Educomp Solutions Ltd. A Strategic analysis April 2013

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1 Executive Summary Educomp is a key private sector player in the Indian education sector (IES) with an addressable market size of $70 billion which is expected to grow to $115 billion by 2018 (Exhibit 1). The company in the past as matter of strategy has straddled all the segments (Exhibit 2). The basic thought processes was to achieve a first mover advantage in all segments, become a segment leader that determines the market structure and practice. It tried to achieve this through a string of acquisitions and subsidiary/associate structures. This was also a portfolio approach not knowing which segment would actually take off. But the success of one or two these would have paid for other investments and more. However the overall business became too complicated in terms of management, assigning priorities, deploying resources, managing legal and other compliance related matters. This had to lead to some corporate governance issues too. Investors and the market had developed serious concerns about the company. This report looks to strategically analyze the large opportunity that IES provides, the emerging trends in it and as to how Educomp can reshape itself to address this opportunity keeping its pioneering status intact, serve the customers better and regain the confidence of its investors. The education industry in India comprises essentially of three segments the school segment from Kinder Garden to XII grade (K-12), higher education (HE) and the vocational & skill development (VSD) segment (Exhibit 1). The formal education segment is regulated and requires a non-profit approach, while the informal segment is relatively unregulated and profit motive is a driver (Exhibit 3 & 4). Apart from the legal issues, the entry barriers to the formal segment are high due to the high capital expenditure required in terms of land, building and other infrastructure. Moreover the need to move profits out (while operating a non-profit organization) has resulted in complicated structures being set up by corporate entities to move profits out. The industry growth drivers are many along with its share of challenges (Exhibit 3). While there are a large number of players, given the demographic profile and the disposition towards education by Indians the market is huge (Exhibit 5). Further government spending on upgrading government school infrastructure where private players are playing a key role is also a key growth driver, albeit a low margin business. The buyer power is limited by the purchasing power of the population. It is relatively higher in the metropolitan cities and lower in tier 2 and 3 towns and villages. In some states the fee structure is also regulated. Under the Right to Education Act, private schools are required to provide certain number of seats at lower cost to the under-privileged children. From a corporate perspective the major geographical space is to be in is the metros and tier 2 cities to begin with. The key supply constraint is the increasing value of land as well rentals in all key cities and towns. Given the potential of the sector, especially in its unregulated segment, many competitors have thrown their hat into this space (Exhibit 6). Clearly Educomp is player across almost all the segments despite 1 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

2 being a corporate player. With the regulations being eased for greater participation of private sector and collaboration with foreign institutions/universities the greater propensity of the private sector getting involved directly and with foreign collaborations in this space is becoming evident (Exhibit 7). The competition is likely to intensify further as funds availability becomes larger with private equity and venture funds get more active in this industry. Further given the improvement of the telecommunication infrastructure, increasing penetration & affordability of smart mobile devices, the required reach, the lack of sufficient teachers/faculty and the low buying power, it is expected that e- learning/distance education will become a major part of the IES landscape in time to come 1. Educomp today has an asset heavy model having deployed capital heavily in the K-12 segment in terms of land and building (Exhibit 8). Clearly the revenue and returns are not commensurate with the funds deployed the reasons being delays in legal clearances, longer startup cycles and the longer gestation before cash inflows happen. However entering this high barrier segment and surviving the initial years would provide a locked in cash flow over the schooling life cycle of the student. But if in the short term survival becomes difficult, then the long term is not realized. The need to shift the focus to asset-light and less regulated business in the overall mix is therefore essential. The company also needs to shed its non-core assets to monetize it to the extent it can and redeploy the funds in those segments where it has created a significant competitive advantage Smartclass, online and vocational streams. These segments are also unregulated. The company having digitized the complete K-12 content has a great lead to reach schools through modern delivery systems like tablets apart from the Smartboards it uses currently. Focus on private schools would improve its pricing and cash flow. The focus on e-learning and greater resource deployment in it would be a strongly suggested move as this would be the most probable/likely way India will get the required large number of projected skilled man-power (Exhibit 3B). Getting rid of non-core assets will help simplify the subsidiary/associate structure and as a result the management structure. This in turn would provide the required operational efficiency. As a matter of principal, taxation issues should not decide the business model but tax planning can be in the ambit of a business model/revenue model that suits the market the most. Given the learning curve that Educomp has enjoyed being the first significant corporate entrant to this industry, it should look to redefine its business as being a partner to all student needs with focus on student s need rather than institutional need. This will ensure their focus remains on the student. This focus will help meet challenges/opportunities which may call for changes in business model/revenue model. For example as online/distance education takes off its preparedness to address the market would still be intact. Even from an institution perspective, a focus on student need will automatically translate into an educational institution s need right from admission stage to becoming an alumni. 2 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

3 Exhibit 1 India private education: Segments, Size and Projected Growth Source: A report card On India Education Sector Technopak 2 3 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

4 Exhibit 2A Educomp positioning & Product profile Source: Company 3 Exhibit 2B - Product profile 4 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

5 Exhibit 3A Formal & informal education and the growth drivers Source: Education Sector in India A Snap Shot KPMG/MIT Enterprise Forum 4 Exhibit 3B - Projected employment in the various sectors of economy for diverse growth scenarios Source: National Skill Development Corporation (NSDC) 5 Year GDP growth rate Projected employment (in million) Agriculture Industry Services Total % % % % % % P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

6 Exhibit 4 - Regulatory matrix Source: A report card On India Education Sector Technopak 2 Exhibit 5A Attitude towards education spend & requirement of education infrastructure Source: BCG sentiment survey, & Company 3 6 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

7 Exhibit 5B Requirement of education infrastructure Source: Technopak Education Outlook July Exhibit 6 Competitive landscape truncated to show relevant competition Source: IDFC, SSKI Research 7 7 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

8 Exhibit 7 Trends in the Indian education sector Source: Education Sector in India A Snap Shot KPMG/MIT Enterprise Forum 4 Exhibit 8A - Educomp Funds deployment and operational performance Source: Company 3 8 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

9 Exhibit 8B - Educomp Offerings across student life cycle Source: Company 3 References: %20Anand%20Ramanathan.pdf P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n

10 For details about Educomp s product please visit the company website. List of Abbreviations: AICTE All India Council for Technical Education CAGR Compound Annual Growth Rate CAPEX Capital Expenditure CBSE Central Board of Secondary Education CII Confederation of Indian Industry DCI Dental Council of India DGET Directorate General of Employment & Training FDI Foreign Direct Investment GDP Gross Domestic Product GER Gross Enrolment Ratio HE Higher Education HRD Human Resource Development IB International Board ICT Information and communications technology IES Indian Education Industry ISCE Indian School Certificate Examinations ITC Industrial Training Center ITI Industrial Training Institute K-12 Kinder Garden to XII LLP Limited liability partnership MCA Ministry of Corporate Affairs MCI Medical Council of India MHA Ministry of Home Affairs MHRD Ministry of Human Resource Development MoU Memorandum of understanding NAAC National Assessment and Accreditation Council NBA National Board of Accreditation PPP Public Private Partnership SCDL Symbiosis Center For Distance Learning UG Under Graduate UGC United Grants Commission VSD Vocational & Skill Development 10 P a g e F o u n d a t i o n s O f B u s i n e s s S t r a t e g y - G a n e s h R a j a g o p a l a n