education report - 3g fund 2

8/2/2019 Education Report - 3G Fund 2

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France USA UK Japan Phillipines India

Public Spending on Education (% of GDP)

1. Sector Overview

India has the largest education market in the world catering to the 540 million population in the 0 – 24

age bracket and the third largest education system in the world after China and USA. The Central

government has given high priority to this sector which can be noticed in increase in the Public

expenditure for Education sector to 3.68% of GDP in 2004-05 from 1.52% in 1961-62. As per XI five yearPlan, the Government proposes to further enhance the figure to 6% of GDP and has envisaged an outlay

for Education of about Rs 2.37 lakh crore at 2006-07 prices, which is four-fold increase over the tenth

plan allocation of Rs 0.54 lakh crore at 2006-07 prices. This results in share of Education in the total plan

Outlay to be 19.4% from the previous 7.7% levels. The Break-up of the Education Outlay is 50% for

Elementary, 20% for Secondary and 30% for higher education (including technical education). An

anomaly that as been noticed is that the Government spending on Higher Education (including technical

education) has been higher than Secondary Education which increase the already high levels of illiteracy.

At elementary level the expenditure was 1.78% of GDP in 1990-91, which marginally went up to 1.89% in

2004-05. For secondary and higher secondary level the figures went down slightly from 1.13% to 1.11%

of GDP during 1997-98 to 2004-05. The percentage expenditure on higher education to GDP was 0.77%

in 1990-91, which decreased to 0.62% in 1997-98 and was slightly raised to 0.66% in 2004-05. As per the

Mid-term Appraisal of the XI five year plan,

the Central expenditure for Education has

increased from 2001-02 levels, however,

there is a decline on the state share and as a

result the Center and the States combined

registered a modest decline from 3.81% of

GDP in 2001-02 to 3.78% in 2008-08

Though the public spending on Education is

on par with leading nations, the absolute

figures prove otherwise. The Public

Expenditure for Education in China is 13% of Government Expenditure. The Public expenditure figuresper student in India has fallen from Rs 7,676 in 1991-92 to Rs 5,522 in 2003-04, which shows the

resources inadequacy for students considering escalating costs and need for bigger & superior system.

Since the liberalization of the economy, the share of private players in the sector has increased.

Classification GovernmentPrivate

Aided

Private Un-

Aided

Total

Elementary 85% 4% 11% 100%

Secondary 41% 29% 30% 100%

Higher Education 67% 15% 18% 100%

Source: Eleventh Five Year Plan; Data for Universities from secondary research on Web

It may be inferred from above table that nearly 60% of schools in Secondary are with Private. Share of Private un-aided schools increased from 15% in 1993-94 to 24% in 2001-02 and further to 35% in 2006-

07. This indicates a willingness to pay for Education that is perceived to be of better quality – better

monitoring and supervision of students’ performance, better attention and accountability of teachers

and better learning infrastructure. A similar trend is seen in Higher education, where the share of private

un-aided higher education institutions increased from 42.6% in 2001 to 63.21% in 2006. The share of

enrollment also showed an increase from 32.89% to 51.53% in the same period. This trend is expected

to continue in the near future too.

includes central, state, Public deemed

Univ.

Includes Private Univ.

Includes Private deemed Univ.



2. Opportunities in Education Sector

The Education sector can be classified into:

K-12 segment

K-12 Segment (Elementary + Secondary)

With the setting up of Sarva Shiksha Abhiyan (SSA) programme, the number of Primary schools (PS)

increased from 6.64 lakh in 2001-02 to 7.86 lakh in 2007-08 and the Upper Primary shools (UPS)

increased from 2.20 lakh to 3.21 lakhs in the same period. A wave of inputs such as 3 lakh PS/UPS, 2.42

lakh new school buildings, and 10.33 lakh additional classrooms and supply of free text books to 9.54

crore children has helped in reducing the School infrastrutcure gap. This has enabled an increase in

student enrollment in Elementary section in absolute terms from 15.9 crore in 2001-02 to 19.28 crore in

2007-08. The Gross Enrollment Ratio (GER) in Elementary has improved substantially from 82.4% in

2001-02 to 100.5%, which is ~ 22% point increase.

The population of children in the age group (14-18 years) is estimated at 107 million in 2001, 119.7 mn

in 2006, and 121.1 mn, whereas the enrollment in the secondary education is ~ 37 mn only (2004-05).

The Gross Enrollment ratio (GER) in Secondary Education is ~40% (2004-05) and drop-out rate is as high

as 62%. The enrollments have been showing a steady increase over the years with average annual rate

of 5.32% initially and later over the three years ending 2004-05 at rate of 6.75% p.a., enrolling anadditional 7.5 mn students. The enrollments into secondary education is expected to accelerate further

as the number of drop-outs in primary education are declining and the transition from primary to upper

primary is getting closer to 90%. There are a total of 1.69 lakh secondary schools in the country of which

63% are under private management. As per the XI plan, 6000 model schools are to set up, 3500 of which

would be on Kendriya Vidyalaya template and the remaining 2500 schools are to be set up under Public

Private Partnership format.

Approx. 460 mn population in India fall within the 0-20 age group and only 61% of the the targeted

school population are enrolled. Apart from this, the drop-out rate at school level is 40%, resulting in a

net enrollment of 37% which is low as per International standards. The country has a network of ~1

million schools out of which 7% are private schools with 40% student enrollment. The XI five year plan

promises a government spending of ~ $30 billion which is subsisted by ~ $50 bn of private spend. Inspite

of the 6 times increase in government expenditure on education there is resource gap of $25 bn which

needs to be filled by private spending. The private role is expected to increase to ~ $80 bn by 2012

growing at a CAGR of 14%.

An important contrast is brought to notice, in USA ~25% of the cummulative public spend is assigned to

4% of the world target population group, whereas in India, public spend on Education is ~ 5.2% of

cummulative public spend which is assigned to 20% of world target population group. The fact is Indian

population in this segment is 5.5x USA’s targeted population.

