Global Education Sector Rating

8/11/2019 Global Education Sector Rating

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MANAGEMENT OF FINANCIAL SERVICES

G LOBAL E DUCATION SECTOR R ATING

ASSIGNMENT

T OWARDS PARTIAL FULFILMENT O F E VALUATION IN T HE SUBJECT

NATIONAL L AW UNIVERSITY , J ODHPUR

Submitted To: Submitted By:

Dr. Rituparna Das Khusboo Agarwal;

Faculty of Management Semester V

National Law University, Jodhpur Roll Nos. : 958


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Management of Financial ServicesGlobal Education Sector Rating

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TABLE OF CONTENTS

Introduction .............................................. ...................................................... ................................. 8

[A] Systematic Importance of Rating and Rating Agencies ................................................... 8

(a) Role and Rationale........................................................................................................ 8

(b) The Rating Process ..................................................... .................................................. 9

(c) Limitations of Credit Rating ............................................... ........................................ 10

[B] Education Sector ............................................................................................................ 11

(a) Overview of the Industry .................................................... ........................................ 11

(b) Internationally Mobile Students ................................................................................. 12

Key sectoral issues In india........................................................................................................... 14

[A] Expanding Market Size .................................................................................................. 14

[B] Inadequate Educational Infrastructure ........................................................................... 14

[C] Quality of Education ...................................................................................................... 15

[D] Regulatory Challenges ................................................................................................... 15

[E] Enrolments Fire Power for Future Growth ................................................................. 16

(a) K-12 Schemes Enrich Enrolments ..................................................... ...................... 16

(b) HE Increasing Enrolments Provide Impetus to Segmental Growth ........................ 16

[F] Dearth of Competent Teachers and Faculty ....................................................... ............ 16


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[G] Demographic Advantage ............................................... ................................................. 17

[H] Education Loans .................................................... .................................................... ..... 17

Rating outlook ................................................... ...................................................... ...................... 18

[A] Stable Outlook ............................................. ..................................................... .............. 18

[B] Liquidity Issues ..................................................... .................................................... ..... 18

[C] Credit Indiscipline ................................................. .................................................... ..... 18

[D] Capex with Heavy Debt ................................................................................................. 19

[E] Evolving Structures Positive .................................................. ........................................ 19

[F] Shortage of Trained Teachers ........................................................................................ 19

[G] What Could Change the Outlook? ................................................................................. 19

(a) Policy Support, Credit Discipline ................................................ ............................... 19

An overview of the education sector and its credit ratinG ............................................................ 21

[A] Key Rating Drivers......................................................................................................... 21

(a) Sector Outlook Stable ................................................ ................................................. 21

(b) Rating Outlook Stable ................................................................................................ 21

(c) Strained Liquidity Position ................................................. ........................................ 21

(d) Sector Expansion with Minor Slippage ................................................ ...................... 21

(e) Loan Availability Crucial ................................................... ........................................ 22

(f) Debt Overload Undermines Debt Service .................................................................. 22

[B] Outlook Sensitivities ...................................................................................................... 22


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(a) Regulatory Changes ................................................... ................................................. 22

Latest Developments in the education Sector IN India with a Global Perspective ...................... 24

CRISIL s Business School Ratings .............................................................................................. 29

[A] The Assessment Parameters ................................................... ........................................ 30

[B] The Credit Grading Process ........................................................................................... 31

ICRA Rating of Management Education Institutes ............................................... ...................... 32

[A] Benefits of ICRA s Rating of MEI ................................................................................ 32

(a) Students ...................................................................................................................... 32

(b) MEIs ........................................................................................................................... 32

(c) Recruiters ................................................. ..................................................... .............. 32

(d) Faculty ........................................................................................................................ 32

[B] Grading Criterion ........................................................................................................... 32

(a) Curricular aspects ....................................................................................................... 33

(b) Selection procedure and student profile ..................................................................... 33

(c) Governance and leadership ................................................. ........................................ 34

(d) Quality of faculty and HR policies .............................................. ............................... 34

(e) Pedagogy and student performance ...................................................... ...................... 35

(f) Infrastructure .............................................................................................................. 35

(g) Student support and development............................................................................... 35

(h) Placements .................................................................................................................. 36


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(i) Financial parameter .................................................................................................... 36

[C] The Credit Rating Process ...................................................... ........................................ 36

[D] The Grading Scale ................................................. .................................................... ..... 38

Full Rating Report of KIIT ........................................................................................................... 39


(a) Tight Liquidity ................................................... .................................................... ..... 39

(b) Moderate Financial Performance ................................................. ............................... 39

(c) Strong Market Position .............................................. ................................................. 39

(d) Comfortable Debt Service .......................................................................................... 40

(e) Capex Plan ............................................... ..................................................... .............. 40

[B] Rating Sensitivities ................................................ .................................................... ..... 40

(a) Sustained Improvement in Operating Performance ............................................... ..... 40

(b) Deterioration in Student Demand ............................................................................... 40

[C] Profile ................................................. ...................................................... ...................... 41

[D] Table 1: Financial Data of KIIT ...................................................... ............................... 41

[E] Rating of KIIT by India Rating and Research: BBB- ............................................... ..... 41

Full Rating Report of Narayan Education society .................................................. ...................... 42


(a) Strong Market Position .............................................. ................................................. 42

(b) Solid Operating Performance ..................................................................................... 42


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(c) Capital Light Model.................................................................................................... 42

(d) Reasonable Balance Sheet Resources ................................................... ...................... 43

(e) Moderate Debt Burden ............................................................................................... 43

[B] Rating Sensitivities ................................................ .................................................... ..... 43

(a) Positive ....................................................................................................................... 43

(b) Negative ................................................... ..................................................... .............. 43

[C] Profile ................................................. ...................................................... ...................... 43

[D] Principal Rating Factors ................................................ ................................................. 44

(a) Administration and Management ............................................................................... 44

[E] Table 2: Types of Schools ...................................................... ........................................ 44

[F] Table 3: Growth in Institutes .................................................. ........................................ 46

[G] Financial Performance.................................................................................................... 47

(a) Revenue Diversity ...................................................................................................... 47

(b) Income ........................................................................................................................ 47

(c) Expenditure .............................................. ..................................................... .............. 48

[H] Table 4: Expenditure Breakdown (%) ...................................................... ...................... 48

(a) Balance Sheet Resources and Liquidity ..................................................................... 48

(b) Debt Burden ............................................. ..................................................... .............. 49

Full Rating Report of Manipal Global Education Services Private Limited ................................ 50

[A] Company Profile ............................................................................................................ 50


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[B] Rating by ICRA ..................................................... .................................................... ..... 50

Conclusion .................................................................................................................................... 52

References ................................................ ...................................................... ............................... 54


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INTRODUCTION

[A] SYSTEMATIC IMPORTANCE OF R ATING AND R ATING AGENCIES

The institution of credit rating as a mechanism for addressing the considerable degree of

information asymmetry in the financial markets has travelled a long way from the times of the

US rail road companies in the mid-19th century. The need for an independent rating agency

capable of assessing creditworthiness of borrowers was felt when corporates started mobilizing

resources directly from savers instead of accessing it through banks which hitherto assumed the

credit risk in such cases. The history of systematic credit rating, however, is a century old

beginning with rating of US railroad bonds by John Moody in 1909. During this one century of

growth and adaptation, CRAs progressed from rating simple debt products to rating complex

derivatives to national economies and altered their business models to cover a range of

activities/products. There are three major credit rating agencies operating internationally- Fitch,

Standard and Poors, Moodys Investor Services: between them they share the bulk of the $5

billion rating business globally relegating other 60 plus local/regional players into just

competitive fringes.

