Educomp Solutions Ltd, founded in 1994 is a globally diversified education solutions provider and the largest education company in India. Educomp Group reaches out to over 21,000 schools and 10.99 million learners and educators across the world. It has 27 offices worldwide, including an office in Canada, 20 in India, two in Singapore, one in Sri Lanka, and three in the United States. In addition, the Company operates through its various subsidiaries, including authorGEN, Threebrix eServices, Learning.com, AsknLearn Pte Ltd, and via its associates such as Savvica in Canada. Educomp is a publicly traded company on the Bombay Stock Exchange and National Stock Exchange, India.
Mr. Shantanu Prakash, Chairman and Managing Director of Educomp Solutions Ltd founded the company in 1994, a few years after acquiring an MBA degree from the Indian Institute of Management (IIM), Ahmedabad. Shantanu?s vision has been to transform the teaching-learning process through the use of technology and best practices. Shantanu is also the Founder and Managing Trustee of the Learning Leadership Foundation (LLF), an organisation dedicated to bringing best practices in education to under-resourced schools. He is also the Co-founder and Chairman of Lakshya Digital Pvt. Ltd.- a pioneering game development studio, based out of New Delhi, India. Shantanu is a charter member of TiE (The Indus Entrepreneurs), an organisation that connects entrepreneurs.
Replying to Anil Mascarenhas of India Infoline, Shantanu Prakash says, ?In India education has a high priority for the family and the education spend is highly inelastic.?
What is the progress with investigations into what you call a slander campaign?
Based on our complaint on 21st January, the Economic Offence Wing, Delhi Police is pursuing the case with vigour. We expect a breakthrough soon that could lead to those behind the circulation of anonymous emails and documents. Regarding our complaint to SEBI, we are happy with the recent confirmation by State Minister for Finance, Mr. Bansal in Rajya Sabha that SEBI is indeed looking into the case of stock manipulation of Educomp shares. We hope SEBI probe will yield results soon.
How do people get away if companies are absolutely not at fault?
A good question. In today's time the investor and public confidence is a bit shaky post-Satyam fiasco. This provides the perfect backdrop for rumor-mongering and raising doubts about any company for those with vested interests. It is unfortunate that we don't have enough checks and balances in place to help prevent corporates from becoming victims of such attacks. As the headline of a prominent column in a leading Business Daily (that made a reference to our case) said "Guilty until proven innocent" seems to be the new mantra.
After the incident of a frivolous FIR, yet another example of the motivated and malicious attempt to sully the image of Educomp, we have now written to the Prime Minister's Office, Finance Minister, Home Minster and Corporate Affairs Minister as well as UP Chief Minister's office and asked them to look into this matter of concerted attacks on Educomp, which seems motivated by corporate rivalry and the cartelization of short-sellers, on priority basis. We are requesting for institutional remedies so that such attacks on corporates can be dealt with swiftly and comprehensively.
Do you think the stock can be controlled by ?elements with hidden agenda? for very long time?
No. But a short term manipulation too can prove detrimental to shareholder/small investors interests and we need to have regulations in place to help prevent all such manipulation. I think good companies with strong and resilient business models such as ours are always at risk to such concerted and malicious attempts to discredit them. It is important for us to expose these elements.
There are rumors that a prominent market player helped push up the stock in recent times. Are you aware of any such development?
At Educomp, we don't pay heed to any rumors. Our job is to create value for all our stakeholders and we are doing this by maintaining a fast growth across businesses through increased efficiency and innovation. If you look at the shareholding pattern of the company over 55% of the stock is with the promoters and about 40% approximately is with Foreign Institutional Investors (FIIs), leaving only about 5% with domestic institutions and retail. The high volatility and unusual trading pattern are thus purely caused by market manipulators and speculators.
There were also rumors that the company diverted money towards supporting the stock price, indirectly.
These rumours are baseless, false and unsubstantiated. Please be aware that rumours of a similar nature have been widely circulated by certain individuals with vested interests. None of the directors or principal shareholders controls any entities that own shares thru the FII route or through P-notes.