Pre- SchoolElementaryEducation -PS & UPS

SecondaryEducation

VocationEducation &

SkillDevelopme

nt

HigherEducation

DistanceLearning

Teacher /TrainerTraining

OtheRequ

ntsBo



The private schools can further be classified into Private aided; Private un-aided standard and private

un-aided premium. An independent study conducted by IDFC – SSKI in 2009 has estimated the market

size, Average no. of students per school and average Fee spend p.a.:

Source: MHRD, IDFC-SSKI research report 2009

The increase in enrollment of students in private schools (40%) shows an increasing paying propensity of

Indian populace. It is evident from the fact that the number of students per Public School is 146 whereas

in Private the numbers are 1200. This increase in shift to Private schools, especially un-aided (i.e. costlier

schools) indicates willingness of parents to pay more for better quality education. According to IDFC-

SSKI, the industry is expected to grow to $ 30 bn market by 2012.

So far in India, schools are either set up on standalone and or chains basis, which are normally set up by

private charitable, political and / or religious groups. Some examples are Vidya Bharati (affiliated to right

wing political organization RSS) with > 18,000 schools, Dayanand Anglo Vedic with >600 schools, DPS (a

franchisee chain) with 120 schools, etc. Some of the other important players in the K-12 segment are

Millenium Schools (Educomp), Kid Zee High (ZILS), Billabong High (Kangaroo High), GEMS (Dubai based).

Using Block cost estimation, a K-12 segment school requires ~ Rs 100 mn (excluding land) to construct

and furnish for a capacity of 2000 students. This would entail a one-time investment after which returns

may be generated (Annuity based) with very less incremental Capex requirement.

As per CBSE norms the area requirement per student is supposed to be 25 sq.ft., however 30 sq.ft. has

been assumed to include larger classrooms, and a construction cost of Rs 1400 per sq.ft have been

assumed. CBSE further requires the school to either own the land or have a 30 yr land lease on a

minimum 2 acre plot (@ Rs 850/sq.ft assumption for cost of land).

Private School business Economics

Capex (include Land) 160 Rs mn

Capacity 2000 students

1 yr 2 yr 3 yr

Capacity Utilization 50% 60% 70%

Enrollment (No’s) 1000 1200 1400Increment enrollment 1000 200 200Annual recurring Fee (Rs) 40,000

Admission Fees (Rs) 34,000normally, more than 50% of Annual

recurring fee

Admission fee collected 34.00 6.80 6.80

Annual recurring Fee

collected40.00 48.00 56.00

Total Revenues 74.00 54.80 62.80

Source: Fee structure based on Educomp schools, Credit Suisse Estimates 2007

The model followed by Educomp schools enjoy high EBITDA margins of 50%. This is due to the fact that

the model or structure followed by Edcomp is the first of its kind and the firm enjoys a first mover

advantage and also a strong track record in ICT implementation and content development. As per IDFC-

No. of

Schools

Average no. of

students

Average Fee spend

(Rs p.a.)

Market Size

($ bn)

Private aided 30,660 1200 5,000 - 6,000 3Private un-aided

Standard15,000 1200 10,000 5

Private un-aided

Premium29,400 1200 15,000 - 45,000 13

Total 21



SSKI report, schools can continue to generate EBITDA of 40% for the next couple of years and the factors

that enable this are:

One-time Investment with incremental capex very low.

Immediate payback due to Upfront fee collection – through collection of non-refundable

admission fee per student. This enables frontloading of revenues atleast in the initial years of

school.

Stable Revenues – Once a school achieves steady state after a couple of years of operations

coupled with aggressive marketing-

o Regular Enrollments are ensured every year.

o Management controls the Fee structure.

K-12 education in India is regulated by State boards, Central Board of Secondary Education, the Central

Council for Indian School Certificate Examinations and International Baccalaureate. School affiliation to

either of State, ICSE or CBSE board recogized by the Education system, is necessary which further

imposes rules such as schools are to be set up by Society, Trust or under Acts of state government as

educational, charitable or religious trusts having no proprietary character (an exception is however seen

in Harayana state where ‘for profit’ strutcure is also followed as Companies under Companies Act arealso allowed).

Financial Snapshot & Performance of Educomp’s business:

2010 2009 2008

Revenues 8727.12 5175.31 2769.03

EBITDA 4619.28 2713.77 1246.93

EBITDA margin 52.9% 52.4% 45.0%

YoY EBITDA 70.2% 117.6% 149.2%

EBIT 3711.89 1992.41 923.74

EBIT margin 42.5% 38.5% 33.4%

YoY EBIT Margin 86.3% 115.7% -

PAT 2218.66 1315.88 700.61

PAT margin 25.4% 25.4% 25.3%

Return on Net worth 18.4% 31.3% 24.4%

Return on Capital Employed 23.3% 25.1% 18.5%

Debt / Equity Ratio 0.50 1.20 1.30

Interest coverage ratio 12.50 23.40 21.70

Current ratio 3.70 2.40 6.90

Cash ratio 3.70 0.50 5.80

Working Capital to Sales 1.20 0.50 1.30

Accounts Receivables turnover ratio 1.74 1.94 2.42

Collection Period (days) 209.87 187.72 150.87

Payment period (days) 92.90 58.50 127.50

Total Asset Turnover 0.41 0.45 0.38

Earnings per Share (Rs) 24.00 76.20 41.40

Dividend per Share (Rs) 2.80 2.50 2.50Operating Cashflow / Sales 34.70% 17.00% 26.00%

It may be noted the revenues of the company increased significantly over the period under

consideration. Revenues have grown by about 68.63% in 2010 from the previous year and by 86.9% in

2009 from 2008. The core business of the company is in School learning Solutions (Smart class &

Edureach), K-12 schools (Pre-schools & High Schools), Higher Learning Solutions (HE, VE & Professional

development i.e. coaching class), and Online, Supplementary & Global (LearnHub.com, WiZiQ.com). The

company has increased its foothold in K-12 segment with number of schools to 43 and pre-schools to

775 which includes 220 franchisees under ‘Roots to Wings’ and 555 pre-schools under Eurokids.



