Mumbai: Shares of companies in the education sector have tumbled from their respective record highs over the last few years as investors became wary of the high leverage and dwindling profits plaguing the sector.

Analysts say many education companies started diversifying into various segments at the same time. There was private equity money and the companies were under pressure to grow.

“Most of these companies, in the process of expanding, ended up with high leverage, which hurt them," said Deven Choksey, group managing director at KR Choksey Investment Managers Pvt. Ltd.

Choksey added that these companies did not have the required management bandwidth to execute new projects. “They need to learn from foreign counterparts on how to execute," added Choksey.

The issues of huge debt to service ambitious expansion plans and working capital requirements bothered companies, and some of them also reported continuous decline in profitability.

For instance, Educomp Solutions which was listed in 2006 at Rs125 a share, made listing gains of Rs128.28 on the day and is currently trading at Rs11.02.

Mint had reported on 6 January that lenders to the digital education provider Educomp Solutions are mulling conversion of debt to a majority equity holding under the strategic debt restructuring (SDR) scheme, citing two bankers in the know.

ALSO READ: Educomp lenders looking at strategic debt restructuring

In the July-September quarter, Educomp Solutions reported loss narrowed to Rs128.61 crore from Rs567.20 crore in the year-ago period. The company has reported a loss for 11 consecutive quarters.

Everonn Education, on the other hand, has been suspended from trading for procedural reasons. The company was listed in 2007 at Rs140 a share, making listing gains of Rs241.75.

For some, the issues run deeper.

TreeHouse Education and Accessories Ltd which was listed in 2011 at Rs135 a share, is down to Rs21.10.

A 12 February report by the newspaper Daily News and Analysis said an FIR has been registered with the Economic Offences Wing (EOW) against Rajesh Bhatia, promoter and managing director of TreeHouse, accusing him and others of cheating and criminal breach of trust by falsifying accounts and fabricating financial statement results.

In December, Zee Learn Ltd withdrew its merger process with TreeHouse, which was announced a year prior.

Career Point Infosystems Ltd has fallen to Rs112.50 right now, against an offer price of Rs310 on the listing day of June 2010. It hit a record high of Rs632.35 on the listing day.

MT Educare, at an offer price of Rs80 a piece has seen its returns erode 52% since its listing in 2012. However, it still has fared better than its peers.

“In the case of MT Educare- it diversified from classroom based business to products such as Robomote. They are also into government’s skill development business.

The working capital requirement is very high, as payments arrive after a long gap," said Pankaj Kumar, AVP – PCG research, Kotak Securities Ltd.

“The business needed a lot of capital, which had been funded though debt. The high borrowing and focus has been an issue," said Kumar.

MT Educare’s consolidated revenue for the December quarter dropped 10.2% from a year before to Rs63.5 crore. It reported a loss of Rs4.4 crore for the quarter, compared with a net profit of Rs7.8 crore a year before.

According to Kumar, similar stories of high borrowings have bothered the sector at large.