 "Slowdown blues: Education sector moves out of comfort zone")
India's education sector is no longer recession-proof, with entities reporting lower growth and credit-rating agencies having a negative outlook. The credit profiles of higher education institutions especially have come under pressure. With declining revenues, their liquidity condition may turn tight in the future.
Credit rating agency Crisil Ratings downgraded 33 institutions in 2012-13 alone, while it upgraded 25. In comparison, there were only 12 downgrades and six upgrades in 2011-12.
"While the demand-supply gap for quality higher education remains robust in India, the credit profile of the many higher education institutes is plagued by high-capital intensity, and long incubation period. The enrolments are not commensurate to the capacity till they establish a brand. This impinges the liquidity that is already constrained owing to cash flow asymmetry because of seasonality in fee collection," said Ramraj Pai, president, Crisil Ratings.
Pai added that institutions with an established track record with higher enrolments and prudent cash flow management practices are able to command a better credit risk profile.
Education/training companies saw a slower growth in FY13 on the back of drop in revenues. Bombay Stock Exchange-listed Educomp Solutions slipped into the red and posted a consolidated net loss of Rs 147.93 crore for the quarter ended March 31, 2013.
The net sales (total income) for the fourth quarter of FY13 of the company saw a 34.5 per cent drop and stood at Rs 336.41 crore, while there was a rise as compared to the previous quarter.
This was due to a lower income from operations and on the back of expenses incurred for changes in inventories of finished goods and stock-in-trade. In the fourth quarter of FY12, the company had posted a net profit of Rs 61.53 crore.
Companies are also exiting non-core areas to improve the balance sheet. In April this year, Educomp sold its entire 50 per cent stake in vocational training firm IndiaCan to its joint venture partner Pearson. Similarly in March this year, it completed the sale of its 50 per cent stake in Eurokids International Limited to a group of investors led by GPE India.
"Educomp will now operate in a larger setup in areas with larger market opportunity," Educomp's Chairman and Managing Director Shantanu Prakash had told Business Standard earlier. He had said that the company would focus on improving operational efficiencies and then grow rapidly.
Similarly, CORE Education and Technologies posted a 35.7 per cent drop in its consolidated fourth quarter net profit, compared to Q4 of FY12. The company posted a net profit of Rs 50.93 crore for Q4 of FY13, compared to Rs 79.23 crore posted in the same quarter in 2012.
Aptech is one of the few companies in this segment that saw a rise in net profit. Ninad Karpe, managing director and CEO of Aptech, said the firm had started the process of re-engineering four years ago -- from changing its logo to consolidating its operations to focus on its core strength of career education. "We are pursuing a path of profitable growth and an 'asset light' model and the results are showing. Like many other industries, there are challenges relating to technology obsolesce and competition; which are faced by the education sector as well," he said.
Crisil Research shows that increasing competition to get into good-quality schools / tier-I and tier-II colleges and the severe shortage of talented workforce that the Indian corporate sector is facing provides significant opportunity for non-formal segments such as coaching classes and skill development.
Ajay Srinivasan, director, Crisil Research, said, "The education sector provides huge opportunities for growth, but potential investors need to be cognizant about segment-specific and firm-specific considerations that would impact the viability of their investments."
He explained the key considerations for investors looking at the non-formal education space (coaching classes, pre-schools, multimedia and Information and communication technology or ICT services, vocational training, and soft skills development) should be the scalability of the business model, competitive scenario, dependence on individuals, relevant tie-ups with the industry, and the availability of systems and processes that will aid business expansion.
Formal education is not a stranger to the slowdown phenomenon. With over one-third seats vacant in engineering and management institutes, experts said the situation looks bleak. Srinivasan said that going forward, many tier-4 engineering and business schools, which are running at sub-optimal capacity utilisation levels, are expected to shut down.