0.0%

20.0%

40.0%

60.0%

80.0%

GER of India compared to other countries GER (in %)

Educomp has increased its share of ICT business in 933 schools in 2007-08 to 1736 in 2008-09 which is

an 86% increase. This shows that there is a huge potential in this segment for Educomp in keeping with

the fact that it enjoys a first mover advantage and that it has penetrated in only 1.5% of the school

market.

The EBIT margin is expected to increase as the company is able to achieve scalability in the industry with

use of new and improved methods of pedagogy. However, EBIT margins may stabilise in future owing tocompetition and other factors. Though profits have been on the rise, the Return on Net Worth (RoNW)

decreased from 31% in 2009 to 18% in 2010. This has been due to a higher increase in share capital from

issue of shares under ESOP/QIP.

The leverage has reduced over the period from 2008-2010, as the company has raised Equity to finance

investment in its subsidiaries. This was possible due to the brand value created by the firm and its likely

potential to grow in the sector.

The Current ratio decreased from 2008-09 period as the Curent assets (Cash & Cash equivalents) were

used to finance the investment activities of the company mainly for Computers & Accessories and

Knowledge based content. Further the Current liabilites also increased due to increase in advances from

various customers, and Acceptances on account of Karnataka state government project.

The Accounts Receivables turnover has increased over the years, as the Company has increased its foray

in ICT & Smart-class services mainly through outright basis contracts and revenues from such services

are generally received over a period of 3-5 years on quarterly basis. Government disbursements

generally take a little over the normal agreed payment period. The Creditors Payment period have

fluctuated, but is lower than receivables period. This should however, not spell a concern as one of the

salient features of Education business is consistent revenues being generated (Annuity model).

Higher Education (HE)

At the time of Independence, the number of

Universities was not more than 20 and colleges

~ 500. The total enrollment then was ~ 1 lakh

students. By the end of the tenth plan i.e. in

2007 there were 378 Universities and ~ 18,000

colleges. Presently, there are 586 Universities

and ~ 25,000 colleges. The no. of HE institutions

in India has grown from 11.1% CAGR between

2002 –06 as per IMACS analysis for NSDC

The GER for HE is ~11% which is very low as

compared to world average of 24% even though

the absolute number of enrollemnts are highestin the world at 11 million. IMACS analysis states that enrolments in HE have grown at 13% in the period

between 2002-06.

The XIIth five year plan of the Government, aims to achieve a GER of 21% with interim target of 15% by

2011-12. To accomplish this, enrollments in universities/ colleges need to be subtantially raised at an

annual rate of 8.9% to reach 21 million by 2011-12. This would require an additional 8.7 lakhs students

in universities and 61.3 lakh colleges.



The presence of Private players has helped in expanding capacity with improved access in selected

disciplines such as engineering, medicine, management, IT, etc. creating imbalances. This is due to

student preferences in these fields and the willingness to pay a high fees to join these courses. Student

preferences for these fields, could be the prospect of higher returns (high salary package) offered by

these career-focused products.

According to Ernst & Young, the Indian Higher Education market is expected to grow @ 18% CAGR till

2020. Improvement in the GER requires focus coupled with increasing the number of Higher education

institutes (HEI). This issue can be addressed by optimizing the under-utilization (~15%-30%) in the

existing universities and colleges.

As per IDFC-SSKI report, the expenditure on Higher Education is ~ $8 bn ( HEI, $6.5 bn + Cash

transactions which includes NRI quota, capitation fee, $1.5 bn). Another finding from the report is that a

large number of students opt for further education outside the country and spend ~ $13 bn every year.

Private

colleges

Avg. no. of

students/college

Total no. of

students

Avg.

spend/student

(Rs p.a.)

Market size

($ bn)

Engineering colleges 1200 1200 1,440,000 150,000 5.40

MBA 300 300 90,000 300,000 0.68

Medical 140 400 56,000 250,000 0.35

Total 6.50

Cash transactions 1.5

Spends on HE outside India 13

Total spending potential 21.00

HE in India is governed by the rules and regulations framed by UGC and the individual regualtory bodies

such as All India Council for Technical Education. Unlike K-12, HE can do without recognition from these

bodies as long as they are quality insitutes and have acceptance of the industry. An ideal case to show

this, is the Indian of School Business (ISB), Hyderabad which is not recognized by the mentioned bodies

and enjoy industry level acceptance.

Issues & concerns faced in investment in K-12 & HE are:

Sector is heavily regulated as all education institutions (school or college) should be run as a

trust or society

o The Education setup has been aligned to be a not-for-profit system.

o No dividend distribution is allowed and ‘surplus generated’ needs to be ploughed back

into the system.

Shortage of faculty and poor infrastructure hamper quality of delivery in education system.

High prices of Land (which forms considerable share of the investements in this sector ~ 50%-

60% of Capex) makes the economics un-viable.

Even though 100% FDI through automatic route is allowed since 2000, no regulations

formulated for recognizing foreign HE institutes under UGC.

Large number of investments expected to happening in the sector (K-12 & HE) and competition

is expected to be high.

Regulations in India have impacted the participation of private enterprises in Education. This is unlike in

China (where private is allowed to earn normal profits) and Brazil (no restricitions on Profit).

Innovative structures have developed to bypass the ‘not-for-profit’ norm in India. Institutions like

Educomp have pioneered this structure where, at one level, the Trust runs the school and receives



revenue generated as fees and pays the Teachers’ salaries. At another level, a company(s) through its

subsidiaries provides services such as infrastructure, O&M, Equipments, Software support, etc. The

Company through subsidiaries are paid for the services by the Trust in the form of Lease rentals,

Managements fees, Other fees, etc.

Similar novel structures have been used by Manipal Group in Higher Education segment, and have

enabled them generate good profits. Its company, Manipal Universal Learning extends services to the

two universities in Manipal fold – Manipal University (through campus programmes) and Sikkim Manipal

University (through distance education programmes).

As per SSKI-IDFC report, HE investment is hugely capital intensive (for instance a Medical college

requires an outlay of Rs 5 bn) and considerable time is required to create a valuable brand (~ > 6 yrs). As

and when value creation happens for the college, then it becomes an Annuity model (revenuegenerated on a regular basis). The report also states that maximum private participation can be

expected for MBA colleges due to the lower capex requirements for setting up the same.

