Educomp scripting turnaround plan

CMD Shantanu Prakash says firm to focus on lesser growth and increase operational eficiency

Its profits in the third quarter of the financial year was down 73% to Rs 6.57 crore from the year-ago period and net sales dipped 32% to Rs 247 crore.

The downslide had started long back, prompting the markets to take the cue. School learning solutions, which contributed the maximum to the revenues, was down 57% 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.

Educomp’s Chairman and Managing Director Shantanu Prakash explains this by saying 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 that deals with technology enabled classrooms in schools has seen a reduction in revenue, Prakash says this was part of their strategy

According to a recent Morgan Stanley Research report, the company has faced market share loss due to increasing competition. The Morgan Stanley research said that they expect revenue to decline by about 25% y-o-y in FY 2014 and for the company to report a net loss.

However, Prakash explained that the company has a greater scale than their competitors and has about 75% market share. He also said that prices are firming up, especially in SmartClass segment, since the industry has realised that there needs to be a realistic way to do business.

"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 has recently made two exits, in segments which it calls non-core. Last week, the company sold its entire 50% stake in the vocational training firm IndiaCan, to its joint venture partner Pearson.  Prakash had then said that 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 its entire 50% 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.

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

He explained that in August last year, 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 that those were marquee businesses in themselves. "Educomp will now operate in a larger set-up in areas with larger market opportunity," he said. As per the BCG review, the market for SmartClass segment is at 1,94,000 schools.

Educomp is concentrating on a six point agenda which include focus on core businesses, cautious growth, leverage on existing SmartClass base of 15,000 schools, vast sales network and brand equity and correction of asset-liability mismatch through preparing the right structure to unlock value and move to cash based, high margin, high IP business with zero capex.

Further, they are also looking to right-size the organization and increase human capital bandwidth by bringing in new proven talent at leadership level.

On the products side, the company is launching SmartClass Tab, which would provide all the SmartClass content on a tablet. Further, Educomp is launching an English language learning solution and assessment based solution for school students in this fiscal. Prakash said that 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 group in Asia Pacific, Raffles Education Corporation. They run Raffles Millennium International, a design training institute and Prakash said that they would focus on this JV and no additional partnership are being planned this year in the higher education segment.