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 year Plan, 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 Public Spending on Education (% of GDP) increased from 2001-02 levels, however, 7.00% there is a decline on the state share and as a 6.00% result the Center and the States combined 5.00% registered a modest decline from 3.81% of 4.00% 3.00% GDP in 2001-02 to 3.78% in 2008-08
2.00% 1.00% Though the public spending on Education is 0.00% on par with leading nations, the absolute France USA UK Japan Phillipines India figures prove otherwise. The Public Expenditure for Education in China is 13% of Government Expenditure. The Public expenditure figures per 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 Elementary Government 85% Private Aided 4% Private UnAided 11% Total 100% includes central, state, Public deemed Univ. Includes Private Univ. Includes Private deemed Univ.

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 200607. 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.

2. Opportunities in Education Sector

The Education sector can be classified into: K-12 segment

Pre- School

Elementary Education PS & UPS

Secondary Education

Vocation Education & Skill Developme nt

Higher Education

Distance Learning

Teacher / Trainer Training

Other Infra. Requireme nts - ICT, Books

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 an additional 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 USAs targeted population.

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.:
No. of Schools 30,660 15,000 29,400 Total Source: MHRD, IDFC-SSKI research report 2009 Average no. of students 1200 1200 1200 Average Fee spend (Rs p.a.) 5,000 - 6,000 10,000 15,000 - 45,000 Market Size ($ bn) 3 5 13 21

Private aided Private un-aided Standard Private un-aided Premium

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 IDFCSSKI, 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).
Capex (include Land) Capacity Capacity Utilization Enrollment (Nos) Increment enrollment Annual recurring Fee (Rs) Admission Fees (Rs) Private School business Economics 160 Rs mn 2000 students 1 yr 2 yr 50% 60%

3 yr 70%

1000 1000
40,000 34,000

1200 200

1400 200

normally, more than 50% of Annual recurring fee

Admission fee collected 34.00 6.80 6.80 Annual recurring Fee 40.00 48.00 56.00 collected 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-

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 marketingo 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 are also allowed). Financial Snapshot & Performance of Educomps business:
Revenues EBITDA EBITDA margin YoY EBITDA EBIT EBIT margin YoY EBIT Margin PAT PAT margin Return on Net worth Return on Capital Employed Debt / Equity Ratio Interest coverage ratio Current ratio Cash ratio Working Capital to Sales Accounts Receivables turnover ratio Collection Period (days) Payment period (days) Total Asset Turnover Earnings per Share (Rs) Dividend per Share (Rs) Operating Cashflow / Sales 2010 8727.12 4619.28 52.9% 70.2% 3711.89 42.5% 86.3% 2218.66 25.4% 18.4% 23.3% 0.50 12.50 3.70 3.70 1.20 1.74 209.87 92.90 0.41 24.00 2.80 34.70% 2009 5175.31 2713.77 52.4% 117.6% 1992.41 38.5% 115.7% 1315.88 25.4% 31.3% 25.1% 1.20 23.40 2.40 0.50 0.50 1.94 187.72 58.50 0.45 76.20 2.50 17.00% 2008 2769.03 1246.93 45.0% 149.2% 923.74 33.4% 700.61 25.3% 24.4% 18.5% 1.30 21.70 6.90 5.80 1.30 2.42 150.87 127.50 0.38 41.40 2.50 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.

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 to competition 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 200206 as per IMACS analysis for NSDC
GER of India compared to other countries GER (in %)

80.0% 60.0% 40.0% 20.0% 0.0%

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 highest in 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 ~ $13 bn every year.
Private colleges Engineering colleges MBA Medical Total Cash transactions Spends on HE outside India 1200 300 140 Avg. no. of students/college 1200 300 400 Total no. of students 1,440,000 90,000 56,000 Avg. spend/student (Rs p.a.) 150,000 300,000 250,000 Market size ($ bn) 5.40 0.68 0.35 6.50 1.5 13 21.00

Total spending potential

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.
The Company

Subsidiary 1 (Infrastructure)

Subsidiary 2 (Operation & Management)

Management Fees

Subsidiary 3 (Hardware or Software or Supplier)

Hardware/ Supplier fees

Lease rentals

Trust (Not-for-profit body)

Tuition Fees Teachers Salaries

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 (revenue generated 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 notforprofit 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

restricted due to the prevailing regulations which require the entity setting up the school or college or a deemed university to be of a notforprofit character. The bearing of a notforprofit 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 nonprofit 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 Distance Learning (SCDL), established in 2001, has 136 courses being offered with 200,000 students enrolled.
No. of Distance Education Institutes offering Distance Education
200 150 100 50 0 1975-76 1981-82 1990-91 2000-01 2007-08 2009-10

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 360,000380,000 (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

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 & services sector which pre-dominently contribute to GDP growth rate.
% of Population receiving training
120% 100% 80% 60% 40% 20% 0% India South Korea World Average Botswana

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 forprofit 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

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.
Incremental employee req. in vocational stream (in 000) 14,280 1,128 3,943 13,872 3,456 33,111 2,763 2,734 18,900 2,367 7,422 543 470

Sectors Textiles (Spinning, Fabric Processing, Garmenting) Electronics and IT Hardware Leather Organized Retail Gems & Jewellery (including Jewellery retail) Infrastructure & Real Estate BFSI Furniture & Furnishings Auto & Auto components Tourism & Hospitality Food Processing Construction Materials & Building Hardware Chemicals & Pharmaceuticals

2008

2022

Incremental req. (in 000) 16,800 3,223 4,639 17,340 4,608 47,302 4,250 3,418 35,000 3,642 9,277 1,357 1,878