Regulations & Taxation concerns

An educational institution in India, set up as a not‐for‐profit organization in the form of a Trust, Society

or a Section 25 Company, can avail of certain tax exemptions as provided under the Income Tax Act,

1961 (ITA), subject to satisfaction of certain conditions. In order to take advantage of tax exemptions

under the ITA, an educational institution will also have to fulfil certain other conditions in respect of

utilization of income, etc., as prescribed under Sections 11 and 12 of the ITA. The institution would need

to make an application under Section 12AA of the ITA to the Commissioner of Income Tax accompanied

with the prescribed documents.

The Education Services Company, a corporate Entity, normally rendering managerial, administrative and

other services to the school, would be subject to tax on its total income at the applicable rate of

corporate tax in India (currently @ 33.99% including surcharge and education cess). In addition to

corporate tax, the entity would be liable to service tax on the entire value of the services rendered by it

@ of 10.3%.

Foreign Direct Investment (FDI) up to 100% has been allowed under the automatic route in the

Education Sector. Despite this liberalized scheme, investment into the education sector has been

Management

Fees

Tuition Fees Teachers’ Salaries

Hardware/

Supplier feesLease rentals

Trust (Not-for-profit

body)

The Company

Subsidiary 1

(Infrastructure)

Subsidiary 2

(Operation &

Management)

Subsidiary 3

(Hardware or Software or

Supplier)



restricted due to the prevailing regulations which require the entity setting up the school or college or a

deemed university to be of a not‐for‐profit character. The bearing of a not‐for‐profit character

mandatorily requires the entity to be either a registered Society or a Trust (in case of schools, colleges

and private/deemed universities) or a Section 25 Company (charitable nature). A Trust or a Society is not

eligible to receive foreign investment under the automatic route. Even if investments were to be

permitted, the entities being of non‐profit nature would not be able to distribute returns on the

investment. Further, a Section 25 Company would be required to apply its profits or other income

towards the promotion of its objects which could be either commerce, art, science, religion, charity or

any other useful object.

Distance Education

This type of education offers as an alternative mode of HE, as it is an effective and low cost supplement

to on-campus learning. The Distance Education Council (DEC) set up under a clause within IGNOU, has

till date granted approval to 176 institutions to offer distance education. IGNOU, the regulator in the

space, is the largest provide of distance education with 30,00,000 students enrolled for 3500 courses

through 338 programmes, 67 regional sub-centers and 3000 study centers. The Sikkim Manipal

University (SMU) has 400,000 students enrolled in 725 study centers. Symbiosis center for DistanceLearning (SCDL), established in 2001, has 136 courses being offered with 200,000 students enrolled.

Source: Ernst & Young, EDGE, 2011

According to E & Y, in the last decade the number of instutions offering distance education more than

doubled with a CAGR of 9% from the pervious decade of 7%. There is a huge untapped potential in the

Distance learning segment as out of ~10% population enrolled in the HE in India, only a miniscule ~7% go

in for Distance learning as per IDFC-SSKI estimates.

This scheme of Education is very less capital intensive and has low entry barriers for suppliers (highly

under-regulated). Provided that the worth of a course can be improved by controlling the quality of

input and output, superior educational supplements can create brand value. Once the Brand value is

created the number of students enrolled under the scheme can increase greatly, generating returns

which can assist in reducing HE (on-campus learning) project break-even to some extent.

A Case study by Ernst & Young; Apollo group, a leader in for-profit higher education (HE) in US, has been

providing online education programmes and in 1997 there were 4300 students enrolled in the program.

Presently, the number is 360,000 –380,000 (80% of the total), out of entire 476,500 students in the

institution.

Innovative models in this scheme include Study centers/classrooms outside university campuses; Online

Education; and, Mobile,TV, radios, etc. Online Education delivery model is being used by many HE

institutions of late such as Symbiosis. It is being used as an entry point by some of the esteemed

0

50

100

150

200

1975-76 1981-82 1990-91 2000-01 2007-08 2009-10

No. of Distance Education Institutes offering Distance

Education



insitutions such as Macmillan Publishers (content developers). The courses offered by Macmillan are for

2-3 months with price ranging from Rs 5,000- Rs 8,000.

Under the current regulatory framework, the following kind of institutions can offer distance education:

Distance Education Institutions, which are part of the regular mode instutions, including central

/ state/ deemed universities, etc

Open Universities (OU) established by an Act of Parliament or state legislature. Presently, 1

central OU and 13 state OUs exist.

Vocational Education

According to National Sample Survey Organization (NSSO) data, only 5% of the population of 19-24 age

group in India have acquired some sort of skills through Vocational Education, whereas, in most of the

developed world ~ 95% of the youth in the age group 15-25 years formally learn a trade or acquire a

skill/competency. The other major problem which adds to the above is that a majority of work force is

involved in Agriculture and related industries, while major growth is seen in manufacturing & servicessector which pre-dominently contribute to GDP growth rate.

Source: XI 5 yr Plan; IDFC-SSKI, 2009

New training areas have emerged such as Aviation, Retail, Hopsitality, Management, English language/

soft skills training, etc), however the space remains hugely fragmented. Though there is enough

potential to achieve scale and mass, most of the players in this segment have been unable to approach

in this direction. This has been mainly due to slow down in some of the industries (IT/ITES) and many

trainings such as corporate trainings generating revenues which have low margins.

Corporates are emphazing on productivity from day one, which is prompting employees to enhance

their skill sets. There is huge potential to invest in this segment as it is highly under-regulated and for-

profit companies can cash on the huge gap provided a couple of factors are ensured:

Certification of skill from concerned Industry or reputed player;

Incentives for students undergoing training such as loan availability, third party payment;

bringing the vocational course in-line with Labour market needs; and,

Placement linkages.

