MANAGEMENT DISCUSSION AND ANALYSISSOURCES:
MHRD website;www.education.nic.in,Union Budget 2010-11 ,Census 2001,www.indiastat.com,UNESCO Institute of Statistics .Planning Commission, The US Bureau ofEconomic Analysis, CLSA, Education Sector Report, 2008. IDFC-SSKI, Education Sector Report2009,Technopak Consulting India Education Opportunity Report,Four-S Research PEDatabase,http://economictimes.indiatimes.com/news/economy/indicators,http://www.whitehouse.gov/omb/budget/fy2011/assets/education.pdf,http://www.edu-talk.net/index.php /2009 /10/30/ budget-2010-on-education/,httpy/www.mof.gov.sg/budget_2010/expenditure_overview/moe.html,http://www.moe.edu.cn/edoas/en/level3.
CAUTIONARY STATEMENT
Certain statements made in the management Discussion and analysis report relating tothe Company's objectives, projections, outlook, expectations, estimates and others mayconstitute forward looking statements within the meaning of applicable laws ®ulations. Actual results may differ from such expectations, projections and so on,whether express or implied. However, the Company has also outlined various risksassociated with the business.
Year 2009-10 has witnessed better than expected recovery in the global economy, withgrowth in India gaining traction and risks to financial stability easing out. Your Companyoperates in an industry which remains unaffected by global changes, being recession-freein a broader parlance. The year gone by has seen Educomp consolidating its position as the'leading education ecosystem in India, serving the entire education value chain - frompre-School, to K-12, to vocational & higher education'. Further, in line with yourCompany's strategy of continuous innovation, a paradigm shift in business strategy hasbeen made in the year to ensure your Company becomes a 'cash flow positive company' and a'capex light company'.
Educomp today reaches out to a total of ~11.4 million students including 3.1 million inSmartClass, 8.2 million in ICT, 35,000 in pre-schools and 24,000 in the high school space.In addition, the Company has over 230 centers for vocational and test prep business, over755 preschools, 43 high schools, 7 colleges and 2.4 million users of its various onlinebusinesses
Educomp today reaches out to a total of ~11.4 million students including 3.1 million inSmartClass, 8.2 million in ICT, 35,000 in pre-schools and 24,000 in the high school space.In addition, the Company has over 230 centers for vocational and test prep business, over755 preschools, 43 high schools, 7 colleges and 2.4 million users of its various onlinebusinesses.
In order to broadbase growth and reach out to students across the length and breadth ofthe country, we have unshackled our flagship product, SmartClass (~60% revenue in FY2009-10), from the heavy weight of associated capital to set it free for its second phaseof accelerated growth.
Recognising the huge potential demand from Tier 2 and Tier 3 markets and the fact that,despite strong growth, the market penetration for a product like SmartClass among Indianschools is still 1.5%, your Company has changed from BOOT to an 'Outright Sale' businessin the SmartClass segment. The move aims to make the segment a capital-light andsecuritisation-based one. Not only does this facilitate faster growth, it also makesSmartClass a free cash flow positive business for the Company.
During the year, apart from digging deeper into existing Educomp footholds across theeducational value chain i.e. Pre-Schools, High Schools, Higher Education and VocationalEducation space, your Company made concerted efforts to encompass the education ecosystem.The year under review saw your Company focus on what we see as an important growth enginegoing forward i.e. the Private High School business, and we are very excited to see thevalue that we are building in this business.
This year also saw your Company renew its focus on the supplemental education business,which aims to capture the consumer spends outside formal education in verticals such astutoring, career counselling, assessment, academic skills enhancement and studentplacements. We benefit from the tremendous reach that Educomp has in India, reaching outto over 12 million students in the K-12 segment. The Company has consolidated as well asrestructured its supplemental business to include a strong focus on online delivery.
Segment-Wise Performance:
As your Company has expanded in recent years to provide educational services forpre-schools, higher education, skill-based vocational and supplemental business space inIndia, a large part of our business is outside of the standalone entity. Hence, yourCompany has re-grouped its business segments to better reflect the contribution of itsvarious businesses into four segments, including School Learning Solutions (comprisingSmartClass & Edureach (ICT) business), K-12 Schools (comprising preschools & highschools). Higher Learning Solutions (comprising vocational, higher education andprofessional development) and Online, Supplementary & Global business.
