MFS Assignment

Management of Financial Services
Global Education Sector Rating

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KEY SECTORAL ISSUES IN INDIA
[A] EXPANDING MARKET SIZE
Indian education sectors market size in FY12 is estimated to be INR3, 411.8bn (USD71.2bn).
The market size is expected to increase to INR6, 024.10bn (USD109.84bn) by FY15 due to the
expected strong demand for quality education. The market grew at a CAGR of 16.5% during
FY05-FY12. The HE segment was at 34.04% (USD17.02bn) of the total size in FY10 and grew
by a CAGR of 18.13% during FY04-FY10.
[B] INADEQUATE EDUCATIONAL INFRASTRUCTURE
Although the governments (center and states) spend on education increased to 3.35% of the
GDP in FY12 Budget Estimates (BE) (FY05: 2.62%), the infrastructure, for both school and HE,
needs to be upgraded to provide better quality education and absorb new enrolments. The
existing institutions (schools and colleges) capacity is not fully utilized and notwithstanding the
enhancement of access (99% of rural population has primary school within 1 kilometer as of
September 2010), the quality of infrastructure is poor. Under the model schools scheme,
launched in November 2008, it is proposed that the state governments build 3,500 schools and
another 2,500 schools under public private partnership (PPP) framework. The government also
intends to build additional public school infrastructure through its funding and in PPP model. It
is viewed as a positive factor; nevertheless the execution delays portend a slip in targets.
Private spend on the education increased by a CAGR of 3.23% during FY04-FY11 and stood at
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INR 361.74bn in FY11. However, private sector building schools in rural areas is unlikely in the
short-run. This allows the government to diligently invest in Tier 3 cities and rural areas. At end-
November 2012, 20 states had permitted formation of 145 private universities.
[C] QUALITY OF EDUCATION
Prolific growth in HE institutes resulted in the challenge of offering quality education and
employability to students. Many technical institutes also run courses without approval from the
regulator All India Council for Technical Education (AICTE). This is because AICTE does not
recognize them due to various reasons including absence of infrastructure and STR. Although the
Eleventh Five Year Plan mandated accreditation of all the HE institutes, the National
Accreditation Regulatory Authority for HE Institutions awaits the parliaments approval.
[D] REGULATORY CHALLENGES
The HE segment is tightly regulated by multiple agencies as opposed to K-12 segment which is
regulated mainly by state education boards or the two national boards. State governments fee
ceilings, fee reimbursements and intake restrictions constrain institutions autonomy. That said,
the remarkable growth in the last decade and governments plan to create an apex regulator at
arms length are positive developments. Although the institutes were formed as not-for-profit,
they plough back profits through associates. Associate companies provide facilities management
and charges management fees, lease rentals and other fees. The structure evolvement is viewed
as a positive. Although, foreign investment is allowed under automatic route in education, there
are regulatory issues. Nevertheless, twinning programs with foreign institutions are recognized
by the regulators.
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[E] ENROLMENTS FIRE POWER FOR FUTURE GROWTH
The gross enrolment rate (GER) in HE was at 18.8% in 2011 and the government aims to
increase it to 30% by the end of the Twelfth Five Year Plan period (FY17).
(a) K-12 Schemes Enrich Enrolments
Sarva Shiksha Abhiyan (SSA) scheme aims to universalise elementary education. Also, the Right
to Education (RTE) empowers Indian citizens to demand eight years of quality education for
children. These measures propelled the enrolment levels at primary (GER - FY10: 116.25%,
FY01: 95.7%) and upper primary levels (GER - FY10: 81.83%, FY01: 58.6%). Despite high
enrolments at primary and upper primary levels, enrolment in secondary level (FY10: 65%) and
senior secondary level (FY10: 37%) remained low.
(b) HE Increasing Enrolments Provide Impetus to Segmental Growth
The HE segment sees lower enrolments and growth rates than K-12 levels but consistent growth
provides some comfort. Engineering is the most preferred course for enrolment and is likely to
grow strongly. Despite upsurge in eligible enrolment rates to 60% (FY08) from 50% (FY94), due
to the absence of strong links with school education, HE enrolments remained low.
[F] DEARTH OF COMPETENT TEACHERS AND FACULTY
The Indian education sector needs trained and quality teachers and staff. The historical STR
marginally improved in the primary and HE segment during FY01-FY10. A moderate growth is
predicted (below 10%) in the HE teachers strength in FY14 based on the historical CAGR of
7.91% during FY01 to FY11. In the agencys opinion, the sector will be unable to achieve STR
proposed by the regulator in the medium term (UGC STR 1:15).
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[G] DEMOGRAPHIC ADVANTAGE
In India, over 500 million fall in the age group of five to 25 years. This provides immense
opportunity for the education sector. It is believed that demand for education and improved
accessibility to educational institutions will help improve literacy rate.
[H] EDUCATION LOANS
Easy credit availability is instrumental for increase in HE enrolment. The credit availability for
the HE segment is expected to continue and be similar to that for white goods sector. Education
loans grew at a CAGR of 26.96% during FY07-FY12 and their contribution to non-food credit
increased to 1.17% (FY12) from 0.87% (FY07).