As per the XIth Five Year Plan, in Central Sponsored Schemes an enrolment of 10 lakh students had been

created in 9,583 schools. The plan targets to cover 20,000 schools with intake capacity of 25 lakh by

2011-12. India has 5500 government run ITIs to impart Vocational Training & Education and 500

0%

20%

40%

60%

80%

100%

120%

India South Korea World Average Botswana

% of Population receiving training



polytechnic colleges offering diplomas in technical courses, while China has around 500,000 vocational

schools.

As per IDFC-SSKI, Vocational Training services enjoys a market of $1.5 Bn which is well poised to grow

rapidly to ~ 25% CAGR in the coming years. As per IDFC-SSKI, there is a huge shortage in global

workforce (~ 57 mn workforce shortage) which can be capitalized since there would be a surplus of 47

mn people in the working age group in India by 2020. Due to high drop-out rates and inefficiency in the

education system, a large chunk of population in India needs to be trained.

As of 2009, the regionwise distribution of ITIs and ITCs is given below:

Source: Annual report, Ministry of Labour & Employment, 2008-09

According to IMACS analysis for NSDC, population in the age group of 15-24 would be ~ 232.166 mn by

2022. The demand for vocationally skilled persons (in addtion to ITI/ ITCs) is expected to be anywhere

between 25% - 85% of the workforce depending on the nature of industry. The demand for vocationally

trained employees would be 112 mn persons between 2008-2022 i.e. 8 million persons annually.

Sectors 2008 2022

Incremental

req. (in

‘000)

Proportion

of Vocational

Stream

Incrementalemployee req. in

vocational stream

(in ‘000)

Annual req. in

Vocational

stream (in ‘000)

Textiles (Spinning, Fabric Processing,

Garmenting)13,100 29,900 16,800 85% 14,280 1,020

Electronics and IT Hardware 906 4,129 3,223 35% 1,128 81

Leather 2,500 7,139 4,639 85% 3,943 282

Organized Retail 283 17,623 17,340 80% 13,872 991

Gems & Jewellery (including Jewellery

retail)3,335 7,943 4,608 75% 3,456 247

Infrastructure & Real Estate 35,968 83,270 47,302 70% 33,111 2,365

BFSI 4,250 8,500 4,250 65% 2,763 197

Furniture & Furnishings 1,455 4,873 3,418 80% 2,734 195

Auto & Auto components 13,000 48,000 35,000 54% 18,900 1,350

Tourism & Hospitality 3,530 7,172 3,642 65% 2,367 169

Food Processing 8,531 17,808 9,277 80% 7,422 530

Construction Materials & Building

Hardware1,140 2,497 1,357 40% 543 39

Chemicals & Pharmaceuticals 1,668 3,546 1,878 25% 470 34



Transportation, Logistics &

Warehousing7,374 25,101 17,727 40% 7,091 506

Total 97,040 267,501 170,461 66% 112,079 8,006

Source: National Skill Developemnt Corporation report

From the above table, it may be inferred that the incremental requirement over the next 15 years forVocational stream is highest in Textiles, Retail (organized), Infrastructure & Real estate, Auto and

Transportation industries.

Employer companies nowadays are having tie-ups with private training institutions for imparting on-the-

job and customized training for employees. For instance, ICICI tie up with Manipal University to form

ICICI – Manipal Academy (IMA). It is a 1 year program, sponsored by ICICI (employer), that guarantees

employment and Manipal charges a mutually agreed fees to ICICI for the service.

Some of the big private players who have achieved scale in this segment are NIIT, APTECH (IT Training);

VETA (English Training); ICA (Financial Training); Frankfinn (Aviation & Hospitality Training).

Other structures include government approved PPP to upgrade 1,396 ITIs, for eg. Educomp runs 18 ITIsas well as 12 skill development centers in Gujarat. As per the XI plan, the center has allocated Rs 310 Bn

to National Skill Devlopment Programme for training through virtual centers. It has been proposed to

run 250,000 vocational schools on PPP basis.

Teachers & Trainers for HE & VE

There is a lack of quality trained personnel to provide education in all segments. As per Venture

Intelligence report, the student-teacher ratio is 23:1 in India compared to world average of 15:1 which

shows a huge dearth in the teaching staff. At primary level (PS), the student-teacher ratio is even worse

at 34:1 for 2008-09 and UPS at 31:1 as per XI mid term appraisal report. Most of students do not prefer

to take up teaching as a profession and refrain from Higher studies in this field which compounds the

shortage.This dearth of teaching faculty could be considered as one of the reasons for investments in

Education not translating to scale. Teacher absentism also causes harm, as nearly 25% of teaching staff

of government schools are not in attendance on a given day according to World Bank study.

Source: Ernst & Young, Edge report 2011

As per the XIth plan mid term appraisal report, annual in-service training for 26.62 lakh teachers have

been achieved. As per IDFC-SSKI, the share of private institutions in Teacher Education in India is > 60%

which is promising. Teacher Training involves training them on pedagogy and use of technology in

teaching. Many of government ICT contracts have embedded in them teacher training on computer

usage. The major cost item in teacher training business is that of trainers, while the school provides

India Developed

countries

Oceania Western

Asia

Latin

America &

Caribbean

23

11.414.8 15.3 16.6

Teacher - student ratio



infrastructure. Hence, margins are high (~ 60%) in this segment. Some of the important players in this

field are Educomp (claims 70-85% share of teacher training market), iDiscoveri, etc. According to Credit

Suisse 2007, the teacher training business is expected to have a 24% three year CAGR, with gradualy

reducing margins.

As per National Skill Development Corporation report, the current estimate of teachers and trainers is ~

7.1 mn as in 2008.

Current Enrollment of Teachers & Trainers (in

000's) for 2008

CategoryCurrently available

(2008)

Teachers in School Education 6,417

Teachers in Higher Education 692

Trainers for Technical Training (ITI /

ITC)37

Total 7,146

Source: National Skill Development Corporation report, 2009

The population in the age group of 5 –24 years, which would constitue a major share of the workforce in

2022, would require necessary infrastructure for education inclusive of teaching staff. Considering a

optimum teacher-student ratio of 30:1 for Schools (Elementary + Secondary) and 20:1 for Higher

Education & Vocational Education, and the above mentioned current enrolment of teachers/trainers the

following demand can be estimated:

Incremental Teacher/Trainer Requirement (in ‘000s)

2008-2022

School Education 3,511

Higher Education 4,459

Trainer Req. (ITI / ITC) 232

Trainer Req. for other vocational

stream*465

Total 8,667

Source: National Skill Devlopment Corporation, 2009

*-The Trainer requirement (no.s) for other streams is based on the fact that a portion of existing workforce would

also need training.