The year saw your Company deliver on its promise of growth with a 76.57% increase intotal consolidated income YoY, driven by strong growth across core business segments ofSchool Learning Solutions (up by 86.66%) and K-12 schools (up by 60.58%1. Total number ofschools signed saw robust growth - up 77.1% under SmartClass segment. Net Profit after taxincreased 107.58% YoY to Rs 2,759 million from Rs 1,329 million. Your Company also madesignificant strides in establishing a stronghold in the K-12 Schools segment during theyear. In the pre-school space, your Company continues to occupy leadership position, with775 pre-school sign-ups, including 220 franchisees under Roots to Wings and 555pre-schools under Eurokids.
To strengthen its position in the highly profitable and rapidly growing high schoolbusiness, the subsidiary of your Company, Educomp Infrastructure and School ManagementLimited, started delivery of both Educational Infrastructure and Content/IP/Services tovarious independent run schools.There are currently 29 schools using the services ofEducomp and 14 Euro-schools operational under Eurokids serving over 24,000 students.
In the Higher Learning Solutions segment, your Company has entered into a joint venturethrough its wholly owned subsidiary with Pearson Plc (for vocational initiatives), namedIndia Can. In the Higher Education segment we operate The Raffles Millennium Colleges (injoint venture with Raffles Education Corporation, Singapore), which are now spread acrossseven metro cities in India, namely Delhi, Bangalore, Chandigarh, Kolkata, Hyderabad,Ahmedabad and Chennai. Your Company's vocational business is a well-oiled engine now, withover 200 points of presence operational across the country in various formats catering tocustomer segments in urban, mid-market and bottom-of-the-pyramid segments. The keyvocational initiatives include - ETEN CA (having a network of over 100 centers),PurpleLeap (network of over 80 centers) and retail vocational training centers (network ofover 40 centers). During the current year, your Company has also acquired a strategicstake in Vidya Mandir Classes Private Limited, a premier test preparation institutereaching out to 10,000 students for IIT-JEE (Joint Entrance Examination for IndianInstitutes of Technology in India) and other engineering entrance examinations such asAIEEE, NSIT, DCE, BITS, etc.
During the year, your Company also acquired Zaptive Internet Services Pvt. Ltd., aneducation lead generation company covering over 3,750 institutes across the globe, makingyour Company the largest processors of education leads in India, Zaptive operates India'slargest student portal focused on the higher education segment www.Studyplaces.com.Further, your Company launched India's first VSAT-based engineering prep program under thebrand "Educomp Leap" in 13 cities in order to strengthen its supplementalofferings.
In addition to its domestic business, your Company offers certain productsinternationally and has key businesses in the United States through its Learning.complatform and in Singapore, Philippines, Indonesia, Brunei,Thailand, and Vietnam, throughits AsknLearn platform, as well as a marketing office in Sri Lanka and the globaleducation community platform, LearnHub.com, which has been developed in Canada.
Overall, the year saw your Company move forward and emerge well positioned with a clearvision and mission to become the leading global player, changing the way Education isbeing delivered, enhancing learning outcomes & enriching the lives of all studentsthrough innovative student & teacher centric learning technologies.
A. INDUSTRY OVERVIEW
Indian Scenario
With an estimated student base of 232 million & 15.5 million in schools andcolleges, India has the world's second largest student population, driving the -$40billion private education market. As per a Boston Consulting Group (BCG) study, due todemographic shifts, a global shortage of 56 million people in the working age group isexpected by 2020. In comparison, India would have a surplus of 47 million workingpopulation. In order to take advantage of this demographic dividend, the Indian Governmentand private sector are expected to increasingly invest in educational infrastructure atall stages, including schools, higher education institutions and skills developmentcentres.
The Government, both at central and state level, already spends approximately $30billion annually on the sector. The spending represents -3.7% of India's GDP, on par withthe global average.
During the Eleventh Five Year Plan, the government envisages an outlay of Rs 2,700billion towards the education sector, a four-fold increase over the 10th Five Year Planallocation of Rs 540 billion. A major thrust area of government intervention is likely tobe via the Public Private Partnership (PPP) route, thus opening up further opportunitiesfor your Company.
The importance of private participation is underlined by the fact that even though only7.5% of total schools are private, they provide education to close to 30% of India's totalstudents enrolled. In the higher education space, 74% of India's -21,000 Higher Educationproviders are private, making it the largest private higher education market globally (interms of number of providers).
