Public Finance

www.indiaratings.co.in 23 January 2013

Rating Outlook
S T A B L E


Education
2013 Outlook: Indian Education Sector
Slow Enrolment Growth and Credit Indiscipline
Outlook Report

Rating Outlook
Stable Outlook: India Ratings has 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 agency expects market
size to be INR6,024.10bn (USD109.84bn) by FY15, driven by robust demand.
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, India
Ratings would assess it under Distressed Debt Exchange criteria and take appropriate rating
action.
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. In India Ratings opinion, the upcoming regulatory changes could
possibly provide autonomy and enhance the credit quality of the issuers.
Capex with Heavy Debt: An entity needs to utilise 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.
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.
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. India Ratings predicts an
unfavourable picture as most organisations will find it challenging to comply with the prescribed
student teacher ratio (STR) in the coming years.
What Could Change the Outlook?
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.
Figure 1

Analysts
Siva Subramanian
+91 44 4340 1704
siva.subramanian@indiaratings.co.in

Neha Agarwal
+91 11 4356 7255
neha.agarwal@indiaratings.co.in

Bryan Alan Munzey



Public Finance




2013 Outlook: Indian Education Sector
January 2013
2

Issuer Credit Concerns
Individual Players Struggle to Tackle Enrolments Slowdown
Some segments in the education sector face enrolment slowdown due to macro-economic
factors, lack of industry appeal and employability issues. However, this phenomenon is specific
to less established institutes and in streams such as medical, engineering and management
courses. Medical colleges attached to their own reputed hospitals draw comfort from their
diverse faculty experiences and continue to see moderate to strong enrolment growth.
Management institutes with less or no industry association witness low enrolment and
revenues leading to loan defaults or closures. India Ratings does not expect enrolments for
these entities to rebound in the short term. However, institutes with low acceptance rates have
tackled the enrolment crisis and have remained financially sound. The agency expects its
portfolio to not see major credit impairments since the rating case scenario incorporates some
of these risks and could provide cushion.
International schools are less in demand than Indian educational boards in the country as they
are new entrants in the education system. However, increasing income levels of the urban
class are likely to drive the demand for international schools in the medium-to-long-run.
Bankers Adjustments
Fee ceilings in HE institutes (both for the government and management quota) and schools
curb the financial prowess of the entities. Even though the fee reimbursements scheme
(applicable only to HE) propelled enrolments and made education affordable to certain
educationally disadvantaged sections of the society, delays in reimbursements by a few states
tightened the liquidity for education institutes.
Nevertheless, bankers understand these problems (fee reimbursements delays and temporary
reduced occupancy levels), extend concessions and accommodate payment of instalments
even after due date without any penalty. They also protract the principal moratorium period and
reschedule the amortisation schedule in certain cases. This accommodation, to some extent,
resolves the liquidity constraints.
Credit Indiscipline
Although the tax-free status and stable operating cash flows support the credit quality, it is
constrained by indiscipline in loan obligations payment. In India Ratings view, notwithstanding
the size of the institution, adherence to contractual provisions is based on its relationship with
lenders. In the agencys opinion, this credit indiscipline might regularise in the medium term.
Debt-Funded Aggressive Expansions
The issuers initial success and the tax exempt status for debt service payments drive them to
engage in forward/backward integration or diverse expansion with high debt loads. The
bankers eagerness to fund capital expansion although at a higher interest rate as opposed to
year earlier instills confidence in the market players. However, in the event of thin coverage
due to less cash flow or less equity infusions, the ratings will remain low.
New Players Encounter Low Margins
Intrinsic quality of strong operating margins lured many private players into the arena.
However, players with no expertise could encounter low margins due to a) premature debut
without adequate infrastructure leading to low occupancy levels b) dilution in admission
standards to fill seats eventually losing student and industry appeal c) high cost acquisition of
skilled and trained teacher talents d) high land prices in prime location driving the institution
base away from city resulting in high administrative costs e) cost overruns in construction.
No major credit impairments are
expected in 2013.
Relationship with lenders allows
flexibility in debt service payments.
Thin cash flow coverage available for
debt service would lower the rating.
Related Criteria
Rating Criteria for Colleges and Universities
School Rating Criteria
Non-Profit Institutions Rating Criteria

Public Finance




2013 Outlook: Indian Education Sector
January 2013
3

Key Sectoral Issues
Expanding Market Size
Indian education sectors market size in FY12 is estimated to be INR3,411.8bn (USD71.2bn).
India Ratings expects the market size 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.
Inadequate Educational Infrastructure
Although the governments (centre 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 utilised and notwithstanding the
enhancement of access (99% of rural population has primary school within 1 kilometre as of
September 2010), the quality of infrastructure is poor.
Figure 3
Infrastructure and Intake
Particulars Number of institutions Students (m)
Kindergarten to Twelfth (K-12) - Government (m) 1.11
K-12 Private (m) 0.31
Total (K-12) 1.42 243.2
HE (both private and public) (numbers) 33,500
Universities (both private and public) (numbers) 634
Total (HE, numbers) 34,134 20.7
K-12 data is for FY11, HE and universities numbers data - end December 2011
Source: Ministry of Human Resource Development (MHRD), District Information System for Education, India Ratings

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. India Ratings views this 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
INR361.74bn 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.
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
recognise 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.
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
Figure 2

Figure 4
IB and Cambridge
Schools (Nov 2012)
Worldwide India
IB Schools 3,483 99
Cambridge 9,000 300
Source: IB and Cambridge
Only 30% of universities and 45% of
the colleges are ranked at A level by
National Assessment and
Accreditation Council (June 2010).
332 technical institutes remain
unapproved/derecognised by AICTE
(end November 2012).
Public Finance




2013 Outlook: Indian Education Sector
January 2013
4

fees, lease rentals and other fees. India Ratings views the structure evolvement as a positive.
Although, foreign investment is allowed under automatic route in education, there are
regulatory issues. Nevertheless, twinning programs with foreign institutions are recognised by
the regulators.
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).
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.
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.
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. India Ratings predicts
moderate growth (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).
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. India Ratings believes demand for education and
improved accessibility to educational institutions will help improve literacy rate.
Education Loans
Easy credit availability is instrumental for increase in HE enrolment. India Ratings expects
credit availability for the HE segment 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).

Figure 5
Deficiency in Enrolments (m)
Segments
Eligible
student
population
(2010)
Actual
enrolments
(2010) Gap
GER
(%)
Primary 116.64 135.60 18.96 116.25
Upper
primary
72.59 59.40-13.19 81.83
Secondary/
senior
secondary
98.28 48.20-50.08 49.04
Total 287.52 243.20-44.32 84.59
Source: CSO, MHRD and India Ratings
Figure 6
Future STR Achievability
Test (HE)
(M) 2011 2016
Students 16.98 25.94
a

GER (%)
18.8
22
b

STR
1:21

Teachers
0.82

Assumed STR 1:15
c

1:20
Required
teachers
1.13 1.30
Deficit
0.31
Annual
additional
teachers
requirement until
2016

0.10
Achievability
Difficult
a
Calculated on the basis of projected
population of CSO
b
Assumed rate
c
As per UGC norms for HE
Source: CSO, MHRD, India Ratings
Although primary level enrolments
are robust, drop outs and
infrastructure bottlenecks mar the
secondary and senior secondary
segments.
Government schools lack
infrastructure and quality pedagogy.
Private institutions catered to 58.9%
of the total enrolments in HE (FY12).
Public Finance




2013 Outlook: Indian Education Sector
January 2013
5




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