2009

Indian Education Sector Report

Signature Group
9/9/2009
Indian Education

Table of Contents

DISCLAIMER & LIMITATIONS ............................................................................................................................ 3

SECTION 1: INDIAN EDUCATION SECTOR OVERVIEW ....................................................................................... 4

1.1. PRE-SCHOOL ............................................................................................................................................. 5

1.2. THE K12 SPACE ......................................................................................................................................... 5
1.3. HIGHER & TECHNICAL EDUCATION (HTE) SPACE.............................................................................................. 6
1.4. TUTORIALS ................................................................................................................................................ 7
1.5. VOCATIONAL TRAINING ............................................................................................................................... 7
1.6. TEXT BOOKS.............................................................................................................................................. 7
1.7. STATIONARY .............................................................................................................................................. 8
1.8. EDUCATIONAL CD-ROMS ........................................................................................................................... 8
1.9. CHILD SKILL ENHANCEMENT ......................................................................................................................... 8
1.10. INFORMATION & COMMUNICATION TECHNOLOGY IN PUBLIC K12 SCHOOLS ......................................................... 9
1.11. OTHER NEW INITIATIVES ............................................................................................................................. 9

PROMINENT PE INVESTMENTS IN INDIAN EDUCATION SECTOR..................................................................... 10

INVESTMENT OPPORTUNITIES ....................................................................................................................... 11

ANNEXURE A ................................................................................................................................................. 13

ANNEXURE B .................................................................................................................................................. 13

ANNEXURE C .................................................................................................................................................. 15

ANNEXURE D ................................................................................................................................................. 16

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D ISCLAIMER & L IMITATIONS
No part of this document shall be replicated or copied for any purpose whatsoever. This document
has been prepared and issued on the basis of publicly available information, internally developed
data and other sources believed to be reliable. Whilst all reasonable care has been taken in the
preparation of this document, the accuracy or completeness of the information contained herein is
not guaranteed. Any opinion expressed (including estimates and forecasts) may be subject to
change.

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Section 1: Indian Education Sector
Overview
The Education Sector in India is largely regulated to run as a social service. It requires registration under the
Societies Registration Act 1860 or as a public trust under Registration Act 1908. Any surplus fund generated in
the process of running formal schools/colleges has to be reinvested into the same and no dividends can be
distributed. This charitable and missionary character discourages private investment.

India’s population growth, coupled with greater a awareness to impart education to the masses, has created
wide disparities. A large section of the population (142 million of the 361 million school going children) is still
out of bounds of education. The majority of those who receive education are catered to by the state run
schools where the quality is generally poor. Most of the quality education is in the private sector, which only a
small percentage of the population can afford. The States’ expenditure on education largely goes towards
operating expenses with little left for capital expenditure. This in turn is further increasing the demand /
supply gap. These constraints in creating infrastructure & improving the quality are forcing the state to revisit
the existing policy of not permitting the private sector “for profit” model.

Pending changes in the regulations, the sheer demand push has lead to ways of working around the existing
regulations by adopting a 2-tiered structure: The trust runs the school, while the land, services and
infrastructure are provided by separate companies who own these assets and operate on lease/fee and
generate return on investment. In the last decade, there has been a proliferation of private colleges, institutes,
universities operating under the said 2-tier structure thus circumventing the philosophy of the government to
provide education at “no profit” basis.

The private sectors spending on education is summarised in Annexure ‘A’. For greater private sector
participation and better regulation, there is an urgent need for reforms in order to recognise the role of
investment for profit in the education sector. The Government has finally accepted the inevitability of
involvement of private sector in education. The issues under debate are the “reasonableness” of the “profits”
and inclusion of all sections of society in accessing quality education at affordable cost. The private sector is
thus set to play a larger role in education.

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1.1. P RE -S CHOOL
Pre-school education is informal and unregulated. It is growing at rate of 36% CAGR and expected to be
$1billion market in next 3 years. It has low entry barriers and is largely fragmented, though in the last few
years, only 10-11 corporate institutions have entered the market.

Some of the prominent players are:

KidZee Shemrock Bachpan DRS Kids

Euro Kids KangarooKids Podar Jumbo Kids Sunshine
Apple Kids Tree House Mother’s Pride

This segment has traditionally been limited to servicing neighbourhood area within 3 to 4 km radius. The
corporate institutions, with proper structuring and branding have evolved a scalable franchise model,
achieving even higher than 36% CAGR. Lately some JVs have been formed with builders/asset owners which
have also led to upgrading to K12 schools.

The market is under-penetrated, particularly in Tier II & III cities although even in metros, well branded schools
have good potential to increase their reach.

