20.0
Difference 32.0 (8.0) (8.0) (8.0) (8.0)
We also do not like the fact that this results in significantly higher tax outgo than what
could have been had revenue recognition been in sync with cash flows (tax outflows are
lowered due to accelerated depreciation though). Hence, unless the net incremental school
addition is greater than last year, ischools may report muted growth or even de-growth
despite increasing schools in the ischool segment.

Education
Company Overview
Everonn is a fully integrated knowledge management, education and training company,

offering a range of services that include creating educational and training content,
designing and executing large learning initiatives, setting up the needed infrastructure
for learning and training.
It is one of the leaders in computer education in schools and colleges. It is also one of
the leading players in setting up virtual and interactive learning classroom networks
across India.
Table 5: Company timeline

Year Everonn Systems: Evolution
2000 Incorporated the company as a Private Limited Company.
Bagged Tamilnadu contract worth INR 450 mln for 332 schools.
2002 Partnered with Hughes Education for virtual classrooms for premium
management education
2004 Launched “Zebra Kross”-branded virtual classroom network in colleges
with state of the art studio in Chennai.
Created a Knowledge Research & Resource Department to build a
reservoir of content to cater to the college segment.Computer Literacy
Excellence Award for Govt. school , Padalur
2005 Test launch of Virtual learning at schools and corporate
2006 Strategic investment of USD 3 mn from Tamasek’s subsidiary ST Asset
Management, India China Pre IPO Equity (Mauritius).
Launch of Retail Centers to cater to a varied segments of customers;
Expansion with two more studios.
Launch of Placement and staffing Division, Corporate Training inaugurated
2007 Acquired Class on the Web from Aban Informatics and Toppers Tutorial
Entered capital market through a public issue aggregating to Rs.50
crores.
2008 Entered in the field of test prep stream with the acquisition of Toppers
Tutorials

Education
Fig 3: Everonn- Key business segments
iSchool
Vitels Everonn Learning

Academy
Business Units Kompass
ICT Classontheweb.com
Everonn
Everonn Toppers Tutorials

(100% subsidiary)
Subsidiaries
Everonn Educational Resources
Solutions (100% subsidiary)

Education
Financial Outlook
Vitels: Operating leverage to kick in post investment phase

Vitels, as a business in its early stages of lifecycle, is characterised by large upfront
investment in capex as well as manpower. As the investment phase nears end or
alternatively the business enters a mature phase, the model will have built large
operating leverage delta, which could spur significant margin expansion. We believe this
expansion will be four or five years down the line, once Everonn believes it has enough
studios. This could further result in any new signup of classroom, contributing straight to
EBITDA
Learning Academy (colleges) remains the key
Improvement in average We view Learning Academy (college segment of Vitels) business as primarily a function
student per college to boost of average number of students per college and course fee per student. We note that
margins
despite 248% growth in colleges in FY09, revenues from learning academy grew just
32%. This was primarily on account of the drop in average student per college from 117
to 40. We estimate an improvement in average students per college in FY10 to 60 with
constant course fee per student, which will be the key driver for expansion in margins.
We estimate revenues in learning academy to increase at a CAGR 107% over the next
two years. A lower average student per college or lower–than-estimated course fee per
student will be downside risk to our estimates.
Chart 6: Average student per college to improve Chart 7: Learning academy revenues to grow @107%
6,000 175 2,500 750
4,800 140 2,000 600
3,600 105
(Nos.)
1,500 450
(INR)
(INR mn)
(Nos)
2,400 70
1,000 300
1,200 35
500 150
0 0
FY07 FY08 FY09 FY10E FY11E 0 0
Average course fee/student FY07 FY08 FY09 FY10E FY11E
Average student/college Revenues Colleges
Lower value-add business dominates revenues; share to drop going forward

We rate iSchool and Learning Academy as the highest value-add segments in Everonn’s
business portfolio, which contributed 30% to FY09 sales. The ICT segment (33% of FY09
sales) has very limited value add. Retail, corporate training, toppers, class on the web,
etc, as businesses, are nascent and together contributed 21% to FY09 revenues.
Eduresource, involving sale of hardware and educational products, is a commoditised
business that contributed 16% to overall revenues. Even though we estimate revenue
contribution from iSchool and Learning Academy to improve to 35% of overall revenues
by FY11, bulk of the revenues will continue to come from lower value-add segments
(65% of FY11 revenues). We estimate overall revenues to post at a CAGR of 47%, while
net profit is estimated to grow at 68% over FY10-11.