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RATING OUTLOOK
[A] STABLE OUTLOOK
Credit Rating Agencies have a stable outlook on the Indian education sector which includes both
school and higher education (HE). The low ratings of small and less established education
institutes already factor in the negative impact of enrolment slowdown, which is mitigated by
Indias demographic advantage and low literacy rate. The agencies expect market size to be
INR6, 024.10bn (USD109.84bn) by FY15, driven by robust demand.
[B] LIQUIDITY ISSUES
In 2012, the sector faced liquidity issues due to a fall in enrolment growth and delays in HE
students fee reimbursements by a few state governments. However, lenders have shown
flexibility by allowing loan repayments even after the due date with no penalties, protracting the
moratorium period or rescheduling loans. In some cases, they have allowed a combination of the
above concessions.
However, during the course of rating review, if the debt is restructured or rescheduled, agencies
assess it under Distressed Debt Exchange criteria and take appropriate rating action.
[C] CREDIT INDISCIPLINE
Irrespective of an institutes size, loan repayments depend on its relationship with lenders. Due to
tightly-regulated operations such as restrictions on student intake, fees and infrastructure, an
institutions autonomy is restricted, leading to weak finances and credit indiscipline. The
upcoming regulatory changes could possibly provide autonomy and enhance the credit quality of
the issuers.
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[D] CAPEX WITH HEAVY DEBT
An entity needs to utilize 85% of its gross income to retain its tax exemption status. Therefore, it
plans expansion by taking huge debt as debt obligations, including principal, is permissible for
tax deduction. This disproportionate increase in debt against revenues reduces coverage levels
and constrains ratings.
[E] EVOLVING STRUCTURES POSITIVE
The not-for-profit stipulations for choice of entity and regulators restriction on entry of foreign
investments have led to formation of new structures. These structures involve institutes
associates managing infrastructure and charging fees to plough back profits and collaborating
with foreign universities for twinning programmes.
[F] SHORTAGE OF TRAINED TEACHERS
A sharp increase in the number of education institutes in FY11 and FY12 led to a shortage of
skilled and trained teachers. an unfavourable picture is predicted as most organisations will find
it challenging to comply with the prescribed student teacher ratio (STR) in the coming years.
[G] WHAT COULD CHANGE THE OUTLOOK?
(a) Policy Support, Credit Discipline
The federal governments Twelfth Five Year Plan to propel the gross enrolment rate across
levels, establish new entities, liberalising the sector (allow private universities and foreign
players) and take other measures including access enhancement, might revive the demand for the
sector. These measures, combined with adherence to contractual provisions, would result in a
positive outlook.