1.2. T HE K12 S PACE

Formal schooling, globally known as K12 (Kindergarten to 12th grade) is India’s core education market and
occupies the largest space in the education system, growing at 14% CAGR. At 361 million, India has the largest
student population globally in the K12 age group i.e. 3-17 years of age (5.5x USA’s K12 population). Refer
Annexure ‘B’ for education led career path in India.

The Central Board for Secondary Education and the Indian Council for Secondary Education and States’
Education Boards form the regulatory bodies. They stipulate running of a K12 institution only as a trust or
society. Income from the trust is non-taxable but the ‘reasonable surplus’ (not defined) can be used only for
development of the same institution and cannot be distributed as dividends. The Regulations however differ
from state to state.

Following pre-school (an optional course), a child enters a K12 school group. Out of the estimated 361 million
children in the K12 age, only 219 million go to school – 142 million being out of the school system. 40% of the
school going children attend private schools, which are approx 7% of the total number of schools in the
country. This indicates a clear preference for private schooling over public the education system. The quality of
education in private schooling is better despite the higher costs. There are over 75,000 private schools with
investment of over US$20billion. The growth of private schools is fast because of the absence of quality public
schools. A growing awareness about the importance of quality education and increasing ability and willingness
of Indians to pay for good education is driving private sector education forward.

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Regulatory framework:
K12 schools are required to be established by educational, charitable or religious Societies or Trusts having a
non-proprietary (not-for-profit) character in order to receive an ‘NOC’ from the State and affiliation to the
regulatory body. In addition, the school needs to have requisite land (owned or on long lease) in the name of
the school or Society/ Trust operating the school and qualified staff.

The ‘not-for-profit’ characteristic is the main deterrent for private investment. Most of the schools are
standalone except for some chains set up by charitable institutions, political and religious groups. For example,
Delhi Public School, which runs over 120 schools – 107 in India and 13 outside under a franchise model.

Independent private schools have evolved a 2-tier structure wherein the trust runs the school while the land,
services and infrastructure are provided by separate companies who own these assets and operate on
lease/fee agreement hence generating return on investment. The trust pays these charges out of the fees
received. The profits are available for distribution. The Trust re-invest surplus, if any, into the school. The
corporate sector has been a little cautious on this but has lately entered this sector through this mechanism.
Investment will however gain momentum once regulations are changed to legitimise “for profit” motive.

Recently, some schools have sought affiliations with various international boards such as IGCSE (International
General Certificate of Secondary Education) and IB (International Baccalaureate from Geneva). These schools
can opt for “for-profit” structure, however subject to state laws (e.g. Haryana allows schools to be run “for-
profit” while most other states do not permit this).

1.3. H IGHER & T ECHNICAL E D UCATION (HTE) S PACE

HTE is governed by a central body (University Grants Commission – UGC) and also a regulatory body of the
specialization (e.g. All India Council for Technical Education - AICTE). The governing body (UGC) stipulates that
these institutions be run as a trust or society where all the infrastructure and capital goods have to be on the
books of the university. Over and above this, AICTE has its own set of rules in respect of infrastructure and
curriculum which the HTE has to follow in order to award degrees and diplomas recognised by public sector
institutions for employment. However, in some cases an institution receives a “deemed” university status; is
so, it is freed from these obligations.

The degrees/diplomas granted by those HTEs which operate outside the controls of governing and regulating
bodies are not recognised for employment in the public sector. In such cases, the employment opportunities
are significantly diminished, except for those who have created their own brand equity like ISB (Indian School
of Business, Hyderabad).

In 2007, there were 1,617 recognised engineering colleges out of which approx 1,200 were in the private
sector; these institutions are growing at a rate of 100 per year. There are more than 300 business schools and
140 medical colleges in the private sector in India, mostly operating as stand-alone institutions. These
represent a US$ 7billion market, with engineering taking the major share at US$ 5.85billion (or 83% of the
total). After K-12, private professional colleges form the single biggest category in Indian education with a
market growth of over 16% CAGR. Five states - Andhra Pradesh, Tamil Nadu, Maharashtra, Karnataka and
Uttar Pradesh dominate the market. However, the fast growth has also resulted in influx of substandard
colleges, irregularities in fees, political involvement etc.

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1.4. T UTORIALS
School/College (Academic)

Augmented teaching outside the classroom is big business in India. Though a largely urban phenomenon, the
numbers add up to a market worth an estimated US$ 5.3billion. Around 20 million i.e.: about 10% of the
school going children are estimated to be taking tuition outside the classroom. Associated with K-12 it is the
third biggest segment in education overall. Most of the market is currently in the hands of teachers who run
tuition classes specific to a city or locality. The market is highly fragmented, driven by individuals and hence
not having any significant opportunity for investment.