Proportion of Vocational Stream 85% 35% 85% 80% 75% 70% 65% 80% 54% 65% 80% 40% 25%

Annual req. in Vocational stream (in 000) 1,020 81 282 991 247 2,365 197 195 1,350 169 530 39 34

13,100 906 2,500 283 3,335 35,968 4,250 1,455 13,000 3,530 8,531 1,140 1,668

29,900 4,129 7,139 17,623 7,943 83,270 8,500 4,873 48,000 7,172 17,808 2,497 3,546

Transportation, Logistics & Warehousing Total

7,374 97,040

25,101 267,501

17,727 170,461

40% 66%

7,091 112,079

506 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 for Vocational 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-thejob 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 ITIs as 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.
Teacher - student ratio
23 11.4 14.8 15.3 16.6

India

Developed Oceania countries

Western Latin Asia America & Caribbean

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

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 Currently available Category (2008) Teachers in School Education 6,417 Teachers in Higher Education Trainers for Technical Training (ITI / ITC) Total 692 37 7,146

Source: National Skill Development Corporation report, 2009

The population in the age group of 524 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 Higher Education Trainer Req. (ITI / ITC) Trainer Req. for other vocational stream* Total 3,511 4,459 232 465 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.

Pre School Market Penetration (in %)

India Brazil USA Scotland France 0 20 40 60 80 100 120

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 preprimary 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 be 25% 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, Mothers 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 KidZee Euro Kids Apple Kids Shemrock Kangaroo Kids Roots to Wings Tree House 1989 1993 2008 2003 Started 2003 1997 Ownership part of Zee group. Indian Private Co. (50% stake by Educomp) Private Private Private Listed under Educomp Private Current Network 623 pre-schools in just 5 years since inception 484 pre-schools. Plans 1000+ schools next 3 yrs 200 pre-schools 90 pre-schools 60 pre-schools Target of 250 pre-schools by end of 2009 55 pre-schools Business Model Franchisee model Franchisee model Franchisee model Franchisee model Joint Venture model. Franchisee model Owned model

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 would have 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 SSA can 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 Period of Contract Average Revenue per Lab yrs Average Revenue per Lab EBIT EBIT Margin Investment per Lab (30% of Contract Value) RoCE Source: IDFC-SSKI reseacrh 1 5 0.2 1 200,000 40,000 20% 300,000 13% Rs mn years Rs mn 2 200,000 40,000 20% 3 200,000 40,000 20% 4 200,000 40,000 20% 5 200,000 40,000 20%

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 increased competition 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 unaided offering a potential of more than $ 1.2 bn as per Credit Suisse. Some of the important players in the market are:
Business model / product offered Smart Class Plasma TV in each Educomp Solutions classroom Everonn Systems using VSAT virtual classrooms NIIT Multimedia based pure content solutions IL&FS K-YAN Source: Credit Suisse, IDFC-SSKI Player Fee charged Rs 150 per student Rs 120-180 per student Rs 40 150 per student one-time fee Rs 130,000 No. of Schools 933 180 981 800

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 is twice 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 Graduation Test prep. Post Graduation Test prep. based on subject/concept based; People driven (Brand Teacher) Content driven; less dependence on teachers Content driven; less dependence on teachers $5.1 bn $ 1.1 bn $ 0.22 bn 15% CAGR over FY 2008 2012 expected.

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 Maharashtras 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 national level, 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 (Day Care Center) / Pre-schools Coaching Classes - Private Tutorials Distance Learning Education - Training Education Finance Education Services Enterprise Software (Education) Higher Education K-12 Schools Online Services (Education) Sports Education curriculum Test Preparation Vocational Training Count 4 1 1 7 1 8 3 2 3 6 2 7 5 Sum 26.9 8.0 43.0 34.5 3.7 144.8 11.0 14.7 36.0 39.8 1.2 59.3 24.0 Minimum 2.2 Maximum 12.2 Middle 50% Min. Max. 4 8.5

0.7 8.8 0.7 6.0 4.0 2.5 0.2 1.1 2.0

23.5 37.0 8.0 8.7 21.0 18.0 1.0 21.0 7.0

1 10

2.6 23

3.75 5 4

5 10 6.5

Year wise deal in Education sector Segments (Day Care Center) / Pre-schools Coaching Classes - Private Tutorials Distance Learning Education - Training Education Finance Education Services Enterprise Software (Education) Higher Education K-12 Schools Online Services (Education) Sports Education curriculum Test Preparation Vocational Training Total 2007 1 1 1 1 3 1 1 2 2 1 1 3 1 2 1 1 1 2 2 17 2 2008 1 2009 2010 2 2011 (till May) 1 Total 4 1 1 7 1 8 3 2 3 6 2 7 5 50

1 1 2 1 8 4 1 3 1 10

1 11

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), Online Services-Education (6), and Vocational Training (5).
Segments (Day Care Center) / Pre-schools Coaching Classes - Private Tutorials Distance Learning Education - Training Education Finance Education Services Enterprise Software (Education) Higher Education K-12 Schools Online Services (Education) Sports Education curriculum Test Preparation Vocational Training Total 2007 8 1 3.7 0.7 6.9 23 2.25 25.9 40 43 0.66 62 8 14.65 4 5 0.22 14.2 22.7 185.13 19.8 2008 12.15 2009 2010 10.7 2011 (till May) 4 Total 26.85 8.00 43.00 34.46 3.70 144.80 10.95 14.65 36.00 39.75 1.22 59.33 72.20 494.91

21 7 9.13 15 44.53 27.75 1 36 32.5 156.40

11

2 74.05

34.80

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 in these 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 investments Education sector Skill Development sector 65 170 Total Value of investments (Rs crore) 7256.71 882.25