A class act

Unlocking the potential

Education in India is a booming business that’s attracting investors by the droves. but success won’t come easily

It takes 15 minutes to get past the reception where a webcam captures your image and a bar-coded entry pass is issued. When you finally walk in, brown stone buildings stretch out far into the distance on either side. At the circle in the centre stands a parked BMW; a salesman hands out brochures and expresses his eagerness to tell you more about the car. Further down is a food court filled with familiar brands selling coffee, pizzas and sandwiches. This isn’t the campus of some IT giant or even a mega shopping mall. This is the Amity University in Noida.

At the other end of the National Capital Region, a few students sit on a hillock, tapping away at their laptops. They are students of the Pathways World School, located in the Aravalli hills in Gurgaon. It’s time for project work and since the school and grounds are connected through a wifi network, they’re making the most of a lovely autumn day instead of sitting in air-conditioned classrooms.

These aren’t the schools and colleges most of us attended. Those were cavernous buildings where a lone ceiling fan barely moved the air around the dusty wooden benches, where the canteen served greasy bread pakoras and walls were covered with graffiti and student council election posters. But then, education today is diametrically different from what it was a decade ago. As incomes rise and aspirations climb, people’s demand from the education system, too, are increasing.

They want better amenities — classrooms, libraries, course material — better choices and combinations of subjects, and they want better methods of teaching. What hasn’t changed is the attitude to education — for many, IIT is still the Holy Grail and an English education is a ticket to prosperity. So, India’s willingness to spend on education hasn’t lessened, either — indeed, it’s one of the biggest chunks of expenditure in most households’ budgets. A January 2012 survey by Credit Suisse reports that Indian consumers spend nearly 10% of their household budget on education, and close to a third of children attend extra classes outside school, up from 23% last year.

And what do you get when you have a demanding customer base that’s willing and able to pay? A business opportunity. Not surprisingly, then, education in India is a booming business that’s attracting established corporates, first-generation entrepreneurs and — to a lesser degree — investors. In the past few years, there’s been a tremendous increase in the number of providers of educational services at every step of a student’s academic life — from preschool to school and college, from coaching classes to vocational training — and these new ventures are bringing with them not just new facilities, but also new curricula and fresh pedagogies.

“Even though education in the country is currently a grey area as an investment opportunity, because it is highly regulated and exits are not easy, it is extremely attractive to a lot of players — private investors, private equity and venture capital funds,” points out Enayet Kabir, associate director, education, Technopak.

It’s a business that’s got everybody excited, and with good reason. According to a July 2012 report by Technopak, there’s a massive gap between demand and supply in Indian education. The country has 1.3 million schools that take in about 18 million students every year; 346 million children should be in school, but only 237 million children are enrolled currently, which means an additional 200,000 schools are required just to meet current demand. In higher education, India has 33,023 colleges and 646 universities that together cater to just 4.5 million of the 17 million students ready for college. So, there’s a requirement for adding 35,000 colleges and 700 universities, which calls for at least $180 billion in investment. (See: Room for more)

Government spending alone won’t bridge this gap. Already, private spending on education across all sectors (schooling, higher education, vocational and ancillary) was over $60 billion (about Rs.300,000 crore) in 2011. Compare that with the 11th Five-Year Plan allocation of Rs. 2,69,873 crore for 2007-12, which was a near five-fold increase over the Rs.58,820 crore expenditure incurred in the 10th Plan. Still, it’s not as if the government isn’t trying: it has opened 300,000 primary schools under the flagship Sarva Shiksha Abhiyan for universal primary education and literacy level in the country is up to 74.04%. But even it recognises the need for greater private sector participation in the education sector — and it’s not just for the money.

The Union Budget in March outlined a proposal for 6,000 model schools, including 2,500 on the public private partnership model, and HRD minister Kapil Sibal is pushing for infrastructure status for the education sector, so that easier fund-raising encourages greater private sector participation. “The government is not able to keep pace with the kind of solutions emerging in education,” admitted Sibal at a conference earlier this year. “In the next 10 years, the nature of education will change.”

It would be all too easy for private sectors players to get carried away with the exuberance, but there are testing times ahead. The education sector in India isn’t only about the opportunities. It’s not an easy business to be in and the hurdles are almost as huge as the rewards. Which is why, although the private sector has big plans for the market, across all segments, it’s taking only baby steps in the education space.

