A young man in dark glasses stands in front of a wall groping for something from time to time. To anybody watching, he’s just a young man in dark glasses standing in front of a wall. But he is actually using 3D visualisation and virtual reality tools at Core Education’s lab in Mahape, Navi Mumbai.
Core claims to be ‘India’s largest global education company’ that develops and sells education related software and services, develops content for pre-school, school and after-school education including 3D content, builds and manages schools and vocational training centres, trains teachers and professionals, and provides technical support. The portable 3D lab, in which learners like this young student can understand concepts not easily explained in 2D settings or a normal classroom, is a result of Core’s partnership with Nasa, the American space agency.
Major Indian state projects signed so far
Thousands of miles across the Atlantic, 46 American states such as California and Michigan use Core’s IT software like a unique ID generator and child tracking system to track monies spent on 12 million students. Over 10,000 American schools use Core’s compliance and reporting tools to ensure adherence to state regulations, and 2.5 million students across 6,100 schools take online tests based on Core’s K-12 (kindergarten to Class 12) platform, which has content for over 180,000 tests in maths, science, English and social sciences.
The same systems are now being used to track education spends in Jharkhand even as children of semi-urban and rural schools in states like Haryana, Maharashtra and Gujarat access digital interactive content for maths and science. Simply put, a child in Nagaland can add a variable to a linear equation and see the shape of the graph change on the screen.
The math adds up for the company, too. Core set shop in India as an IT and ITES company catering to the American market in 2003 (though it was in the US from 2001 albeit under a different name). Less than 10 years later, it is firmly entrenched in the US and UK and is making inroads into India, UAE and Africa.
Core’s own report card is that of a topper. Compared to last year, its FY12 revenues grew by 50% to Rs.1,638 crore — 86% of which came from the US, 10% from the UK and the remaining 4% from India and others. The education vertical accounted for 80% of Core’s business while ‘extra curricular’ services, such as technical support and ERP for American banks, healthcare and insurance firms, accounted for the rest.
Core’s vocational training projects
Core’s compounded sales growth of 51% since 2007 makes its business story stand out. At the centre of this stellar performance are the steady client relationships it has managed to build in the US — its nine-year-old relationship with the Michigan state government has seen the account grow from $0.45 million to $2.35 million in 2010, and the recently renewed $24-million five-year Los Angeles account came amidst tough competition from industry giants such as Pearson and McGraw Hill. Along the way, Core developed unique intellectual property rights and updated its technology solutions with 12 acquisitions in less than nine years.
But Core’s new India focus is what makes it really interesting. Till 2010, despite being an Indian company, Core business interests in India were minuscule. “We watched from the sidelines,” says Sandeep Mansotra, the company’s founder-CMD. “We specialised in technology-driven education solutions, but the Indian education market, even the information and communication technology (ICT) market, was very hardware driven — computers were installed in schools without much thought given to the softwareand services one could offer through them.”
Mansotra says that if the American market has a 60% software and 40% hardware mix, in India it was 90% hardware and 10% software. Now, he says, “it has changed to about 40% software and 60% hardware.” Even the bidding for ICT projects in India has changed from L1 (only lowest cost) basis to pricing that considers technical capabilities — for instance, Core recently bagged the order to deploy School Quality Enhancement Programmes akin to what it offers to American schools at 60 Navodaya Vidyalaya Samitis and 25 Kendriya Vidyalaya Sangathans.
Mansotra’s India-strategy benefits from increased government spending on education, which went up fivefold to Rs.2.5 lakh crore in the 11th Five Year Plan. In fact, the government has pledged to increase spend on education to 6% of GDP. Already, the human resources ministry has invited expressions of interest for building 2,500 child-friendly model schools with well-designed classrooms, better infrastructure, clean toilets, modern computer labs and a more interactive and accountable teaching process that gets more kids into school and keeps them there. “Even if you take Rs.2 crore per school, it’s a Rs.5,000 crore opportunity,” says Mansotra.
But what makes Mansotra so confident that he can win contracts and manage slow-moving government machinery? “My business competency is not IT but working with governments,” he says. “Even in the US, government business is our main business. We understand what governments need and how they work.”
Core expects its India focus to pay off materially over the next two years. By 2014, the company’s American share of revenues is expected to come down to 75% with the UK and India market increasing to 15% and 10% respectively. The US and UK markets are expected to grow at a healthy 30%. Expansions in the African and UAE markets also bode well — Core has signed a $13.5 million contract with the Ghana Government to provide content for the K-12 segment and another with the provincial government of Ras al-Khaimah in the UAE for running a higher education institute offering MBA, architecture and engineering degrees (content partnership with BITS, Ranchi).