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AN OVERVIEW OF THE EDUCATION SECTOR AND ITS CREDIT RATING
[A] KEY RATING DRIVERS
(a) Sector Outlook Stable
Credit Rating Agencies have maintained a stable outlook on the education sector for FY15 on
account of growing enrolments in the K-12 (kindergarten to twelfth) segment and the gradual
expansion of higher education segments. They believe that Indias young demographic would
continue to benefit the sector even as protracted infrastructure upgrades and regulatory issues
delay timely benefits.
(b) Rating Outlook Stable
Ind-Ra has a Stable Outlook on most of its rated education institutes for FY15 on the expectation
of consistent enrolments and strong operating margins. These indicators are likely to display
stability in FY15 leading to a preponderance of affirmations in Ind-Ras rated universe.
(c) Strained Liquidity Position
Seasonal fee receipts and delays in fee reimbursements have resulted in tight liquidity for most
education institutes. The credit profiles of many institutes have been constrained by the absence
of policies to monitor liquidity. Although investment grade institutes monitor liquidity with
rigor, the unstructured application of policies is common.
(d) Sector Expansion with Minor Slippage
The muted growth in the private financing of the sector was offset by public investments in
FY13. In Ind-Ras opinion, flagship schemes could slip from the scheduled completion time and
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market size would be INR5,901.92bn in FY15, marginally lower than the earlier estimate of
INR6,024.10bn.
(e) Loan Availability Crucial
Ind-Ra believes timely availability of education loan to students will be crucial to boost the
education sector, as periodic revision in fees by both the government and private colleges has
been eroding their affordability. Dilution in Admission Criteria: Fairly new and financially weak
educational institutions are diluting their admission criteria to counter the slowdown in
enrolment. Despite fee increases, these institutes failed to bolster their debt servicing ability and
capacity utilisation has remained low for speculative grade institutes. However, Ind-Ra believes
established institutes admission procedures and demand flexibility will withstand the enrolment
slowdown comfortably.
(f) Debt Overload Undermines Debt Service
Ind-Ra believes strong and established players are comfortably placed to manage high debts due
to adeptness available on demand flexibility along with the sculpted debt repayment schedule.
Having said that, speculative grade institutes ambitious debt-led expansions with unpalatable
amortisation schedules dent their debt servicing ability.
[B] OUTLOOK SENSITIVITIES
(a) Regulatory Changes
Passage of pending educational bills such as the National Accreditation Regulatory Authority of
Higher Education Bill and National Council for Higher Education and Research Bill as well as
liberalising the sector would provide the necessary growth impetus. However, it will have a lag
effect.
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Stagnant Sector Indicators: Stagnation in the sector due to a decline in student-generated
revenues and enrolments, and an increasing inability of institutes to pass on higher costs to
students could affect the sector.
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LATEST DEVELOPMENTS IN THE EDUCATION SECTOR IN INDIA WITH A
GLOBAL PERSPECTIVE
India's education sector is no longer recession-proof, with entities reporting lower growth and
credit-rating agencies having a negative outlook. The credit profiles of higher education
institutions especially have come under pressure. With declining revenues, their liquidity
condition may turn tight in the future.
Credit rating agency Crisil Ratings downgraded 33 institutions in 2012-13 alone, while it
upgraded 25. In comparison, there were only 12 downgrades and six upgrades in 2011-12.
"While the demand-supply gap for quality higher education remains robust in India, the credit
profile of the many higher education institutes is plagued by high-capital intensity, and long
incubation period. The enrolments are not commensurate to the capacity till they establish a
brand. This impinges the liquidity that is already constrained owing to cash flow asymmetry
because of seasonality in fee collection," said Ramraj Pai, President, Crisil Ratings.
Pai added that institutions with an established track record with higher enrolments and prudent
cash flow management practices are able to command a better credit risk profile.
Education/training companies saw a slower growth in FY13 on the back of drop in revenues.
Bombay Stock Exchange-listed Educomp Solutions slipped into the red and posted a
consolidated net loss of Rs 147.93 crore for the quarter ended March 31, 2013.
The net sales (total income) for the fourth quarter of FY13 of the company saw a 34.5 per cent
drop and stood at Rs 336.41 crore, while there was a rise as compared to the previous quarter.
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This was due to a lower income from operations and on the back of expenses incurred for
changes in inventories of finished goods and stock-in-trade. In the fourth quarter of FY12, the
company had posted a net profit of Rs 61.53 crore.
Companies are also exiting non-core areas to improve the balance sheet. In April of the previous
year, Educomp sold its entire 50 per cent stake in vocational training firm I ndiaCan to its joint
venture partner Pearson. Similarly in March of the previous year, it completed the sale of its 50
per cent stake in Eurokids I nternational Limited to a group of investors led by GPE India.
"Educomp will now operate in a larger setup in areas with larger market opportunity," said
Educomp's Chairman and Managing Director Shantanu Prakash. He had said that the
company would focus on improving operational efficiencies and then grow rapidly
Peers also had a tough year. Everonn Education, which had seen some volatility last few year