"Players who do not have an established track record and haven't been able to build trust and credibility are finding it difficult to attract students. In the non-formal education, especially multimedia and ICT, the high rise in receivables from private schools as well as government (in case of government schools) and increasing pricing pressure are leading to stress on the balance sheet," said Srinivasan.
He added with numerous players entering this segment, operating margins have steadily declined over the past few years, led by multiple factors such as lower average realisations due to high competition and low product differentiation. In the private schools segment, he said, the first mover advantage is gradually diluting and renewal of contracts is increasingly becoming a challenge for multimedia players.
These entities have seen downgrades in the recent periods, too. Earlier this month, India Ratings & Research (Ind-Ra) has downgraded Educomp Solutions Limited's (Educomp) Long-Term Issuer Rating to 'IND D' from 'IND BB-'. Ind-Ra said that the downgrade reflects Educomp's ongoing delays in its debt repayment due to continued liquidity and earnings stress.
"Stressed earnings are reflected by a 35 per cent y-o-y (year-on-year) drop in consolidated revenues in Q4 of FY13, Ebitda (earnings before interest, taxes, depreciation, and amortisation) loss in Q4 FY13 and net loss in Q4 FY13 and FY13 coupled with a 74 per cent y-o-y increase in finance cost for FY13 given its high debt. The company is negotiating with its banks regarding extension of debt maturities and further refinancing. To alleviate liquidity stress, Educomp is seeking equity infusion, along with implementing a strategy of monetising non-core businesses and assets, including land parcels," Ind-Ra said. The company, however, added that future developments may lead to positive rating action including timely debt servicing for one quarter.
Rating agency Standard & Poor's (S&P), too, has cut its long-term credit rating on Core Education and Technologies Ltd's (CORE) to 'B' from 'B+'. "We lowered the rating on CORE because we believed that the sharp fall in the company's equity prices could negatively affect its access to capital markets and bank funding," said S&P.
This would put pressure on CORE's refinancing and funding plans and 'less than adequate' liquidity.
Players are, however, hopeful that the education sector will see a growth in the next few quarters. Karpe of Aptech said, "We remain optimistic about the industry. It still has a lot of depth and continues to grow at a CAGR (compound annual growth rate) of 12-15 per cent. Only those education companies, who are able to reinvent themselves and rise above the clutter, will survive and grow. Technology will also be a key differentiator."
Credit rating agency Crisil Ratings downgraded 33 institutions in 2012-13 alone, while it upgraded 25. In comparison, there were only 12 downgrades and six upgrades in 2011-12.
"While the demand-supply gap for quality higher education remains robust in India, the credit profile of the many higher education institutes is plagued by high-capital intensity, and long incubation period. The enrolments are not commensurate to the capacity till they establish a brand. This impinges the liquidity that is already constrained owing to cash flow asymmetry because of seasonality in fee collection," said Ramraj Pai, president, Crisil Ratings.
Pai added that institutions with an established track record with higher enrolments and prudent cash flow management practices are able to command a better credit risk profile.
Education/training companies saw a slower growth in FY13 on the back of drop in revenues. Bombay Stock Exchange-listed Educomp Solutions slipped into the red and posted a consolidated net loss of Rs 147.93 crore for the quarter ended March 31, 2013.
The net sales (total income) for the fourth quarter of FY13 of the company saw a 34.5 per cent drop and stood at Rs 336.41 crore, while there was a rise as compared to the previous quarter.
This was due to a lower income from operations and on the back of expenses incurred for changes in inventories of finished goods and stock-in-trade. In the fourth quarter of FY12, the company had posted a net profit of Rs 61.53 crore.
Companies are also exiting non-core areas to improve the balance sheet. In April this year, Educomp sold its entire 50 per cent stake in vocational training firm IndiaCan to its joint venture partner Pearson. Similarly in March this year, it completed the sale of its 50 per cent stake in Eurokids International Limited to a group of investors led by GPE India.
