The dilemma of investing in Education sector

I always wanted to buy some credible company in education sector, given that the sector is benefitting from exponential inflation in fees and inconceivable willingness of parents from all socio-economy stature to provide the “best” education for their kids at “any” price (even if it means sacrificing other desires).

What I paid for my MBA course 10 years ago (Rs 0.3mn), is now annual school/tuition fees for student in class 1, and I cannot even imagine the share of our savings that will flow into our kid’s education expense over the next 15-20 years. As a hedge against this inflation (which no insurance seems to cover other than their flashy advertisements to protect child dreams), I wanted to own some company in this space that would grow its profits exponentially and give us capital appreciation that will atleast partly offset the burden.  

Till few years back, I always thought that with such super-normal growth in the sector the beneficiaries should be many in the education value chain- i.e pre-schools, private schools/colleges, tutorial classes, publishing houses, and digital content provider. However, as surprising it may sound too many, there has been hardly any listed company that has been able to reflect this benefit on their P&L. In fact, the sector has given one of the highest disappointments to investor community and sharp downfall in shares when expectations did not materialize. This includes unimaginable 99% fall from its peak in Educomp and Everonn, who were once thought to be pioneers that will change the way of learning through their digital content; Treehouse Ltd. which was easily believed as relatively asset-light, high-margin scalable pre-school biz, but has already fallen from grace; NIIT and Aptech who have tried to diversify their biz. model but have achieved little success; and finally Career Point and MT Educare in coaching classes segment who have failed to prove that they can scale-up their business to drive strong profitable growth.   

The reasons for this downfall in post-facto analysis are plenty- highly capital intensive businesses, long payback period, bloated balance sheets, poor corporate governance, competition with trust owned institutions, etc.  I can probably have endless discussion on company-specifics issues, but I will restrict those thoughts for some other day.

Conclusion

The situation has turned out to be similar to classic joke flowing around about liquor consumption- the drunkard, owner of the liquor company (Mr. Mallya) as well as banks lending to Mallya are all losing money- so the big question is where has the money gone? I think education sector has given a similar dilemma to most of us.   

The key learning to me from this sector has been that reality can be materially different that what is perceived. What appears to be money machine for a common man on the street, company’s P&L has categorically different result. The hypothetical new winners in education sector have failed drastically, while publishing house like Navneet which is believed to be in mature or declining stage of business has hold out reasonably well.

The hunt is on for some interesting biz. model in this space that can prove its mettle with financial strength. So far, only Zee Learn and Navneet Education have been able to hold strong; MT Educare had good prospects, but has given away its B/S strength recently.I will have sleepless nights till I found a good hedge.