with top management shuffle ended the year with a net loss. The net loss of Everonn Education
Ltd has widened in the fourth quarter of 2012-13 to Rs 69.24 crore from Rs 29.29 crore in the
corresponding quarter of the previous financial year.
Similarly, CORE Education and Technologies posted a 35.7 per cent drop in its consolidated
fourth quarter net profit, compared to Q4 of FY12. The company posted a net profit of Rs 50.93
crore for Q4 of FY13, compared to Rs. 79.23 crore posted in the same quarter in 2012.
Aptech is one of the few companies in this segment that saw a rise in net profit. Ninad Karpe,
managing director and CEO of Aptech, said the firm had started the process of re-engineering
four years ago -- from changing its logo to consolidating its operations to focus on its core
strength of career education. "We are pursuing a path of profitable growth and an 'asset light'
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model and the results are showing. Like many other industries, there are challenges relating to
technology obsolesce and competition; which are faced by the education sector as well," he said.
Crisil Research shows that increasing competition to get into good-quality schools / tier-I and
tier-II colleges and the severe shortage of talented workforce that the Indian corporate sector is
facing provides significant opportunity for non-formal segments such as coaching classes and
skill development.
Ajay Srinivasan, director, Crisil Research, said, "The education sector provides huge
opportunities for growth, but potential investors need to be cognizant about segment-specific and
firm-specific considerations that would impact the viability of their investments."
He explained the key considerations for investors looking at the non-formal education space
(coaching classes, pre-schools, multimedia and Information and communication technology or
ICT services, vocational training, and soft skills development) should be the scalability of the
business model, competitive scenario, dependence on individuals, relevant tie-ups with the
industry, and the availability of systems and processes that will aid business expansion.
Formal education is not a stranger to the slowdown phenomenon. With over one-third seats
vacant in engineering and management institutes, experts said the situation looks bleak.
Srinivasan said that going forward, many tier-4 engineering and business schools, which are
running at sub-optimal capacity utilisation levels, are expected to shut down.
"Players who do not have an established track record and haven't been able to build trust and
credibility are finding it difficult to attract students. In the non-formal education, especially
multimedia and ICT, the high rise in receivables from private schools as well as government (in
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case of government schools) and increasing pricing pressure are leading to stress on the balance
sheet," said Srinivasan.
He added with numerous players entering this segment, operating margins have steadily declined
over the past few years, led by multiple factors such as lower average realisations due to high
competition and low product differentiation. In the private schools segment, he said, the first
mover advantage is gradually diluting and renewal of contracts is increasingly becoming a
challenge for multimedia players.
These entities have seen downgrades in the recent periods, too. Earlier this month, India Ratings
& Research (Ind-Ra) has downgraded Educomp Solutions Limited's (Educomp) Long-Term
Issuer Rating to 'I ND D' from 'I ND BB-'. Ind-Ra said that the downgrade reflects Educomp's
ongoing delays in its debt repayment due to continued liquidity and earnings stress.
"Stressed earnings are reflected by a 35 per cent y-o-y (year-on-year) drop in consolidated
revenues in Q4 of FY13, Ebitda (earnings before interest, taxes, depreciation, and amortisation)
loss in Q4 FY13 and net loss in Q4 FY13 and FY13 coupled with a 74 per cent y-o-y increase in
finance cost for FY13 given its high debt. The company is negotiating with its banks regarding
extension of debt maturities and further refinancing. To alleviate liquidity stress, Educomp is
seeking equity infusion, along with implementing a strategy of monetising non-core businesses
and assets, including land parcels," Ind-Ra said. The company, however, added that future
developments may lead to positive rating action including timely debt servicing for one quarter.
Rating agency Standard & Poor's (S&P), too, has cut its long-term credit rating on Core
Education and Technologies Ltd's (CORE) to 'B' from 'B+'. "We lowered the rating on CORE
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because we believed that the sharp fall in the company's equity prices could negatively affect its
access to capital markets and bank funding," said S&P.
This would put pressure on CORE's refinancing and funding plans and 'less than adequate'
liquidity.
Players are, however, hopeful that the education sector will see a growth in the next few quarters.
Karpe of Aptech said, "We remain optimistic about the industry. It still has a lot of depth and
continues to grow at a CAGR (compound annual growth rate) of 12-15 per cent. Only those
education companies, who are able to reinvent themselves and rise above the clutter, will survive
and grow. Technology will also be a key differentiator.
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CRISILS BUSINESS SCHOOL RATINGS
CRISIL Business School Grading is India's first independent and rigorous grading service for the
education sector. The grading will enable exchange of best practices, supporting an improvement
in the quality of education being delivered.
A CRISIL Business School Grading, assigned to a specific programme, assesses the ability of the
institute to impart quality education and to achieve desired student outcomes through the graded
programme. The CRISIL Business School Grading will be valid for one year from the date of its
assignment. The business school can request CRISIL to renew the grading at the end of this
period.

