Schools and colleges will report 12-14% revenue growth this fiscal, riding on higher enrolments, which allows for upward fee revisions, and students scouting for new course offerings. The growth will be despite the high base following three consecutive years of high-teen growth.
Improved enrolments and better utilisation of assets should cover increasing salary costs for faculty and other ancillary expenses for new courses and, thereby, aid in maintaining the operating margin at around 28%.
Additionally, as existing courses and seats remain highly utilised, educational institutes will continue to make capital expenditure (capex) to improve infrastructure and enhance intake capacities. However, strong cash flow (from higher revenue and timely realisation of fees) limits reliance on debt for capex and supports the credit risk profile.
An analysis of 96 educational institutes rated by CRISIL Ratings, accounting for almost Rs 20,000 crore fee income, indicates as much.
Enrolments for the educational institutes in the K-12 segment, largely schools, will continue to rise due to two reasons – rising demand for high-quality education and improved affordability as income levels rise.
The government aims to increase the gross enrolment ratio1 for higher education to 50% by 2035, from under 30% currently, by promoting new institutions while expanding and improving current institutions and increasing penetration among the addressable population. Even as intake capacity increases, utilisation rates for schools and higher-education institutes may improve to 86-87% by this fiscal from 85% last fiscal.
Says Himank Sharma, Director, CRISIL Ratings, “Occupancies in Computer Science courses in engineering colleges remained healthy in fiscal 2024 despite subdued placements. Moreover, new courses on Artificial Intelligence, Data Science and Machine Learning were in high demand. Occupancies in these courses will be further boosted by better hiring signals for fiscal 2025. Medical colleges and schools, too, continue to register high enrolments, driving fee income growth. Hence, educational institutes have the flexibility to undertake periodic fee revisions, which will result in fee income being higher by 12-14% in the current fiscal.”
Despite the increase in fee base, working capital requirement will remain minimal as fee receivables have been controlled at 45-50 days over the past few fiscals. Further, gearing and interest coverage ratio will improve to around 0.41 time and 7.0 times, respectively, this fiscal, as against 0.46 time and 6.2 times last fiscal (refer Chart 1 in Annexure).
Says Nagarjun Alaparthi, Associate Director, CRISIL Ratings, “Strong cash generation by educational institutions led to capex spends increasing by 18-20% of existing gross blocks, reaching an all-time high in fiscal 2024. Even in the current fiscal, schools and colleges will continue to expand their capacities by investing heavily in land and infrastructure, around 14-16% of existing gross blocks, while adding various new courses to their portfolio. Yet, credit profiles of education institutes will remain stable as leverage continues to be low.”