Education companies: long road to recovery

Shares of education services companies Career Point Ltd, Educomp Solutions Ltd and Everonn Education Ltd are pale shadows of their former selves. While the Career Point stock halved, the latter gave up three-fourths of their value in the past one year.

Unbridled expansion in their heyday and a sudden change in the business environment have hit the companies hard. Educomp Solutions and EveronnEducation are losing money. Profits at Career Point fell sharply, as its bread-and-butter tutorial business was hit by changes in the engineering entrance examinations.

Still, the stocks continue to see lots of action. All three breached their upper circuit limits at least once in the past week and rallied over 10% each. The spurt in the share prices is perplexing as fundamentally no significant development happened during the week.

That said, the companies are moving in the right direction to set their houses in order. Beleaguered Everonn Education has received the approval of the Madras high court to restructure its business. In line with its new promoters’ core expertise in school management, the company has decided to focus on K12 schools (kindergarten to Class 12) and technology-based education services. To reduce losses, Everonn will slowly exit the higher education and capital intensive businesses, the company’s managing director A. Srinivasan told The Times of India. With debt restructuring in process, interest costs are coming down.

Educomp Solutions has also applied for debt restructuring. The company is curbing capital intensive businesses, optimizing the existing school capacities, increasing the focus on collections and it has outsourced the logistical and hardware responsibilities to another firm. Career Point, on the other hand, is ramping up the formal education business, which is more stable in nature. The company expects the contribution of the formal education business to overall revenue to reach 50% in four years, from less than a quarter now.

Investor interest continues to remain poor in most of the education stocks. The sharp fall in share prices has battered investor confidence. As Daljeet S. Kohli, head of research at IndiaNivesh Securities Pvt. Ltd, points out, for investor interest to revive two things have to happen. One is consistency. The operational performance of education companies has been volatile. Enrolments, schools and classroom additions are prone to sudden spikes and slumps. Innovative and intelligent planning of courses can reduce the impact of seasonality on revenues.

The second requirement is pruning debt. Despite being in restructuring mode for some time, companies (except Career Point) are not able to bring debt levels to sustainable levels. Sure, they are refocusing and taking steps to improve profitability. But with no signs of stability emerging, investors would do well to remain cautious about the stocks despite their low valuations.

How IT education companies are fighting slowdown

Education technology companies are looking to sell their services directly to students as they seek alternative avenues to push their ware at a time when their traditional customer base — schools are defaulting on payments and adding to their debt burden. "What we are looking at is, how we can interact directly with the end-user. 

In this case, the primary beneficiary in the whole process is mainly the student. We have about 4,000 schools currently and if we are looking at even a 1,000 kids in each school, we could reach about 4 million kids," said Chetan Mahajan, business head at HCL Learning. HCL Learning, which began three years ago, is further ahead on the path of directly targeting schools as compared to its peers. 

Last month, the company launched MyEduWorld, which has course and learning material for school children. Traditionally, companies like Educomp, NIIT, Everonn and HCL Learning sold a combination of hardware, software and learning material to schools on multi-year contracts, but as schools defaulted on payments and the market slowdown impacted the demand for education products, service providers have been struggling. Educomp has cut about 3,500 jobs and Everonn is restructuring its business, looking to exit the hardware-supplying business entirely. 

Educomp, which has struggled with its schools business, is in the process of launching products for individual students. "We are focusing on launching student-centric products. We will be launching Uniclass — a low-cost product that enables content access for individual learner. 

It is the key focus for us and going forward we will be enhancing our product range targeting individual learners," said Shantanu Prakash, chairman and MD, Educomp. As a business model, selling directly to students has till now proved itself as a profitable one. 

Meritnation, an e-learning website backed by Naukri.com's owner Info Edge, earned Rs 9.8 crore as revenue from operation but posted a loss of Rs 21.7 crore for the financial year-ended March 2013. The company spent Rs 9.5 crore, about as much as its revenue, on advertising and promotions.

 "What is happening here is in a sense category creation. This is an untested category. We won't spend big money on advertising because that is a huge expense, we would rather target students through schools for now," HCL Learning's Mahajan said. HCL Learning has sales of about Rs 100 crore.Other education technology companies are taking a wait-andwatch approach. 

"We are studying the retail market and at an appropriate time we will have solutions on iPad and mobile phones as well, which are under development right now. If we find the market is conducive, we will take a call at that moment," said Hemant Sethi, president of school learning solutions at NIIT. 
But despite the problems, the schools business, which is the mainstay of the education business, is not going away. "There are instances where schools have defaulted or delayed payments beyond reasonable time frames. 

However, alarge majority of schools do pay in a timely fashion and it still makes a lot of sense for us to do business with schools," Educomp's Prakash said. Industry experts think that sooner than later the companies will have to look at alternate sales channels, if growth in traditional channels doesn't pick up.