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Soumik Kar
Say Cheese: There are three main factors contributing to the growth of this segment: low entry barriers, low regulation and under penetration.
Pre-School’s In
Venture capital and private equity funds are making a beeline for pre-schools. Are the schools ready yet?

Pre-School Primer

  • A $500 million segment catering to a total population of 119 mn people but only 1 out of 100 enrolled.
  • Low regulations, low entry barriers and under penetration leading to rapid growth (35% CAGR over the last four years).
  • Organised players adopting the franchisee route because of low upfront investment by franchisee.
  • Highly fragmented market, with 11 major chains−KidZee, Euro Kids, Apple Kids, Shemrock, Kangaroo Kids, Tree House, Bachpan, Podar Jumbo Kids, Mother’s Pride, DRS Kids and Sunshine.


When she was barely 18 months old, Aria Lalwani was enrolled in the Kangaroo Kids playschool in Mumbai’s upscale Pali Hill area. Within days, she was coming home and identifying colours. “I was taken by surprise,” says mother Parita. “I hadn’t taught her to do that.” Sheetal Punjabi teaches a playgroup class at the same institution. She recalls how a boy who was less than two years struggled at first but slowly developed his language and motor skills. By the time he joined nursery school he was at par with his peers. “If he had not gone through that year in my class, the child would have wasted a lot of time in nursery to match up to the challenges there,” explains Punjabi.

"We serve the elite because of acceptability, as these parents know the importance of pre-schooling."—Lina Ashar, Chairperson, Kangaroo Kids Education
Scientific studies have proven that the most important years of human learning are not during school or college, but at infancy. That is the period when the brain grows rapidly, from the time a child is born, up to the age of around five. It is during this time that children learn to assimilate information, express interest and develop cognitive and emotional skills. Pre-schools or nurseries have a huge role to play in this development. By using fun tools, such as puzzles, they help children develop cognitive skills and intelligence, and ultimately shape their personalities.

Indian parents, many of whom have become prosperous thanks to the economic boom of recent years, have begun taking pre-schooling very seriously. They want nothing but the best education for their children, and that perhaps explains why pre-schooling has become such a big business today.

According to a report compiled by Mumbai-based Kaizen Private Equity, an education fund, pre-schooling in India is a $500 million industry expanding at a compounded annual growth rate (CAGR) of 35%. It is expected to be worth $1 billion by 2012. The industry is dominated by the unorganised sector (small, neighbourhood schools), which accounts for over 75% of the market. But the huge business opportunity has seen a number of larger players quietly emerge in the rapidly growing organised sector, which boasts of 21 pre-school chains—11 large and 10 small ones. Together, these chains run about 1,700 institutions catering to 200,000 children across 260 cities. That number is big, but considering that there are 119 million children in India in the 0-4 age group, it is a drop in the ocean. And therein lies the opportunity.

"Right now, a lot of money is chasing few opportunities. So, scalability is not an issue if you have deep pockets."—Sumeet Mehta, CEO, Zee Learn
The major players in the organised sector include Kidzee, Shemrock Schools, Euro Kids International, Tree House and Kangaroo Kids. While unorganised schools are simple affairs often operating out of a single room and with no fixed curriculum, those operated by the chains are well equipped. They have everything from outdoor play areas and separate classrooms to security alarm systems. Their curriculum, too, is of a reported higher standard.

The quality of these schools and the limited number of seats available has meant that parents vie hard to get their children in. And they’re willing to shell out a fair amount of money to do just that. On average, pre-schooling fees range between Rs 10,000 and Rs 60,000 a year per child, depending on the school and the locality, says a source in a private equity (PE) firm. For instance, he points out, the fees in upscale areas like South Mumbai and South Delhi could be as high as Rs 60,000 a year. In smaller towns and less-developed urban areas the fees could be a more modest
Rs 10,000 a year.

“We serve the elite. Not because of affordability but because of the acceptability,” says Lina Ashar, Chairperson of Kangaroo Kids, which caters to the urban rich. She explains that branded pre-schools are still a very metro-centric phenomenon and parents of upper- and upper middle-class families know the importance of sending their children to pre-school.

Investor Appeal

Unlike schools, colleges and higher educational institutions, which are barred by law from becoming for-profit ventures, pre-schools are allowed to make profits. Besides, there are no real regulations governing them and just about anybody can start one. Moreover, the investment required to set up a pre-school is comparatively low. A high school, for instance, costs 10 times more—between Rs 1.5 crore and Rs 2 crore —excluding land and building costs.

"We have expanded to over 200 towns since we launched. And we are looking to add 250 schools annually for the next five years."Uday Mathur, MD, Euro Kids International
Another factor driving the segment’s growth is the low level of penetration. Only one in 100 pre-school aged children is enrolled, according to the report by Kaizen Private Equity.

The segment’s potential has got even venture capital (VC) funds salivating. “There is huge interest from venture capitalists in this space and I have been approached by quite a few,” says Rajesh Bhatia, Managing Director of Tree House. The chain has secured VC funding of Rs 90 crore from Matrix Partners India and Foundation Capital. Matrix, an investment firm with Rs 1,500 crore under management, invested Rs 59 crore in Tree House in two rounds of funding. “They have a significant number of self-managed pre-schools and are growing at 100% CAGR over the last two years,” says a pleased Rishi Navani, Managing Director of Matrix. Foundation Capital invested
Rs 31 crore in Tree House.