Coming of age
Core’s growth has matched the progress of its founder. The Mumbai born-and-bred Mansotra cut his teeth in his father’s steel making business at 16. Over the next 10 years, he tried his hand at different things before finally buying over a 20 people IT unit. “They came to me for funding and already had offshore clients in the US,” says Mansotra. “I had no understanding of IT but acquiring a running, profitable business made sense to me.”
He bought over a listed firm with nil revenues in 2003 and renamed it Core Projects and Technologies. By 2006, he had acquired three US companies for an average $5 million. “These companies had EBITDA (operating) margins of 10-12%,” says Mansotra. “In addition, the owner was taking almost 20% of the margins home as high salaries and overheads. The value proposition was obvious.”
One of these firms, Enterprise Computing Systems, was in the business of providing school management and student performance software and services. And so, Mansotra found himself in the education sector. One year later, he had acquired three more such firms in the US and UK (see: Applied theory), cementing his firm’s status as a domain expert in the education sector. “I started actively focusing on making only education-centric acquisitions,” says Mansotra who acquired four more such firms by 2011. “It also helped us cross-sell products to our existing customers.”
As Core went about building its overseas education technology business, the sector simmered in India. Mansotra got a sense of the glaring gaps in the Indian education system after an exposé in a business daily showed how just a fraction of the public money meant for educating poor students actually reached them — he immediately thought of the American states using his Student Tracking System (STAR).
In 2007, Core signed a contract with the Jharkhand government under Sarva Shiksha Abhiyan to develop a modified version of STAR to track eight million children from Classes 1 to 7 across 22 districts — at any given time, the state government could check whether a student was getting his mid-day meal, whether he had changed schools, his marks, or if he had dropped out, at the click of a button. The Karnataka State Open University too signed up for Core’s admissions and examinations management system.
The Indian thrust became more evident in 2010 after states such as Maharashtra, Gujarat, Nagaland, Delhi and Madhya Pradesh, started implementing ICT-based Computer Aided Learning Programmes (CALP) to attract and retain children at rural schools by using animated multimedia-based educational content.
Soon enough, Core bagged a Rs.119 crore CALP contract from the Maharashtra government for 947 schools. The Gujarat government too has awarded Core two projects of Rs.120 crore (3,121 schools) and Rs.24 crore (586 schools) for CALP and ICT services, respectively. Core is also working on similar projects for 2,622 schools in Haryana (Rs.295 crore), 1,420 schools in Punjab (Rs.6 crore) and 72 schools in Nagaland (Rs.2 crore) (see: Inter-connected) implementation is underway for another project in Assam. Core is also betting big on vocational training for the Indian market.
Core’s fast-paced expansion and acquisitions have led to considerable debt on its books. Total debt in FY11 zoomed to Rs.840 crore from Rs.358 crore in FY10. Mansotra has also pledged 27.95% of the 47% shares he owns in the company. “Most of our debt is of long-term nature,” he says in response to the concerns over the high debt. “For instance, we raised $100 million via FCCBs in 2007 at a 0% coupon rate, all of which was converted in 2011. We raised another $75 million from FCCBs in 2010 at a 7% coupon rate. Of this, 15 % has already been converted.” Working capital makes up for Rs.300-400 crore of Core’s total debt.
The competencies acquired will lead to a steeper learning curve in India
Sujan Hazra and Atul Thakkar of Anand Rathi Securities expect Core to tide over: “Core will require additional funds for its fresh initiatives (K-12 and ICT). However, with an FY11 debt-equity ratio of 0.5:1 and interest-coverage ratio of 4.5, Core’s debt is manageable.”
Other worries remain. Moody’s, the rating agency, estimates Core to spend Rs.200 crore per annum to open 3,000-4,000 schools. This capital outlay will be recovered from the state government but such payments take long and often get delayed. “Payments from the central and state governments may be delayed as the ICT programme is untested,” notes Moody’s. Ultimately, working capital requirements may increase, putting Core’s cash flows under pressure.
“But it’s a risk you take with any business,” says Mansotra, in defence. He also points out that his larger business income from the US is stable, and will offset the India business. “Over time, as the India operations gain size, their cash flows will stabilise,” he says.
For now, Core counts among the handful of players, including Educomp, NIIT and Edserve, which appear poised to profit from the boom in the education industry. It’s also the only player besides Educomp that’s offering end-to-end education services. Finally, Core is learning its lessons well and working hard to improve its report card.