HDFC chalks out a major foray into education

No one minds a moderate profit on quality education: Parekh.

Housing Development Finance Corporation (HDFC), India’s largest housing finance company, will make a big-bang entry into education. HDFC Chairman Deepak Parekh has told Business Standard that the group’s blueprint will be ready shortly.

HDFC will look at small towns to either set up schools or take over defunct boarding schools. “The opportunity is huge, as the need for quality education will only increase. Parents in even rural areas want to give their children a good education. Higher education is also on our radar,” Parekh said.

The entry into education will be made through a separate subsidiary. “No one would mind if one makes a moderate profit by providing quality education,” Parekh said. According to McKinsey Global Institute’s Bird of Gold report, discretionary spending on education is set to increase from 5 per cent in 2005 to 6 per cent in 2015.

According to players in the education sector, several schools are looking at a model that is profitable and scalable, as operating under trusts makes it difficult to segregate profits. Many schools would be open to the “takeover model” that HDFC plans to adopt. Trusts can’t sell stakes, as they are not allowed to give dividends.

Analysts explain that for such a venture, HDFC directors will need to be on the board of schools as trustees. “When a company director becomes a trustee on a school’s board, he can co-opt another trustee and the trust can be taken over. The trust can then sign agreements with interested parties to manage the assets,” said an analyst.
 

CLEAN SLATE

* Will set up schools or take over schools in small towns

* Entry into education will be through a separate subsidiary

* It already has 51% stake In Credila educational loan unit

* K-12 seen as most attractive segment of education market

“Many missionary trusts or individual families, which have been running institutions the conventional way, are now exploring the private equity route of raising funds. Also, with parents giving importance to factors like a school’s infrastructure (both physical and IT), curriculum and extra-curricular activities, educational institutions are choosing various parameters to build their brands,” said a Mumbai-based analyst.

Kindergarten to class 12 (K-12) is said to be the most attractive segment of the education market, as a student usually stays on for 12 years. The K-12 segment will be the direct beneficiary of rising middle-class incomes in India.

HDFC already has an educational loan unit — Credila Financial Services — in which it raised its stake to 51 per cent in July. Credila plans to leverage the distribution network and customer base of HDFC Bank to expand and also bring down the cost of funds.

Credila, which hopes to grow its loan book 2.5 times in the current financial year, is also in talks with other banks to diversify sources of funds. It has a line of credit from Punjab National Bank.

At present, Credila lends around 65 per cent to students pursuing courses within the country. The company charges interest rates of between 9.75 per cent and 12.5 per cent on loans of up to Rs 50 lakh, unlike PSBs, which do not lend more than Rs 20 lakh.