A new business model

For the longest time, corporate involvement in the education sector was about philanthropy. Big business groups would set up schools and colleges for their employees, usually in factories located in distant or rural areas. Some (think Tatas and Birlas) would also establish educational institutions as centres of excellence. The profit motive was almost completely absent — and government regulations ensured it stayed that way.

Education in India is heavily regulated — schools and colleges can be run only as non-profit organisations by a society and any income generated has to be reinvested in the institution; no dividends may be distributed. What little business interest there was, then, was diverted to the unregulated part of the sector — vocational training, preschools and coaching academies. 

In the past several years, though, a new model has started to emerge, which allows for profit generation in the formal education space. While the school is established by a trust or society, as directed, it is operated and managed by another entity, which provides services such as course content and teacher training, and charges a fee for the same. The trust hires the teachers and provides salaries and other miscellaneous expenses.

There may also be a separate, infrastructure company that provides land and buildings to the trust on lease. Revenue is initially recorded in the books of the trust and is transferred to the companies as lease rental and management fees. This is not only legally accepted, but also an attractive business proposition — EBITDA of over 30%, internal rates of return of 20-30% and break even in six to eight years. And that’s brought out investors and entrepreneurs in droves. IDFC PE pumped in $35 million for a 13% stake in Manipal Universal (now Manipal Global Education) in 2006.

More recently, Lighthouse India 2020 Fund invested $10 million in content provider iDiscoveri; Matrix Partners bought 36% of preschool chain Tree House for Rs.59 crore; and Pearson Education paid Rs.577 crore for 59% in TutorVista. Private deals are being struck in the schools space as well. Reliance Capital invested more than Rs.100 crore in Pathways Global School, for instance, while Global Indian International School is backed by Barings Partners.

And with the June 2012 decision of the University Grants Commission to open doors to 500 foreign universities to start dual-degree courses, expect action to pick up there as well. Meanwhile, the action is hotting up in other parts of the market
as well.


A playschool used to be a place where you’d drop off your little tyke for a few hours of fun and play with other toddlers while you caught up on your chores. Now, Technopak says it’s a $1.5 billion opportunity that will grow to $5 billion by 2020. With the growing prevalence of nuclear families and working mothers, the need to get children to school earlier has resulted in the mushrooming of preschools across urban India.

There are no official numbers available, but various estimates place the number of preschools in the country at over 15,000. There are about 20 big chains -— including Kidszee (over 900 centres in 330 cities), EuroKids (780 schools in 280 cities), Tree house (304 schools), Shemrock (175) and Apple Kids (150) — that together account for over 2,000 schools.

A CLSA report on education in India says 11% of urban children go to preschools, a number that will only grow, given the market dynamics. Many preschools quote research that says the first 2,000 hours of a child’s life are the most critical for learning skills like language and music, and ambitious parents are enrolling their children at increasingly younger ages — some as young as 12 months. And increasing disposable incomes mean parents don’t mind forking out anywhere from Rs.3,000 upwards as fees every month, especially since many preschools also double up as day care centres. 

As a business case, preschools are the cottage industry of the education sector. It’s not regulated, so anyone can set up a centre with little or no infrastructure or training. A stand-alone preschool can be started with as little capital as Rs.5 lakh (not including land and building costs), two or three teachers and about six helpers. But in terms of both marketing and pedagogy, it is easier to take up the franchise of an established preschool brand.

The initial set-up costs and franchisee fee could be between Rs.5 lakh and Rs.10 lakh and profit margins may be lower but there are several advantages. “Access to better course structure, teacher training and, perhaps most importantly, a better-known brand name is tilting the preference in favour of franchisee models versus the stand-alone neighbourhood school,” says a report on Indian education by Anand Rathi Securities.  

Indeed, most education analysts expect stand-alone schools to slowly give way to preschool chains as the sector grows more organised and parents, too, demand greater consistency in education quality. Anusuya Das ran a playschool in south Delhi’s Kalkaji for seven years before downing shutters last year. She agrees that it doesn’t take much to start a preschool, “but it takes a lot of effort and money to keep it going”. “The long-term economics aren’t favourable,” Das adds. “Any repairs or maintenance eats directly into your bottomline.” 