Admission Test Preparation (Coaching Centres)

The market for Coaching Centres has its roots in the competition for admission in reputed engineering,
medical and business management institutes. Nearly 400,000 students appear for IIT-Joint Entrance
Examination and around 230,000 for IIM-Common Admission Test for MBA. Approx 1% get through. The same
situation exists for medical entrance exams, other reputed engineering colleges entrances & Civil Services
entrance. This has led to a proliferation of a large number of privately-run Coaching Centres. The estimated
market is worth more than US$1.7billion with 20% CAGR.

There are no regulatory restrictions for them. The market is largely stand-alone or regionally segmented
although a few nation-wide chains have come up like Time, IMS, Career Launcher, FIITJEE, Brilliant Tutorials,
Vidyasagar Classes, Akash Institute, Professional Tutorials, Mahesh Tutorials. There is a fair investment
opportunity in the segment.

1.5. V OCATIONAL T RAINING

Service Industry Skills Training

There is a growing demand for non- formal vocational training for skills required in specific industries like
airlines, retail chains, hospitality, financial services, ITES and also for English Language as it creates
employment opportunities. Services-sector growth is the key driver for this segment. The current market is
estimated to be worth over US$1.5billion with 25% CAGR. Some of the prominent players are NIIT, Aptech,
Avalon, Jet King, ICA, CMS, VETA and FrankFinn. With established brands commanding the market, good
investment opportunities exist in the segment.

IT Training

The informal IT Education market is estimated as US$225m, with NIIT and Aptech being the dominant players,
having countrywide presence. NIIT has about 450 centres in India, and 170 in China, with global coverage of
nearly 750 (including Asean/Africa). However, the growth in recent years has slowed down as universities have
started offering IT (BSc/MSc, MCA/BCA) courses.

1.6. T EXT B OOKS

India’s education sector consumes nearly US$2billion worth of textbooks a year, of which US$1.6billion are in
K-12 segment and US$300m in higher education. A large number of students re-use text books in both the

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segments. Private publishers have access to just 60% of the market given the monopoly of state boards and
NCERT (National Council of Education Research and Training) in 95% of the school text book market. With
more than 8,000 publishers, the private text books market is heavily fragmented. Some of the prominent text
book publishers are Tata Mcgraw Hill, Cengage (formerly Thompson), John Wiley, S. Chand, BPP Laxmi
Publications, Oxford, Macmillan, Orient, Longman and Navneet Publications. The segment has limited scope
for growth and investment opportunities.

1.7. S TATIONARY
A K-12 student in a private school consumes each year around US$ 8.5 worth of notebooks, pens, pencils, and
other stationery items. In public schools it is just about US$ 1.5 a year. With 90 million children in private and
129 million in public schools, this market is worth approx US$ 1.3billion. The market is fragmented and has
limited investment opportunity.

1.8. E DUCAT IONAL CD-ROM S

Use of educational CD-ROMs is increasing within middle to upper-middle class urban households. Assuming 5%
of urban households buy 10 CD-ROMs a year, the market size is nearly US$120m. Intensive use is evident in
the 2-9 years age group, with wider use emerging in the secondary and higher secondary curriculum, notably
maths and science for Grades 9 and 10. There is a potential for expansion in this market over time although
investment avenues are limited.

1.9. C HILD S KILL E NHANCEMENT

Child skill enhancement (in 1-8 grades) is a new segment primarily catering to urban middle and upper middle
class segment. Skill enhancement services such as mental mathematics, memory and speed reading are
becoming increasingly popular. “UC Mas” has 900 centres in India teaching mental mathematics and memory
skills. “Aloha” has another 600 centres. “SIP Academy”, started in 2002, has grown to 450 centres. Other
players are expanding as well (Smart Brain has 110 centres). It is fast growing, throwing open new investment
opportunities.

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1.10. I NFORMATION & C OMMUNICATION T ECHNOLOGY IN P UBLIC K12 S CHOOLS
Increasing awareness about the effectiveness of ICT in improving the quality of education has created a huge
market for this complementary teaching mechanism. The government is opting for public private partnerships
(PPP) to source IT infrastructure and training in order to reach out to public. Around 16,000 schools have been
enrolled and by 2013 the number is likely to go up to 200,000.

Presently, out of 75,000 private schools, only a handful of them are using ICT enabled teaching tools. However
it has started spreading fast achieving a high CAGR of approx 75 – 80%. Educomp Solutions, Everonn Systems,
NIIT and Compucom are the main players apart from a host of regional players. Educomp Solutions has
pioneered Smart Class – a high-return and annuity business model. Others are increasingly adopting the
model.

1.11. O THER N EW I NITIATIVES

Several related new businesses are emerging, such as,

 Revision modules on the Internet (for K-12)

 Information exchanges for Indian education
 On-line examinations and analysis
 Solved questions on the different CBSE curriculums

Although they are in nascent stage, the growth rate is likely to be very high with exponential increase in
broadband penetration. By end-2007, India had about 3m broadband subscribers, growing at 0.25m per
quarter. The investment potential will emerge 3-4 years down the line once the user base expands to make the
business model sustainable.