(a) Role and Rationale

A credit rating is technically an opinion on the relative degree of risk associated with timely

payment of interest and principal on a debt instrument. It is an informed indication of the

likelihood of default of an issuer on a debt instrument, relative to the respective likelihoods of

default of other issuers in the market. It is therefore an independent, easy-to-use measure of

relative credit risk. Given the universal reliance on rating, and hence the power of the opinion,


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credit rating is expected to increase the efficiency of the market by reducing information

asymmetry and lowering costs for both borrowers and lenders.

A simple alphanumeric symbol is normally used to convey a credit rating. Ordinarily the

company which issues the debt instrument is not rated. It is the instrument which is rated by the

rating agency. But the issuer company which has issued the debt instrument gets strength and

credibility with the grade of rating awarded to the credit instrument it intends to issue to the

public for raising funds.

Though the purpose of rating is to rate instruments, a general perception may be gathered that the

organization issue a highly rated instrument is also sound and a highly rated entity. Thus, credit

rating is a mechanism whereby an independent third party makes an assessment, based on

different sources of information on the credit quality of the assessed.

(b) The Rating Process

Rating is a multilayered decision making process. The process of rating starts with a rating

request from the issuer, and the signing of a rating agreement. The rating agreement has

important clauses like confidentiality, agreement by the issuer to share information with the CRA

for the purpose of assigning the rating and thereafter on an ongoing basis when the rating is

under surveillance. The rating agency undertakes discussion with the management of the issuing

entity. Discussions during a management meeting are wide-ranging, covering competitive

position, strategy, financial policy, historical performance, and near- and long-term financial and

business outlook. Discussions with company managements help rating analysts evaluate

management capability and risk appetite, which is an important aspect of the evaluation. After

discussion with the issuer's management, a report is prepared detailing the


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analyst teams assessment of the business risk, financial risk, and management risk associated

with the issuer. The report is then presented to the rating committee. This is the only aspect of

the process in which the issuer does not directly participate. Drawing on the knowledge and

expertise of the participants, the rating committee determines the rating. The process is an

attempt to ensure objectivity of the rating, since the decision results from the collective thinking

of a group of experts analyzing the risks pertaining to the issuer vis--vis its competitors in the

industry and markets in which they operate. On finalization of a rating at the rating committee

meeting, the rating decision is communicated to the issuer. As the decision to get an initial rating

is at the issuer's discretion (except, in India, for public issues of debt), the global best practice is

to allow the issuer to decide whether to accept the rating. If the issuer disagrees with the rating, it

can also appeal for a fresh look at the rating assigned. The rating committee then discusses the

information submitted; it may or may not decide to modify the rating, depending on the facts of

the case. If the rating is not changed and the issuer continues to disagree with the rating, it can

choose not to accept the rating, which then does not get published.

(c) Limitations of Credit Rating

Not a recommendation to buy, hold or sell any shares, bonds, debentures or other instruments

issued by the rated entity, or derivatives thereof. A rating is one of the many inputs that is

used by investors to make an investment decision.

Not Intended to measure many other factors that debt investors must consider in relation to

risk- such as yield offered, liquidity risk, pre-payment risk, interest rate risk, taxation aspects,

risk of secondary market loss, exchange loss risk, etc.

Not a general-purpose credit or performance evaluation of the rated entity, unless otherwise

specified. The rating is usually specific to the instrument and is not the rating of the issuer.


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Not an opinion on associate, affiliate or group companies of the rated entity, or on promoters,

directors or officers of the rated entity.

Not a statutory or non-statutory audit of the rated entity

Not an indication of compliance or otherwise with legal or statutory requirements

Not a guarantee against default of the rated instrument. Even the highest-rated instrument

faces some risk of default, although the risks associated with this are lower than lower-rated

instruments.

[B] E DUCATION SECTOR

(a) Overview of the Industry

The global market for education is currently worth $4.4 trillion, and poised to grow significantly

over the next five years. The e-learning market is projected to grow by 23 per cent between now

and 2017, making it the fastest-growing market in education. In dollar terms, this translates into

$166.5 billion in 2012 and $255 billion in 2017.

The education industry comprises the entrepreneurs, businesses and organizations which are

playing an increasingly important and essential role in supporting public education by meeting

the demand for products and services that both complement and supplement public education.

These include after-school tutoring providers, school improvement and management services,

charter schools, alternative education and special education services, professional development

for teachers and administrators, educational content providers and suppliers, as well as the

rapidly growing sector of online education.

Educational technology holds the promise of substantially improving outcomes for K-12

students, but there are significant challenges in bringing new educational technology products for


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this population to market. It is difficult for producers of these technologies to demonstrate the

effectiveness of their products to potential buyers and market fragmentation creates barriers to

entry by all but the largest suppliers.

The spread of broadband Internet and Common Core State Standards have improved the

landscape for education al technologies, but these factors alone are likely insufficient for a "game

changing" advance. Working together, stakeholders can form a plan of action to provide local

school systems with easy access to good information about the effectiveness of various

educational technology products and give prospective developers of these products access to

customers on a scale sufficient to make it worthwhile for them to enter the market.

The vast majority of revenue in this industry comes from tuition or program fees. Gross profits

tend to range from 60-90% depending on the location and particular course, and net profit

averages out to between 2-10%. Increasing company size has helped consolidate operations in

the educational services field - helping to lower fixed costs and improve overall operational

efficiency, both of which are very important to keeping businesses in the field healthy and

profitable. Finding qualified instructors in any field is becoming increasingly challenging; it is

important to inquire about this when researching potential franchises.

(b) Internationally Mobile Students

The UK is the most popular destination for students studying English outside of their home

country, attracting nearly 50% of students globally in 2011. English Language Teaching (ELT)

in the UK was worth 2.5bn, representing 35% of the global market by value. In 2012/13 there

were nearly 26,000 international students studying at UK independent schools, with fee income


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estimated to be 685m. There were also at least 34,500 students studying at FE level in 2012,

who are estimated to have paid 350m in tuition fees in 2011/12 and 980m in living expenses.

Globally, the majority of internationally mobile students are in the HE sector 4.3 million in

2011. The UK is the second most popular destination for these students, with a market share of

13% in 2011. In 2011/12, there were 488,000 international students studying HE in the UK (at

both publicly- and privately-funded institutions).These students were estimated to have paid

3.9bn in tuition fees (net of scholarships) and 6.3bn in living expenses. Other HE-related

export activity, such as research contracts, was estimated to have been worth a further 1.1bn.

There is potential for growth in internationally mobile students across the sector.

Our central estimate12 is that the number of internationally mobile higher education students

coming to the UK will grow by 3.7% per annum until 2020. The global English language sector

is forecast to grow by 25% per annum over 2012-17; whilst this covers all students, it is

reasonable to assume that such rapid growth will also lead to an increase in those studying

outside their home country. In addition, the \Independent Schools Council believes that the

number of international pupils in the UK can increase at 3% per annum in the near future.