That hasn’t stopped investors from jumping into the sector. “Preschools have become a business where big bucks are involved,” says Lina Ashar, chairperson, Kangaroo Kids Education, which runs 80 preschools across 17 cities “Earlier, no one was interested in investing in a school, the supply of funds was limited. Today, you have investors and private equity funds knocking on your door all the time.”

 In 2008, Educomp Solutions invested Rs.39 crore for a 50% stake in EuroKids, while more recently, Kaizen Private Equity has pumped in Rs.20 crore in Bengaluru-based day care and preschool chain, Your Kids Are Our Kids. Companies like  Tree House are listed entities that are popular with investors. Going forward, Technopak’s Kabir expects investor interest in the sector to only increase. “I know of two foreign investors who want to invest in the sector,” he says. “Currently, only a fifth of the space is organised. If these players come in, it will start getting more organised.” That’s what is happening in the K-12 segment.

Lessons in entrepreneurship

As things stand, most of the action in the education sector is happening in the schools segment, specifically the Kindergarten to Grade 12 (K-12) segment. This is also the single-largest part of the market, according to Technopak — $29 billion in 2011, expected to grow at 14% CAGR to reach $95 billion by 2020 (See: Supersize that).

The new schools are made to global standards, which mean facilities that would be seen as luxuries even a few years earlier. AC classrooms and buses, individual lockers for students, smartclasses and wired campuses, multi-cuisine cafeterias and state-of-the-art sports facilities are now par for the course. 

As can be expected, these schools not only charge high fees — Rs.5-7 lakh a year, on average — they’re also expensive to set up. Depending on the facilities offered, it costs anywhere from Rs.20 crore to Rs.150 crore to set up a school in a big city. The differentiators are usually technology and library resources, which account for 15-20% of total costs. “We have spent about Rs.150 crore per school,” says Prabhat Jain, director, Pathways School.

The educational foray of Delhi-based Sarla Group currently involves three schools in Gurgaon and Noida and plans are afoot to expand to 10 schools in cities such as Mumbai, Chennai and Hyderabad in the next two years. The group is considering alternatives such as lease or taking over only the management of a school — while somebody else owns the infrastructure — for its expansion plans to cut down on land costs. “This kind of investment and revenue from schools was unthinkable 10 years ago,” Jain adds.

Most schools make operational profits in the first three years, according to analysis by Technopak, since they are recession-proof and are catering to people who are willing to spend higher and higher on education (See: Golden eggs). Pathways, for instance, makes operational profits when it has around 600 students per school; currently, the three schools together have 2,000 students. 

The willingness to pay for education is also why most new investment in urban schools are heading towards the International Baccalaureate (IB) syllabus. From two IB schools in 1991, the country had 84 in 2011 and Technopak estimates the number will shoot up to 900 by 2020. IB schools follow international teaching practices and emphasise learning through experience — they’re also significantly more expensive than central and state board schools. 

Private schools are also willing to try out different pedagogies. At Indus International, for instance, the central idea is leadership. The IB school with branches in Bengaluru, Hyderabad and Pune, whose trustees include Mantri Developers, follows its own leadership curriculum, says Sarojini Rao, principal of the Bengaluru school. “Even 1st grade students set goals for themselves — academic, personal and service-oriented,” she adds.

Similarly, Lancers International School in Gurgaon was set up in 2009 largely to allow the promoters to employ a new pedagogy of experiential learning. Their other school is the 30-year-old Lancers Convent in Delhi, an established CBSE school. “It would have been difficult to change the teaching there as it has an established pattern,” explains Harshita Mann, director, Lancers International. 

Despite the fact that demand for quality K-12 education at any price is growing by leaps and bounds, there are significant challenges for the sector as well (See: Take your pick). The high cost of land acquisition and of setting up the schools is, of course, the first. Even if that can be overcome, what’s tougher to get around is the shortage of teachers.

The profession is still not a high-paying one (even in IB schools, teachers usually get Rs.15,000-40,000 a month), which makes teachers soft targets for poaching. Also, where teachers are the secondary income earners of the household, they may be willing to quit more readily if family circumstances demand it. Technopak estimates that India will require 6 million more teachers by 2020 to get to the global average teacher-student ratio.

