Education companies stare at flat revenue growth

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Mumbai: Education companies stare at flat revenue growth. Fewer enrolments in engineering and business administration courses and the inability to hike fees amid the Covid-19 pandemic will keep the revenues of education companies flat this fiscal, Crisil said on Thursday.

According to the rating agency, flat revenues for education companies compare with a compound annual growth rate of 12 percent seen by the sector over the past five fiscals.

But a sharp slide in credit profiles will be averted because of controlled cash outflows and deferment of CAPEX, an analysis of 170 Crisil-rated education entities has shown.

The formal education segment, comprising K-12 (kindergarten to Class 12) and tertiary/ higher education (offering graduation and post-graduation courses, including medical course), accounts for almost two-thirds of the Rs 900,000 crore revenue of the Indian education sector.

The informal segment comprising coaching/test preparations, pre-schools, and other vocational courses accounts for the rest.

K-12 contributes 60 percent to the formal segment’s revenue, while tertiary/higher education brings up the rest. Despite no fee hike, the K-12 segment is expected to grow 1-2 percent because of steady enrolments.

The tertiary segment, comprising engineering, and other technical and business administration courses, which contribute about 15 percent to the formal segment revenue, is expected to shrink 5-6 percent owing to fewer enrolments this fiscal.

Economic growth has a direct bearing here, and there is also oversupply at present, the report said.

The tertiary segment offering medical education, which accounts for 5 percent of formal segment revenue, has a favorable demand-supply gap and is largely insulated from the economy. This segment will see moderate revenue growth of over 5 percent, driven by higher intake and enrolments. Revenues from other segments such as arts, science, commerce, and teacher training are seen stable, Crisil said.

Resultantly, for the formal education segment, revenue will be flat this fiscal, though profitability would be undented.

Says Rahul Guha, Director, Crisil Ratings Ltd, “Because of the lockdown, formal education companies had to spend significantly on shifting operations online. But this spending was offset by savings on utility, establishment, maintenance, and administrative costs. Consequently, overall operating profitability of these companies will be sustained at 20-22 percent this fiscal.”

While revenues are expected to be flat, due to lower fee-collection efficiency cash flows will be impacted. That’s because the average fee collection was down 25 percent on-year till November-end as new enrolments were delayed and an installment facility was offered for fee payment. The sector relies solely on fees to meet operating expenses and maturing bank-loan obligations and typically does not avail of the working capital facility from banks.

Companies resorted to postponement or cut in staff salaries, which typically constitute a third of cash outflows and deferred CAPEX. But things are expected to improve with swifter fee collection in the near-term.

What will support credit profiles in the medium term is an improvement in fees collection given that the academic year typically ends in April-May, and sustained revenue and operating profitability.

Says Shirish Mujumdar, Associate Director, Crisil Ratings Ltd, “The formal education segment’s growth should rebound to 10-12 percent over the medium term on the back of urbanization, increasing enrolment in the tertiary segment, and economic rebound. In the meantime, recovery in fees collection and cash flow management will remain monitorable.”

While the shift online will support the operating profitability of companies, what will benefit balance sheets is the curbed Capex requirement towards building physical capacities.

But challenges such as access to capital, incorporating technology seamlessly into business models, and training of teachers to deliver efficiently using digital platforms will need to be addressed.

–IANS

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