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

Posted in Uncategorized by Manas Ganguly on April 24, 2013

This is third and concluding part of a series of posts that 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. Read Part I and Part II here.

A Capex intensive balance sheet and a diffused sense of direction aside, it was Educomp’s financial wizardry and creative accounting that puts the spotlight on Educomp taking what is clearly a unsustainable basis for business. Educomp formed Edusmart, an ‘unrelated’ company headed by one of Educomp’s senior executives. The new company took over all of Educomp’s newer five-year school contracts, pledged the receivables with banks in return for roughly 75 percent of the amount as a lump sum, most of which it meekly handed over to Educomp. This innovative technique even ended up making its debt disappear for a while. Educomp itself was the guarantor of the bank loans to Edusmart.

The model’s sole purpose seemed to allow Educomp to book three-fourths of a school’s five-year annuity revenue right upfront, thus inflating revenue and profits. Clearly, the move was amied at keeping the securitised debt off Educomp’s books as contingent liability, otherwise the higher leverage ratio would have meant banks wouldn’t lend money for their K-12 schools business. This is why Educomp’s total debt as of March 2012 is just Rs 337 crore, while its total liabilities were Rs 2,148 crore. When Educomp saw growth slowing down because they’d penetrated most premium ICSE and CBSE schools, a better way would have been to educate the market and make itself more sustainable instead of changing their accounting model by using a private company to book revenue upfront.

And just when, you would think the list of follies was closing, Educomp stepped into even more capital-intensive setup by deciding to buy the land on which to put up its schools instead of long-term leases like most competitors. Schools are valued on the basis of their cash flows, not land banks. Because whatever the land’s real value, on the school’s books it can only be notional because it can’t ever be de-linked and sold. Today, the 47 schools run by Educomp have nearly 50,000 seats between them, filled with only 22,000 students.

In India any educational services company should be a private and not public listed business. While listing might bring capital, it will inevitably also force businesses to take unsustainable steps to drive higher growth and valuation. In Educomp’s case it was a combination of poor execution, lack of adequate planning and oversight, and overreach as its businesses grew at a faster pace than its management capability.

Lately and Belatedly Educomp seems to have realized its mistakes. Post a $155 million infusion by International Finance Corporation, Proparco and Mount Kellett – Educomp seems to be focusing on a transformation plan that seeks to focus the company’s attention on two primary businesses: The content-based Smart Class and the asset-backed K-12 schools. Most other businesses will be sold off progressively.

Since July last year Educomp has sold off its stake in Eurokids, a pre-school chain and raised Rs 22 crore for its online learning subsidiary authorGen in a funding round led by private equity firm Kaizen. Pearson is likely to acquire its entire stake in the loss making IndiaCan venture imminently. Also up for sale are Educomp’s majority stake in coaching firm Vidyamandir Classes and test preparation company Gateforum.

But would that be enough? I guess not. Educomp will find it difficult to bounce back to its former glory – the market today is more crowded and perhaps more specialized. Educomp will be one of the bigger players (perhaps the biggest), but the markets would have split into fragments – all of which Educomp will not recover.

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

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