Can Educomp regain its past 'glory'?

by Sohini Bagchi    Aug 19, 2013

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Digital content provider, Educomp Solutions’ rollercoaster ride over the past few years and noticeably since 2012 can be an eye-opener to educational institutions as well as corporate across the country. The company that once created the hype around its Smart Classes and other smart money-making opportunities in school education, is now making headlines – mostly for wrong reasons. The question industry analysts are asking now is whether Educomp can regain its past glory and more importantly the lost trust?

No strategy, no focus

To chart a graph briefly, the company has been marked by a steady dip in its stock prices in the last 3 years, besides witnessing the exit of several high profile employees and investors over the past 1-2 year. It has also hold back the salaries of many employees since the past 6 months according to sources and terminated over 3500 employees in the last 3 months. Very recently, it has also hit road blocks with hundreds of schools moving the consumer court against the deficiency in service, support and maintenance of equipments. With the list of its offenses getting longer, analysts and investors are wondering what’s next for Educomp!

 “Educomp is a clear example of a company that tried its hands in too many things and lost focus. There was a lack of strategy leading to its fall,” observes an industry expert keeping her identity anonymous. This was evident the fact that the company’s net profit margin has fallen 61% since 2009 and the net cash generated by its operations has declined significantly in 3-4 years and most importantly, its overall liabilities in 2012 were over twice its revenues.

According to a report that appeared in Forbes, the company’s market capitalization has fallen from Rs 7,000 Crore in November 2009 to just Rs 771 Crore as of March 2013.

Un-smart moves

From its core business of computer repairing and maintenance in early 1980s, Educomp ventured into the business of Smart Class range of digital classroom aids that allowed school teachers to use interactive multimedia content to supplement the standard textbook-and-blackboard approach. Smart Class concepts mushroomed in a few years and by 2012, Educomp had in its kitty nearly 7000 schools from less than 100 schools in 2006. Schools affiliated to the CBSE, ICSE, and the State boards passing on lakhs of rupees to avail online learning content solutions alleged that the company failed to deliver its promises.

A case in point is Sanskaar, a school in Hubli district of Karnataka. Cheesed off with Educomp’s missing contractual deadlines for installation and commissioning, Sanskaar cancelled its deals and Educomp received no further payments from the school and several letters asking for the equipment to be taken away. Yet it was only when the school threatened to auction the ageing hardware that Educomp decided to finally take it back just a few weeks ago. Not only Sankaar, other schools across the country started to terminate their contracts with Educomp and many of them stopped paying them owing to pathetic services.

Recently, a number of private schools in Bangalore filed a case in consumer court against Educomp, for its repeated failure to provide adequate support and maintenance. In a recent statement, D. Shashi Kumar, organizing secretary of the Karnataka State Private Schools Managements Federation, said: “The equipment is not functioning and we are unable to get satisfactory support and maintenance and the children failed to benefit because of Educomp’s poor services.”

Internal upheaval

Experts also point out things have not been well internally in the last two years, with even employee salaries being held up at both Educomp and IndiaCan, its joint venture with Pearson Plc. Since May 2013, the company has terminated 3500 employees.

The first high profile exit was that of Sangeeta Gulati’s, who served as the CFO of the company in April, 2012, working there for nearly 12 years. She was extremely pessimistic about the way the company was shaping up in recent times. Four months after her resignation, Mohit Maheshwari, Educomp’s company secretary and the person who led its compliance and corporate governance functions, resigned too.

Even investors who had confidently put money into it by seeing the lightening growth of the company have withdrawn. Kenneth Andrade, the head of investments at IDFC Asset Management, informs Forbes, “We bought the Educomp stock during its IPO and continued to hold a significant percentage of it over the years. But in 2010, we exited the stock completely because I felt they were straying from their original promise of being an ‘asset-light’ education services player into being a balance-sheet player.”

The other turning point was that Educomp was making its debt disappear for a while through Edusmart, an ‘unrelated’ company headed by one of its senior executives. The new company took over all of Educomp’s newer five-year school contracts, pledged the receivables with banks in return of a huge amount, and the sum was handed over to the latter. According to an official, banks lend to a new and unknown company because Educomp stood as a guaranter on those loans, even though Edusmart was neither a subsidiary nor a related party on its books. This could be a reason, many analysts and investors had wondered why the company never appointed a big accounting firms to audit its books!

A revival strategy???

Currently the Gurgaon-based firm has announced its transformational plan that entails modifications in structure, systems and sales strategies. “Educomp has announced a slew of measures aimed at putting the company back on a growth trajectory at a time when market sentiment is adversely impacting bottom lines across industry and has pushed the education sector into negative growth territory,” it said in a release. According to a senior official, the company is targeting a reduction in operational costs of close to 20% over the last fiscal due to these measures.

Educomp Smartclass COO Divya Lal said, “Redundancies are being calibrated in a progressive manner and employee strength is being rationalised. Contracts of unproductive staff are being terminated, while enhancing responsibilities among existing staff to control costs without impacting performance.” Justifying its letting go of 3500 people.

Recently, the firm outsourced its service and maintenance logistics to HCL Infosystems to increase efficiencies of scale as well as provide specialist services to existing and new customers.

 The Forbes report also suggests that it raised $150 million in new funding from a foreign investor, two-thirds would go to pay back a five-year-old foreign currency loan it couldn’t repay on its own, given the debt and liabilities on its stressed balance sheet.

Whether the revival plan would lead the company to success is a matter of time and strategy again. A business strategy is strongly linked with its financial plans. So, even if it tries to revive on the business front, it may take a lot of effort to gain back investor trust, and that of its customers!