The Rise and Fall of Educomp
Image: Amit Verma
nkur Rudra, a stock analyst at Ambit Capital, knows how to call it like it is. In January 2011, the then 29-year-old stuck his neck out by putting a ‘sell’ rating on Infosys, a company that had been the blue-eyed baby of the Indian stock market for nearly two decades.
It would take nearly a year-and-a-half for the rest of the analyst and investor community to come round to Rudra’s point of view, that Infosys was being valued too highly in the context of its growth potential. Of course, by then its stock had shed nearly a third of its value, so everyone had the benefit of hindsight as well.
In February last year, Rudra stopped tracking Educomp Solutions, the largest education services firm in the country. “I’d been pessimistic about the company since 2009, but by 2012 there just wasn’t enough trading in the stock for it to be of commercial interest to any stock broking firm,” says Rudra.
Sangeeta Gulati too had been bearish on the stock. Of the 35 transactions she undertook in Educomp between 2007 and 2012, nearly two-thirds were sales, and in almost all cases undertaken within a fortnight of acquiring the shares.
But Gulati wasn’t a star fund manager. She was the chief financial officer (CFO) of Educomp. Most of the stock she sold was allotted to her through Educomp’s ESOP (employee stock ownership plan). In April 2012, Gulati resigned, a week after making her two final share sales.
Today, Gulati’s pessimism on Educomp’s stock makes perfect sense. For a company that almost single-handedly created the hype around money-making opportunities in school education, its stock is down 67 percent over the previous year; 84 percent over two years; 91 percent over three years. Its market capitalisation has fallen from Rs 7,000 crore in November 2009 when Forbes India did a profile on the company to just Rs 771 crore as of March 23.
Things have been bleak internally as well during the last two years, with even employee salaries being held up at both Educomp and IndiaCan, its joint venture with Pearson Plc.
Of the $150 million in new funding it raised in July 2012 from three foreign investors, two-thirds would go to pay back a five-year-old foreign currency loan it couldn’t repay on its own, given the debt and liabilities on its stressed balance sheet.
Surely there are some lessons that Educomp and its founder Shantanu Prakash have learnt during the rollercoaster ride of the last five years?
“It is not right to say that anything went wrong with Educomp,” Prakash avers. “From 2006 when we went public to 2012, our revenue has grown from Rs 51 crore to Rs 1,500 crore; profits from around Rs 6 crore to Rs 180 crore; school customers from 75 to 15,000. Plus we have 250 preschools, 47 schools with 22,000 students and 350 vocational training centres. This is ‘Wow!’ This is fantastic growth! How companies fare in the capital markets doesn’t tell the full story of how they’re doing in terms of their social impact.”
What Prakash doesn’t talk about is that Educomp’s net profit margin has fallen 61 percent during the last four years; the net cash generated by its operations has been falling significantly for the last three years; the time taken to collect its money from customers almost doubled in the last four years; and most importantly, its overall liabilities in 2012 were over twice its revenues.
Prakash is also cool about some high-profile exits from his company.
Four months after CFO Gulati’s resignation in 2012, Mohit Maheshwari, Educomp’s company secretary and the person who led its compliance and corporate governance functions, resigned too.
Meanwhile, that very year, four consecutive company secretaries would resign in Edusmart, a three-year-old company whose sole purpose was to convert nearly two-thirds of Educomp’s annuity revenue from schools into large chunks of discounted loans from banks.
An uninformed, lay investor would think there was a pattern. “There is no pattern and no inference from these resignations. They are 500 percent irrelevant. Edusmart is a really small company and Educomp has had several management changes over the years,” Prakash says.
A good place to see how the Educomp story developed chinks would be at the Sanskaar School in Hubli, Karnataka.
EDUCATION’S SUB-PRIME CRISIS
Flanked by acres of red earth-topped bare fields and demarcated plots on all four sides, the six-year-old Sanskaar English Medium School sits a few hundred metres off the Gulbarga-Bijapur highway in Hubli.
The 19 classrooms from Montessori to Class 10 brim with the chatter of nearly 800 students. Each of the classrooms is fitted with an interactive digital ‘board’ that teachers use to mix multimedia content with their regular teaching.
In early 2011, Educomp inked a deal with Sanskaar to equip all its classrooms with its Smart Class range of digital classroom aids that allowed teachers to use interactive multimedia content to supplement the standard textbook-and-blackboard approach. Instead of paying roughly Rs 37 lakh to Educomp for the hardware and content, the school would pay it a monthly fee per class over a contract period of five years. In turn, the school would pass on the cost as a monthly fee increase of Rs 150 to Rs 200 per student.
Given India’s population, paucity of good schools and love for all things technology-enabled, the potential market for such a service was seen as a few hundred thousand schools. Smart Class itself grew like weed, from less than 100 schools in 2006 to over 6,550 schools by 2011.