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KEY SECTORAL ISSUES IN INDIA

[A] E XPANDING M ARKET SIZE

Indian education sector s market size in FY12 is estimated to be INR3 , 411.8bn (USD71.2bn).

The market size is expected to increase to INR6, 024.10bn (USD109.84bn) by FY15 due to the

expected strong demand for quality education. The market grew at a CAGR of 16.5% during

FY05-FY12. The HE segment was at 34.04% (USD17.02bn) of the total size in FY10 and grew

by a CAGR of 18.13% during FY04-FY10.

[B] INADEQUATE E DUCATIONAL INFRASTRUCTURE

Although the government s ( center and states) spend on education increased to 3.35% of the

GDP in FY12 Budget Estimates (BE) (FY05: 2.62%), the infrastructure, for both school and HE,

needs to be upgraded to provide better quality education and absorb new enrolments. The

existing institution s (schools and colleges) capacity is not fully utilized and notwithstanding the

enhancement of access (99% of rural population has primary school within 1 kilometer as of

September 2010), the quality of infrastructure is poor. Under the model schools scheme,

launched in November 2008, it is proposed that the state governments build 3,500 schools and

another 2,500 schools under public private partnership (PPP) framework. The government also

intends to build additional public school infrastructure through its funding and in PPP model. It

is viewed as a positive factor; nevertheless the execution delays portend a slip in targets.

Private spend on the education increased by a CAGR of 3.23% during FY04-FY11 and stood at


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INR 361.74bn in FY11. However, private sector building schools in rural areas is unlikely in the

short-run. This allows the government to diligently invest in Tier 3 cities and rural areas. At end-

November 2012, 20 states had permitted formation of 145 private universities.

[C] Q UALITY OF E DUCATION

Prolific growth in HE institutes resulted in the challenge of offering quality education and

employability to students. Many technical institutes also run courses without approval from the

regulator All India Council for Technical Education (AICTE). This is because AICTE does not

recognize them due to various reasons including absence of infrastructure and STR. Although the

Eleventh Five Year Plan mandated accreditation of all the HE institutes, the National

Accreditation Regulatory Authority for HE Institutions awaits the parliament s approval.

[D] R EGULATORY C HALLENGES

The HE segment is tightly regulated by multiple agencies as opposed to K-12 segment which is

regulated mainly by state education boards or the two national boards. State governments fee

ceilings, fee reimbursements and intake restrictions constrain institutions autonomy. That said,

the remarkable growth in the l ast decade and government s plan to create an apex regulator at

arm s length are positive developments. Although the institutes were formed as not -for- profit ,

they plough back profits through associates. Associate companies provide facilities management

and charges management fees, lease rentals and other fees. The structure evolvement is viewed

as a positive. Although, foreign investment is allowed under automatic route in education, there

are regulatory issues. Nevertheless, twinning programs with foreign institutions are recognized

by the regulators.


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[E] E NROLMENTS F IRE P OWER FOR F UTURE G ROWTH

The gross enrolment rate (GER) in HE was at 18.8% in 2011 and the government aims to

increase it to 30% by the end of the Twelfth Five Year Plan period (FY17).

(a) K-12 Schemes Enrich Enrolments

Sarva Shiksha Abhiyan (SSA) scheme aims to universalise elementary education. Also, the Right

to Education (RTE) empowers Indian citizens to demand eight years of quality education for

children. These measures propelled the enrolment levels at primary (GER - FY10: 116.25%,

FY01: 95.7%) and upper primary levels (GER - FY10: 81.83%, FY01: 58.6%). Despite high

enrolments at primary and upper primary levels, enrolment in secondary level (FY10: 65%) and

senior secondary level (FY10: 37%) remained low.

(b) HE Increasing Enrolments Provide Impetus to Segmental Growth

The HE segment sees lower enrolments and growth rates than K-12 levels but consistent growth

provides some comfort. Engineering is the most preferred course for enrolment and is likely to

grow strongly. Despite upsurge in eligible enrolment rates to 60% (FY08) from 50% (FY94), due

to the absence of strong links with school education, HE enrolments remained low.

[F] DEARTH OF C OMPETENT T EACHERS AND F ACULTY

The Indian education sector needs trained and quality teachers and staff. The historical STR

marginally improved in the primary and HE segment during FY01-FY10. A moderate growth is

predicted (below 10%) in the HE teachers strength in FY14 based on the historical CAGR o f

7.91% during FY01 to FY11. In the agency s opinion, the sector will be unable to achieve STR

proposed by the regulator in the medium term (UGC STR 1:15).


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[G] DEMOGRAPHIC ADVANTAGE

In India, over 500 million fall in the age group of five to 25 years. This provides immense

opportunity for the education sector. It is believed that demand for education and improved

accessibility to educational institutions will help improve literacy rate.

[H] E DUCATION L OANS

Easy credit availability is instrumental for increase in HE enrolment. The credit availability for

the HE segment is expected to continue and be similar to that for white goods sector. Education

loans grew at a CAGR of 26.96% during FY07-FY12 and their contribution to non-food credit

increased to 1.17% (FY12) from 0.87% (FY07).


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RATING OUTLOOK

[A] STABLE O UTLOOK

Credit Rating Agencies have a stable outlook on the Indian education sector which includes both

school and higher education (HE). The low ratings of small and less established education

institutes already factor in the negative impact of enrolment slowdown, which is mitigated by

India s demographic advantage and low literacy rate. The agencies expect market size to be

INR6, 024.10bn (USD109.84bn) by FY15, driven by robust demand.

[B] L IQUIDITY ISSUES

In 2012, the sector faced liquidity issues due to a fall in enrolment growth and delays in HE

students fee reimbursements by a few state governments. However, lenders have shown

flexibility by allowing loan repayments even after the due date with no penalties, protracting the

moratorium period or rescheduling loans. In some cases, they have allowed a combination of the

above concessions.

However, during the course of rating review, if the debt is restructured or rescheduled, agencies

assess it under Distressed Debt Exchange criteria and take appropriate rating action.

[C] C REDIT INDISCIPLINE

Irrespective of an institutes size, loan repayments depend on its relationship with lenders. Due to

tightly-regulated operations such as restrictions on student intake, fees and infrastructure, an

institution s autonomy is restricted, leading to weak finances and credit indiscipline. The

upcoming regulatory changes could possibly provide autonomy and enhance the credit quality of

the issuers.


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[D] C APEX WITH H EAVY DEBT

An entity needs to utilize 85% of its gross income to retain its tax exemption status. Therefore, it

plans expansion by taking huge debt as debt obligations, including principal, is permissible for

tax deduction. This disproportionate increase in debt against revenues reduces coverage levels

and constrains ratings.

[E] E VOLVING STRUCTURES P OSITIVE

The not-for- profit stipulations for choice of entity and regulators restriction on entry of foreign

investments have led to formation of new structures. These str uctures involve institute s

associates managing infrastructure and charging fees to plough back profits and collaborating

with foreign universities for twinning programmes.

[F] SHORTAGE OF T RAINED T EACHERS

A sharp increase in the number of education institutes in FY11 and FY12 led to a shortage of

skilled and trained teachers. an unfavourable picture is predicted as most organisations will find

it challenging to comply with the prescribed student teacher ratio (STR) in the coming years.

[G] W HAT C OULD C HANGE THE O UTLOOK ?