Global Scenario
Malaysia
In its 2010 budget, Malaysia allocated RM 30 billion to enhance primary and secondaryschool education nationwide.The country has undertaken several initiatives to boosteducation sector in its budget 2010.
Singapore
Singapore continued to strengthen its investment in education in order to developfuture-ready population. A total budget of $9,664 million has been allocated to Ministryof Education (MOE) in FY2010.
China
The Chinese government has recently approved an education reform plan - Medium andLong-term National Educational Reform and Development Plan (2010-2020), which promises toprioritize the development of education while ensuring fairness in the system.
USA
There has been major increase in K-12 education and school education programs and athrust on expansion of educational options.
B. COMPANY OUTLOOK & STRATEGY FOR 2010 - 11
Your Company expects robust growth across all its business segments on the back oforganic and inorganic initiatives in the domestic as well global market. In the currentfiscal year, the Company will further strengthen its position as the only company cateringto the full "Education Value Chain" through further IP consolidation, innovationand investment in R&D and focus on its current breadth of products and services withmajor emphasis on SmartClass business, K-12 business, and Vocational & Supplementalbusinesses. We expect rapid growth in the SmartClass segment due to the change in itsbusiness from BOOT to the "Outright Sale" basis, in order to rapidly penetratethe large addressable market as well as to make it a free cashflow positive business.
C. SEGMENT REVIEW (CONSOLIDATED)
The Company has business segments as primary segment and geographical segments assecondary segment.
In the current fiscal year, your Company changed the nomenclature and composition ofits business segments to better reflect the present state of its business evolution andthe contribution from various businesses across the entire education value chain. Thereclassification will help stakeholders understand the performance of the Company muchbetter. The new classification is as follows:
• School Learning Solutions: Comprising SmartClass & Edureach (ICT) businesssegments
• Higher Learning Solutions: Comprising Higher Education, Vocational Business andProfessional development
• K-12 Schools: Comprising preschools & High Schools
• Online, Supplementary & Global: Comprising online business such asLearnHub.com, WiZiQ.com; supplemental businesses such as Learning Hour, study placestuition centers and global businesses such as Learning.com in the US and AsknLearn inSingapore
| Fiscal Year Ended 31 March (Audited) |
| 2009 | 2010 |
| (Rs million, except percentages) |
| School Learning Solutions | | |
| Sales | 4,322.09 | 8,067.64 |
| % of total revenue | 67.84% | 77.61% |
| Gross Profit | 2,101.96 | 4,502.62 |
| Margin | 48.63% | 55.81% |
| High Learning Solutions | | |
| Sales | 309.73 | 264.54 |
| % of total revenue | 4.86% | 2.54% |
| Gross Profit | 91.58 | (111.08) |
| Margin | 29.57% | |
| K-12 Schools | | |
| Sales | 620.96 | 997.12 |
| % of total revenue | 9.75% | 9.59% |
| Gross Profit | 274.36 | 322.10 |
| Margin | 44.18% | 32.30% |
| Online Supplementary & Global | | |
| Sales | 1,117.85 | 1,065.60 |
| % of total revenue | 17.55% | 10.25% |
| Gross Profit | 204.12 | (156.61) |
| Margin | 18.26% | - |
Revenue by Geography
The Company's primary market currently is India, accounting for approximately 89.61 %of its consolidated revenues in Fiscal 2010 through products and services supplied to morethan 18,000 schools & offering other services across India. The Company has expandedits operations in the international market, including the United States of America,Singapore, Canada and Sri Lanka. The Company currently operates three offices in theUnited States of America, two offices in Singapore, one office in Canada and one office inSri Lanka, in addition to its 48 offices in India (including those of its subsidiaries).
| Fiscal Year Ended 31 March (Audited) |
| 2009 | 2010 |
| Amount | % | Amount | % |
| Revenue by Geography | | | | |
| India | 5,266.44 | 82,67 | 9,315.12 | 89.61 |
| Rest of the world | 1,104.19 | 1733 | 1079.78 | 10.39 |
| Total | 6,370.63 | 100.00 | 10,394.90 | 100.00 |
D. SEGMENT REVIEW (STANDALONE)
Review by Business Segment
Revenue by Geography
The Company's primary market currently is India, which accounted for approximately99.57% of its standalone revenues in the Fiscal 2010 through products and servicessupplied to more than 18,000 schools & offering other services across India. TheCompany has expanded its operations in the international market, wherein Company providesits global content to its subsidiaries.