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Each programme is given a national grading (relative to other such programmes across India)
and a state grading (relative to other such programmes in the same state). This enables the
institute to benchmark itself with other business schools across the country, and with institutes in
the same state, operating in the same regional, infrastructural and regulatory environment.
[A] THE ASSESSMENT PARAMETERS
1. Industry Interface
2. Management and Governance
3. Student Selection Processes
4. Learning and Physical Infrastructure
5. Faculty
6. Curriculum
7. Research
8. Student Outcomes
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[B] THE CREDIT GRADING PROCESS

STEP 1
The business school requests the credit rating
agency for a grading
STEP 2
The business school shares information with the
agency in a pre-specified manner
STEP 3
The agency analyses the information provided by
the business school
STEP 4
The agency visits the campus and interacts with
the students, faculty and management
STEP 5
The Agency also takes feedback from recruiters
and alumni
STEP 6
The agency's team prepares a detailed report
and presents it to its grading committee
STEP 7
The grading committee assigns the grades
STEP 8
The agency comminucates the grades and
provides a detailed report
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ICRA RATING OF MANAGEMENT EDUCATION INSTITUTES
[A] BENEFITS OF ICRAS RATING OF MEI
ICRAs Grading of MEIs is designed to provide students, MEIs, recruiters, and faculty with an
independent opinion on the quality of education imparted at the MEIs concerned. The service
seeks to benefit these stakeholders in the following manner:
(a) Students
Facilitates selection of an MEI over others
(b) MEIs
Enables service differentiation | Facilitates benchmarking
(c) Recruiters
Serves as an objective measure of the relative quality of education imparted
Facilitates recruitment of the right candidates
(d) Faculty
Serves as an input in making a career choice.
[B] GRADING CRITERION
ICRA sees the quality of education imparted (the output) at an MEI as a function of various
inputs and the processes at the levels of both the institute and the classroom. The inputs include,
among others, the infrastructure, pedagogy, faculty and other resources.
To be able to make an accurate assessment of an MEIs standing and capability, ICRA has drawn
up several parameters, both qualitative and quantitative, in consultation with various experts in
the field of professional education and in the user industries, besides referring extensively to a
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wide array of published material on the subject. The following list discusses some of the key
parameters against which ICRA evaluates an MEI
(a) Curricular aspects
ICRA considers the appropriateness of the institutes curriculum and the initiatives it takes to
update the same in accordance with the industrys requirements. In drawing up its curriculum, an
MEIs ultimate objective is expected to be to minimize the training that its students would
require once they get into dealing with real-life business situations. ICRA also considers the
years for which the MEI has been operational or affiliated to a university, as institutes with an
established track record usually have greater visibility, a larger alumni network, and more data
points for analysis. In the case of affiliated colleges, the standing of the university concerned is
also taken into account. For institutes with foreign tie-ups, ICRA assesses the nature of these tie-
ups and the benefits accruing to the institute from the same.
(b) Selection procedure and student profile
The quality of students taken in by an MEI is a critical factor in determining the excellence of the
class that eventually passes out of it. Hence, the robustness of the entrance examination goes a
long way in determining the quality of students. The proportion of reservation quotas and the
impact that has on the quality of student intake are also considered while arriving at the Grading.
ICRA gauges the quality of students not only from the marks they scored in their previous
examinations, including the entrance test, but also from their non-academic achievements.
Another factor looked at is student diversity, an attribute that is preferred to homogeneity. The
extent of student diversity is gauged from the mix of educational backgrounds, gender ratio,
types of prior work experience, and spread of locations that the students hail from. ICRAs.
Grading process also pays special attention to seat occupancy and seats-to-applications ratio,
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which are strong indicators of the demand for admission to an MEI. In examining the fee
structure, ICRA looks at the basis for fee computation, frequency of fee revision, and
transparency, besides making a comparison between the MEI and its peers on the fees charged.
(c) Governance and leadership
The background of the promoters and members of the board of trustees of an MEI is a critical
factor determining its success. The Grading process also factors in the commitment of the
promoters and the trustees to the institutes day-to-day operations, and the steps taken by them to
promote and improve the institute. The quality and stability of the key decision makers like
Deans and Heads of Department are considered crucial from the point of view of continuity and
completion of strategic plans. ICRAs Grading process attaches great importance to the degree of
regulatory risk that an institute is exposed to, and to its liabilities and legal exposure, if any, as
these factors can impair its ability to continue imparting quality education.
(d) Quality of faculty and HR policies
ICRA evaluates an MEIs faculty on the basis of several parameters, including, among others,
educational background, years of teaching experience, industry exposure, research papers
published, and other positions of eminence held. In addition, student feedback is obtained to
assess the classroom efficacy of faculty members. ICRA also evaluates such factors such as
faculty-student ratio, number of permanent, guest and foreign faculty, and the distribution of
classes among faculty. Given the shortage of competent faculty, it is imperative for MEIs to be
able to attract, develop and retain talent, for which they need to have effective human resource
(HR) policies. An important indicator of an institutes attractiveness for existing and potential
faculty and of its faculty satisfaction level is its attrition rate, especially in comparison with that
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of its peers. Apart from salary and perks, ICRA also takes note of the assistance provided by the
institute to its faculty to carry out research, consultancy, and other self-development activities.
(e) Pedagogy and student performance
ICRA evaluates the various modes of teaching employed by an MEI to hone the academic skills
of its students. An approach that seeks to maintain a judicious mix between theoretical and
practical study is generally preferred to pure classroom teaching. Industry interface is also
accorded high importance as that not only helps students apply theory to real-life business
situations, but also enables the institute strengthen its relationship with the industry. The mode
and frequency of evaluating student performance is also assessed.
(f) Infrastructure
For an MEI, its internal infrastructure is a critical asset, being the platform from which education
is delivered. The external infrastructure, in terms of location and connectivity, is also vital as that
influences several aspects including industry interface, faculty retention, and placements. In
assessing an MEIs internal infrastructure, ICRA focuses on several elements including in-
campus hostel and mess, library facility, computer labs, classroom infrastructure, auditorium,
playgrounds, and networking facilities.
(g) Student support and development
ICRA, in assessing an MEIs ability to foster all-round development of its students, takes note of
the student clubs that the institute has, the college festivals and seminars it organizes, and the in-
house publications it comes out with. Further, ICRA looks at the performance of the institutes
students at inter-collegiate events. The festivals and seminars that the institute holds are also
evaluated for the quality and type of sponsorships they are able to get, the people who attend
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them, and the extent of participation from other institutes in the events. ICRA also assesses the
level of support that the institute provides to its students via entrepreneurship cells, alumni
networking, faculty support, funding of student activities, and such other measures.
(h) Placements
ICRA pays special attention to the quality of placements that an MEI is able to make as that
serves as a key indicator of the institutes acceptability in the corporate world. ICRA looks at the
placement ratio of the institute, the number of offers made per student, the number of foreign
offers made, and the kind of compensation packages offered to assess the employment prospects,
while also making a qualitative assessment of the corporate entities that visited the campus.
Adjustments are made in the data for foreign and domestic salaries, and the number \of students
who opted out of the placement process. A similar study is carried out for summer placements.
(i) Financial parameter
In assessing an MEIs financial position, ICRA looks at the institutes profitability, leverage, and
working capital management policies. It also evaluates the institutes financial flexibility to
determine if adequate funds would be available for expansion, improvement of infrastructure and
faculty, and meeting all its contractual obligations. The quality of internal controls, management
information systems, and audit are aspects that are examined closely as the presentation of
accounts by educational institutions is not governed by the Companies Act, 1956.
[C] THE CREDIT RATING PROCESS
The process commences at the request of the MEI. Once the mandate letter is received, ICRA
assigns a team of qualified in-house analysts to initiate the Grading process. This team starts by
interacting with the institutions management and circulates a list of information required from
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the entity. This is followed by a detailed evaluation, involving facility visits, review of
documents and records, and extensive interviews with select staff of the institution. The teams
analytical observations are then collated in a report. This report is then presented to ICRAs
Grading Committee, and the issues identified by the team discussed along with the teams
Grading recommendation. The Grading Committee is the final authority for assigning Gradings.
The assigned Grading, along with the key issues, is communicated to the MEIs top management
for acceptance. At the request of the MEI, two separate Gradings, one a National-level Grading
and the other a State-level one, can be assigned.If the MEI does not find the Grading acceptable,
it has a right to appeal for a review. Such reviews are usually taken up only if the MEI provides
fresh material inputs. During a review, the MEIs response is presented to the Grading
Committee. If the inputs and/or fresh clarifications so warrant, the Grading Committee can revise
the initial Grading decision. Non-accepted Gradings are not disclosed and complete
confidentiality is maintained on them. The Gradings are subjected to review (called surveillance)
once every year, unless the circumstances of the casewarrant an early review, and remain valid
for a period of two years from the date assigned. Following surveillance, the Grading may be
retained or revised (upward or downward), depending on the developments since the previous
Grading exercise and ICRAs assessment of the same.