(a) Policy Support, Credit Discipline

The federal government s Twelfth Five Year Plan to propel the gross enrolment rate across

levels, establish new entities, liberalising the sector (allow private universities and foreign

players) and take other measures including access enhancement, might revive the demand for the

sector. These measures, combined with adherence to contractual provisions, would result in a

positive outlook.


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AN OVERVIEW OF THE EDUCATION SECTOR AND ITS CREDIT RATING

[A] K EY R ATING DRIVERS

(a) Sector Outlook Stable

Credit Rating Agencies have maintained a stable outlook on the education sector for FY15 on

account of growing enrolments in the K-12 (kindergarten to twelfth) segment and the gradual

expansion of higher education segments. They believe that India s young demographic would

continue to benefit the sector even as protracted infrastructure upgrades and regulatory issues

delay timely benefits.

(b) Rating Outlook Stable

Ind-Ra has a Stable Outlook on most of its rated education institutes for FY15 on the expectation

of consistent enrolments and strong operating margins. These indicators are likely to display

stability in FY15 leading to a preponderance of affirmations in Ind- Ra s rated universe.

(c) Strained Liquidity Position

Seasonal fee receipts and delays in fee reimbursements have resulted in tight liquidity for most

education institutes. The credit profiles of many institutes have been constrained by the absence

of policies to monitor liquidity. Although investment grade institutes monitor liquidity with

rigor, the unstructured application of policies is common.

(d) Sector Expansion with Minor Slippage

The muted growth in the private financing of the sector was offset by public investments in

FY13. In Ind- Ra s opinion, flagship schemes could slip from the scheduled completion time and


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market size would be INR5,901.92bn in FY15, marginally lower than the earlier estimate of

INR6,024.10bn.

(e) Loan Availability Crucial

Ind-Ra believes timely availability of education loan to students will be crucial to boost the

education sector, as periodic revision in fees by both the government and private colleges has

been eroding their affordability. Dilution in Admission Criteria: Fairly new and financially weak

educational institutions are diluting their admission criteria to counter the slowdown in

enrolment. Despite fee increases, these institutes failed to bolster their debt servicing ability and

capacity utilisation has remained low for speculative grade institutes. However, Ind-Ra believes

established institutes admission procedures and demand flexibility will withstand the enrolment

slowdown comfortably.

(f) Debt Overload Undermines Debt Service

Ind-Ra believes strong and established players are comfortably placed to manage high debts due

to adeptness available on demand flexibility along with the sculpted debt repayment schedule.

Having said that, speculative grade institutes ambitious debt -led expansions with unpalatable

amortisation schedules dent their debt servicing ability.

[B] O UTLOOK SENSITIVITIES

(a) Regulatory Changes

Passage of pending educational bills such as the National Accreditation Regulatory Authority of

Higher Education Bill and National Council for Higher Education and Research Bill as well as

liberalising the sector would provide the necessary growth impetus. However, it will have a lag

effect.


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Stagnant Sector Indicators: Stagnation in the sector due to a decline in student-generated

revenues and enrolments, and an increasing inability of institutes to pass on higher costs to

students could affect the sector.


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LATEST DEVELOPMENTS IN THE EDUCATION SECTOR IN INDIA WITH A

GLOBAL PERSPECTIVE

India's education sector is no longer recession-proof, with entities reporting lower growth and

credit-rating agencies having a negative outlook. The credit profiles of higher education

institutions especially have come under pressure . With declining revenues, their liquidity

condition may turn tight in the future.

Credit rating agency Crisil Ratings downgraded 33 in sti tuti ons in 2012-13 alone, while it

upgr aded 25 . In comparison, there were only 12 downgrades and six upgrades in 2011-12.

"While the demand-supply gap for quality higher education remains robust in India, the credit

profile of the many higher education institutes is plagued by high-capital intensity, and long

incubation period. The enrolments are not commensurate to the capacity till they establish a

brand. This impinges the liquidity that is already constrained owing to cash flow asymmetry

because of seasonality in fee collection," said Ramraj Pai , President, Crisil Ratings .

Pai added that institutions with an established track r ecord with higher enr olments and prudent

cash f low management practi ces are able to command a better credit risk profile.

Education/training companies saw a slower growth in FY13 on the back of drop in revenues.

Bombay Stock Exchange-listed Educomp Solutions slipped into the red and posted a

consolidated net loss of Rs 147.93 crore for the quarter ended March 31, 2013.

The net sales (total income) for the fourth quarter of FY13 of the company saw a 34.5 per cent

drop and stood at Rs 336.41 crore, while there was a rise as compared to the previous quarter.


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This was due to a lower income from operations and on the back of expenses incurred for

changes in inventories of finished goods and stock-in-trade. In the fourth quarter of FY12, the

company had posted a net profit of Rs 61.53 crore.

Companies are also exiting non-core areas to improve the balance sheet. In April of the previous

year, Educomp sold its enti re 50 per cent stake in vocational train in g fi rm I ndiaCan to its joint

venture partner Pearson. Similarly in March of the previous year, it completed the sale of its 50

per cent stake in Eur okids I nternational L imited to a group of investors led by GPE India.

"Educomp will now operate in a larger setup in areas with larger market opportunity," said

Educomp' s Chair man and M anagin g Di rector Shantanu Pr akash . He had said that the

company would focus on improving operational efficiencies and then grow rapidly

Peers also had a tough year. Everonn Education , which had seen some volatility last few year

with top management shuffle ended the year with a net loss. The net loss of Everonn Education

Ltd has widened in the fourth quarter of 2012-13 to Rs 69.24 crore from Rs 29.29 crore in the

corresponding quarter of the previous financial year.

Similarly, CORE Education and Technologies posted a 35.7 per cent drop in its consolidated

fourth quarter net profit, compared to Q4 of FY12. The company posted a net profit of Rs 50.93

crore for Q4 of FY13, compared to Rs. 79.23 crore posted in the same quarter in 2012.

Aptech is one of the few companies in this segment that saw a rise in net profit. Ninad Karpe,

managing director and CEO of Aptech, said the firm had started the process of re-engineering

four years ago -- from changing its logo to consolidating its operations to focus on its core

strength of career education. "We are pursuing a path of profitable growth and an 'asset light'


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model and the results are showing. Like many other industries, there are challenges relating to

technology obsolesce and competition; which are faced by the education sector as well," he said.

Crisil Research shows that increasing competition to get into good-quality schools / tier-I and

tier-II colleges and the severe shortage of talented workforce that the Indian corporate sector is

facing provides significant opportunity for non-formal segments such as coaching classes and

skill development.

Ajay Srinivasan, director, Crisil Research , said, "The education sector provides huge

opportunities for growth, but potential investors need to be cognizant about segment-specific and

firm-specific considerations that would impact the viability of their investments."

He explained the key considerations for investors looking at the non-formal education space

(coaching classes, pre-schools, multimedia and Information and communication technology or

ICT services, vocational training, and soft skills development) should be the scalability of the

busin ess model , competi tive scenar io, dependence on i ndi viduals, relevant ti e-ups with the

indu stry, and the availabil i ty of systems and processes that wil l aid business expansion .

Formal education is not a stranger to the slowdown phenomenon. With over one-thi rd seats

vacant i n engin eeri ng and management in stitu tes , experts said the situation looks bleak.

Srinivasan said that going forward, many tier-4 engineering and business schools, which are

running at sub-optimal capacity utilisation levels, are expected to shut down.

