Byte into this

If the 1980s and 1990s were all about queues of students eager to sign up for multi-year courses, the millennium has been about potential owners lining up at Aptech. Founded in 1986 by Atul Nishar, the computer training institute that along with NIIT defined the space has changed hands several times in the past decade. In 2003, Nishar sold out to Chennai-based IT training company SSI, the brainchild of serial investor Kalpathi S Suresh. Two years later, billionaire investor Rakesh Jhunjhunwala and his family, along with Ramesh Damani and Asit Koticha, picked up a 32.19% stake in Aptech at ₹56 per share. And in 2010, Jhunjhunwala picked up a further 2.24% for about ₹8 crore. 

Making magic

Aptech’s animation arm, Arena, contributes a major chunk to revenues

Aptech would have had a fourth owner in 2012 had Jhunjhunwala’s plans to sell his stake come through. The ace investor had even hired Avendus Capital to scout for prospective suitors and a couple of private equity investors and companies, such as Core Education & Technologies and Team Lease, did express interest, but walked away without making a bid due to a valuation mismatch. At the time, Aptech’s promoters were said to be looking for a valuation of over ₹ 600-700 crore, while the market didn’t think the company was worth more than ₹ 460 crore. Still, the company has a good chance of changing hands again, given its promoter now is a financial investor, not an IT industry hand. But while it remains a zero-debt company with the core business continuing to bring in cash, there are a few concerns regarding some investments the company has made that analysts believe Aptech needs to address for a possible re-rating.

Beyond bits and bytes

Over the years, Aptech has evolved into much more than a computer training institute that taught teens just out of school how to code, although it still remains the No.2 player in that space, after NIIT. In 1996, it branched off to offer animation and multimedia courses under the Arena brandname. Another decade later, it acquired training solutions provider Avalon and started training people in travel and aviation, and after acquiring First English in 2009, added English learning centres to its portfolio. In 2010, it paid ₹76 crore to acquire Maya Academy of Advanced Cinematics (MAAC), promoted by Bollywood director Ketan Mehta and Deepa Sahi, and was instantly catapulted to pole position in the multimedia and animation training space with a market share of 80%. Currently, more than 70% of the company’s ₹ 169-crore revenue comes from animation, multimedia and computer training.

And not just from India. Of Aptech’s 1,300 centres, nearly 500 are overseas, with the company having a presence in 40 countries, including Nigeria, Afghanistan, Russia, Philippines and Mexico. It is the leader in some Asian markets such as Vietnam and Pakistan and has a 35% share in China. Aptech is betting on its international business to drive growth in the next couple of years: over the next two years, the company has set itself a target of getting half its revenue from the overseas market, compared with the current contribution of around 40%. But operating in these markets can be quite a challenge. “International markets are difficult markets to operate in because it takes time to scale up operations. But since we understand the career education space rather well, we are able to offer the right courses based on the skill gap and requirement of the recruiters,” says Ninad Karpe, MD and CEO, Aptech. He adds that content is localised depending on the skill levels of the students and the recruiter’s requirements. Aptech has also got placement teams in India and overseas who work with recruiters to help students with jobs. 

While the retail business quite naturally accounts for the lion’s share of Aptech’s revenue, the company also has a thriving enterprise business that currently contributes 20% to the topline. Under this, it offers corporate training and content to companies. It also provides online testing services for courses and corporate clients. This includes entrance exams such as CMAT and certification tests, as well as screening tests for company recruitments. This is a growing business segment, as many companies have moved from paper-based to computer-based tests for preliminary screening of candidates and the activity is often outsourced to optimise hiring time. 

In FY13, Aptech conducted 1.81 million tests compared with 1.55 million tests the previous year on the back of increased acceptance of online tests. The company conducted the CMAT exam for over 130,000 students at 124 centres across 62 cities in the country over a period of five days and has won the contract to conduct the exams this year as well. The enterprise business will help immensely in Aptech’s non-linear growth, says Karpe. “As more and more companies adopt online testing, our margins in this business will improve as online testing is a volume game. More tests will lead to better margins,” he explains. 

Operating margins improved in FY13 to 15.78% from 13.86% even as revenue declined marginally from Rs 174 crore to ₹ 169 crore. The drop in revenue came after Aptech realigned revenue recognition of MAAC in line with the rest of the company: while Aptech recognises revenue based on collection, MAAC recognised its revenues on an accrual basis.

