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

Posted in Business Cases by Manas Ganguly on April 23, 2013

This is Part II of a series of posts that discusses 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 here

From an asset light services to a capex laden balance sheet player – Educomp was getting its business mode wrong – Why did Shantanu Prakash (CEO, Founder) and Educomp move to this business model which would take in more capital and where the money would not come in quickly? The Answer – The lure of high valuation. In January 2008, it’s price-earnings multiple was 27.8 (today it is just a fraction of that at 6.77).

smartclass-logo

Buoyed by Educomp’s rosy growth numbers, between 2008 and 2009 investment banks and broking firms started putting out fat reports on the massive pot of gold at the end of the education rainbow. And Educomp was buoyed by its greed to ride the wave. The potential market was estimated at $30-35 billion across various education segments like multimedia-in-classrooms, privately run K-12 schools, vocational training, preschools, coaching classes and higher education.

Secondly Shantanu Prakash and Educomp diffused the effort over too many businesses in education using every conceivable strategic tool. For instance, Educomp’s joint ventures list reads-
IndiaCan with Pearson Plc (Vocational training)
Raffles Millenium colleges with Raffles Education
Topper TV with Network 18 in the TV space.

There were investments and acquisitions
PurpleLeap in vocational training
Vidya Mandir and Gateforum in test preparation
Eurokids in preschools.
And of course there were numerous new subsidiaries of which its own brand of K-12 schools was the most significant one.

Educomp’s annual report for 2009-10 listed 15 directly held subsidiaries, 28 indirectly held ones, five joint ventures and 14 associate companies spread across India, Singapore, Canada, USA and the British Virgin Islands.

Diffused sense of direction alongwith an awry business model is one of the worst cocktails and Educomp was brewing this.

Continued in Part III

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

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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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