A few years ago, education was the hot new sector that every investor — from retail to private equity — wanted a slice of. But the secondary market has not been all that excited, at least in recent times.
Consider these numbers. Companies such as Educomp, Everonn and Aptech that had enjoyed price-earnings multiples of 60-99 times in 2008 (investors were willing pay Rs 60-99 for every rupee of per share earnings) are now trading at single digit valuations.
Even as more education-related companies are listed on the bourses now, investors aren't willing to pay high price to own a share of them.
Why have multiples collapsed?
It isn't the profit growth that is the problem. Companies in the education space have seen their profits surge 3-5 times in the last three years.
“The listed basket of education players is still relatively small and each of them has their own unique issues, which led to a de-rating of the stocks,” explained Mr Nikhil Vora, Managing Director, IDFC Securities. He pointed to corporate governance issues in Educomp and promoter issues in Everonn.
In the case of Educomp, questions about the company's rapid pace of growth and stake sales by the promoters were raised by analysts, leading to a de-rating. The (erstwhile) promoter of Everonn was arrested by the CBI for allegedly trying to bribe an income-tax official. He was subsequently granted bail. Then he resigned from the company.
But governance issues apart, companies that got listed in the last couple of years (such as Career Point and Edserv Softsystems) have seen their multiples crash too. The loss of the ‘scarcity' value could be one reason.
“While there is a fantastic growth opportunity in this space around K-12 schools, higher education, education services such as testing, coaching classes and education-focussed technology players, private equity players are learning with each incremental investment.
“The sector continues to be attractive for PE investors although in my view valuations may start getting moderated given the overall macro economy trends coupled with a moderated IPO market,” said Mr Raja Lahiri, Partner, Transaction Advisory, Grant Thornton India. There also have been exits from prominent education companies by private equity players in recent years. Educomp and Everonn saw private equity funds exit.
Gaja Capital made an exit from Educomp in March 2011 while New Vernon made a complete exit from Everonn over the past one year.
Tutorial companies MT Educare and Career Point which made IPOs in the past year saw private equity investors such as Helix Investments and Franklin Templeton Private Equity, respectively, offload some shares.
“It's still a little early for meaningful PE exits as education as a theme caught on only in the last couple of years. Apart from Pearson-Tutor Vista and some IPOs of education companies such as Tree House, there haven't been any large-scale PE exits in this space per se .
“Of course, there have been cases of partial exits by players during IPOs, which would be driven by liquidity needs of private equity players,” explained Mr Raja Lahiri. The sector is attracting some new investors though.
Pockets of value
As per data provided by Grant Thornton India, the sector had attracted about $395 million worth M&A and PE investments in 2011 up from $266 million in 2010.
Within the space, those involved in coaching for competitive exams, such as FIIT JEE, Career Launcher and IMS, have seen private equity investments. A non-regulated space, the $6.4-billion coaching class market is one of the larger opportunities, but not without its challenges.
“There is limited value creation potential in the space as scalability is a challenge in 80 per cent of the market (tuitions).
“In the remaining that offer coaching for aptitude-based entrance exams to engineering/professional courses, scalability is an issue,” felt Mr Nikhil Vora.