In Sept 2 '06 - Educomp Infra was incorporated at a total investment Rs1 lakh. On March 10 '07 the listed entity Educomp invested Rs500mn in Educomp Infra. What changed in the company in six months to demand such high valuations?
In February 2006, two entities were created, called Educomp Infrastructure Pvt. Ltd. or EIPL and Educomp School Management Pvt. Ltd. or ESMPL which would be the vehicles for the education infrastructure and school operator parts of Educomp?s K12 business. Mr. Gopal Jain and Mr. Shantanu Prakash were founding nominee shareholders of Educomp Infrastructure Pvt. Ltd. (EIPL) on September 2006 with 5,000 shares each. On 20th December 2006 and 1st January 2007, Mr. Gopal Jain ?transferred? (and not sold) the 5,000 shares at par since this was a personal shareholding of Mr. Gopal Jain.
To kick-start the business, two fully operational schools were rolled up into the business ? a) PSBB Millennium School, Chennai and b) Learning Leadership Academy, Bangalore into the K12 business. These schools had a total enrollment of nearly 2,500 fee paying students, with agreements with the Padma Seshadri Group of schools, a very reputed brand in South India
We engaged Grant Thornton to arrive at a valuation for Educomp?s investment into the company. Based on this valuation exercise, Educomp invested Rs500mn in return for a 69.38% shareholding in both EIPL and ESMPL, which was used to build the initial wave of schools and launch this business as part of Educomp
You gave loans to Richmond who is a client. Apprehensions are these could be bogus entries as you are literally providing a client with money to do business with you?
These are not bogus entries; it is a loan in the regular course of business. We are happy to explain the transaction to you and take you on a tour to see the school set up by Richmond against which a loan has been made.
The issue of cheques in hand has also talked about as a ploy to avoid making provisions. What is your stand?
Our debtor days have fallen from 176 days in FY06 to 159 days in FY08 and further, on a consolidated basis, our debtor days are down to 145 days as on September 30, 2008.
Also, if you were to look at Schedule VI of Educomp?s Annual Report (Page 93), we have provided, in full disclosure, the break-up of "Debtors less than 6 months" and "Debtors more than 6 months" as required by the law.
Our current 145 debtor days are well within industry average, and are on account of the billing cycle of our business as well as the obvious seasonal patterns prevalent in the education industry.
To clarify further, in the SmartClass segment of private schools, Educomp bills for its services on a quarterly basis (ie. after 90 days). Here the payment is typically realized within 30 days of close of quarter, hence making for a 120 day payment cycle. In the case of the ICT segment, Educomp?s payment collection is usually between 45 to 60 days of the close of the quarter, making the payment cycle here about 150 days. You will appreciate that these credit cycles are not just among the best in the industry, but we are also working to improve these on a year-over-year basis.
In the education business, schools tend to invest less at the beginning of the financial year, and more towards the end. We typically book about 10% - 12% of our year?s revenues in Q1, about 18% to 20% in Q2, about 25% to 30% in Q3 and the rest (about 38% to 47%) in Q4. Hence, due to the large billing in Q4, our debtor days appear to be high on March 31st and must be interpreted in this context.
To your questions of cheques in hand, they have all been fully realized and they pertain to receivables from over 650 schools, from government clients and towards teacher training.
By when do you expect the ROC inspection of accounts to be completed?
MCA has indicated a maximum period of 2 months for inspection of the 300 plus companies whose inspection they announced earlier in the month. We are looking forward to a clean chit soon.
When senior management sells shares doesn?t it usually send out a wrong signal?
As a standard practice, employees of any company are allowed to transact in company shares whether by way of allotment of ESOP or market purchase/sale subject to required disclosures by the employee to the company and the company further intimates the same to stock exchanges. It is a moment of pride for employees when their ESOP allocations vest and they sell their shares. In fact the entire purpose of providing stock to management is that they can sell it. The only thing that we monitor is that they must comply with all rules and regulations in this regard. One can view details of employees from reputed companies having bought or sold shares by checking the same on the website of exchanges.