Accordingly as per NSDC, the incremental teacher / trainer req. would be about 8.67 mn, which is more

than the current enrolment. This translates into a requirement to train about 722,247 teacher & trainers

annually.

Pre-School

The Pre-school market in India is highly under-regulated just like other informal education segments and

is witnessing rapid growth over the last three years. So far, the penetration has been very low with only

1 out of 100 pre-school aged children being enrolled. This coupled with the increased paying capacity

and the awarness created by the organized segment of the importance of pre-school education, would

ensure this market grows rapidly. A comparison of Pre-school penetration viz. other countries, shows

that India is hugely lagging (1.1% enrolment) in this segment.



Source: IDFC – SSKI report

As per the XI five year plan, the Sarva Shiksha Abhiyan (SSA) would have a component to provide one

year pre-primary education which would be universalized to cover 2.4 crore children. The XIth plan

mentions the significane of this course for school readiness with increased basic vocabulary and

conceptual abilities which would result in decline of school drop-outs. The exisiting coverage of pre-

primary classes in schools is 11 million as per XIth plan.

This market is fragmented in nature and due to increasing prosperity, organized players have forayed

into the market. According to IDFC-SSKI 2009, Pre-school market is expected to grow at 36% CAGR for 3

years and the growth of organized section is expected to be even higher at 50%. Pre-school market,

predictably a for-profit venture, is likely to target the household with annual incomes in excess of Rs

200,000.0 which form an estimated 8% of the total population i.e. (8% of 1.15 bn =) 91mn. IDFC-SSKI

estimates the current target market in the age-group of 2-4 yrs to be (6% of 91 mn =) ~ 5.52 mn. Of the

target numbers only 12% are currently enrolled pre-schoolers i.e. 662,400. With an average Fees rate of

Rs 18,000 p.a. the current market is Rs 11,900 mn. The current share of organized market is 17%.

As per IDFC-SSKI, the pre-school market expected to grow ~ 36% in the next couple of years is estimated

to be a Rs 40,240 mn in size. Out of this the share of the organized pre-school market is expected to be25% of the total market ~ Rs 10060 mn.

Some of the organized players in the market are Kids Zee, Euro Kids, Bachpan, Apple kids, Shemrock,

Kangaroo Kids, Podar Jumbo Kids, Tree House, Mother’s Pride, DRS Kids and Sunshine. Players in other

segments of education are also entering the space such as Little Tigers (from Mahesh Tutorials who are

engaging in private tutorials space), ‘Ananda’ (from Career Launcher) and ‘Roots to Wings’ (from

Educomp).

Private Party Started Ownership Current Network Business Model

KidZee 2003 part of Zee group.623 pre-schools in just 5 years

since inceptionFranchisee model

Euro Kids 1997Indian Private Co. (50%

stake by Educomp)

484 pre-schools. Plans 1000+

schools next 3 yrsFranchisee model

Apple Kids Private 200 pre-schools Franchisee model

Shemrock 1989 Private 90 pre-schools Franchisee model

Kangaroo Kids 1993 Private 60 pre-schoolsJoint Venture

model.

Roots to Wings 2008 Listed under EducompTarget of 250 pre-schools by end

of 2009Franchisee model

Tree House 2003 Private 55 pre-schools Owned model

0 20 40 60 80 100 120

France

Scotland

USA

Brazil

India

Pre School Market Penetration (in %)



However this segment is loaded with risks:

Pre-schoolers beyond a catchment area of 2-3 kms are not part of target segment (parents

prefer to send children within a limited radius for safety/comfort reasons).

Pre-schools, being a predominant urban phenomenon, high lease rentals are a concern which

can eat into profitability of the business. According to study conducted by IDFC-SSKI, capital

costs can increase by ~ 15%-20% in Bangalore with an average rentals of 27-70 Rs/sqft/month.;

45%-60% for Mumbai with rentals of 290-400 Rs/sqft/month; 15%-40% for Pune with rentals of

30-70 Rs/sqft/month.

Un-organized segment provides services at lower cost to customers which would increase

competition.

Enhanced competition from Organized players since there are no entry barriers to this segment

for players.

Most of the Organized players in this segment have gone for franchisee model to scale up while few

have gone for Joint Ventures with developers (Kangaroo Kids) and some have owned schools (Tree

House). Under the Franchisee model, the franchisee has to pay a brand / franchisee fee (Rs 60K-70K) per

annum plus a percentage of the revenues (~20%). All personnel costs and administrative costs wouldhave to be borne by the franchisee. The one-time capex comprises of Furnitures and fittings costs and

would be ~ Rs 600,000 (Rs 500,000 as per IDFC-SSKI inlcuding escalaltion/inflation of 8% p.a.).

The concerns of catchment area and high lease rentals, can cause the franchisee business to be

unviable, resulting in most of these franchisors providing services to segments beyond the target group

of 1.5-3 yrs like programmes for mother toddlers (6-12 months) and activities like dance, music, pottery

for children aged 3 and above. Apart from this, Preschool chains having their own schools would also

benefit as the pre-school children become a feed for their K-12 business.

Information & Communication Technology (ICT)

A substantial investment in the XIth plan has been in improving the quality of education which

comprises of technology upgradation and ICT facilities in schools. The XIth plan has targeted universal

coverage of ICT at UPS level by 2011-12. As per the five year plan, ICT infrastructure would be

established at government and government aided secondary & senior secondary schools. There are

about 1.4 lakh such schools out of which 1.08 lakh are Govt. & Govt. aided. About 28,000 schools are in

far flung areas. 80,000 schools are to be connnected via terrestrial /wireless broadband mode and

remaining 28000 schools would be provided internet through Broadband Very Small Aperture Terminals.