"Players who do not have an established track record and haven't been able to build trust and

credibility are finding it difficult to attract students. In the non-formal education, especially

multimedia and ICT, the high rise in receivables from private schools as well as government (in


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case of government schools) and increasing pricing pressure are leading to stress on the balance

sheet," said Srinivasan.

He added with numerous players entering this segment, operating margins have steadily declined

over the past few years, led by multiple factors such as lower average realisations due to high

competition and low product differentiation. In the private schools segment, he said, the first

mover advantage is gradually diluting and renewal of contracts is increasingly becoming a

challenge for multimedia players.

These entities have seen downgrades in the recent periods, too. Earlier this month, India Ratings

& Research (Ind-Ra) has downgraded Educomp Solutions Limited's (Educomp) Long-Term

Issuer Rating to ' I ND D' from ' I ND BB-' . Ind-Ra said that the downgrade reflects Educomp's

ongoing delays in its debt repayment due to continued liquidity and earnings stress.

"Stressed earnings are reflected by a 35 per cent y-o-y (year-on-year) drop in consolidated

revenues in Q4 of FY13, Ebitda (earnings before interest, taxes, depreciation, and amortisation)

loss in Q4 FY13 and net loss in Q4 FY13 and FY13 coupled with a 74 per cent y-o-y increase in

finance cost for FY13 given its high debt. The company is negotiating with its banks regarding

extension of debt maturities and further refinancing. To alleviate liquidity stress, Educomp is

seeking equity infusion, along with implementing a strategy of monetising non-core businesses

and assets, including land parcels," Ind-Ra said. The company, however, added that future

developments may lead to positive rating action including timely debt servicing for one quarter.

Ratin g agency Standard & Poor' s (S& P) , too, has cut its long-term credit rating on Core

Education and Technologies Ltd's (CORE) to 'B' from 'B+'. "We lowered the rating on CORE


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because we believed that the sharp fall in the company's equity prices could negatively affect its

access to capital markets and bank funding," said S&P.

This would put pressure on CORE's refinancing and funding plans and 'less than adequate'

liquidity.

Players are, however, hopeful that the education sector will see a growth in the next few quarters.

Kar pe of Aptech said, "We remain optimistic about the industry. It still has a lot of depth and

continues to grow at a CAGR (compound annual growth rate) of 12-15 per cent. Only those

education companies, who are able to reinvent themselves and rise above the clutter, will survive

and grow. Technology will also be a key differentiator.


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CRISILS BUSINESS SC HOOL RATINGS

CRISIL Business School Grading is India's first independent and rigorous grading service for the

education sector. The grading will enable exchange of best practices, supporting an improvement

in the quality of education being delivered.

A CRISIL Business School Grading, assigned to a specific programme, assesses the ability of the

institute to impart quality education and to achieve desired student outcomes through the graded

programme. The CRISIL Business School Grading will be valid for one year from the date of its

assignment. The business school can request CRISIL to renew the grading at the end of this

period.


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Each programme is given a national grading (relative to other such programmes across India)

and a state grading (relative to other such programmes in the same state). This enables the

institute to benchmark itself with other business schools across the country, and with institutes in

the same state, operating in the same regional, infrastructural and regulatory environment.

[A] T HE ASSESSMENT P ARAMETERS

1. Industry Interface

2. Management and Governance

3. Student Selection Processes

4. Learning and Physical Infrastructure

5. Faculty

6. Curriculum

7. Research

8. Student Outcomes


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[B] T HE C REDIT G RADING P ROCESS

STEP 1

The business school requests the credit rating

agency for a grading

STEP 2

The business school shares information with theagency in a pre-specified manner

STEP 3

The agency analyses the information provided bythe business school

STEP 4

The agency visits the campus and interacts withthe students, faculty and management

STEP 5

The Agency also takes feedback from recruitersand alumni

STEP 6

The agency's team prepares a detailed reportand presents it to its grading committee

STEP 7 The grading committee assigns the grades

STEP 8

The agency comminucates the grades andprovides a detailed report


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ICRA RATING OF MANA GEMENT EDUCATION INSTITUTES

[A] BENEFITS OF ICRA S R ATING OF MEI

ICRA s Grading of MEIs is designed to provide students, MEIs, recruiters, and faculty with an

independent opinion on the quality of education imparted at the MEIs concerned. The service

seeks to benefit these stakeholders in the following manner:

(a) Students

Facilitates selection of an MEI over others

(b) MEIs

Enables service differentiation | Facilitates benchmarking

(c) Recruiters

Serves as an objective measure of the relative quality of education imparted

Facilitates recruitment of the right candidates

(d) Faculty

Serves as an input in making a career choice.

[B] G RADING C RITERION

ICRA sees the quality of education imparted (the output) at an MEI as a function of various

inputs and the processes at the levels of both the institute and the classroom. The inputs include,

among others, the infrastructure, pedagogy, faculty and other resources.

To be able to make an accurate assessment of an MEI s standing and capability, ICRA has drawn

up several parameters, both qualitative and quantitative, in consultation with various experts in

the field of professional education and in the user industries, besides referring extensively to a


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wide array of published material on the subject. The following list discusses some of the key

parameters against which ICRA evaluates an MEI

(a) Curricular aspects

ICRA considers the appropriaten ess of the institute s curriculum and the initiatives it takes to

update the same in accordance wit h the industry s requirements. In drawing up its curriculum, an

MEI s ultimate objective is expected to be to minimize the training that its students would

require once they get into dealing with real-life business situations. ICRA also considers the

years for which the MEI has been operational or affiliated to a university, as institutes with an

established track record usually have greater visibility, a larger alumni network, and more data

points for analysis. In the case of affiliated colleges, the standing of the university concerned is

also taken into account. For institutes with foreign tie-ups, ICRA assesses the nature of these tie-

ups and the benefits accruing to the institute from the same.

(b) Selection procedure and student profile

The quality of students taken in by an MEI is a critical factor in determining the excellence of the

class that eventually passes out of it. Hence, the robustness of the entrance examination goes a

long way in determining the quality of students. The proportion of reservation quotas and the

impact that has on the quality of student intake are also considered while arriving at the Grading.

ICRA gauges the quality of students not only from the marks they scored in their previous

examinations, including the entrance test, but also from their non-academic achievements.

Another factor looked at is student diversity, an attribute that is preferred to homogeneity. The

extent of student diversity is gauged from the mix of educational backgrounds, gender ratio,

types of prior work experience, and spread of locations that the students hail from. ICRA s.

Grading process also pays special attention to seat occupancy and seats-to-applications ratio,


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which are strong indicators of the demand for admission to an MEI. In examining the fee

structure, ICRA looks at the basis for fee computation, frequency of fee revision, and

transparency, besides making a comparison between the MEI and its peers on the fees charged.

(c) Governance and leadership

The background of the promoters and members of the board of trustees of an MEI is a critical

factor determining its success. The Grading process also factors in the commitment of the

promoters a nd the trustees to the institute s day -to-day operations, and the steps taken by them to

promote and improve the institute. The quality and stability of the key decision makers like

Deans and Heads of Department are considered crucial from the point of view of continuity and

completion of strategic plans. ICRA s Grading process attaches great importance to the degree of

regulatory risk that an institute is exposed to, and to its liabilities and legal exposure, if any, as

these factors can impair its ability to continue imparting quality education.