"Educomp will now operate in a larger setup in areas with larger market opportunity," Educomp's Chairman and Managing Director Shantanu Prakash had told Business Standard earlier. He had said that the company would focus on improving operational efficiencies and then grow rapidly.
Similarly, CORE Education and Technologies posted a 35.7 per cent drop in its consolidated fourth quarter net profit, compared to Q4 of FY12. The company posted a net profit of Rs 50.93 crore for Q4 of FY13, compared to Rs 79.23 crore posted in the same quarter in 2012.
Aptech is one of the few companies in this segment that saw a rise in net profit. Ninad Karpe, managing director and CEO of Aptech, said the firm had started the process of re-engineering four years ago -- from changing its logo to consolidating its operations to focus on its core strength of career education. "We are pursuing a path of profitable growth and an 'asset light' model and the results are showing. Like many other industries, there are challenges relating to technology obsolesce and competition; which are faced by the education sector as well," he said.
Crisil Research shows that increasing competition to get into good-quality schools / tier-I and tier-II colleges and the severe shortage of talented workforce that the Indian corporate sector is facing provides significant opportunity for non-formal segments such as coaching classes and skill development.
Ajay Srinivasan, director, Crisil Research, said, "The education sector provides huge opportunities for growth, but potential investors need to be cognizant about segment-specific and firm-specific considerations that would impact the viability of their investments."
Formal education is not a stranger to the slowdown phenomenon. With over one-third seats vacant in engineering and management institutes, experts said the situation looks bleak. Srinivasan said that going forward, many tier-4 engineering and business schools, which are running at sub-optimal capacity utilisation levels, are expected to shut down.
"Players who do not have an established track record and haven't been able to build trust and credibility are finding it difficult to attract students. In the non-formal education, especially multimedia and ICT, the high rise in receivables from private schools as well as government (in case of government schools) and increasing pricing pressure are leading to stress on the balance sheet," said Srinivasan.
He added with numerous players entering this segment, operating margins have steadily declined over the past few years, led by multiple factors such as lower average realisations due to high competition and low product differentiation. In the private schools segment, he said, the first mover advantage is gradually diluting and renewal of contracts is increasingly becoming a challenge for multimedia players.
These entities have seen downgrades in the recent periods, too. Earlier this month, India Ratings & Research (Ind-Ra) has downgraded Educomp Solutions Limited's (Educomp) Long-Term Issuer Rating to 'IND D' from 'IND BB-'. Ind-Ra said that the downgrade reflects Educomp's ongoing delays in its debt repayment due to continued liquidity and earnings stress.
"Stressed earnings are reflected by a 35 per cent y-o-y (year-on-year) drop in consolidated revenues in Q4 of FY13, Ebitda (earnings before interest, taxes, depreciation, and amortisation) loss in Q4 FY13 and net loss in Q4 FY13 and FY13 coupled with a 74 per cent y-o-y increase in finance cost for FY13 given its high debt. The company is negotiating with its banks regarding extension of debt maturities and further refinancing. To alleviate liquidity stress, Educomp is seeking equity infusion, along with implementing a strategy of monetising non-core businesses and assets, including land parcels," Ind-Ra said. The company, however, added that future developments may lead to positive rating action including timely debt servicing for one quarter.
Rating agency Standard & Poor's (S&P), too, has cut its long-term credit rating on Core Education and Technologies Ltd's (CORE) to 'B' from 'B+'. "We lowered the rating on CORE because we believed that the sharp fall in the company's equity prices could negatively affect its access to capital markets and bank funding," said S&P.
This would put pressure on CORE's refinancing and funding plans and 'less than adequate' liquidity.
Players are, however, hopeful that the education sector will see a growth in the next few quarters. Karpe of Aptech said, "We remain optimistic about the industry. It still has a lot of depth and continues to grow at a CAGR (compound annual growth rate) of 12-15 per cent. Only those education companies, who are able to reinvent themselves and rise above the clutter, will survive and grow. Technology will also be a key differentiator."