According to the mid term appraisal of XIth Plan, in 2008-09 53,250 schools had been covered. In HE

segment, the ICT scheme has been extended to over 20,000 colleges and 10,000 departments

An amount of Rs 5000 crore has been set aside in the XIth five year plan for development of ICT

infrastructure in schools. In the coming years an increase in the spend on ICT through allocation on SSAcan be expected. The ICT infrstructure as per the Plan comprises of :

Networked computer lab with atleast 10 computers, server, printer connected on LAN and

broadband internet connectivity of 2 Mbps.

Technology classroom with audio-visual equipment

Dedicated programme for content creation as per curricula & educational content on CDs to be

made available.

Training of Teachers in use of computers and teaching through computers.



All universities and colleges to be networked through broadband internet modes of adequate

bandwidth.

ICT has been implemented in public schools via public private partnership (PPP) route where contracts

are generally structured as Build-Own-Operate-Transfer (BOOT) model for a period of 3-6 years. The

contract is assigned to 1 or 2 parties, so that no vendor concentration risk arises. The party quoting the

lowest (L1) is assigned the implementation task. So far ICT contracts for 100,000 schools have been

autioned in various states. According to IDFC-SSKI, with increased spending by Govt., ICT services for

~29,000 schools were expected to be auctioned in 2009. The market has a low penetration ~11% of total

public schools (11% of total ~ 950,000 in no.s) and a CAGR of 70% growth is expected in the coming

years.

Economics of Business

Contract Value 1 Rs mn

Period of Contract 5 years

Average Revenue per Lab 0.2 Rs mn

yrs 1 2 3 4 5

Average Revenue per Lab 200,000 200,000 200,000 200,000 200,000

EBIT 40,000 40,000 40,000 40,000 40,000

EBIT Margin 20% 20% 20% 20% 20%

Investment per Lab (30% of

Contract Value)300,000

RoCE 13%

Source: IDFC-SSKI reseacrh

The low RoCE for this segment is expected due to the initial investment being high, L1 selection process

as revenue margins becomes low, and receivables period being long (delay of fees being reimbursed to

selected party). The RoCE can however, be improved with increasing focus on service contracts and

extension of existing hardware contracts into service contracts.

Apart from this, the contracts are now structured with being a combination of L1 & T1 (Technical

Bidding), giving more significane to the experience of the party. This has increased the entry barriers for

players in this segment.

Even though this segment offers high growth potential, there are concerns which make this business

less attractive:

High capex requirements – entire capex needs to be installed at the beginning of the contract

(~Rs 300,000 per lab per school), resulting in most players shifting to other opportunities in

space.

L1 selection process giving no room for product differentiation and coupled with increasedcompetition reduces margins.

Receivables period are long – Government payments to the selected private player are quarterly

based, but take longer time to get released.

The main players in the segment are Educomp, NIIT and Everonn, all together present in less than 1.5%

of government schools in India. Though many regional players have crowded the market, the dominant

players are expected to grow faster considering the entry barrier.

Technology based Multimedia (incld. Content)



There is huge potential in the content development market as an increased number of private schools

are adopting educational technology products / content from private sector. Penetration in this market

is low only less than 5% as per IDFC-SSKI. There are ~ 75,000 private schools in India with 44,400 un-

aided offering a potential of more than $ 1.2 bn as per Credit Suisse.

Some of the important players in the market are:

Player Business model / product offered Fee charged No. of Schools

Educomp Solutions‘Smart Class’ – Plasma TV in each

classroomRs 150 per student 933

Everonn Systems using VSAT – virtual classrooms Rs 120-180 per student 180

NIIT Multimedia based pure content solutions Rs 40 – 150 per student 981

IL&FS ‘K-YAN’ one-time fee – Rs 130,000 800

Source: Credit Suisse, IDFC-SSKI

The capex for setting up technology based multimedia product is high (~ Rs 90,000 per class) and the fee

charged @ Rs 150 per student results in capital costs being recovered in less than a year. EBIT margins of

Educomp in this segment is ~58% & RoCE of 49%, which is due to the first mover advantage enjoyed and

the general market perception of good value creation by the firm. Apart from this, most of these

produts are offered to schools on BOOT contracts and hence the revenue streams are assured for a

period of 3-5 years of the Concession. The risks associated with this segment are content duplication

and less differentiation and huge competition.

Books

Private spends on Books segment is ~ $ 1.75 bn as against ~ $ 50.11 bn spend on Indian Education sector

as a whole for 2008. A growth rate of 9% CAGR is expected in this segmentwhich is the lowest compared

to 14% average CAGR in education sector. IDFC-SSKI feels that market for private publishers is Rs 1 bn.

More than 95% schools in the state follow state syllabus and books are printed by SCERT. From the

remaining 5% schools which are under ICSE & CBSE, only ICSE & few CBSE schools use text books

published by private players.

The Private players in Books segment are Tata McGraw Hill, Oxford, Macmillan, John Wiley, S Chand,

Longman etc. The HE segment allows more scope for private participation as also the supplementary

book market (Navneet Publications is the leader in the supplementary book market).

Potential in terms of value creation and scalability in this sector has been marred by the re-usability

factor (IDFC-SSKi reports mentions 70% of the target market reuses the books); and the fact that State &

NCERT prints 95% of school textbooks.

Coaching Classes

A major share of the revenue in informal education sector comes from Coaching class business (~63%).

According to Credit Suisse, industry estimates show that spending on child education outside school istwice that of school fees and materials. There are two main sub-segments in this business – Physical

classes and online tutoring. In physical classes the factors ‘brand teachers’, their reputation (star

performers in previous years), accessibility (proximity to maximum students) and word-of-mouth

publicity are important.

For Online Tutoring, low broadband penetration has been a major issue; a comparison may be drawn

between India (1% broadband penetration = ~ 3 mn subscribers) and South Korea (83%). In South Korea

online tutoring has been a huge success (Megastudy, the largets player in the market). In India this

business has strong growth prospects in the long term, if internet penetration takes off in the country.



The National Broadband & Wireless Policy intends to bring ~ 25 mn subscribers to the broadband fold by

2012.

