Education sector new learning curve for investors

If analysts are to believed, it looks that education is one sector where you can bet your money safely. Reason: the industry is standing on solid fundamentals and appears ready for big action this year.

Sample this: Career Launcher, Frankfinn Institute of Air Hostess Training and Air Hostess Academy (AHA) are all set to raise funds through initial public offers (IPOs) this year. Probably, 2008 may go down as a year when the education space in India would take a giant leap forward.

A sneak peek at the listed companies in this segment and their performance at the bourses also shares this optimism. In 2007, companies such as Educomp Solutions posted whoppping returns of 374%, while Everonn Systems, which got listed in August 2007, gave returns of 130% in five months in 2007. That’s a lot of money. Not far behind are the old horses such as Aptech and NIIT, which fetched returns of 162% and 124%, respectively, in 2007.

“It is a big play on the favourable Indian demographics. The young profile of the Indian population, with the need for education and training and the talent crunch put this industry in a very sweet spot,” says Ajay Bagga, CEO, Lotus India AMC.

He, however, believes that the sector is still not well represented. There are companies with high ROEs (return on equity) and PEGs (price/earnings to growth ratio), which will get listed over time and create a value unlocking for the sector as a whole.”The potential is that of the real estate sector four years before,” he says.

Analysts believe that based on the current and future manpower requirements for various sectors, there is a huge demand-supply gap in education space. This has attracted many players to invest in education and training institutions with the aim of building valuable franchises that can be rapidly scaled up. Due to its projected growth, the returns are expected to be very attractive.

“Any new and potentially high growth sector attracts many new entrants, some of whom may drop-off midway. Retail investors should be vary of the same and only invest in ventures that are backed by reputed business houses or promoters that have strong track records of building businesses,” cautions Amitabh Singh, partner, Ernst and Young India, a consultancy firm. He feels that as an investor you should also take note of publicly available reports or analysis on this sector as well as the players.

In the recent months, the education segment has also seen the rising interest of private equity players. India-focused PE firm Gaja Capital partners invested $8.25 million in Career launcher. Similarly, Helix investments pumped in $12 million into preparatory education company Mahesh Tutorials, SAIF partners invested $10 million in English training academy Veta and ICA Infotech.

Sequoia has invested in two e-learning companies, TutorVista and Brainvisa, and Berggruen Holdings, a New-York based fund, plans to invest $300 million in India over the next three years. “Its an evergreen theme. It plays to all our strengths as an economy, demographics, labour cost advantage, offshoring potential, domestic consumption story and relative protection from a global slowdown. As more quality names go public, this can be a strong theme to play,” reasons Bagga.

So, if you’re looking forward to invest in education space it’s desirable that you should start with a small exposure and build it up as the industry matures. “I recommend a small exposure of not more than 5% in your portfolio, given the paucity of listed, quality names in the sector,” explains Bagga.

Singh of E&Y has another piece of advise for young investors. He says that before investing in any company, it’s pertinent to look at its business model, as also look at the track record of the company. “Avoid new entrants with no or little record,” he sums it up.

Analysts feel that though the valuations are high, but the PEGs of 1.5 and EPS CAGR of 100% plus for next three years mean these valuations are justified. A comparison across similar companies in both the developed markets of US and Europe as well as emerging markets like Korea, Singapore, China and Brazil show that on a relative basis, the Indian education companies are not overvalued.