Crisil Ratings: Income of educational institutions to grow 11-13% this fiscal and next
Capex intensity to remain high but strong cash flows to ensure credit profiles remain stable
Rising enrolments and fee hikes across segments will help educational institutions log an 11-13% increase in total income this fiscal and the next. This fiscal will mark the sector’s fifth straight year of double-digit growth, majorly driven by higher spending on education by households as incomes improve.
Operating margin will be steady at 27-28% as these institutions will incur higher staff salaries and other related costs.
With rising enrolments, the institutions will also incur capital expenditure (capex) to create additional capacity and improve infrastructure. Credit profiles will, however, remain stable as strong cash flows will limit reliance on external debt.
Our analysis of 107 educational institutions, comprising K-12 (kindergarten to twelfth grade) and higher education (engineering, medical and other streams) institutions, accounting for almost Rs 26,000 crore income, indicates as much.
The K-12 segment, accounting for a third of the sector’s revenues, is expected to grow at a steady rate of 9-10%, supported by increasing urbanisation and affordability, along with annual fee revisions at private schools.
In the higher education segment (also accounting for one third of the sectoral revenues), the enrolment growth rate for arts, science, commerce and diploma courses that account for the bulk of higher education intake remains moderate at 3-4%. However, engineering courses continue to log healthy demand—this is despite some turbulence in the job market amid the global slowdown and issues related to visas and immigration restrictions in the US—resulting in higher growth in total income.
Seat additions in technology related courses such as cyber security, business systems, artificial intelligence, machine learning and data science in the engineering stream, along with enrolment growth, will drive the total income growth for this segment as these courses also fetch higher fees compared with other traditional courses.
In medical education, demand for undergraduate MBBS course has continued to surpass supply, even as other courses on nursing, pharmacy, physiotherapy, etc, witness moderate demand. The government’s thrust on increasing the number of undergraduate and postgraduate medical seats and augmenting education infrastructure will drive enrolments for medical courses in the near term.
Says Himank Sharma, Director, Crisil Ratings, “Overall income is expected to log healthy double-digit growth over the next few fiscals, mainly supported by fee revisions, along with growth in enrolments, albeit at a modest rate. Fee escalations are primarily driven by higher inflation, especially in the urban areas. Despite this, increasing spends on staff salaries and facilities will prevent any improvement in operating margins, which are expected to remain stagnant at around 27-28%.”
As demand improves and enrolments rise, educational institutions continue to invest heavily on infrastructure for adding new courses, increasing intake capacity and improving the facilities. Also, given regulatory requirements, the total income to gross block will remain low due to continued higher capex spends.
Says Nagarjun Alaparthi, Associate Director, Crisil Ratings, “The credit profiles of educational institutions rated by us will be supported by strong cash flows from rising fee collections, which will be used for developing infrastructure. Gearing and interest coverage ratios are expected to be healthy at 0.37 time and 7.6 times, respectively, this fiscal, similar to the previous fiscal.”
Any slowdown in the overall economic growth, change in course preferences and impact of government regulations on the sector will bear watching.