That will require training 750,000 teachers every year, whereas the total capacity of all B.Ed colleges currently is just 250,000 a year. Some schools, such as Indus International, are trying to get around that by setting up their own training institutes, but that may not be enough if schools want to expand operations. 

The new challenge to profitability of private schools is the recently-introduced Right to Education Act, which mandates that 25% seats must be set aside free of cost for students from economically weaker sections of society. It’s a serious loss of revenue for the schools and if they don’t comply, the RTE Act mandates closure of the institution. “Right now, because our numbers are small, this is not a problem. But as we grow, we will have to re-work our financials to comply with the law,” says Mann. Thankfully, RTE allocations are not an issue for private universities.

Changing the course

The 1990s saw a flood of private investment into the higher education segment, with companies and entrepreneurs alike setting up mostly engineering colleges and management institutes. The resulting oversupply is now leading to several of these private colleges closing down -— media reports say at least 138 have sought permission from the All India Council for Technical Education to cease operations, citing poor admissions. That still leaves India with nearly 650 universities and 33,000 colleges, but enrolment figures are dismal — 16% on average, compared with 23% globally. Still, it’s considered a $11-billion opportunity, since 18 states allow private universities.

These are high risk, high reward ventures. Depending on the infrastructure and the subjects offered, the initial capital outlay can be anywhere between Rs.30 crore and Rs.300 crore. Fees are commensurately high — Rs.5-6 lakh a year. It takes three to four years for a college to establish itself but, “based on the ramp-up and choice of courses, private universities can typically provide returns of 15-20% over a 10-year horizon,” says the Technopak report.

That is, of course, if state regulations remain unchanged. In 2005, the Supreme Court quashed a provision in a Chhattisgarh state law that allowed registration of private universities; over 110 universities in the state were declared illegal. There have also been protests over the legality of private universities in Sikkim, although they continue to flourish.

It’s perhaps easier for a private K-12 school to establish itself than a private college, since the school is affiliated to a recognised board. Amity University founder-director Ashok Chauhan agrees that setting up the institution was challenging. “Changing people’s perceptions about private universities was the first task. It was also difficult to get government clearances,” he says. Amity’s first campus was set up in Noida in 2005; today the group has five universities, 150 institutions and 95,000 students. 

While private universities and colleges do not have the legacy that established, government-funded colleges have, they can offer students several extras such as flexibility in curriculum and course selection, apart from modern infrastructure and technology. Private universities are also tying up with international universities to establish their credentials and attract students.

Shiv Nadar University, for instance, is collaborating with Carnegie Mellon for its undergraduate programme in engineering; OP Jindal Global University has a tie-up with Indiana University for its law, management and public and environmental affairs courses; and LN Welingkar Institute of Management Development & Research is partnering with Nottingham Trent University for its bioinformatics programme.

Some others are counting on their location to work in their favour. In Mumbai’s distant suburb of Virar is Viva, a private college set up in 1998. While it struggled to get students initially, as the suburb grew, so did demand. Today, Viva has 28,000 students in its various streams, which include engineering, management studies, biotechnology and pure sciences. Unlike most educational institutes in India, Viva doesn’t have trouble finding lecturers — considering the Mumbai commute, many local qualified post graduates prefer working within the suburb than travelling downtown. The issue is with professors. Viva trustee Shashank Patil points out that UGC regulations stipulate that professors must have Ph.Ds. “So we encourage our lecturers to do a Ph.D and support them with resources,” he adds. 

Not having Ph.Ds may not matter since students’ approach to college education is changing with the times. “Students only ask about the kind of placements they will get. They are not worried about the course or the faculty,” says Amity’s acting vice-chancellor Balivender Shukla wryly. Accordingly, most private universities engage actively with the corporate sector through seminars, guest faculty and student internships that, hopefully, will lead to permanent placements. And as long as corporate India continues to hire from these institutes, they will flourish. 

Across segments, there are both challenges as well as high potential for strong returns from investing in the education sector. Successful institutes will be those that differentiate themselves in terms of pedagogy and facilities, and sustain and scale up their operations year after year. 

With the demographic of the population where it is, investment in education — when done with foresight and some astute planning — can only be a positive. There are millions of people waiting to be educated — and millions to be made in doing so.