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Educomp and Education’s sub prime crisis (Part I)

Posted in Business Cases by Manas Ganguly on April 22, 2013

This is part 1 of a series of posts that will discuss the Rise and Fall of Educomp track the growth of the prodigal education services company and track the factors that led to its fall.

For a company that almost single-handedly created the hype around money-making opportunities in school education, Educomp’s stock is down 72% YoY; 84%over two years; 91% over three years. Its market capitalisation has fallen from Rs 7,000 crore in November 2009 to just Rs 786 crore as of May 1st 2013. Of the $150 million in new funding it raised in July 2012 from three foreign investors, two-thirds would go to pay back a five-year-old foreign currency loan it couldn’t repay on its own, given the debt and liabilities on its stressed balance sheet.

Educomp

Educomp’s rise to glory is a story not too far away in history – From 2006 to 2012, revenues jumped 30X (from Rs 51 crore to Rs 1,500 crore); profits jumped 30X (from Rs 6 crore to Rs 180 crore); school customers increased 200X ( from 75 to 15,000) plus 250 preschools, 47 schools with 22,000 students and 350 vocational training centres. However, the devil they say is in numbers – and Educomp’s net profit margin has fallen 61 percent during the last four years; the net cash generated by its operations has been falling significantly for the last three years; the time taken to collect its money from customers almost doubled in the last four years; and most importantly, its overall liabilities in 2012 were over twice its revenues.

Educomp’s biggest star is the Smart Class – an interactive multimedia heavy digitally powered teaching experience which supplement the normal textbook and blackboard approach. To make things easier, Educomp does not charge for the infrastructure and works on a per student monthly fee for a contract period. The school in turn would pass the cost as a monthly fee increase of Rs.150-Rs.200 per student. Driven by the paucity of good teaching mediums, the technology enabled Smart-Class grew from 100 schools in 2006 to over 6550 schools in 2011.

While all that business and growth is hunky dory – the reality bites in when one accounts for delayed payments from schools and sometimes no payments from schools. The risk is that this technology sales model becomes akin to the sub-prime mortgage scenario that caused the credit crisis in the US. Like in the US where loans were given to people who did not have the repayment capacity, there is some danger that ambitious schools looking for a magic bullet are buying hardware and software they ultimately can’t afford.

It is the job of a financing institution, not an educational services vendor, to finance a school. Otherwise you end up bearing business risk, execution risk and financing risk. Unfortunately the business model of Educomp was treading the risk bit a little too high. Educomp initial assent on the bourses was because it was supposed to be ‘asset-light’ education software company that would scale with lightning speed. Unfortunately the business model chosen was driving Educomp from an ‘asset-light’ education services player into being a balance-sheet player.

Continued in Part II

Reproduced from Article on Forbes: The Rise and the Fall of Educomp (April 8, 2013)

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