Educomp scripting a turnaround plan

To focus on operational efficiency

Its profits in the third quarter of the financial year was down 73 per cent to Rs 6.57 crore from the year-ago period and net sales dipped 32 per cent to Rs 247 crore. The downslide had started long back, prompting the markets to take cue. School learning solutions, which contributed the most to the revenues, was down 57 per cent in the same period. The bad news doesn’t end there: the market capitalisation of Educomp Solutions, one of the leading education solutions provider, is down to Rs 736.85 crore, a fraction of the Rs 2,441 crore on April 2, 2012.

According to Educomp’s Chairman and Managing Director Shantanu Prakash, the company is cautious. “This implies lesser growth, but this is a part of the mechanism to strengthen the processes internally. We will focus on improvement, in operational efficiencies, strong backbone and then grow rapidly," he said.

The silver lining is that the company’s market share in the SmartClass segment is intact. While this segment, which deals with technology-enabled classrooms in schools has seen a reduction in revenue, Prakash said this was part of their strategy

According to a recent Morgan Stanley Research report, the firm has faced market share loss due to increasing competition. The Morgan Stanley research said revenue would decline by about 25 per cent year-on-year in FY14 and the company would report a net loss. However, Prakash explained that the firm has a greater scale than their competitors and has about 75 per cent market share. He added that prices are firming up, especially in SmartClass segment. “Further, it is being heard that competitors are slowing down in this space. So, overall, competitive intensity has reduced, while average revenue per user has increased for us,” he added.

Educomp recently made two exits in what it calls non-core segments. Last week, the company sold its entire 50 per cent stake in the vocational training firm IndiaCan, to its joint venture partner Pearson. Prakash had then said this was in line with their strategy of focussing on digital content and IP offerings and asset-backed offerings like schools and colleges.

“As part of agenda to focus on core-businesses, we are successfully making one more divestment and thus saving the company from the need of funding the losses and other capital needs of a non-core business,” he had said in a statement to the stock exchanges. The transaction in IndiaCan was the third in a series of exits from non-core businesses.

Earlier this year, Educomp announced a primary capital investment from Kaizen PE and Bertelsmann in their internet education platform business, Authorgen. Under this agreement, Educomp sought growth capital investment of Rs 22 crore in Authorgen from Kaizen PE and Bertelsmann. In March, they completed the sale of 50 per cent stake in Eurokids International Limited to a group of investors led by GPE India. The company had said it made a profit of Rs 70 crore on this investment, and that the proceeds would be used for its core businesses.

According to Prakash, Educomp has made 3X (three times) its original investment in Eurokids and has seen a good demand for its assets. Further, he said that some debt realignment will also happen, thanks to the sale of non-core assets.

He explained that in August 2012, Boston Consulting Group (BCG) was engaged to do a strategic review of Educomp, among other segments. “They gave a review that while we were engaged in many businesses, we needed to focus on core areas. After a lot of research, we came up with three core areas, which were digital content (SmartClass), K-12 school business and higher education segment,” he said.

Talking about the businesses that they exited, Prakash said those were marquee businesses in themselves. “Educomp will now operate in a larger setup in areas with larger market opportunity,” he said. According to the BCG review, the market for SmartClass segment is at 194,000 schools.

Educomp is concentrating on a six-point agenda: focus on core businesses; cautious growth; leverage on existing SmartClass base of 15,000 schools; vast sales network; brand equity and correction of asset-liability mismatch by preparing the right structure to unlock value; and move to cash based, high margin, high IP business with zero capex. Further, it is also looking to right-size the organisation and increase human capital bandwidth by bringing in new proven talent at leadership level.

On the products side, the firm plans to launch SmartClass Tab, which would provide all the SmartClass content on a tablet. Educomp is also launching an English language learning solution and assessment based solution for school students in this financial year. Prakash said all these solutions were ready for launch.

In the higher education segment, where Educomp has a joint venture with one of the largest private education groups in the Asia-Pacific, Raffles Education Corporation, which runs Raffles Millennium International, a design training institute. Prakash said he would focus on this joint venture and that no additional partnership are being planned this year in the higher education segment.