(d) Quality of faculty and HR policies

ICRA evaluates an MEI s faculty on the basis of several parameters, including, among others,

educational background, years of teaching experience, industry exposure, research papers

published, and other positions of eminence held. In addition, student feedback is obtained to

assess the classroom efficacy of faculty members. ICRA also evaluates such factors such as

faculty-student ratio, number of permanent, guest and foreign faculty, and the distribution of

classes among faculty. Given the shortage of competent faculty, it is imperative for MEIs to be

able to attract, develop and retain talent, for which they need to have effective human resource

(HR) policies. An important indicato r of an institute s attractiveness for existing and potential

faculty and of its faculty satisfaction level is its attrition rate, especially in comparison with that


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of its peers. Apart from salary and perks, ICRA also takes note of the assistance provided by the

institute to its faculty to carry out research, consultancy, and other self-development activities.

(e) Pedagogy and student performance

ICRA evaluates the various modes of teaching employed by an MEI to hone the academic skills

of its students. An approach that seeks to maintain a judicious mix between theoretical and

practical study is generally preferred to pure classroom teaching. Industry interface is also

accorded high importance as that not only helps students apply theory to real-life business

situations, but also enables the institute strengthen its relationship with the industry. The mode

and frequency of evaluating student performance is also assessed.

(f) Infrastructure

For an MEI, its internal infrastructure is a critical asset, being the platform from which education

is delivered. The external infrastructure, in terms of location and connectivity, is also vital as that

influences several aspects including industry interface, faculty retention, and placements. In

assessing an MEI s internal infr astructure, ICRA focuses on several elements including in-

campus hostel and mess, library facility, computer labs, classroom infrastructure, auditorium,

playgrounds, and networking facilities.

(g) Student support and development

ICRA, in assessing an MEI s abi lity to foster all-round development of its students, takes note of

the student clubs that the institute has, the college festivals and seminars it organizes, and the in-

house publications it comes out with. Further, ICRA looks at the performance of the in stitute s

students at inter-collegiate events. The festivals and seminars that the institute holds are also

evaluated for the quality and type of sponsorships they are able to get, the people who attend


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them, and the extent of participation from other institutes in the events. ICRA also assesses the

level of support that the institute provides to its students via entrepreneurship cells, alumni

networking, faculty support, funding of student activities, and such other measures.

(h) Placements

ICRA pays special attention to the quality of placements that an MEI is able to make as that

serves as a key indicator of the institute s acceptability in the corporate world. ICRA looks at the

placement ratio of the institute, the number of offers made per student, the number of foreign

offers made, and the kind of compensation packages offered to assess the employment prospects,

while also making a qualitative assessment of the corporate entities that visited the campus.

Adjustments are made in the data for foreign and domestic salaries, and the number \of students

who opted out of the placement process. A similar study is carried out for summer placements.

(i) Financial parameter

In assessing an MEI s financial position, ICRA looks at the institutes profitability, leverage, a nd

working capital management policies. It also evaluates the institute s financial flexibility to

determine if adequate funds would be available for expansion, improvement of infrastructure and

faculty, and meeting all its contractual obligations. The quality of internal controls, management

information systems, and audit are aspects that are examined closely as the presentation of

accounts by educational institutions is not governed by the Companies Act, 1956.

[C] T HE C REDIT R ATING P ROCESS

The process commences at the request of the MEI. Once the mandate letter is received, ICRA

assigns a team of qualified in-house analysts to initiate the Grading process. This team starts by

interacting with the institution s management and circulates a list of information re quired from


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the entity. This is followed by a detailed evaluation, involving facility visits, review of

documents and records, and extensive interviews with select staff of the institution. The team s

analytical observations are then collated in a report. This report is then presented to ICRA s

Grading Committee, and the issues identified by the team discussed along with the team s

Grading recommendation. The Grading Committee is the final authority for assigning Gradings.

The assigned Grading, along with t he key issues, is communicated to the MEI s top management

for acceptance. At the request of the MEI, two separate Gradings, one a National-level Grading

and the other a State-level one, can be assigned.If the MEI does not find the Grading acceptable,

it has a right to appeal for a review. Such reviews are usually taken up only if the MEI provides

fresh material inputs. During a review, the MEI s response is presented to the Grading

Committee. If the inputs and/or fresh clarifications so warrant, the Grading Committee can revise

the initial Grading decision. Non-accepted Gradings are not disclosed and complete

confidentiality is maintained on them. The Gradings are subjected to review (called surveillance)

once every year, unless the circumstances of the casewarrant an early review, and remain valid

for a period of two years from the date assigned. Following surveillance, the Grading may be

retained or revised (upward or downward), depending on the developments since the previous

Grading exercise and ICRA s a ssessment of the same.


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[D] T HE G RADING SCALE


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FULL RATING REPORT OF KIIT


(a) Tight Liquidity

Kali nga In stitute of I ndustri al Technology (KIIT) S ociety s rating is constrained by its tight

liquidity profile due to a disproportionate increase in its operating expenditure and debt-led

capex in relation to available funds ( cash and unr estr icted investments ). Available funds (FY12

(end-March 2012): INR301.52m) provide only a minimal financial cushion relative to both

financial leverage (FY12: 12.03%) and operating expenditure (FY12: 16.35%).

(b) Moderate Financial Performance

Operating margins marginally deteriorated in FY12 by 2.75 percentage points mainly because of

higher administrative expenses (FY12: INR556.26m; FY11: INR425.63m), however they

increased to 33.2% in FY12 from 21.58% in FY08. KIIT's revenue is dominated by tui tion fee

income , constituting averagely 89.19% of total revenue during FY08-FY12. Operating

expenditure (average: 43.83%) and staf f costs (26.27%) were the prime contributors to the

expenditure in FY12. KIIT reported a current balance of INR 150.13m in FY12 against

INR172.28m in FY11.

(c) Strong Market Position

KIIT inducts students who secure min imum 60% on the national level entrance examination for

technical courses and management aptitude test of Al l I ndia M anagement A ssociation .

Historical acceptance rate (admissions/applications received) remains below 3.5%, highlighting

the strong market position.


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(d) Comfortable Debt Service

The society's debt service coverage ratio (DSCR) slightly improved to 1.19x in FY12. Although

it was below 1.00x during FY07-FY11, it managed to meet its debt service commitments from

the then existing cash balance. I ndia Ratings & Research (Ind-Ra) expects KIIT to comfortably

service its debt commitments in the near-term due to an expected increase in the student demand

(38.45% yoy in FY12 and 21.9% yoy in FY11). KIIT availed a working capital facility during

lean months (January to May) and banks had sanctioned ad-hoc limits in months of excess usage.

(e) Capex Plan

The society plans to incr ease it s hospital ' s bed capacity from 450 to 800, hostel capacity by

2,000 rooms and the construction of new academic blocks which is unlikely to hamper

operating margins and DSCR. Nevertheless, the metrics could deteriorate if the increasing tuition

fee trend reverses. Debt/ current balance before interest and depreciation reduced to 3.23x in

FY12 from 3.46x in FY11.

[B] R ATING SENSITIVITIES

(a) Sustained Improvement in Operating Performance

Positive rating action may result from a strong operati ng perf ormance on a sustained basis in

conjunction with a stark increase in the liquidity profile.

(b) Deterioration in Student Demand

Any unexpected fal l i n student demand coupled with a quantum jump in debt resulting in weak

coverage ratios could trigger negative rating action.