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[D] THE GRADING SCALE

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FULL RATING REPORT OF KIIT
(a) Tight Liquidity
Kalinga I nstitute of I ndustrial Technology (KIIT) Societys rating is constrained by its tight
liquidity profile due to a disproportionate increase in its operating expenditure and debt-led
capex in relation to available funds (cash and unrestricted investments). Available funds (FY12
(end-March 2012): INR301.52m) provide only a minimal financial cushion relative to both
financial leverage (FY12: 12.03%) and operating expenditure (FY12: 16.35%).
(b) Moderate Financial Performance
Operating margins marginally deteriorated in FY12 by 2.75 percentage points mainly because of
higher administrative expenses (FY12: INR556.26m; FY11: INR425.63m), however they
increased to 33.2% in FY12 from 21.58% in FY08. KIIT's revenue is dominated by tuition fee
income, constituting averagely 89.19% of total revenue during FY08-FY12. Operating
expenditure (average: 43.83%) and staff costs (26.27%) were the prime contributors to the
expenditure in FY12. KIIT reported a current balance of INR 150.13m in FY12 against
INR172.28m in FY11.
(c) Strong Market Position
KIIT inducts students who secure minimum 60% on the national level entrance examination for
technical courses and management aptitude test of All I ndia Management Association.
Historical acceptance rate (admissions/applications received) remains below 3.5%, highlighting
the strong market position.
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(d) Comfortable Debt Service
The society's debt service coverage ratio (DSCR) slightly improved to 1.19x in FY12. Although
it was below 1.00x during FY07-FY11, it managed to meet its debt service commitments from
the then existing cash balance. I ndia Ratings & Research (Ind-Ra) expects KIIT to comfortably
service its debt commitments in the near-term due to an expected increase in the student demand
(38.45% yoy in FY12 and 21.9% yoy in FY11). KIIT availed a working capital facility during
lean months (January to May) and banks had sanctioned ad-hoc limits in months of excess usage.
(e) Capex Plan
The society plans to increase its hospital's bed capacity from 450 to 800, hostel capacity by
2,000 rooms and the construction of new academic blocks which is unlikely to hamper
operating margins and DSCR. Nevertheless, the metrics could deteriorate if the increasing tuition
fee trend reverses. Debt/ current balance before interest and depreciation reduced to 3.23x in
FY12 from 3.46x in FY11.
[B] RATING SENSITIVITIES
(a) Sustained Improvement in Operating Performance
Positive rating action may result from a strong operating performance on a sustained basis in
conjunction with a stark increase in the liquidity profile.
(b) Deterioration in Student Demand
Any unexpected fall in student demand coupled with a quantum jump in debt resulting in weak
coverage ratios could trigger negative rating action.
28

[C] PROFILE
KIIT was founded by Dr. Achyuta Samanta in 1992 in Bhubaneswar, Odisha, as an industrial
training institute. The institute has grown in size and become a deemed university under Section
3 of the University Grants Commission Act, 1956.
[D] TABLE 1: FINANCIAL DATA OF KIIT

31
st
March, 2011 31
st
March, 2012
Current Balance
(INRm)
172.28 150.13
Debt (INRm)
2704.63 3042. 43
Debt/Current Balance
before interest and
depriciation
3.46 3.23
Debt service coverage
ratio (x)
0.97 1.19
Available funds/total
long term debt (%)
14.11 12.03

SOURCE: Source: KIIT, Ind-Ra
[E] RATING OF KIIT BY INDIA RATING AND RESEARCH: BBB-

29

FULL RATING REPORT OF NARAYAN EDUCATION SOCIETY
(a) Strong Market Position
The ratings reflect Narayana Educational Societys (NES) solid brand name, strong student
headcount growth and preeminent academic programmes. NES has created a niche position in
the education market by offering a curriculum which focuses on competitive exams.
(b) Solid Operating Performance
NES relies largely on tuition fees which constitute an average 85.91% of the total revenue during
FY08-FY12. However, stable and strong growth in fee income alleviates the concentration risk.
Fee income grew 15.56% yoy in FY12 after falling to 4.89% yoy in FY11 (FY10: 8.78% yoy).
This was due to below 11% growth in the number of students. I ndia Ratings & Research (Ind-
Ra) expects the income to grow strongly in FY13 due to comfortable headcount growth (35.67%
yoy). Operating margins improved to 29.07% in FY12 from 24.86% in FY11.
(c) Capital Light Model
The society generates almost 96% of the tuition fee income from junior colleges and schools.
NES had opened 65 schools in FY12 and FY13 across the country. NESs model of leasing
buildings for junior colleges and schools is capex light and considerably reduces the time taken
to commence a school.
30