| Fiscal Year Ended 31 March (Audited) |
| 2009 | 2010 |
| Amount | % | Amount | % |
| Revenue by Geography | | | | |
| India | 4,732.39 | 94.43 | 8,286.06 | 99.57 |
| Rest of the world | 279.31 | 5.57 | 36.15 | 0.43 |
| Total | 5,011.70 | 100.00 | 8,322.21 | 100.00 |
E. THREATS fit RISKS:
The Company, in the execution of its business operations, faces several external andinternal risks, which it regularly monitors and endeavours to minimize through focusedpolicy measures.
External risks faced by the Company relate to possible changes in Government policies,decline in India's foreign exchange reserve, inflation, violence and social unrest,natural calamities, slowdown in economic growth, among others.
Internally, the risks faced by the Company relate to regulatory requirements andcontractual obligations. The Company's ability to acquire companies located outside Indiamay depend on the approval of the RBI, and a failure to obtain such approvals couldnegatively impact the Company's business and financial prospects. Delay in payments fromGovernment of India (including state Governments) contracts may affect business cash flow.
Further, the Company faces risks and uncertainties associated with the implementationof its expansion projects, within and outside India. However, the Company has successfullyimplemented expansion projects in the past, & is confident about executing the futureprojects on time & with greater efficiency, through suitable procedures & MISdeveloped in these regards.
The Company undertakes certain projects through joint ventures with third parties andmay in the future undertake further projects through additional joint ventures. Thesuccess of such joint ventures depends significantly on the satisfactory performance bythe joint venture partners and the fulfillment of their obligations.
The Company's services and products may become outdated and not be compatible withindustry standards and requirements in the future, which may adversely affect its businessand financial condition.
Finally, the Company's revenue is seasonal, with approximately 40-47% ofrevenues booked in the last Fiscal quarter, which precedes the beginning of the newacademic year and is the quarter in which the budget of various state Governmentdepartments lapses. The Company expects such seasonality to continue in the near future aswell.
The Company's sustained growth depends upon its ability to attract and retain skilledmanpower. The Company's ability to attract and retain customers is heavilydependent upon its reputation, which in turn relies on its maintaining a high level ofservice quality. The Company has already implemented ESOPs 2006, ESOPs 2007 & ESOPs2008 as a step to retain its senior & key management team members including that ofcertain subsidiaries. Our present attrition rate is quite low.
The payment system with the government is subject to delays due to bureaucraticprocess. As a proactive measure, at the tendering stage only, cost of payment delays arebeing built into the price of product/ services offered.
Looking at the huge margins in the business & a big untapped addressable market,there are chances that competition might come in near future.
Competitive Strengths:
The Company's past performance and future prospects are directly related to acombination of competitive strengths, including the following:
• Large library of proprietary content in a various Indian languages
• Strong balance sheet
• Strong asset base (Gross block) amounting to Rs 8,967.06 million as on 31 March2010 on consolidated basis.
• Established client base through long term relationships
• Scalable business model and comprehensive range Of products and services
• Change to "outright sale" business has also led to improved cashflows, making the company potentially cash flow +ve, improving the quality of balance -sheet thus allowing the leveraging balance sheet for expansion of other projects.
• Continuous innovations & strategic alliances / JV / partnerships
• First mover advantage
• We benefit from cross selling opportunities by providing various educationalsolutions to over 12 million students
• Strong financial position registering a CAGR of 111.37% over a period of 3 yearson consolidated basis.
F. HUMAN RESOURCE DEVELOPMENT
With the expansion and growth in business, the requirement for human assets has alsoincreased. Your Company recognizes the importance of human resource development. Hence,several initiatives have been taken to ensure that people are well-trained and motivated.The Company also believes in nurturing young talent through management trainingprogrammes, which strive to develop business managers for tomorrow. Recently, the Companyhas been rated as the No. 1 company in India in the Education andTraining sector by theGreat Places to Work Institute. As at 31st March, 2010, the company employed (on aconsolidated basis) over 12,000 employees (including retainers & contractual employeescollectively over 9,000 for executing various State Government projects) located in 40offices across India & abroad.
