Educomp close to ceding IndiaCan to JV partner Pearson

IndiaCan, the 50:50 joint venture (JV) between Educomp, India's largest educational services company, and Pearson Plc, the $9 billion global publishing and education services major, is set for a change of control and ownership.

At least four well placed sources, all of who did not want their names to be used in this context, told Forbes India that the deal transferring most, if not all, of Educomp's 50 percent shareholding in the vocational training company to Pearson has been closed. Though the exact details of what Pearson will pay Educomp for its share is not known, it is understood to be significantly lesser than what Shantanu Prakash, founder and CEO of Educomp, had apparently been holding off for the last few years.

Rumours of Pearson buying out Educomp from the JV have been circulating for well over a year. But the two sides never managed to reach an agreement on the valuation. Educomp of course wanted a premium in return for ceding control in the company, while Pearson was wary of paying that because the business has yet to start making any profits.

Why IndiaCouldn’t

In June 2009 Pearson invested $30 million across two Indian companies that it felt were promising.

The first was TutorVista, a Bangalore-headquartered company headed by K.Ganesh that cannily used the Internet to enable teachers in India to coach students in countries like the US and UK.

Something must have clearly clicked on that investment, because in less than two years Pearson upped its stake from 17 percent to 80 percent by investing an additional amount of nearly Rs.600 crore. And in February this year it acquired the remaining 20 percent in TutorVista, making the company its wholly owned subsidiary.

Meanwhile its other investment was in IndiaCan – an equal joint venture in the vocational training space with Educomp, a pioneering and fast-moving company led by Shantanu Prakash.

Suffice it to say, things didn’t go very well on that front.

Educomp’s star would start fading within a few months as the overall slowing down of the global and Indian economies would constrict the availability of cheap debt – the fuel for the company’s numerous engines.

Like an insatiable and self-replicating organism, Educomp had spread itself across every single sector even remotely related to education, from vocational training to schools and colleges to online coaching to digital classrooms and even TV channels. (Disclaimer: Network 18, the parent company and publisher of Forbes India, has a joint venture with Educomp called Topper Learning)

Unfortunately the sheer scale of its ambition to become the number one player in every single educational segment imaginable was stymied by an equally sheer shortage of capital and management bandwidth to devote across all the businesses.

With its two ‘primary’ businesses – SmartClass and K-12 schools – sucking in vast amounts of capital, the company was running out of cash faster than it could raise it.

And IndiaCan was one of the victims.

In a way it was perplexing, because Indian industry has been clamouring for trained & skilled talent for years together. Take for instance this account of a recent panel discussion organized by Mint. It is as if every business with some scale is desperate to find suitably trained talent.

And yet, every single vocational training company in India is slowly atrophying away, chasing a mirage of business models.

"NIIT was worth Rs.10,000-plus crore when I passed out of college. Today they're worth around Rs.390 crore which is less than the value of land on their books. Aptech is worth just Rs.200 crore. There is an inherent birth defect in the vocational training space," says Manish Sabharwal, the founder and CEO of Teamlease Services, India's largest staffing and HR services firm.

In typical Sabharwal fashion, he rattles away problems, metrics and solutions to this vexing problem - how can vocational training companies be in the doldrums even as their prospective clients are all desperate for trained talent?

- "Four key labour variables – 12% manufacturing employment, 50% self employment, 55% agricultural employment and 90% informal sector employment - have all been the same since 1991. Thus 100% of job creation has been happening in the informal sector."

- "Companies are now realizing that skills like curiosity, team play, communication etc. are more important than last mile skills. And if someone hasn't learned those in 12 years, you can teach them in 3 months. You have to first fix the education system."

- "There is a market failure in skill development because companies will not pay for training but they will pay for trained candidates; candidates will not pay for training but they will pay for a job; and finally banks & micro finance institutions are unwilling to lend money for training unless jobs are guaranteed at the end of it. Innovation has to lie at the intersection of jobs and employability."

- "Prof. Gary Becker (at the University of Chicago Booth School of Business) has done pioneering work to show that companies can't be expected to "manufacture" their own talent by investing in training. For one, the benefits mostly go to society and individuals, not companies. And even they do invest in training, they need to handle three risks - learning (a person is un-trainable); productivity (a person is unable to apply his or her training effectively); and attrition (a person simply quits after training)."

IndiaCan also suffered from the lack of clear government or trade body policy that would compel poor and unskilled workers to acquire formal trade skills.

It was a chicken-and-egg problem, says a senior executive from IndiaCan who did not want to be quoted because he is not authorized to speak to the press. “On one hand as Indians we chase degrees more than skills, even if it from a distance learning university. On the other, most employers will keep crying about the lack of skilled labour but are yet unwilling to pay a premium for them, preferring instead to hire unskilled labour,” he says.

Smart businesses often fight sectoral headwinds by rapidly investing in newer services that might work, but that too didn’t happen at IndiaCan. With neither profits (it is yet to turn one) nor adequate equity capital coming in from its two owners, the business was forced to shy away from new training offerings that required capital investments, say, for instance a machinery course requiring a CNC lathe.

Instead it shifted its focus on low-hanging ‘soft skills’ programs like test preparations for the Chartered Accountant and Civil Services exams. Even then the monies weren’t enough. Salaries and even statutory dues were delayed many times.

"The vocational training sector in India is yet to discover right business model. But the good part is that every year IndiaCan is losing less money than the year before," says Prakash.

That isn't much consolation for the founders of PurpleLeap, a college training company that Educomp bought in 2008 before merging it under IndiaCan in 2011, who have yet to be paid out their full dues.

Many of these issues have apparently been escalated to Pearson’s global management, but it has till now been constrained by the equal partnership clause in the venture that mandates both partners bringing in equal amounts of capital.

"PurpleLeap was only an "investment" of IndiaCan and we expected the management team to deliver results. The founders still run the company and if there has been any financial stress, it has to do with them," counters Prakash.

Now with Educomp and Prakash close to exiting the business, Pearson will need to figure out where to take the company.

"But even if or after Pearson takes control, IndiaCan doesn't have a path to the moon. Cost, quality and scale are the impossible trinity in their business, and a linear programming problem no one has been able to solve till date," says Sabharwal.

The thoughts and opinions shared here are of the author.