(d) Reasonable Balance Sheet Resources
The societys available funds provide a reasonable cushion for both financial leverage(FY12:
25.58%) and operating expenditure(22.85%). In the absence of future capex, Ind-Ra expects the
coverage to improve from present levels.
(e) Moderate Debt Burden
Debt service coverage ratio (DSCR), including rental payments, stood below 1.0x in FY11 as the
revenue shrunk. Notwithstanding the low DSCR, the societys adequate cash position facilitates
debt servicing in a distress period. Debt servicing calendar will be stressed in FY14 because NES
would extinguish a large debt portions.
[B] RATING SENSITIVITIES
(a) Positive
I mprovements in operating margins coupled with growth in available funds to cover financial
leverage and operating expenditure could positively affect the ratings.
(b) Negative
A downward rating momentum could stem from a disproportionate increase in debt and
operating expenditure over income.
[C] PROFILE
NES was founded in 1996 by Dr. P. Narayana as a not-for-profit entity under the Societies
Registration Act 1860. Its registered office is in Nellore. The society had junior colleges (291)
and schools (160) across the country as at end-FY13. The number of students grew to 267,036
31

(FY13) from 196,827 in FY12 (CAGR FY10-FY13: 14.33%). NESs current balance increased
to INR366.57m in FY12 from INR155.04m in FY11.
[D] PRINCIPAL RATING FACTORS
(a) Administration and Management
NES is based in Andhra Pradesh and operates schools and colleges in various streams across the
country. The streams covered by the society include:
1. Arts and sciences
2. Engineering
3. Medical
4. Dental
5. Paramedical
6. Pharmacy
7. Nursing
8. Education Teacher Training
[E] TABLE 2: TYPES OF SCHOOLS
School Type Description
Narayana Concept Schools
Pre-primary, primary and high school up to
X class and includes coaching for IIT
entrance exam.
32

Narayana e-Techno
Schools

Classes from VI to X with high-tech
classrooms, having computers, internet
connectivity, air conditioning. The syllabus
conforms to state government board
however; the teaching includes a
combination of material that focuses on
Central Board of Secondary Examination
(CBSE), Indian Certification of Secondary
Examination (ICSE) and state board
curriculum. Concurrently, the school study
material equips the students on Indian
Institute of Technology (IIT) and All India
Engineering Entrance Exams (AIEEE) and
Olympiad.
Located in Bangalore, Bellary and
Bhubaneshwar
Teacher student ratio maintained is 1:10.
Narayana IIT
Olympiad Schools

An integrated academic programme, with
equal focus on three boards of CBSE, ICSE
and state government, without any
repetition or overlapping
Training for IIT entrance examination and
competitive exams such as National
33

Talent Search Exam, Maths Olympiad,
Kishore Vaigyanik Protsahan Yojana
(Department of Science & Technology)
Teacher student ratio maintained is 1:10

SOURCE: NES
[F] TABLE 3: GROWTH IN INSTITUTES
Type of
institute
FY09 FY10 FY11 FY12 FY13
Junior
Colleges
188 189 189 249 291
Schools
37 52 95 111 160
Sub-total
225 241 284 360 451
Other
institutes*
17 17 17 17 17
Total
242 258 301 377 468
*Other institutes are medical, dental, engineering, paramedical, yoga, B.Ed. and pharmacy
SOURCE: NES

34

[G] FINANCIAL PERFORMANCE
(a) Revenue Diversity
Like other private institutions, NESs revenue is dominated by tuition fee income. Nevertheless,
its stable demand and strong market position aids in overcoming the dependency risk. Gradual
growth in other income provides some comfort to the revenue diversity. However, Ind-Ra
expects the tuition fee to remain a major source of revenue for the society.

(b) Income
Tuition income on an average contributed 85.91% to the total income during FY08-FY12;
however, annual contribution dipped to 82.38% in FY12 from 93.70% in FY08. Although the
proportion of tuition fee income to the total income has been decreasing, the opening of new
schools in FY11 and FY12 coupled with school centric expansion is likely to reverse this trend.
Other income was supported by a strong hospital income during the same period. The
Figure 1: Average Revenue Composition
Tution Fee
Others
Endowment
35

establishment of a super specialty hospital has driven the hospital receipts between FY09 and
FY12. NES booked total revenue of INR7, 554.77m in FY12 as against INR6, 651.51m in FY11.
(c) Expenditure
Expenditure was primarily driven by core expenditure(including rents) followed by staff costs
during FY08-FY12. While the proportion of core expenditure in total expenditure had gradually
increased, staff costs diminished until FY11, however, staff costs increased marginally in FY12.
[H] TABLE 4: EXPENDITURE BREAKDOWN (%)

Staff costs Core
expenditure
Interest
FY07
42.63 44.95 3.58
FY08
43.09 47.13 3.11
FY09
39.52 50.67 3.82
FY10
32.82 56.90 4.81
FY11
32.97 56.93 4.72
FY12
34.11 53.29 7.05

SOURCE: NES, I nd-Ra
(a) Balance Sheet Resources and Liquidity
I n FY12, available funds sharply increased to INR1, 435.21m from INR629.06m in FY11 due
to an increase in fee income from the schools. The balance sheet resources continue to provide
36

reasonable coverage to debt and expenses. The society has made investments in national savings
certificate, postal deposits and fixed deposits. Ind-Ra expects its liquidity to improve from the
current levels due to the completion of expansion plans in FY12. Many Ind-Ra rated
societies/trusts liquidity were benefitted by the development fee from students unlike NES.
(b) Debt Burden
Debt (including rent)/current balance before interest depreciation and rent (CBBIDR) increased
to 2.53x in FY12 from 2.36x in FY11 due to higher debt and capitalized rent. Due to the heavy
expansion, the societys leased premises costs increased during FY08-FY12. In Ind-Ras
opinion, absence of future capex provides comfort to the rating and leverage ratios are expected
to improve. Ind-Ra as per its criteria considers NESs debt, capital leases and non-cancellable
operating leases as debt.