Could you briefly explain your business model?
Currently, over 85 of our revenue come from schools- both Private and Government. Under our ICT initiatives, Educomp works very closely with the Government of India on a public-private partnership basis implementing computer-aided learning projects in government schools. We currently have over 12,000 schools in our portfolio catering to over 5.5 million students. We largely work on a BOOT (Build Own Operate and Transfer) model though there are many instances of outright sales of computers and accessories by State Governments as well.
For Smart Class we have a licensing model wherein a school pays us per student fee for deploying Smart Class in their classrooms. Educomp wires up the school by putting in place projectors and digital whiteboards in classrooms and provides its huge library of educational content to the school.
We are also the largest operator of pre-schools in India. Our millennium schools initiative is helping set up a number of next generation schools across the country to cater to the shortage of schools and out other initiatives like our teacher training program help bridge the gap in teacher quality. Our business model is unique in the sense that we are able to have highly predictable earnings due to the annuity nature of most of our contracts both with private as well as government schools.
Schools cannot be run as profitable institution in India. Does this impose a limitation on your business model?
No. While schools have to be governed by non-profit trusts, societies or section 25 companies, Educomp Infrastructure provides long term infrastructure (>30 year terms) to these trusts. Like an infrastructure provider, Educomp Infrastructure leases the land and building to the schools along with the requisite intellectual property such as books, curriculum and content to enable the school to function effectively. We thus bridge a critical gap in the school capacity environment in India; that of infrastructure. Today, India is short of about 200,000 schools and over 100 million students do not go to school in India. Educomp is helping bridge this crucial gap.
Education is usually considered recession proof. But to what extent could it get impacted by the slowdown?
We do not foresee any impact of recession on education sector in India. It is one of the most resilient sectors in the country. In India, education has a high priority for the family and the education spend is highly inelastic. Currently, the education spending is as robust as it was before.
What is the capital intensity of your biz?
A typical school may require capex from Rs 7mn to Rs120mn. Depending upon where the schools are located. In a semi-urban city, schools would cost about Rs7mn. In a Tier III city, they would cost about Rs60-70mn while in Tier I and Tier II cities, the cost of a typical school would be around Rs120mn.
What is the capex for FY09 and plan for FY10 and FY11? How much capex is required per schools of a typical size?
We have not given a detailed guidance on CapEx for the schools business for next year and the appropriate time to give that guidance will be at the end of Q4. At this moment we do not have that number to share with you. However, as a general guideline, we can share with you that Educomp now has several Capex light models for running its business as well. Currently, if you look at our portfolio schools, not all schools are those schools where Educomp owns the assets. So, we have got a model in which Educomp is simply licensing our IP ie. Millennium Learning System. We have a model in which we are building schools on other people?s land and other people?s assets. We will be sharing our business plan for FY2010 at the end of Q4FY09 and the resultant Capex thereof, at that time.
Whom do you consider as credible competitors in India? Are there similar models that exist globally?
Educomp is unique in the sense that it provides a seamless learning path for the student from age 2.5 to age 25, most models globally focus on a few of the niches in the education ecosystem such as higher education and supplemental tutoring. Some of the globally creditable companies in this space globally are, New Oriental in China, Megastudy in Korea, University of Phoenix in the US and Pearson in the UK.
There are few parallels for the business of Education Infrastructure ? Charter Schools in the US, or GEMS (Middle East), Cognita (UK) ? but Educomp?s plan of creating 150 schools in the next 5 years is the largest such implementation of private school education and is a pioneering effort. Educomp also addresses a uniquely Indian problem ? millions of students seeking schools due to favorable demographics, coupled with a severe shortage of quality schools.
March quarter is usually expected to be good for your business. How do you see it this time?
