Education companies are getting back into the groove. After their asset-light strategy, the companies are turning their focus to margin improvement. At a conference conducted by Elara Securities (India) Pvt. Ltd, managements expressed confidence about improving margins through better utilization of schools.

Tree House Education and Accessories Ltd, for instance, is reportedly running its pre-schools at around half their capacity. Utilization levels of K-12 schools (kindergarten to Class XII) are even lower. As K-12 schools add new students, margins are expected to rise. “The company expects to add 3,500 students every year, largely in the K-12 segment. This will further enhance Ebitda (earnings before interest, taxes, depreciation and amortization) margin. Management expects Ebitda to double in the next three years," Elara Securities said in a note. The company recently signed an agreement to sell land and building of a second K-12 school. It aims to do more such asset sale transactions and become debt-free.

Pre-schools of Zee Learn Ltd are running at 55-60% of capacity. K-12 schools, due to recent launches, are running at even lesser capacity. “Most of our (K-12) schools have an average age between 3-4 years and hence in these schools the current capacity utilization is around 30%. As these schools get older and get established in their respective markets, we will see their capacity utilization improve, thus adding to margins," said KVS Seshasai, chief executive officer at Zee Learn.

Career Point Ltd, on the other hand, expects to gain from a recovery in enrolments in the tutorial business. Changes in the Indian Institute of Technology entrance examination and admission process have hit the company’s coaching business. As the new system settles in, the management expects enrolments to improve, helping deriving better operating leverages. In the first nine months of the current fiscal year, enrolments in the tutorial business increased by almost 17%. Due to addition of new academic years, enrolments in the formal education business are growing at an even faster pace.

The optimism is driving up the stocks. Shares of Career Point and Tree House Education doubled in the last one year. Zee Learn gained 28%. While the commentary is encouraging, staff attrition remains a challenge for the education service providers. High competition and limited entry barriers (in tutorial and coaching businesses) means retaining qualified teachers is increasingly getting difficult. Even though it’s not worrisome now, the problem, if not contained, can impact service delivery of the companies. That in turn can hit the companies’ brand image as many of them provide outcome-based services.

The writer doesn’t own shares in the above-mentioned companies.

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