37

FULL RATING REPORT OF MANIPAL GLOBAL EDUCATION SERVICES PRIVATE
LIMITED
[A] COMPANY PROFILE
Manipal Global Education Services Pvt. Ltd., established in 2001, provides higher education
services, including distance education and corporate training. The company has shown rapid
growth in its services during the last five years, and has ventured into other segments of the
education sector, such as continuing education for professionals and corporate training. MaGE
has also expanded internationally by acquiring and setting up colleges in Nepal, Dubai,
Antigua and Malaysia.
MaGE had consolidated revenues of Rs. 840.3 crore in FY11, with an OPBDIT margin of 32.4%
and net loss of Rs. 195 crore, the latter being on account of goodwill amortization. In FY12, the
company posted revenues of Rs. 726.8 crore and a lower OPBDIT margin of 28.6%, but net
profits are expected to be higher due to absence of significant amortization charges in FY12. Due
to the companys strong OPBDIT margins and upfront cash payments received from students
and franchises, MaGE enjoys healthy cash flows, albeit it has had to rely on external financing
for meeting its aggressive expansion plans and student funding at Antigua campus.
[B] RATING BY ICRA
ICRA has reaffirmed the [ICRA] BBB rating assigned to the Rs. 26 crore Term Loans and Rs
129 crore Cash Credit limits of Manipal Global Education Services Private Limited (MaGE),
which was previously known as Manipal Universal Learning Private Limited. The outlook on the
long-term rating is stable.
38

The rating reflects the long track record and well-recognized brand of MaGE in the education
sector, the companys presence in diversified geographies with high growth potential, stable
revenues from established campuses in Antigua and Malaysia, satisfactory performance of
ventures in education services such as corporate training, the companys robust OPBDIT
margins, and healthy profit growth at the distance education business. However, FY11 net
margins have been impacted due to the amortization of goodwill pertaining to Malaysia and
Antigua acquisitions.
The rating is constrained by the slowdown in admissions seen at the Dubai campus due to the
weak economic conditions in the region and the substantial funding requirements at the
Antigua campus for providing student loans, as students have been facing constraints in availing
loans after the credit-crisis in 2008. The rating also factors in the substantial negative impact on
the companys tangible net worth position if adjusted for the large goodwill component, and the
sizeable planned capex (close to Rs 450 crore) over FY12-13 for setting up a University in
Malaysia, the latter likely to add around Rs 315 crore to overall debt levels. The financial profile
of MaGE had weakened because of its aggressive expansion plans, but capital structure has
remained moderateas the acquisitions were largely funded through equity infusion by MaGEs
parent, MEMG (Manipal Education and Medical Group). While assigning the rating, ICRA has
taken into account the possibility of redemption of private equity, in case MaGE does not come
out with an Initial Public Offer (IPO) or makes available alternate exit routes to investors by
FY13.
39

CONCLUSION
The global education industry is witnessing strong growth momentum with fast emerging and
developing nations. In terms of industry ranking, education stood on second place after
healthcare industry. The gross enrolment ratio (GER) in lower secondary education increased
from 72% to 80% worldwide between 1999 and 2009, with notable increase in the Arab States
and sub-Saharan Africa. The school-age population is mainly influenced by population trend and
economy of a country.
Demand for infrastructure development in education industry is becoming necessity with
increasing demand for quality schooling. Enrolment in Pre-primary education recorded a steady
increase between 1995 and 2011 for both boys and girls all over the world. There is a slow
adoption rate in Arab States and Central Asian countries, whereas East Asia and the pacific
region have witnessed high percentage of participation. In 2011, 713.0 million children were
enrolled worldwide in primary education compared to 689.0 million in 2006. A relatively strong
growth in primary enrolment has been noticed in Sub-Saharan Africa region.
In North America, the US is the largest hub of students and generate large amount of education
expenditures worldwide. In the US, higher education alone generated USD 453.7 billion of
revenue in 2011.3
Over the last five years, developing countries have increased their share of the worlds total
number of internet users from 44% in 2006 to 62% in 2011. The percentage of individuals using
internet in the developed world reached the 70% landmark by the end of year 2011. In the last
six years, the global E-learning market has registered a CAGR of 4.7% (2006-2011). It is
40

expected that by 2016, the market will reach to USD ~ billion, registering an expected CAGR of
6.68%. In emerging countries such as India, e-learning is growing at a rapid pace (growth of
27.9% in the last 3 years) with the growing competition. Currently, there are more 140 e-learning
companies operating in India among which more than 100 players have just started their
operations in the last 3 years.

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