Schools are among our largest customers and they largely place orders in Jan-March period. The seasonal pattern of the business can be observed wherein we usually book about 10-12% in Quarter 1, about 18-20% in Quarter 2, 25-30% in Quarter 3 and the balance 40-45% in Quarter 4. The fact is that we stand on the threshold of a great opportunity to transform Indian education. Every segment that we are in, from pre-schools, to education technology in classrooms to our initiative to help set up schools is all growing rapidly to serve the needs to the youngest population in the world that resides in India.
Brief us on your latest financials and outlook?
Educomp Solutions' Q3 FY09 standalone net profit went up 65.88% at Rs315.5mn from Rs190.2mn year-on-year. The company's net sales surged 103.13% to Rs1.45bn from Rs715.2mn yoy. On a Q3 FY09 basis, 60% of our revenues came in from a flagship product line, Smart Class. It is a very large library of educational content that Educomp licenses through literally 1,000s of schools across the country. This is a product that mainly goes out to private schools. 25.8% of our revenue on a standalone basis came from our business segment called ICT in which Educomp worked very closely with the Government of India on a public-private partnership basis implementing projects in government schools. Other retail initiatives such as our pre-school initiatives and eLearning comprised the balance.
Besides the recent events, what are the opportunities and challenges faced by companies such as yours?
Opportunities are immense in the education sector. Much needs to be done with regard to access and quality in education. Almost every sector of the education economy is on the verge of a massive transformation from a fragmented initiative to an organized, branded and structured business. India has over 100 million students out of schools and education is over 5% of our GDP and growing. There is a huge shortage of capacity in both school education as well as higher and professional education. It is certainly a sector that can deliver high growth and high margins in the years to come for companies that invest in R&D and development of Intellectual property this sector could lead to high returns.
What competitive edge does India have to dominate the world in the education business?
India is uniquely positioned in the education business. Firstly, we have huge intellectual capital and human resources that can be leveraged. For example Educomp builds education content in India and we sell it across the world. India also has one of the largest pools of teachers in the world that can be used to fill the shortage of teachers in other parts of the world. India can also become an education destination for a large part of the world. To do that, we would need to set up high quality universities and colleges in India. The government should proactively look at making the regulatory framework more proactive in this area.
What push do you think the government should give to further boost the sector?
Tax breaks would provide a boost to the education sector. Education providers that are setting up schools should be considered as core infrastructure companies and they should be allowed a lower tax rate. Currently, education providers pay the same tax rate as everyone else and that hampers their ability to invest back in the sector. They key need in this sector is capital investment and a tax break would certainly help in that direction. Some relaxation in regulation would also encourage private participation urgently needed in this sector.
Comment on your capex plans and how would they be funded?
Our capex plans are fully funded not just from our internal accruals but also from our lines of credit with various banks.
Brief us on the corporate governance initiatives you have taken in recent times?
Educomp recently announced (in the 3QFY09 earnings call) its aspiration of being among the Top 10 Indian companies in terms of corporate governance and has made the following announcements in that regard:
Appointment of Grant Thornton as Internal Auditor of the company
Promoters will declare, one quarter in advance, intention of selling company shares
Independent certification by NSDL and CSDL on the issue of share pledging Educomp has also announced that its promoters have not pledged any shares to any financial or other institutions
What is your message to shareholders?
At Educomp, we are deeply committed to protecting the interests of our shareholder/investors. We have taken swift, comprehensive and proactive actions like replying to all allegations with substantial detail and financial data in real time, complained to EOW and SEBI to probe the matter as well as announced slew of new initiatives aimed at higher disclosure and greater transparency to benefit our investors. We already have the highest disclosure standard in the Industry and are committed to an open and transparent culture upholding the highest standards of corporate governance.
Our shareholders can be rest assured that the company has and will continue to do all it takes to protect their interests while we remain focused on our primary mandate to create greater value for all our stakeholders and take the company to new heights.
We also want our shareholders to rally against the unscrupulous and motivated campaign against Educomp. Unless we expose the people responsible for this, they will continue to harass not just Educomp but potentially also other companies in India. This is a wake up call for Corporate India in a way.