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[C] PROFILE

KIIT was founded by Dr . Achyuta Samanta in 1992 in B hubaneswar, Odisha , as an industrial

training institute. The institute has grown in size and become a deemed university under Section

3 of the University Gr ants Commission Act, 1956 .

[D] T ABLE 1: F INANCIAL DATA OF KIIT

31 st March, 2011 31 st March, 2012

Current Balance

(INRm)

172.28 150.13

Debt (INRm) 2704.63 3042. 43

Debt/Current Balance

before interest and

depriciation

3.46 3.23

Debt service coverage

ratio (x)

0.97 1.19

Available funds/total

long term debt ( )

14.11 12.03

SOURCE : Source: KIIT, Ind-Ra

[E] R ATING OF KIIT BY INDIA R ATING AND R ESEARCH : BBB-


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FULL RATING REPORT OF NARAYAN EDUCATION SOCIETY


(a) Strong Market Position

The ratings reflect Narayana Educational Societys (NES) solid brand name , str ong student

headcount gr owth and preeminent academic programmes . NES has created a niche position in

the education market by offering a curriculum which focuses on competitive exams.

(b) Solid Operating Performance

NES relies largely on tui tion fees which constitute an average 85.91% of the total revenue during

FY08-FY12. However, stable and strong growth in fee income all eviates the concentration r isk .

Fee income grew 15.56% yoy in FY12 after falling to 4.89% yoy in FY11 (FY10: 8.78% yoy).

This was due to below 11% growth in th e number of students . I ndi a Ratin gs & Research (Ind-

Ra) expects the income to grow strongly in FY13 due to comfortable headcount growth (35.67%

yoy). Operating margins improved to 29.07% in FY12 from 24.86% in FY11.

(c) Capital Light Model

The society generates almost 96% of the tuit ion f ee in come f rom j un ior colleges and schools .

NES had opened 65 schools in FY12 and FY13 across the country. NES s model of leasing

buildings for junior colleges and schools is capex light and considerably reduces the time taken

to commence a school.


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(d) Reasonable Balance Sheet Resources

The society s available funds provide a reasonable cushion for b oth fi nancial leverage (FY12:

25.58%) and operati ng expendi tur e (22.85%). In the absence of future capex, Ind-Ra expects the

coverage to improve from present levels.

(e) Moderate Debt Burden

Debt service coverage ratio (DSCR), including rental payments, stood below 1.0x in FY11 as the

revenue shrunk. Notwithstanding the low DSCR , the society s adequate cash positi on facilitates

debt servicing in a distress period. Debt servicing calendar will be stressed in FY14 because NES

would extinguish a large debt portions.

[B] R ATING SENSITIVITIES

(a) Positive

I mprovements in operati ng margins coupled with growth in available funds to cover financial

leverage and operating expenditure could positively affect the ratings.

(b) Negative

A downward rating momentum could stem from a disproportionate increase in debt and

operati ng expendi tur e over in come .

[C] PROFILE

NES was founded in 1996 by Dr . P. Narayana as a not-for-profit enti ty under the Societies

Registration Act 1860. Its registered office is in Nellore . The society had juni or colleges (291)

and schools (160) across the country as at end-FY13. The number of students grew to 267,036


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(FY13) from 196,827 in FY12 (CAGR FY10- FY13: 14.33%). NES s current balance increased

to INR366.57m in FY12 from INR155.04m in FY11.

[D] PRINCIPAL R ATING FACTORS

(a) Administration and Management

NES is based in An dhra Pradesh and operates schools and colleges in various streams across the

country. The streams covered by the society include:

1. Arts and sciences

2. Engineering

3. Medical

4. Dental

5. Paramedical

6. Pharmacy

7. Nursing

8. Education Teacher Training

[E] T ABLE 2: T YPES OF SCHOOLS

School Type Description

Narayana Concept Schools Pre-primary, primary and high school up to

X class and includes coaching for IIT

entrance exam.


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Narayana e-Techno

Schools

Classes from VI to X with high-tech

classrooms, having computers, internet

connectivity, air conditioning. The syllabus

conforms to state government board

however; the teaching includes a

combination of material that focuses on

Central Board of Secondary Examination

(CBSE), Indian Certification of Secondary

Examination (ICSE) and state board

curriculum. Concurrently, the school study

material equips the students on Indian

Institute of Technology (IIT) and All India

Engineering Entrance Exams (AIEEE) and

Olympiad.

Located in Bangalore, Bellary and

Bhubaneshwar

Teacher student ratio maintained is 1:10.

Narayana IIT

Olympiad Schools

An integrated academic programme, with

equal focus on three boards of CBSE, ICSE

and state government, without any

repetition or overlapping

Training for IIT entrance examination and

competitive exams such as National


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Talent Search Exam, Maths Olympiad,

Kishore Vaigyanik Protsahan Yojana

(Department of Science & Technology)

Teacher student ratio maintained is 1:10

S OURCE : NES

[F] T ABLE 3: G ROWTH IN INSTITUTES

Type of

institute

FY09 FY10 FY11 FY12 FY13

Junior

Colleges

188 189 189 249 291

Schools 37 52 95 111 160

Sub-total 225 241 284 360 451

Other

institutes*

17 17 17 17 17

Total 242 258 301 377 468

* Other in stitu tes are medical, dental, engineer in g, paramedical, yoga, B.Ed. and ph armacy

S OURCE : N ES


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[G] F INANCIAL PERFORMANCE

(a) Revenue Diversity

Like other private institutions, NES s revenue is dominated by tui tion f ee in come . Nevertheless,

its stable demand and strong market position aids in overcoming the dependency risk. Gradual

growth in other income provides some comfort to the revenue diversity. However, Ind-Ra

expects the tuition fee to remain a major source of revenue for the society.

(b) Income

Tuiti on income on an average contributed 85.91% to the total income during FY08-FY12;

however, annual contribution dipped to 82.38% in FY12 from 93.70% in FY08. Although the

proportion of tuition fee income to the total income has been decreasing, the opening of new

schools in FY11 and FY12 coupled with school centric expansion is likely to reverse this trend.

Other income was supported by a strong hospital income during the same period. The

Figure 1: Average Revenue Composition

Tution Fee

Others

Endowment


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establishment of a super specialty hospital has driven the hospital receipts between FY09 and

FY12. NES booked total revenue of INR7, 554.77m in FY12 as against INR6, 651.51m in FY11.

(c) Expenditure

Expenditure was primarily driven by core expendi tur e (including rents) followed by staff costs

during FY08-FY12. While the proportion of core expenditure in total expenditure had gradually

increased, staf f costs dimin ished until FY11, however, staff costs increased marginally in FY12.

[H] T ABLE 4: E XPENDITURE BREAKDOWN (%)

Staff costs Core

expenditure

Interest

FY07 42.63 44.95 3.58

FY08 43.09 47.13 3.11

FY09 39.52 50.67 3.82

FY10 32.82 56.90 4.81

FY11 32.97 56.93 4.72

FY12 34.11 53.29 7.05

S OURCE : NES, I nd-Ra

(a) Balance Sheet Resources and Liquidity

I n F Y12, avail able funds shar ply in creased to INR1, 435.21m from INR629.06m in FY11 due

to an increase in fee income from the schools. The balance sheet resources continue to provide


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reasonable coverage to debt and expenses. The society has made investments in national savings

certificate, postal deposits and fixed deposits. Ind-Ra e xpects it s li quidity to impr ove f rom the

current levels due to the completion of expansion plans in FY12. Many Ind-Ra rated

societies/trusts liquidity were benefitted by the development fee from students unlike NES.

