Educational institutes: Cyclicality in income leading to tight liquidity

By: and |
Published: June 1, 2015 12:15:11 AM

Initiatives to rectify the demand-supply mismatch and manpower quality in education are needed if India has to reap its demographic dividend

Education is considered the most potent instrument that can bring about both social and economic change. Recognising this, our policy-makers laid strong emphasis on education right from the time India got independence.

As a result, public spending on education increased over the years and reached 3.6% of GDP in FY13 (RE).

Despite the overwhelming presence of the government, the private sector has made significant contribution in the education space over the years. Their entry and presence has not only expanded the size of the sector but has also improved the quality. This participation has mostly been through education societies run on a not-for-profit basis.

However, the exponential growth of private education lately can be attributed to the evolving operating structure of societies or trusts, whereby they assign the work relating to services and infrastructure of an educational institution to private limited companies owned by them or their associates. This is done essentially to appropriate the profit earned by the society or trust.

An analysis of India Ratings and Research’s (Ind-Ra) rated educational institutions in FY15 shows that institutes having better placement records attract more students. Due to strong market position and low acceptance rate (ratio of the number of students accepted to the number of students who applied for admission), nearly 92% of educational institutes witnessed stable or growing approved intake, leading to stability or increase in enrolment and student headcount in FY14 and FY15. The remaining institutes could not attract enough students due to both academic and non-academic reasons.

Educational institutions with a weak market position accept nearly all applications to fill the seats, leading to high acceptance rate. Despite rising student enrolments, the placement record of these institutes remains low due to their weak industry-linkages. Rising affordability among prospective students results in growing enrolments into such institutions. As tuition fees for technical and professional courses are regulated, the scope of a fee hike is limited.

Although this limits income growth, non-profit educational institutions with comfortable market position managing colleges and schools are able to post adequate income growth on the back of sound demand for their courses. For most of the Ind-Ra rated educational institutes, the current balance before interest and depreciation (CBBID) margins were close to operating margins due to the absence of income from other than core educational activities.

This indicates high dependence of educational institutes’ income on tuition fee.

The cyclical nature of education business often results in tight liquidity for educational institutes, leading to their higher working capital use. They witness comfortable liquidity at the beginning of the new fiscal but liquidity pressure increases as the year progresses. In addition, delays in fee reimbursements, in few states, by the state governments, strain the liquidity profile of educational institutes. These institutions may ease the liquidity crunch through creation of endowment funds and fixed deposits. Timely injection of funds (capital or unsecured loans) and reducing the collection days and administrative cost could improve the liquidity position of educational institutions.
A majority of educational institutes have aggressive capital expansion plans. Sub-investment grade (rated ‘IND BB+’ or below) institutes generally fund their capex through debt and equity/internal accruals in the ratio of 70:30.

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However, higher-rated institutes fund capex through equity contribution in the form of additional funds or internal accruals. The debt burden of higher-rated institutes is likely to fall in the near term due to rising enrolments and improvements in their financials. For few institutes, debt is expected to drop in the near term due to the absence of major capex because the management is pursuing a strategy to stabilise the financial position.

The outlook of the education sector, while it appears stable, but continuous creation or upgrade of physical infrastructure as also addition of new educational institutions will be critical for the growth of this sector.

During the Twelfth Five-Year Plan, the government aims to increase expenditure on the department of school and higher education by 149.05% and 178.11%, respectively, compared with the Eleventh Plan. The higher education sector is undergoing huge changes and some more developments are expected in the upcoming years. As various surveys conducted on consumer spending show that expenditure on education is one of the top priorities after basic necessities for the middle class, the demand for education loan is rising due to rising cost of higher education. As a result, the Centre launched a full interest subsidy on education loans to the economically weak students in FY10.

Further, the government approved the Credit Guarantee Fund Scheme for Educational Loans in FY14 with a view to (1) reduce the non-performing assets relating to education loans, (2) allow more loans at reasonable rates, and (3) allow loans without any collateral security in the form of third-party guarantee in select cases.

The MHRD’s recent proposals to amend the national education policy will benefit the sector. In a recent move, the UGC has mandated the introduction of a grading system across 400 universities from FY16 onwards. Moreover, the foreign educational institutions Bill, if cleared by Parliament, will benefit the Indian education sector. Initiatives to further liberalise the sector and rectify the demand-supply mismatch and manpower quality are needed if India has to reap its demographic dividend in the long term.

The authors are analysts, India Ratings and Research (Ind-Ra). Views are personal. The article is based on the agency’s FY16 Outlook: Education, available www.indiaratings.co.in

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