The Indian education sector has witnessed an exceptional boom over the past five years. Buoyed by high economic growth and a bull run in the equity markets, privately run companies in the sector witnessed multiple deals.
And even now, the investor fascination for the sector is far from over, as suggested by a sector P/E at 24, far higher than the Sensex P/E of 16. Three deals were announced in the space in the last one week – Educomp Solutions Ltd said it is raising Rs 607 crore through a QIP, while Helix Investments has picked up a stake in LearningMate, which provides e-learning solutions, and Matrix Partners said it would invest Rs 100 crore in IIT test prep company FIITJEE Ltd.
Given the huge potential for the sector – favourable demographic profile, growth rates and potential for further opening up of the sector, this is perhaps no surprise. But with the cycle having turned as economic growth slows and equity markets still figuring out the direction, we try to assess how good is the opportunity in the education space.
In our analysis, we stick to listed companies for want of details on the deals in the unlisted space. There are three parameters on which we consider the space – historical investor returns, current value of investments in education and extrapolation of current trends to assess where the investments will be in the years to come.
Historical investor returns – Of the two exits made from the investments made in the listed education space, both have given good returns within 2.5 years for which the investments were made. For instance, Intel capital recorded a gain of over 5 times its initial investment in NIIT, when it sold of its entire 9.4% share for Rs 196 cr in the company within 2.5 years in June 2007.
Similarly, Gaja Capital sold 0.5% of the total 2.32% share in Educomp solutions in September 2007, which it had bought at the time of the listing of the stock in December 2005. It cashed in Rs 90 crore, registering a return of 22.5 times over the original investment. But do note, that these investments were made early on in the bull-run in the equity markets, and the exits came in at a time when they were reaching their peaks.
Current valuations of later investments – However, the more worrisome part has to do with the later investments. Over 20 PE deals have taken place in the education space between the start of 2007 and September 2008, when deal making came to a standstill. The overall markets have not recovered to the previous highs, and education is no exception to the overall trend. The average value of stock prices of listed education companies as on July 9, 2009 was 40-45% lower than the 52- week highs.
This also reflects on the current value of the later investments. Consider the instances of Everonn and Core projects, which received fresh investments in May 2008 and January 2008 respectively. A group of investors – New Vernon, Deutsche Securities and Blackstone India fund – made investments in Everonn for a total of Rs 168 crore as late as May 2008. Our estimates suggest that the current value of the investments is 44% lower the original value at Rs 74 cr. The investment by Aditya Birla PE in Core Projects in January 2008 has fared somewhat better, though the value of the initial investment of Rs 13.5 cr has also lost 37%, and is now at a value of Rs 5 crore.
Future expected returns – In order to see how the investments are likely to fare over time, we did some number crunching based on past trends. We again consider only Everonn and Core in this case, since these are the only later investments in the education space. If we assume a constant P/E at the current levels, of 20 and 14 respectively, the projections suggest that Everonn investments would be in the green by end of FY10, while the Core projects investment would likely only give positive return by the end of FY12.
Hence, as there is nothing fundamentally in the numbers that suggests caution and as economic growth is picking up, the value of the stocks should only rise. This in turn would give positive returns over time to investments made, however, the returns are unlikely to be as quick or as high as those witnessed by some of the earlier exits.
In conclusion, the merit to the education story remains in place. But in conditions of sluggishness, high returns may not come either as fast or as high as some of the previous exits indicate. However, it remains a space to watch out for medium to long term investors.