Teacher training is taking off, but scalability issues remain, due to a low propensity among school management
to spend on training. In public schools, 97% of government budgetary outlay for education goes into salaries.
Educomp is a major player in organised teacher-training business and is growing annually at 35-40%. However
the current market is too small from an investment point of view.

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Relocating or building new schools, colleges, universities or job centres and providing facilities management
for the new buildings/campuses. Projects might involve land swaps or enable the private sector provider to
generate a third party revenue stream from the extant infrastructure. The investment returns and upside are
limited.

Building sports or academic/conference facilities for common use of educational institutions. Can be a good
investment opportunity, depending on specific project model.

Refurbishing/maintaining existing assets, providing facilities/hardware/software. Good business though the

opportunity may not be sizeable to attract investment.

Refer Annexure ‘C’ for segment wise private sector players.

P ROMINENT PE I NVESTMENTS IN I NDIAN E DUCATION S ECTOR

In-spite of regulatory barriers, there have been PE investments have been visible in Indian Education sector.

PE Company Investee Amt ($Mn)

WestBridge Capital Partners Brainvisa E-learning (US-focus) 5.5
(Now Sequoia Capital)
Sequoia Capital TutorVista online tutoring (US-focus) 2
Lightspeed Venture Partners TutorVista online tutoring (US-focus) 10
& Sequoia Capital
IDFC Private Equity Manipal Universal Higher education 10
Learning Capital Manipal Universal Higher education 40
Learning Manipal Education & Medical Meritrac
Corporate recruitment testing 8
Group (HSBC PE Asia)
Helix Investments Mahesh Tutorials Tutorials 30
Gaja Capital Career Launcher Test Prep 8.3
Helion Ventures Hurix Systems e-learning (US-focus) 5.1
SAIF Partners ICA Vocational Training
Manipal Education Group Tutorvista Online tutoring 2.5
SAIF Partners VETA Vocational training, English speaking 10
Aditya Birla Group Core Projects Multimedia ICT 3.5
KPCB, Sherpalo Ventures StudyPlaces Education portal 3
& Infoedge
Capital18 24x7 Learning e-learning - training solutions 4
(Network18 Solutions Pvt. Ltd)
Lightspeed Venture Partners TutorVista Tutoring 18
& Sequoia Capital
Matrix Partners India Tree House Preschools 7.5
Please see Annexure ‘D’ for valuation of Indian companies in education sector.

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I NVESTMENT O PPORTUNITIES
The estimated private sector spend in the education sector is US$50billion growing at over 16% CAGR. Turning
education into a profitable business is however a medium to long-term investment strategy. The fast growing
“middle class” and its propensity to spend more on education has exponentially increased the demand for
quality pre-schools, schools, professional under-graduate & post graduate colleges and coaching centres.
Equally strong is the demand from the lower segment of “middle class” for skill oriented training centres to
cater to demands of Services and Industrial sectors. The demand for “top end” international
colleges/universities to provide globally recognised education is also increasing day by day.

In the current regulated regime, the private sector investment is feasible under a 2-Tier Structure in the
companies engaged in providing management services and leasing out land/building/assets to the Education
Society/Trust with required checks and balances like:

1. The trust/society and the company are not run by the same management
and common directors. Also, the transactions are done at an arm’s length
and at a fair market value.
2. The trust/society has the teachers on the rolls, collects fees from
students and controls the imparting of the education.

This structure has been in existence for years and has not been challenged. Besides, there are ample
opportunities in segments unbridled by “not for profit” diktat of the State.

With the present central government’s focus on creating an education infrastructure and improving quality of
education, it is likely that the regulations will be suitably modified to attract genuine investment in education.
The changes in the policy are imminent as one can make out from the recent policy statements which indicate
a more conducive environment ahead for private sector’s participation.

The investment opportunities in the present environment can be found in scalable operators in the following
segments:

1. Pre-school – School chains with scalable model under competent

management team
2. Institutes under corporate structure having an established brand for
Training (IT, ITES) and industry specific skill development like Banking,
Airlines & Retail.
3. E-learning companies with accepted complementary education tools,
having potential to enter school establishments – both in private & public
schools
4. Tutorials (Engineering, Medical, MBA, Civil Services, GRE/GMAT/SAT etc)
having established brand name and modular structure for scalability
across the country
5. Established Schools in expansion mode across geographical spread –
through a 2-Tier Structure – investment in companies providing Assets &
Services to the Colleges/Schools

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 6. Schools & Colleges outside the regulatory requirement – having own
brand name or affiliation outside Indian Education System (International
affiliations)

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A NNEXURE A

A NNEXURE B

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A NNEXURE C

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A NNEXURE D

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