Euro Kids International is another player that has received external funding. Education solutions provider Educomp recently acquired a 50% stake in the chain. Shemrock Schools, a chain that has been around for 20 years, is being wooed by VCs but has so far refused to bite.

“The fact that pre-schools are a for-profit business makes them very attractive. They can be corporatised in a way other schools can’t,” confirms Amol Arora, Managing Director, Shemrock.

"The fact that pre-schools are a for-profit business makes them very attractive. Unlike other schools, they can be corporatised."Amol Arora, MD, Shemrock
The chain has 124 franchisees in India and owns one. In 2009-10, it clocked over Rs 15 crore in revenues and went up from 70 franchisees to 110. Shemrock has been approached by many VCs in the last two years, but Arora is confident that it doesn’t need outside equity.

“In the last one year, our business has become viable. Rentals have fallen, making it easy on our franchisees.” He feels that a VC would put pressure on the management by focusing solely on the bottom line.

Lina Ashar echoes the same view. “After exploring the PE route recently, I saw that most are focused on numbers all the time.” Kangaroo Kids has 108 schools, three of which are in the Maldives and two in Dubai. It is looking to open another four schools by 2011. “We will be looking to raise further funding a year from now,” admits Ashar but adds that she has decided to scout for some angel investors who will not toy with her mandate.

Another player reluctant to partner with VCs is Kidzee. The chain, which has about 700 pre-schools, is backed by the Subash Chandra-led Essel Group. “As a brand, we scaled up from 0 in 2003 to 700 in 2010,” says Sumeet Mehta, CEO, Zee Learn, of which Kidzee is a division.

“We are part of a big media house, and we stand on their shoulders in terms of driving brand credibility.” More importantly, being an Essel subsidiary allows Kidzee the luxury of not needing VC funding, thereby ensuring its independence.

Franchisee Route

The franchisee model is quite popular with some of the chains. Out of Euro Kids’ 650 pre-schools, only 30 are owned by the company; the rest are run by franchisees. It costs between Rs 5 lakh and Rs 15 lakh to set up a school, depending on the location. Most break even in the second year of operation. “The return on investment ranges between 30% and 40%,” reveals Uday Mathur, Managing Director of Euro Kids.

"There is a great deal of interest from venture capitalists in this space and I have been approached by quite a few of them."Rajesh Bhatia, MD, Tree House
Shemrock sends a team of carpenters, painters and artists to help set up a franchisee school. “It is cost-effective if we do it,” explains Arora. “If they did it themselves, it would cost them Rs 4 lakh to Rs 8 lakh.” Ajay Malhotra paid a one-time licence fee of Rs 2 lakh to become a Shemrock franchisee in Faridabad, Haryana. Shemrock also collects a royalty of 15% from Malhotra’s monthly collections and provides his pre-school with study materials and teacher training.

The return on investment for a Shemrock franchisee is Rs 1.5 lakh a month. The parent spends 10% of its own revenues every year to lend its franchisees advertising support. In comparison Euro Kids bears the entire cost of promotions for its franchisees, spending around Rs 6 crore every year.

Bhatia of Tree House is one of the few entrepreneurs who prefers to have more of his own schools than franchisees. Of Tree House’s 137 schools, 90 are company owned. “We are growing slowly and steadily. Education is not about numbers,” he emphasises. Running company-owned schools ensures tighter control on quality and consistent delivery of service, Bhatia insists.

Narayan Ramaswamy, Executive Director at KPMG, agrees: “Frankly, I think franchisees won’t work in the short-term. They are not customised enough to function together. Tree House doesn’t have too many franchisees because it managed to get VC funding.”

Growth Hurdles

One of the challenges most pre-schools face is in getting professional teachers, especially in small towns. Tree House has gotten around the problem by starting its own teacher training centres in Mumbai, Pune and Ahmedabad.

The low entry barriers make it easy for new players to enter. But given the size of the market there’s enough room for everyone to grow.
It hires most of the teachers graduating from these institutes. Kangaroo Kids also has its own training centres and retains around 50% of the teachers. Ashar of Kangaroo Kids laments the teacher attrition rate at her pre-school. “There has been a lot of poaching of our teachers and IP (intellectual property),” she says.

The low entry barriers mean it is easy for new players to come into the segment. But given the size of the market there should be enough room for everyone.

However, each player wants to scale up big time and scaling up will not be easy. Each new school will require infrastructure and top-class teachers, who are hard to come by.

“As an investment, pre-schools look to be a low-hanging fruit,” says Mehta of Kidzee. “Right now, a lot of money is chasing very few opportunities in education,” he adds. “So, scalability, if you have deep pockets, is not as big an issue.” Kidzee aims to open 1,000 pre-schools across India by 2011.

Other players are also looking to actively expand. When Euro Kids started its first pre-school in 2001, it focused solely on big cities. “Today we are present in more than 200 towns,” says Mathur. Despite already having 650 centres catering to 50,000 kids, he isn’t taking it easy. “We are looking to add 250 schools every year for the next five years,” he asserts. He also plans to open pre-schools in the Middle East, Singapore and Sri Lanka within a year.

Clearly, the boom years have just begun for India’s pre-school players.

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