The path to take and the potholes to avoid in the Indian education sector

“Education is the most powerful weapon which you can use to change the world.” – Nelson Mandela

Quotes like the above, the knowledge that India has the world’s largest population of under 25 year olds, and that it’s education system is antiquated; have inspired many entrepreneurs to launch themselves into the education industry. However, a lot of them have realised that building a profitable venture in this sector is not as easy as it seems, considering the huge addressable market and the obvious need for quality education.

So should more entrepreneurs be looking at the education sector?

Before we answer that question, let’s take a step back to get a broad understanding of the myriad opportunities and business models in this space.

A Massive Market

Most people would be surprised to know that at an estimated size of USD 105 Billion, India’s education sector is just slightly smaller than its IT sector. We have more than 1.4 million schools and 35,000 colleges across the country, with the online education market expected to touch USD 40 Billion by 2017. Despite this size, at current sector growth rates, India will have a very tough time creating the 500 million skilled workers needed by 2022. So there is a definite need for private players to come in to fill this gap.The education space can be categorised into three sub-sectors: Core, Parallel and Ancillary.

The Core Sector

This consists of basic and fundamental education that generally culminates in a degree, i.e. K-12 schools & undergraduate and post-graduate colleges. This is the largest segment and has the most government regulation.

An entrepreneur, who wants to setup a government recognized school or college, can only operate this in the form of a non-profit trust. Some states require the trust to purchase (not lease) the land on which the institution is to be built, which means high capital costs upfront. It is difficult to attract equity investors into these entities as there is no way that the trustee can issue shares or give an ROI in the form of capital gains or dividends. There are workarounds where the promoters create their own for-profit education service companies that supply management, marketing, faculty and other services to the trust run school or college. However, due to the complexity of these structures, many equity investors shy away.This is unfortunate, because once the high upfront capital costs are covered (usually through debt), the operating costs are quite low. Adding to the relatively strong ability of successful schools and colleges to charge higher fees (ranging from Rs. 2 lakhs to 15 lakhs per student, per annum), it is not uncommon for these institutes to have a profit after tax of upto 60 per cent. One well known private university in Noida has been reported to have generated an EDITDA of Rs. 350 Crore in 2014! Added to that, once an institution has built its reputation, it does not have much difficulty attracting students, who provide it with strong cash flows which generate ongoing sustainable revenues for years to come.

Basically, if an entrepreneur is able to invest large funds through debt and can sustain the costs for a period of upto five years, setting up an institution in the core sector is one of the most profitable educational ventures he can consider.

Parallel Sector

This segment consists of services which fill the gaps in core education, including preschools, Vocational training institutes, coaching classes, tutoring classes, test preparation, teacher training, and related services. Although this sector is smaller than the core sector, it does not attract much government regulation and it allows private for-profit companies to operate.

Within this sector, setting up a pre-school requires the lowest amount of upfront investment. It is also fast growing with an estimated 35 per cent CAGR. Many entrepreneurs may find it easy to become a franchisee of one of the large preschool chains like Zee Learn, Tree House or Kangaroo Kids, and set up a preschool in a small rented ground floor apartment in a residential area.

The tutoring or coaching classes market is the third largest opportunity targeting almost 342 million students between the ages of 8 years to 24 years. This is an outcome of India’s focus on exams, which requires students to memorize facts through rote learning, and the pressure to get high marks in these exams to get admission into the college of their choice. Students in preparation for their board exams spend fees of up to four times their school fees for tuition classes.

Both the above two sub-sectors are high profit margin businesses, and the entrepreneur has the option of starting independently or becoming a franchisee of a larger player. However, since the barriers to entry are low, there is quite a bit of competition, with many neighborhoods in the major metros having multiple preschools or tutoring classes marketing to the same student base.

Other opportunities in parallel education comprise of setting up career oriented vocational classes, e.g. for accounting, software programming or retail sales. There is also a segment that provides corporate training for medium to large companies.

Ancillary Sector

This sector comprises of companies that provide products and services to institutes in the core and parallel education sectors like Learning Management Systems (LMS), teaching aids for schools, textbooks, tablets with e-learning content, etc. This is a highly fragmented space with many companies entering each year. Most venture capital funding goes into this area due to the ease of entry and exit for investors. There are also a fast growing number of Education Technology companies like WizIQ, Simplilearn, etc., which provide online education services directly to the consumer; bypassing the institutions. However, like many companies in the technology space, the possibility of growth is high but the risk of failure is higher.

The Bottom Line

As we can see, there is a huge range of opportunities out there for education entrepreneurs. However funding availability and ability to take risk would determine the right path to choose, whether it is a high debt, high profit, low risk core sector institute or a high risk, high equity funded edu-tech company.

About the author

Akhil Shahani is the Managing Director of The Shahani Group that runs a range of colleges in Mumbai in the area of management, media, real estate and entrepreneurship. He is also an angel investor in education and mentors many young entrepreneurs in his spare time. He can be reached at [email protected]Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.