Aptech follows an asset-light model where, barring some 20-odd centres, all are franchised. It provides the content, training to trainers and oversees quality control, while the franchisee makes the investment, typically in the range of ₹ 10 lakh to ₹ 80 lakh, depending on the location, size of centre and the brand. Aptech gets about 20% of the revenue generated. The advantage with this model is that the company can scale up without making heavy investments. “In an asset-light model like ours, the more you leverage, the better your margins are. We can grow without adding to costs in the same proportion,” says Karpe. In FY14, the company has added 103 new centres so far and is looking to add 100 centres in the next year, where 50 of those centres will be in India and the balance will be overseas. 

Reboot required

So much for the good news. Aptech also has its fair share of challenges to overcome. For starters, there is increasing competition in the education technology space. And that, not surprisingly, eats into the demand for computer education companies such as Aptech and NIIT. “Aptech has to contend with universities now getting on the online platform and offering e-learning courses, which increases the options available to students today,” says Deepak Agrawal, founder, Impetus Advisors. For its part, the company is not too perturbed by the increasing availability of content. “Our biggest advantage is the content we have developed over the past two decades. Once we see a robust revenue model on the emerging platforms, we will be quick to adopt it,” says Karpe. 

Also, growth rates in the IT services business have become more sedate. “The career education space, especially in the IT sector, has gone through a structural change in the last two and a half decades,” says G Chokkalingam, founder, Equinomics Research & Advisory. He points out that exports have grown from a mere couple of billion dollars in the early 1990s to over $80 billion now. “In the process, the growth rate of IT exports tapered off and hence, education companies focused on IT training started seeing tapering in their growth curve,” he adds. But with the market opportunity for the informal education space that Aptech operates in pegged at over $1 billion in India, there is more than enough headroom for the company to grow.

Anaemic returns

Cash on books and lower return from investments keep return ratios low

More worrying is the lack of clarity in Aptech’s Chinese operations. The company entered China in 2000 with a joint venture with Beida Jade Bird (BJB), which is affiliated to Beijing University. In 2009, Aptech divested its 50% stake in the joint venture and invested the proceeds (₹ 108 crore) in the holding company, BJB Career Education (BJBC). Currently, the Indian company holds 22.4% in BJBC, but instead of revenue, gets only dividends — and that, too, is not always consistent. In FY13, the company did not receive any dividend unlike the previous year where it received ₹ 50.38 crore. “There is no clarity on Aptech’s Chinese operations since it does not divulge the revenue figures so it becomes difficult to value that part of the business. The company would be better off hiving off the investment as it would improve the return ratios significantly,” says Agrawal. At the end of FY13, Aptech’s return on net worth stood at 9.44% while the return on capital employed was at 8.56%. That is rather low for a company where the core business is generating good cash flows. 

The bottomline

In 2013, in a bid to improve its returns and earnings per share, Aptech announced a buyback of its shares. Of the ₹ 64 crore set aside for this, the company used ₹ Rs 60.19 crore, that is, 94% of what it had targeted, to buy nearly 8.9 million shares. (Incidentally, Jhunjhunwala’s stake stands at 42.76%, post the buyback.) 

Upping the stakes

After the buyback, promoter holding in Aptech has only gone up

When the company announced the buyback, it had about ₹ 120 crore on its balance sheet, which it did not require for its daily operations. That money was used for the buyback. Post the transactions, Aptech’s capital will reduce by 18%, improving its earnings per share and return ratios.  

The education space in India is garnering a lot of attention from PE funds and overseas players who are looking to enter the country. As one of the leading players in this space, Aptech will definitely be on their radar, especially since the company is focusing on its presence in the international market, in addition to the domestic market. “Spurring growth, especially from regions outside India, will act as a major trigger for re-rating of the stock.” says Chokkalingam. The stock has gained 67% over the past one year compared with a Sensex return of 12% during the same period. Over the same period, its competitor and market leader, NIIT, gained 33%. Currently, the Aptech stock trades at 11X its FY14 earnings. “The asset-light business model and its debt-free stats are its strong points. Considering the diversified business model across regions and verticals, my view is that Aptech is a good long-term bet,” says Chokkalingam. Currently, the stock is trading at a premium of 6% to the average buyback price of ₹ 67.50. That should be the new floor for the stock and the upside, of course, will depend on how ambitious Jhunjhunwala gets.