Physical coaching can be further classified into tutions from K-12 to HE segment, Graduation test

Preparation and Post Graduation Test Preparation. As per IDFC-SSKI, the market for tutions

Tutions to K-12 & HE segment based on subject/concept based;People driven (‘Brand Teacher’)

$5.1 bn 15% CAGR over FY

2008 – 2012

expected.Graduation Test prep. Content driven; less dependence on teachers $ 1.1 bn

Post Graduation Test prep. Content driven; less dependence on teachers $ 0.22 bn

One of the main reasons for lack of stability and scalability in this field is brand teacher factor, unlike the

brand institute factor in other segments. Mahesh Tutorials has been able to reduce overdependence on

brand teachers by creating a brand for itself in the space and has managed to reach revenues of Rs

700mn (share of 3% only in Maharashtra’s tutiton segment).

For Graduation Test prep., the dominant share goes to engineering (59%), followed by medicine (23%),

Civil Service (12%) and CA (6%). The tests are based on application of concepts with test worksheets and

materials, also reducing dependence on ‘brand teacher’. Since most players conduct tests on nationallevel, this offers opportunity to scale-up.

Post Graduation Test prep. sub-segment, is dominated by CAT aspirants forming 41.6%, followed by CET

(34.7%) and then GATE, GMAT, GRE, IELTS, TOEFL, etc as per IDFC-SSKI research. It is more easier to

achieve scale in this sub-segment as focus is on standardized content and study material and even lesser

dependence on ‘brand teacher’.

Scalability can be improved by companies in coaching class segment that manage to create strong

process-driven model by reducing dependency on brand teachers, or by formulating strategies to retain

brand-teachers (strong incentives such as revenue share).

VENTURE FINANCE

As per the venture intelligence database the number of PE/VC deals during the period from 2007-2011 is

50 deals. As per a study conducted, the private institutions have estimated the education business to be

a ~ $ 40 bn market. Below gives details of some of the deals available on website ventureintelligence.in:

Deals in Education sector (January 2007 to May 2011)

Segments Count Sum Minimum MaximumMiddle 50%

Min. Max.

(Day Care Center) / Pre-schools 4 26.9 2.2 12.2 4 8.5

Coaching Classes - Private Tutorials 1 8.0

Distance Learning 1 43.0

Education - Training 7 34.5 0.7 23.5 1 2.6Education Finance 1 3.7

Education Services 8 144.8 8.8 37.0 10 23

Enterprise Software (Education) 3 11.0 0.7 8.0

Higher Education 2 14.7 6.0 8.7

K-12 Schools 3 36.0 4.0 21.0

Online Services (Education) 6 39.8 2.5 18.0 3.75 5

Sports Education curriculum 2 1.2 0.2 1.0

Test Preparation 7 59.3 1.1 21.0 5 10

Vocational Training 5 24.0 2.0 7.0 4 6.5



Year wise deal in Education sector

Segments 2007 2008 2009 2010 2011 (till May) Total

(Day Care Center) / Pre-schools 1 2 1 4

Coaching Classes - Private Tutorials 1 1

Distance Learning 1 1

Education - Training 1 3 2 1 7

Education Finance 1 1Education Services 1 2 3 2 8

Enterprise Software (Education) 1 1 1 3

Higher Education 2 2

K-12 Schools 1 1 1 3

Online Services (Education) 1 4 1 6

Sports Education curriculum 1 1 2

Test Preparation 2 3 2 7

Vocational Training 1 1 1 2 5

Total 8 11 10 17 4 50

Education sector attracted a maximum number of 17 deals in 2010 and a sizeable fund of $ 185 mn.

Over all years under consideration, the maximum number of 8 deals were noticed in Education services

(ICTs, content, etc) segment, followed by Education – training & Test Preparation (7 each), OnlineServices-Education (6), and Vocational Training (5).

Segments 2007 2008 2009 2010 2011 (till May) Total

(Day Care Center) / Pre-schools 12.15 10.7 4 26.85

Coaching Classes - Private Tutorials 8 8.00

Distance Learning 43 43.00

Education - Training 1 6.9 25.9 0.66 34.46

Education Finance 3.7 3.70

Education Services 23 40 62 19.8 144.80

Enterprise Software (Education) 0.7 2.25 8 10.95

Higher Education 14.65 14.65

K-12 Schools 21 4 11 36.00

Online Services (Education) 7 27.75 5 39.75Sports Education curriculum 1 0.22 1.22

Test Preparation 9.13 36 14.2 59.33

Vocational Training 15 2 32.5 22.7 72.20

Total 44.53 74.05 156.40 185.13 34.80 494.91

It can be noticed that maximum value of deals for Education sector happened in year 2010 ($ 185 mn),

followed by yr 2009 ($ 156 mn). Considering segment wise distribution, the maximum share in value

terms was noticed for Education services segment ($ 144.80 mn), followed by Vocational Training ($

72.20 mn), Test Preparation ($ 59.33 mn), Distance Learning ($ 43 mn).

It can be inferred from the trend that maximum investment has happened in the informal education

segments due to un-regualted nature of the business, lower risks, and better value creation potential inthese segments. According to above table, of $ 185 mn investment in 2010, close to 90% of the

investment has been in un-regulated space which is indicative of the complexity involved in investing in

the regulated sector. As per Venture intelligence report-PE pulse on education ~ 70% have been

invested on non-regulated space.

VIBRANT GUJARAT 2011

Vibrant Gujarat summit is the flagship event of Gujarat government to attract investments in the state

of Gujarat. In 2011, the Gujarat government signed 7,936 memorandum of understanding statements



(MOUs) worth $ 462 billion in two days. Out of 7,936 MOUs, 242 MoUs were signed in Education sector

inclusive of skill development. Within these, 235 MoUs worth ~ Rs 8140 crore are of large enterprise

projects, while remaining 7 MoUs worth ~ Rs 20.27 crore are of medium and small enterprise projects.

No. of investmentsTotal Value of investments

(Rs crore)

Education sector 65 7256.71Skill Development sector 170 882.25

education report - 3g fund 2

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