Everonn Education Ltd’s corporate governance troubles have thrown the spotlight on education services stocks. Given the much talked about demographic dividend, the shortage of employable people and the government’s thrust on vocational skills training, it would seem there was easy money for the taking in this sector.
But the reality is far different in the listed stock universe. While the recent troubles may have seen the Everonn stock losing some 42% over the past three trading days, the sector as a whole has underperformed the broader markets for quite sometime now. Even before these allegations came to light, the scrip had shed 23.6% since the start of the current fiscal, against the 12.7% fall in the BSE-500 Index of BSE.
Rival Educomp Solutions Ltd lost half its market value in the same period (though that was partly due to a Securities and Exchange Board of India consent order on alleged insider trading by the promoter). Others such as Career Point Infosystems Ltd and Zee Learn Ltd, too, have fallen behind the BSE-500.
The primary reason these stocks are lagging is that the financials—which may look good in isolation—are not meeting Street expectations, say brokerages. Many of the stocks had listed at high price-earning multiples of up to 100 times, which implied growth rates of 50-60% for investors. That hasn’t happened.
The latest new share sale in this sector, Tree House Education and Accessories Ltd, listed at some 50 times fiscal 2011 earnings and has declined since.
Secondly, while there is strong demand in this sector, the potential has meant that competition has grown strongly in the past few years leading to saturation and driving down margins.
In the case of Everonn and Educomp—to name the two most visible stocks in this sector—high capital intensity in their preferred segment of multimedia education has led to wobbly balance sheets.
“Like Educomp, Everonn’s cash burn from capex has risen substantially, which has begun to meaningfully impact PAT (profit after tax) as interest costs almost tripled in the last quarter,” Ambit Capital Pvt. Ltd said in a recent note.
Thirdly, firms have to deal with a fragmented market, and for some, geographical concentration risk. For Career Point, which is mainly in the business of test preparation, nearly half its revenue comes from one city—Kota, in Rajasthan. While it is expanding into schools and private universities, these are more regulated segments.
Firms operating in this segment have to come up with smart capital structures to beat the not-for-profit clause, and it will be quite sometime before the results show.
These problems may not go away overnight, but those who have lots of patience may do well to remember that education is the biggest middle-class household spend after food.
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