Stepping up despite regulation

On the face of it private participation in schools, or K-12 in shorthand, would seem to be unrewarding as it is one sector of education where profit is a strict no-no. This is so given the morass of central laws, state laws, commission reports, high court judgments, Supreme Court pronouncements— and the layers of interpretations. Any auditor looking for a profit figure in this maze could go crazy.

But paradoxically, it is this morass that is becoming the most fertile ground for the seeds of private participation, with explosive growth rates, as new entrepreneurs enter and established players expand.

Meet Meena Ganesh, 46, IIMCalcutta alumni, former Microsoft employee and an entrepreneur. Meena had just done a stint at UK retail major Tesco, building its IT services and BPO arm in India from scratch, when an entrepreneurial opportunity came calling in 2008. TutorVista, the online tutoring firm set up by her husband K. Ganesh (48), had just bought out Bangalorebased Edurite Technologies. Meena picked up a stake in her husband’s venture and joined Edurite as its MD & CEO in September 2008. Manipal Education, which had a stake in TutorVista, lent its name and Edurite was reborn as Manipal K-12.

Meena added regular tutorials and school management to Edurite’s business profile, and set up 30 tutorials. Upgrading the content business to offer digital learning support solutions to schools brought explosive growth: revenues were up seven times in the year to March 2008 over the previous year.

“I am expecting our business to grow 10 times year-on-year by March next,” she says. She has just snapped up Tandem—a tutorial chain of 39 centres in Kerala.

Six months ago, Manipal K-12 broke new ground by taking over Sharada School, Mysore. “We offer two choices to managements of schools that fit our business model. They can either pay us to manage their schools professionally or transfer management responsibilities,” says Ganesh. The firm has also taken over four schools in Nepal recently. She plans to manage 100 K-12 schools and set up six International schools in the next five years.

Growing revenues ten times? Acquisitions? And not for profit?

With the increased demand for private sector education, a new wave of entrepreneurs like Meena Ganesh and Manipal K-12 are on a growth spree, backed by big-time funding and eyeing cash flows from valueadditions and services.

“When we enter a school, we change the whole professional atmosphere. We elevate the school to its next level,” she says. From investors perspective too, school management presents a fertile area of business unhindered by regulatory oversight—while the trusts that own schools are regulated, the third-party management is not.

The K-12 (Kindergarten to Class 12) is estimated to be worth half the $42-billion (Rs 2,01,600 crore) private education market in India and growing fast enough to double in a decade. Analysts expect the share of average household spend on education to increase from the present seven per cent to nine per cent by 2018.

Meena Ganesh, CEO, Manipal K-12

Manipal K-12 India (P) Ltd.

ESTABLISHED: 2000 (as Edurite Technologies) STARTED AS: A firm selling content to schools ACQUIRED: 2007, by TutorVista Global SCHOOLS TAKEN OVER: 5 STUDENT STRENGTH: 3,000 INITIAL INVESTMENT: Not Available REVENUE: Not Disclosed FOOTPRINT: India, Nepal EXPANSION PLANS: Open 100 schools across India and six International schools in the next few years

Technopak, a consulting firm, sees enrollments in K-12 growing to 351 million, requiring an additional 34 million seats by 2018. This equals Rs 3,91,000 crore at Rs 1.15 lakh a seat. Brokerage firm IDFC-SSKI Securities is more bullish: it expects private spending on education to grow by 14 per cent, creating a $80 billion (Rs 3,84,000 crore) market by 2012.

With such numbers in the air, the K-12 space has attracted big names like Educomp, IMS Learning Resources, Career Launcher and Shamrock. Like retail chains on an expansion spree, they have even set targets for buying out schools or building new ones.

Private equity
And it’s not just entrepreneurs: Kaizen Private Equity is raising Rs 300 crore for a dedicated, 8-year education fund, part of which will be invested in companies that manage K-12 schools. “The companies we invest in will upgrade the curriculum, teaching methodologies, staff and technology solutions to global standards. This will help us generate revenues from core education and value-added services,” says Sandeep Aneja, Managing Director, Kaizen Management Advisors, Mumbai.

Kaizen intends to licence the brand name of some of the schools in which it is investing. “Using the brand name of some of the schools we own, we can easily set up and expand operations in new locations," says Aneja.

