In response to the Forbes India story titled ‘The Rise and Fall of Educomp’ in the edition of April 19, 2013, Shantanu Prakash, the chairman and managing director of Educomp sent us a letter clarifying some controversial aspects of the story. Here is his letter along with our comments in bold and italics:
We wish to place on record our disappointment at the report filed by your journalist.
That there is an attempt to sensationalize the story is not only evident from the headlines and title of the article but the opening paragraph itself - it paints the exit of former CFO Ms. Gulati as an act of intrigue and her divestment of shares earned through ESOPs as some sort of a conspiracy. As a journalist in the financial sector, he should have known that all senior management use ESOPs to sell shares and create value. Even if one were to keep that aside, the facts don’t support this conclusion as anyone analyzing data on her divestment will figure out (grant date, vesting date, exercise date and sale date of the same are a matter of public record and can be accessed easily , however for the sake of convenience the data is attached. (attached excel sheet)
He has focused on Educomp without pointing to the challenges all players in the education sector are facing. He forgets to mention that of the eight companies’ active in the education space; seven have noticed erosion in market value in the last fiscal which has ranged from 22% to 77%. It is therefore safe to conclude that evaluation of Educomp has been done in a vacuum with no reference to externalities.
He finds fault with Educomp's ability to pay off its debt or restructure it. Hundreds of companies raised FCCB in 2007-08 as it was a popular instrument then. Educomp was one among those able to do, in full, and on its due date, and from such marquee investors. But he sees this as a matter of regret instead of an achievement and a validation of the intrinsic value of Educomp.
He is unable to address why, if the company is such a bad bet, it has been able to secure funding from marquee investors over the last fiscal; why International Finance Corporation (IFC) would choose Educomp to makes its debut investment in the education sector in India or why Educomp has attracted more investment than any other player in India and continues to be the investment of choice for high caliber investor interest globally.
He ignores the high quality of Educomp businesses which have attracted the attention of discerning investors such as Gaja Capital, Pearson, Kaizen and Bertlesmann who have invested over Rs. 200 Crore over the past 6 months in either investing in or acquiring Educomp run and managed businesses, the period which he refers to as the ‘Fall of Educomp’.
Our response: Based on inputs from reliable sources, we understand that Pearson found it more prudent to acquire Educomp’s stake in the joint venture because of serious operational concerns and Educomp’s diminishing role in the partnership.
Note his use of "several high profile exits" as something stunning and unique for a company. All we can say to that is that if the story makes reference to exits, it could have also mentioned high profile entries at a senior level-a new Group CEO and a new Business Head for Smartclass business is not something that should be selectively ignored.
The journalist presents the difference in 50000 school seats versus 22000 students as some sort of anomaly. In India, by law, you can only launch grades from K-5 and then ramp up to K-12 grades in a few years. When you construct capacity, you obviously create capacity for all grades (because it is cost-effective), but students will come in over time, so it is only natural that a school wouldn’t have 100% capacity utilization instantly. Therefore ‘highlighting’ this aspect seems deliberately designed to give out a false impression of our schools running at low capacity.
The attempt to tarnish Educomp's business model is clear. The journalist picks out one case from South India to create a scenario of failure in spite of admitting a quote from Educomp that this was a case of dispute. Even with the largest customer base of over 15000 schools, Educomp NPA rate is less than 1% (this data was shared with the journalist)and yet he chooses to call our Smartclass model ‘perilous’. Not to mention that he ignores the fact that every single of Educomp’s competitor uses the exact same business model which his research must have certainly shown. The model that Educomp pioneered is in fact standard for the entire industry.
An entire piece within the main story aims to raise questions about my leadership ‘style’ and opinions of direct competitors of Educomp (which can hardly be considered credible or genuine) is offered as evidence for the same. If you were to take an opinion on leadership style would you take a quote from our direct competitor or an impartial credible third party?
Our response: We solicit inputs from a range of stakeholders for our stories, including competitors, investors, company executives, analysts and investors. So there’s nothing unusual about a quote from a direct competitor.
Educomp retains the pole position among education companies in India. It remains a pioneer with considerable IP advantages. It is the market leader and its business model is now being followed by almost all competitors. Educomp is the largest company in education in India on several metrics. It is number one in seven of its nine main verticals and leading the pack in others. It has the biggest customer base of any education company; it has trained more teachers than any other and it remains the largest education provider to the largest number of school children in the history of India – reaching over 32,000 schools and over 20 million learners and educators across the world- largest in the world for any education company. These are hardly the characteristics of a company that has fallen. All the above data was given in writing to the journalist which he conveniently chose to ignore. He fails to mention why, if the company is such as bad bet, Educomp still remains one of the highest valued education companies in India till date.
Our response: Educomp’s stock price has lost over 90 percent of its value in the last 3 years, and another 10 percent in just the 3 weeks since March 23rd 2013 when the Forbes India story was filed. But it is also true that some of its smaller competitors may be doing even worse.
The education business, like all businesses in India and even across the globe, is passing through turbulent market conditions. At such times, expansion strategies, growth targets and bottom lines all come under pressure. This is not an unusual phenomenon in the life of a business. Had the journalist wanted to understand the business, its potential, its challenges, and how Educomp is reorienting itself to face them, he would have been greatly benefited, and Forbes’ readers equally illumined.
I personally invited him to visit our R&D facilities, see our path-breaking products and speak to our leadership team but he declined. Had he done that he would have seen the contribution that Educomp has made to the entire education sector in India and understood the long term vision of the company. Forbes India is a magazine that stands for fair, accurate, balanced and credible reporting and presenting the full story rather than a one- sided negative view would have given readers the data they need to make a balanced judgment.
Our response: We did not imply any permanence with our title, “The Rise and Fall of Educomp”. It is entirely possible for Educomp to rise again, and we wish it luck in that.