Education
Chart 8: Revenues to grow at CAGR of 47% Chart 9: Lower value add business continue to dominate
3,500 675 3,500
2,800 540 2,800
2,100 405 2,100
(INR mn)
(INR mn)
(INR mn)
1,400 270 1,400
700 135 700
0 0 0
FY07 FY08 FY09 FY10E FY11E FY07 FY08 FY09 FY10E FY11E
Revenues Net profit Ischool & College ICT Others
Return ratios to improve once cash deployed; equity multiplier may kick in
The company has INR 403 mn cash and liquid investments on its books as on FY09
(money unutilised from IPO plus recently raised cash through preferential allotment,
Large cash on books
depresses return ratios ~30% of its FY09 net worth) which depresses overall return ratios. Also, Everonn has
funded most of its capex though equity (debt equity stands at 0.25 as on FY09), not
allowing the equity multiplier to take effect. We believe return ratios will continue to
expand over the next few years, driven by: a) deployment of cash and b) use of debt for
expansion, allowing the equity multiplier to take effect.
Chart 10: Return ratios to improve once cash deployed

35.0
28.0
21.0
(%)
14.0
7.0
0.0
FY08 FY09 FY10E FY11E
ROCE ROE

Education
Financial Statements
Income statement (INR mn)

Income from operations 430 916 1,447 2,184 3,101
Total operating expenses 249 582 935 1,274 1,741
Materials costs 26 93 218 326 489
Course execution & delivery expenses 105 306 292 321 353
Employee cost 76 119 278 406 588
Other expenses 42 64 147 221 310
EBITDA 181 334 512 909 1,360
Depreciation and amortisation 87 99 159 258 370
EBIT 94 235 354 651 990
Interest 23 33 52 54 54
Total other income - 15 39 16 16
Profit before tax 71 218 341 613 953
Provision for tax 22 80 120 208 324
Profit after tax 49 138 221 405 629
Profit after minority interest 49 138 221 405 629
Shares outstanding (mn) 10 14 15 15 15
EPS (INR) diluted 3 9 15 27 42
Common size metrics- as % of net revenues

Operating expenses 58.0 63.6 64.6 58.4 56.1
Material cost 6.1 10.1 15.1 14.9 15.8
Course execution & delivery expenses 24.4 33.4 20.2 14.7 11.4
Employee cost 17.6 13.0 19.2 18.6 19.0
Other expenses 9.8 7.0 10.1 10.1 10.0
Depreciation and amortisation 20.1 10.8 11.0 11.8 11.9
Interest expenditure 5.4 3.6 3.6 2.5 1.7
EBITDA margins 42.0 36.4 35.4 41.6 43.9
Net profit margins 11.3 15.1 15.3 18.5 20.3
Growth metrics (%)

Revenues 39.2 112.9 57.9 50.9 42.0
EBITDA growth 23.5 84.6 53.3 77.5 49.6
PBT (14.2) 207.2 56.6 79.9 55.4
Core net profit (1.1) 184.2 60.0 83.2 55.4
EPS (88.8) 184.2 60.0 83.2 55.4

Education
Balance sheet (INR mn)

As on 31st March FY07 FY08 FY09E FY10E FY11E
Equity capital 103 139 151 151 151
Reserves & surplus 263 812 1,986 2,391 3,019
Shareholders funds 366 950 2,137 2,542 3,172
Secured loans 235 453 482 482 482
Unsecured loans 0 6 5 5 5
Borrowings 235 459 487 487 487
Deferred tax (Net) 54 60 91 91 91
Sources of funds 655 1,469 2,715 3,120 3,750
Gross block 562 787 1,376 2,070 2,865
Depreciation 197 292 450 709 1,079
Net block 365 495 926 1,362 1,786
Capital work In progress 0 126 250 0 0
Intangible assests 0 5 5 5 5
Investments 0 87 234 234 50
Inventories 3 0 0 0 0
Sundry debtors 280 424 764 1,155 1,640
Cash and bank balances 41 385 403 181 112
Loans and advances 59 133 576 811 1,054
Total current assets 383 942 1,742 2,147 2,805
Sundry creditors and others 74 117 310 419 572
Provisions 20 70 132 208 324
Total current liabilities & provisions 93 187 442 627 896
Net current assets 290 756 1,301 1,520 1,910
Uses of funds 655 1,469 2,715 3,120 3,750
Book value per share (INR) 36 69 141 168 210
Free cash flow (INR mn)

Net profit 49 138 221 405 629
Depreciation 87 99 159 258 370
Deferred tax 10 6 31 0 0
Gross cash flow 146 243 411 663 999
Less:Changes in working capital 107 123 527 441 459
Operating cash flow 38 121 (117) 222 540
Less: Capex (129) (356) (713) (444) (794)
Free cash flow (91) (235) (829) (222) (255)
Cash flow metrics

Operating cash flow 38 121 (117) 222 540
Financing cash flow 104 665 995 0 0
Investing cash flow (129) (443) (860) (444) (610)
Net cash flow 13 343 19 (221) (70)
Capex (129) (356) (713) (444) (794)
Share issuance/(Buyback) 86 36 13 0 0

