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Investing In Education

Monday, February 13, 2012
K. Raman

A large young population base, increasing household incomes and regulatory changes are making the Indian education sector attractive for private sector investment. Depending on their strategic objectives and risk profiles, investors can realize value in one or more segments of education through a data driven evaluation of investment opportunities say K. Raman of Tata Strategic Management Group.

The Indian education sector is one of the largest in the world. Total expenditure in the sector stood at USD 100 Bn in FY11 and is expected to increase at 15% CAGR to USD 175 Bn in FY15. Of this large pie, private sector revenue is estimated to be USD 30 Bn and is expected to grow at a faster rate of 19% CAGR between FY11 and FY15.

Underlying these large size and growth numbers are some fundamental growth drivers that make education an attractive sector for investment.

Key growth drivers:

India has ~600 Mn people in the age group 0 to 24 years, the largest globally. This large addressable population base together with growing household incomes is expected to spur tremendous growth in demand for education across various segments.

Household income is expected to grow significantly in the years to come. Higher income households have a greater propensity to spend on education. They also have a higher preference for private education. Already 24% of secondary and higher secondary students and 55% of students undergoing technical education are enrolled in private institutes. As more households get into the mid and high income levels, the demand for private education is expected to grow many-fold.

Average household education expenditure in India has risen from 1.46% of annual income in 1981 to 2.55% in 2008 and 7.5% in 2010 (compared with 6.2% in China and 4.5% in Brazil).

Skill development is an area that is receiving a lot of attention due to the country’s demographics and government support. The government has set up various Public Private Partnership schemes to realize its target of training 500 Mn individuals by 2022. The National Skills development Corporation (NSDC) has been set up under the National Skills Development mission (NSDM). The government also recently launched the National Vocational Education Qualification Framework (NVEQF) which will be implemented in polytechnics, engineering colleges and other colleges across the country. The programme is expected to cater to more than five million students for vocational degree and diploma every year.

Regulatory shifts in the right direction
One of the key constraints for the development of the education sector has been that of regulation. Being a concurrent sector, there are multiple regulations around content, assessments etc. making the delivery complex. However the government is attempting to take steps in the right direction to reduce this complexity. For example, the Foreign University Bill is expected to be passed in the near future. There are efforts to simplify the current higher education regulatory framework by creating the National Council for Higher Education and Research (NCHER) to assimilate bodies like UGC and AICTE. Recently, the government has allowed medical colleges to be set up as Section 25 companies. There are also initiatives being taken for unification of syllabi across states in India.

While opening up of the formal education sector to profit making is not expected to happen in the short term, it is anticipated that greater participation of the private sector in modes like PPP to help in improving efficiency of the institutions will be encouraged.

All segments in education are expected to see high growth rates in the next few years, making it an attractive opportunity for investors. Many segments of the sector are also perceived to be insulated from the vagaries of the economy. Adoption of technology in education has been increasing leading to creation of new business models. Hence education has continued to see large investments in the recent past. In 2011 alone, private equity investors have pumped USD 93 Mn in 10 education companies.

However, all segments may not be uniformly suitable for investment and would therefore need to be carefully evaluated. For example, investors interested in the K12 segment would need to consider potential exit options. Investors would need to identify opportunities in accordance with their strategic objectives and risk profile. This combined with a data driven due diligence for market potential and regulatory considerations is likely to generate attractive returns in the medium to long term.

With  inputs from Prashanth Nair and Mayurpankhi Barooah of Tata Strategic Management Group.

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