G. CORPORATE SOCIAL RESPONSIBILITY
INITIATIVES THROUGH EDUCOMP JV
Educomp has set up a 50:50 JV called India Can (ICan) with Pearson, the internationalEducation and Information Company. ICan participates extensively in developing Governmentfunded ITIs and also in various other Government programs under PPP initiatives. As ofJune 2010,17ITI s across the states of Punjab, Haryana, Rajasthan and Uttar Pradesh havebeen adopted under PPP scheme (Public Private Partnership). Over 11,000 students have beentrained through these initiatives. Employers of pass outs include companies like TataMotors & Hero Honda. Besides the ITI initiatives, India Can is also a major partnerwith Government agencies for vocational training in IT as well as non-IT trades.
INITIATIVES BY EDUCOMP SUPPORTED IMPLEMENTATION AGENCIES
CSC (Common Service Centers) Scheme executed as partners of Microsoft
The Common Services Centers (CSC) projects are part of the Government of India'sNational E-Governance Plan.The CSC Scheme, as approved by the Government of India,envisions kiosks in rural India to provide "web-enabled Anytime, Anywhereaccess" to information and services. Under the CSC Scheme, a Public PrivatePaitnership (PPP) model has been deployed for undertaking this challenging task andaddressing the related issues.
Government School Teacher's IT empowerment in the rural and urban areas
This is an ongoing initiative implemented with other partners who want to spend undertheir CSR activity. The implementation agency joins hands with the other partner for theprogram where the Government school teachers are empowered with IT skills to make theteaching learning more interactive and effective in their class-rooms. The training isbeing conducted from over 50 locations at this point of time across India.
Program for Indian Army - empowering soldiers towards employability after retirement:
An ongoing project, its objective is to empower Jawans (soldiers) with Englishcommunication and IT skills to facilitate better employability post retirement.The programis being conducted in 48 locations across India, in association with India Can andMicrosoft.
Program with IGNOU - reaching out to North-East rural belt:
A workshop of 15 days for the teachers of North East, in response to their request forhelp in digitizing their lesson plans, was done in partnership with Microsoft and theIndira Gandhi National Open University (IGNOU).
H. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
Educomp has proper and adequate internal control systems, which ensure that all assetsare safeguarded against loss from unauthorized use and all transactions are authorized,recorded and reported correctly. The management continuously reviews the internal controlsystems and procedures to ensure orderly and efficient conduct of business. The Companyregularly conducts internal audits, using external and internal resources to monitor theeffectiveness of internal controls. The Audit Committee of the Board deals with allsignificant control issues highlighted by the internal and external auditors and instructsfurther areas to be covered.
I. FINANCIAL PERFORMANCE
The financial performance of Educomp Solutions Limited (Educomp) as per Indian GAAP isdiscUS$ed in two parts:
(i) Educomp (Standalone) which excludes the performance of subsidiaries of Educomp.
(ii) Educomp (Consolidated) which includes performance of subsidiaries of Educomp. TheConsolidated Financial Statements bring out comprehensively the performance of the Educompgroup and are more relevant for understanding the overall performance of the group.
Overview of the Financial performance summary (Standalone)
The total revenues of Educomp aggregated Rs 8,727.12 million in FY10 as compared to Rs5,175.30 million in FY09, registering a growth of 68.63%.
In fiscal 2010, the Company's profit before taxes aggregated Rs 3,746.21 million (Rs2,018.62 million in fiscal 2009).
In fiscal 2010, the Company's profit after taxes and prior period aggregated Rs2,218.66 million as against Rs 1,315.88 million in fiscal 2009, up by 68.61%.
In fiscal 2010, the Company's earnings per share (basic) was Rs 23.99 (Rs 15.23 infiscal 2009).
Overview of the Financial performance summary (consolidated)
In fiscal 2010, the total consolidated revenues of Educomp Solutions Limited aggregatedRs 11,650.15 million as compared to Rs 6,598.00 million in fiscal 2009, registering agrowth of 76.57%.
The consolidated profit before taxes aggregated Rs 4,421.03 million in fiscal 2010 (Rs2,186.75 million in fiscal 2009).
In fiscal 2010, the Company's consolidated profit after taxes, prior period andminority interest aggregated Rs 2,758.64 million (Rs 1,328.94 million in fiscal 2009).
In fiscal 2010, the Company's consolidated earnings per share (basic) were Rs 29.83 (Rs15.38 in fiscal 2009).