(b) Debt Burden

Debt (including rent)/current balance before interest depreciation and rent (CBBIDR) increased

to 2.53x in FY12 from 2.36x in FY11 due to hi gher debt and capital ized r ent . Due to the heavy

expansion , the society s leased premises costs increased during FY08-FY12. In Ind- Ra s

opinion, absence of future capex provides comfort to the rating and leverage ratios are expected

to improve. Ind- Ra as per its criteria considers NES s debt, capital leases and non -cancellable

operating leases as debt.


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FULL RATING REPORT OF MANIPAL GLOBAL EDUCATION SERVICES PRIVATE

LIMITED

[A] C OMPANY P ROFILE

M anipal Global Education Services Pvt. L td ., established in 2001, provides hi gher education

services , including distance education and corporate train in g . The company has shown rapid

growth in its services during the last five years, and has ventured into other segments of the

education sector, such as continuing education for professionals and corporate training. MaGE

has also expanded internationally by acquiring and setting up colleges in Nepal, Dubai,

An tigua and Malaysia .

MaGE had consolidated revenues of Rs. 840.3 crore in F Y11 , with an OPBDIT margin of 32.4%

and net loss of Rs. 195 crore, the latter being on account of goodwill amortization. In FY12, the

company posted revenues of Rs. 726.8 crore and a lower OPBDIT margin of 28.6%, but net

profits are expected to be higher due to absence of significant amortization charges in FY12. Due

to the company s strong OPBDIT ma rgins and upfront cash payments received from students

and franchises, MaGE enjoys healthy cash f lows , albeit it has had to rely on external financing

for meeting its aggressive expansion pl ans and student fun ding at Anti gua campus .

[B] R ATING BY ICRA

ICRA has reaffirmed the [ICRA] BBB rating assigned to the Rs. 26 crore Term Loans and Rs

129 crore Cash Credit limits of Manipal Global Education Services Private Limited (MaGE),

which was previously known as Manipal Universal Learning Private Limited. The outlook on the

long-term rating is stable .


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The rating reflects the long tr ack r ecord and well -recogni zed brand of MaGE in the education

sector, the company s presence in diversif ied geographies with high growth potential , stable

revenues from established campuses in Antigua and Malaysia, satisfactory perf ormance of

ventures in education services such as corporate training, the company s robust OPBDIT

margins, and healthy profit growth at the distance education business. However, FY11 net

margins have been impacted due to the amortization of goodwill pertaining to Malaysia and

Antigua acquisitions.

The rating is constrained by the slowdown i n admission s seen at the Dubai campus due to the

weak economic condi tions in the region and the substanti al f un ding requir ements at the

An tigua campus for providing student loans, as students have been facing constraints in availing

loans after the credit-crisis in 2008. The rating also factors in the substantial negative impact on

the com pany s tangibl e net worth positi on if adjusted for the large goodwill component, and the

sizeable planned capex (close to Rs 450 crore) over FY12-13 for setting up a University in

Malaysia, the latter likely to add around Rs 315 crore to overall debt levels. The financial profileof MaGE had weakened because of i ts aggressive expansion plan s, but capital structu re has

remained moderate as the acquisitions were largely funded through equity infusion by MaGE s

parent, MEMG (Manipal Education and Medical Group). While assigning the rating, ICRA has

taken into account the possibility of redemption of private equity, in case MaGE does not come

out with an Initial Public Offer (IPO) or makes available alternate exit routes to investors by

FY13.


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CONCLUSION

The global education industry is witnessing strong growth momentum with fast emerging and

developing nations. In terms of industry ranking, education stood on second place after

healthcare industry. The gross enrolment ratio (GER) in lower secondary education increased

from 72% to 80% worldwide between 1999 and 2009, with notable increase in the Arab States

and sub-Saharan Africa. The school-age population is mainly influenced by population trend and

economy of a country.

Demand for infrastructure development in education industry is becoming necessity with

increasing demand for quality schooling. Enrolment in Pre-primary education recorded a steady

increase between 1995 and 2011 for both boys and girls all over the world. There is a slow

adoption rate in Arab States and Central Asian countries, whereas East Asia and the pacific

region have witnessed high percentage of participation. In 2011, 713.0 million children were

enrolled worldwide in primary education compared to 689.0 million in 2006. A relatively strong

growth in primary enrolment has been noticed in Sub-Saharan Africa region.

In North America, the US is the largest hub of students and generate large amount of education

expenditures worldwide. In the US, higher education alone generated USD 453.7 billion of

revenue in 2011.3

Over the last five years, developing countries have increased their share of the world s total

number of internet users from 44% in 2006 to 62% in 2011. The percentage of individuals using

internet in the developed world reached the 70% landmark by the end of year 2011. In the last

six years, the global E-learning market has registered a CAGR of 4.7% (2006-2011). It is


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expected that by 2016, the market will reach to USD ~ billion, registering an expected CAGR of

6.68%. In emerging countries such as India, e-learning is growing at a rapid pace (growth of

27.9% in the last 3 years) with the growing competition. Currently, there are more 140 e-learning

companies operating in India among which more than 100 players have just started their

operations in the last 3 years.


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REFERENCES

1. Report of the Committee on Comprehensive Regulation for Credit Rating Agencies ,

December 2009, Ministry Of Finance, Capital Markets Division.

2. John Beaufoy and Others , International Education Global Growth and Prosperity: An

Accompanying Analytical Narrative , July 2013, HM Government.

3. Mike King, Global Education Market, November 2013, Companies and Market.com.

Available at http://www.companiesandmarkets.com/MarketInsight/Business-

Services/Global-Education-Market/NI8403

4. Fiscal 2011 Median Ratios Reflect The Stability Of The U.S. Independent-School

Sector , November 2012, Standard and Poor s Rating Services.

5. 2013 Outlook: Indian Education Sector Slow Enrolment Growth and Credit

Indiscipline , India Ratings & Research.

6. M. King and T. Sinclair , Private actors and public policy: a requiem for the new Basel

Capital Accord , 2003, International Political Science Review , 24 (3).

7. Standard & Poors (2008) Report Card: UK Universities Enjoy Higher Revenues but

Still Face Spending Pressures , London: Standards & Poor s.

8. Private Higher Education Institutes: Opportunities Abound, But Creditworthiness Still

Low, ICRA Rating Feature, October 2011.

9. http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-

idINFit70855120140714

10. ICRA Grading of Management Education Institutes, ICRA Limited.
http://www.companiesandmarkets.com/MarketInsight/Business-Services/Global-Education-Market/NI8403http://www.companiesandmarkets.com/MarketInsight/Business-Services/Global-Education-Market/NI8403http://www.companiesandmarkets.com/MarketInsight/Business-Services/Global-Education-Market/NI8403http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://in.reuters.com/article/2014/07/14/fitch-affirms-mcgraw-hill-global-educati-idINFit70855120140714http://www.companiesandmarkets.com/MarketInsight/Business-Services/Global-Education-Market/NI8403http://www.companiesandmarkets.com/MarketInsight/Business-Services/Global-Education-Market/NI8403

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