Educomp wants to repeat its success story

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Educomp wants to repeat its success story

After selling educational content, Educomp’s Shantanu Prakash now wants to set up his own schools.

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After making his millions selling educational content across India, Educomp's Shantanu Prakash now wants to set up his own schools.

For reasons that remain shrouded in mystery, in July 2005 the Carlyle Group, a global private equity firm, sold its 16% stake in the education services company, Educomp , back to founder Shantanu Prakash. Incredibly, Carlyle made the sale at a loss of roughly 94% on the USD 2.1 million (Rs 1,087 lakh) it had paid to acquire the shares in June 2000. To make up for the shortfall Carlyle took all of the 9% shareholding that Educomp's had in one of its subsidiary companies, LearningMate, a business in which Carlyle was already the majority shareholder. Carlyle did so, says Prakash, because it saw greater potential in LearningMate which was focussed on offshore content delivery, rather than the domestically focused Educomp.

While 94% is a really bad "haircut" - an investing term describing the reduction in the value of a security - it paled in contrast to what Carlyle had given up in the future. Less than six months after Carlyle's exit, Prakash took Educomp through an IPO. The shares Carlyle sold back to him in 2005 for Rs 60 lakh are today worth roughly Rs 300 crore. Prakash's total shareholding in Educomp is valued at over Rs 700 crore.

Educomp's services (multimedia content, computer labs, teacher training) reach 23,000 schools and 12 million students and teachers. The company has grown at a compounded rate of over 100% over the last five years, making 20 paisa of every rupee earned as pure profit. With a market capitalisation of over Rs 7,000 crore, Educomp is easily the most valuable company in the Indian education sector. ( Network 18 , the parent of Forbes India, is a partner with Educomp in Graycells18 Media, a company offering interactive educational services on television.)

Yet, in many ways Educomp is just getting started. Because the overall market for private education in India is estimated at USD 40 billion by brokerage firm CLSA. And Educomp has annual revenues of just Rs 637 crore (about USD 140 million).

When Prakash established Educomp in 1994, his goal was to set up and run computer labs for schools. Prakash knew there was potential in the education sector but wasn't clear what kind of business model would work. The biggest obstacle was the fact that Kindergarten-to-class 12 (K12) school education (valued at USD 20 billion, half the size of the entire education market) was deemed "non-profit" by regulators and governments. That's why most private schools are governed by non-profit "trusts". As a result, investors were wary of putting money into any K12-focussed entrepreneur, even as a majority of schools were struggling to provide world-class education.

"Indian classrooms were highly dysfunctional with large number of students per classroom, underpaid teachers, growing curriculum and competitor peer pressure. Would 80% of students take private tutoring if classrooms were working?" says Prakash. "We had to intervene to get results from classrooms."

Prakash hit upon both the root of the problem with Indian education, as well as its most lucrative segment. He focussed on improving the quality of education using existing infrastructure: School classrooms. That was more efficient than setting up his own, which is what his older competitors (NIIT, Aptech) were doing.

His solution, Smart Class, introduced in 2003, was a canny combination of computer and audio-visual hardware and multimedia content. Smart Class' interactive content was "enthusiastically adopted by underpaid and unrecognised teachers who desperately needed help," says Prakash.

Prakash, 44, decided to become an entrepreneur at a time when his father, a manager with SAIL , couldn't even afford to buy a flat in Delhi. He got his first taste of business by organising music concerts while studying at Delhi's Sriram College of Commerce, which he later expanded into broader event management. He continued with this business on the side even as he was studying at IIM Ahmedabad (batch of 1988). Prakash is an Art of Living follower. He is a frugal man; no executive travels business class in Educomp.

Entrepreneurs before Prakash who had tried to sell digital content to schools had run into a chicken-and-egg wall. Most schools didn't have the hardware (computer servers, networks, flat screen televisions) to play content, nor did they want to invest in setting it up first without having quality content at hand.

Prakash smartly decided to sell the chicken and the egg together. Educomp would offer hardware along with bundled content to schools, which were charged a per child, per month fee of Rs 75 to Rs 150. Educomp in most cases recovered the value of its investments in just the second year, leaving pure profits ahead. Today Educomp's pre-tax profit margins on Smart Class revenues are 59%.