Education
Ratios
ROAE (%) 17.9 21.0 14.3 17.3 22.0
ROACE (%) 16.4 23.1 18.3 24.2 30.1
Inventory (days) 7 2 0 0 0
Debtors (days) 192 140 150 160 164
Payable (days) 195 126 121 140 130
Cash conversion cycle 4 16 28 21 34
Current ratio 4.1 5.0 3.9 3.4 3.1
Debt/EBITDA 1.3 1.4 1.0 0.5 0.4
Interest cover (x) 4.0 7.1 6.8 12.1 18.5
Fixed assets turnover (x) 1.3 2.1 2.0 1.9 2.0
Total asset turnover(x) 0.7 0.9 0.7 0.7 0.9
Equity turnover(x) 1.6 1.4 0.9 0.9 1.1
Debt/Equity (x) 0.6 0.5 0.2 0.2 0.2
Adjusted debt/Equity 0.6 0.5 0.2 0.2 0.2
Du pont analysis
NP margin (%) 11.3 15.1 15.3 18.5 20.3
Total assets turnover 0.7 0.9 0.7 0.7 0.9
Leverage multiplier 2.1 1.6 1.4 1.2 1.2
ROAE (%) 17.9 21.0 14.3 17.3 22.0
Valuation parameters
Diluted EPS (INR) 3.2 9.1 14.6 26.8 41.6
Y-o-Y growth (%) (88.8) 184.2 60.0 83.2 55.4
CEPS (INR) 12.1 16.7 23.0 43.9 66.1
Diluted P/E (x) 132.6 46.7 29.2 15.9 10.2
Price/BV(x) 12.0 6.2 3.0 2.5 2.0
EV/Sales (x) 10.6 6.4 4.3 3.0 2.2
EV/EBITDA (x) 25.3 17.6 12.3 7.2 5.0
EV/EBITDA (x)+1 yr forward 13.7 11.5 6.9 4.8

Education
NOTES

Education
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246
Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Miscellaneous

Bharat Electronics, Lakshmi Energy Opto Circuits and Page Industries.
Everonn Systems Educomp Solutions
600 5,000
480 4,000
(INR)
(INR)
360 3,000
240 2,000
120 1,000
0 0
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Recent Research
Date Company Title Price (INR) Recos
22-Jul-09 Bharat A great defensive 1,417 Buy

Electronics yet; Initiating
Coverage
17-Jul-09 Opto Steady performance; 165 Buy

Circuits Result Update
19-Jun-09 Opto Well-grounded; 162 Buy

Circuits Result Update
16-Jun-09 Page Steady going; 481 Buy

Industries Result Update

Education
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 70 53 16 142 Buy appreciate more than 15% over a 12-month period
* 3 stocks under review Hold appreciate up to 15% over a 12-month period

> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 89 38 15
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Edelweiss Value Scanner

 Demand-supply gap; growth opportunities abound

 Regulatory changes likely catalysts for growth

 Market size estimated at over USD 21 bn

 Educomp best placed but valuations a speed breaker

1 Edelweiss Securities Limited

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

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

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

2 Edelweiss Securities Limited

Education Sector: Poised for Big Leap

• Demand for education to rise

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

Chart 1: India’s GER remains extremely low

Source: Crisil, Edelweiss research

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

Edelweiss Securities Limited 3

Source: Edelweiss research

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

4 Edelweiss Securities Limited

0.4 Rich 1.7 Rich

5.7 Middle class 12.8

21.9 Aspirers 33.9

71.9 Deprived Deprived

Source: NCAER, The great Indian middle class

• Supply remains restricted

• Public education system has collapsed

Chart 8: GoI spend on secondary and higher education insufficient

Elementary Secondary Higher

Edelweiss Securities Limited 5

Table 1: Infrastructure in government schools remain below par

6 Edelweiss Securities Limited

Regulatory Changes to be Catalysts

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

Vocational Higher education +

SSC IB English coaching AICTE, UGC/Others

Source: Edelweiss research

Edelweiss Securities Limited 7

Fig. 2: Structure of a trust

Fees Educational Trust Profits

Source: Edelweiss research

As a rebuttal, another committee member argued thus:

(a) Education chains likely to emerge

8 Edelweiss Securities Limited

 Policy shift no. 2: Change in government’s role to a facilitator than a licensor

Impact on private players:

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

Edelweiss Securities Limited 9

 Likely immediate policy changes

• Change 1. Public private partnerships to increase

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

• Change 2. Relaxation in requirement for private schools

10 Edelweiss Securities Limited

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

Source: Edelweiss research

• Change 3. Setting up central regulator for higher education

Edelweiss Securities Limited 11

Market Opportunity at USD 21 bn

Education Sector&#43

Education Sector&#43

Demand-supply gap; growth opportunities abound

Regulatory changes likely catalysts for growth

Market size estimated at over USD 21 bn

Educomp best placed but valuations a speed breaker

Policy shift no. 2: Change in government’s role to a facilitator than a licensor

Likely immediate policy changes

ICT in government schools

Higher education: Professional and vocational