So far PE and venture capital funds are still small players. According to a Venture Intelligence report, PE/VC funds have invested $300 million (Rs 1,440 crore) in education-related companies, but only two companies have invested in the K-12 sector.

Ashok Chandra, Chairman, DPS Society

Delhi Public School

ESTABLISHED: 2000 (as Edurite Technologies) STARTED AS: A firm selling content to schools ACQUIRED: 2007, by TutorVista Global SCHOOLS TAKEN OVER: 5 STUDENT STRENGTH: 3,000 INITIAL INVESTMENT: Not Available REVENUE: Not Disclosed FOOTPRINT: India, Nepal EXPANSION PLANS: Open 100 schools across India and six International schools in the next few years

Deepak Srinath, Director, Bangalore-based Viedea Capital Advisors, points out that income for schools does not come from fees. “The companies are interested in school ownership not because of fee income, but because of the business coming out of selling content, technology and other services. By taking over a school, an investor ensures that the business is captive,’’ says Srinath, adding that his I-bank had been approached by a few large education-service providers exploring takeover opportunities in the school segment.

They are changing...
Even the veteran brands are changing with the times. The 59-year-old Delhi Public School (DPS), which has 122 affiliate schools, has become choosy about its partners. It’s open to proposals for new schools only from public sector undertakings and large corporates. Bangalore’s National Public School chain, which turned 50 this year, is even choosier: it’s currently open to invitations only from foreign governments.

The Rs 3,000-crore Yash Birla Group has just announced a Rs 500-crore investment in education by 2012. Birla Edutech CEO Srikrishna says eventually they will own 20 per cent of the schools and run the rest via joint ventures and franchisees.

Six K-12 schools, under the brand name Open Minds, will come up at Nasik, Mumbai, Gurgaon, Bangalore, Hyderabad and Chennai from 2011. Another Mumbai-based group, Ryan International, which started its first school in a garage in 1976, today has 115 schools in India and one in Sharjah with 2 lakh students. In the next two years, Ryan will open schools in West Asia and in other Indian cities, says its Managing Director, Grace Pinto (53).

K.P. Gopalkrishna, Founder, National Public School

National Public School

ESTABLISHED: 2000 (as Edurite Technologies) STARTED AS: A firm selling content to schools ACQUIRED: 2007, by TutorVista Global SCHOOLS TAKEN OVER: 5 STUDENT STRENGTH: 3,000 INITIAL INVESTMENT: Not Available REVENUE: Not Disclosed FOOTPRINT: India, Nepal EXPANSION PLANS: Open 100 schools across India and six International schools in the next few years

Some, like Zee Group unit KidZee, prefer not to own any school at all. But KidZee dominates the pre-school segment with 697 schools run by franchisees, from whom it takes a royalty per student. Launched in 2003 with an investment of Rs 4.05 crore, KidZee has 33,000 enrollments and reports revenues of Rs 16.5 crore a year. Nitin Pandey (30), KidZee’s Business Head, says the chain has grown by 50 per cent annually in the last six years, outpacing the segment’s growth. The aim: 1,800 centres by 2012-13.

Regulations, a dampener
With an oversupply of government schools and shortage of quality private schools, there’s a big gap that private investors can fill. But the patch is strewn with roadblocks.

A Venture Intelligence survey of 90 PE funds in January this year threw up a common reply: education is a hot segment. Over 80 per cent of them said they plan to invest in education companies, but half of those polled said regulatory hurdles are a deterrent.

National Public School’s Founder K.P. Gopalkrishna and his National Education Trust, for one, would rather go to Bangkok, Dubai and Malaysia, than open any more schools in India.

“I have put my plans on expansion in India on hold. The proposed Right to Education Act entails several commitments from private schools. It discourages private investments in education,’’ says Gopalkrishna. If extended the same economic freedom as the IT sector, Indian educationists will produce world-class institutions, he asserts.

DPS Society Chairman Ashok Chandra, a former IAS officer, also favours some easing of controls and says schools should be allowed to make a small surplus for reinvestment into the sector.

With Saumya Bhattacharya in Delhi, Anamika Butalia in Mumbai And Nitya Varadarajan in Chennai.