FY23 Education Outlook: Liquidity Mismatch To Weigh On Debt Servicing

India Ratings and Research (Ind-Ra) has maintained a neutral outlook for the Indian education sector for FY23. The key reasons are: (i) about 5% growth in the market size in FY23, as per Ind-Ra's estimates, (ii) government's initiatives on the universalisation of education, (iii) emphasis on digital learning and strengthening of digital infrastructure to cater to the quality education across the nation.

India's track record in maintaining the standard pupil:teacher ratio has been poor. According to Ministry of Education, it is 28 for higher education, and about 26 for primary school and higher secondary school, which is higher than that for developed countries. Government initiatives towards digital learning and teaching have benefitted the students of rural and remote areas by overcoming the challenges posed by the teacher shortage across the country.

Stable Rating Outlook

Ind-Ra has maintained a Stable rating Outlook for FY23, on most of the rated educational institutions in its portfolio. The majority of Ind-Ra-rated educational institutions reported an increase in enrolments for FY22, a recovery from FY21 headcount levels, despite the COVID-19 pandemic. However, Ind-Ra in many cases observed strained liquidity and a weakened debt servicing profile owing to a mismatch in cash inflow and outflow as admissions got delayed in FY21-FY22.

Nevertheless, operating profitability has improved in FY21-FY22 on account of savings in operational expenses as educational institutions switched to the online mode to continue providing teaching services in FY21. Ind-Ra expects operating profitability to fall in FY23 from FY21-FY22 levels on the back of the resumption of physical classes. Ind-Ra expects educational institutions in the rated portfolio to revert to their pre-covid profitability levels and be comfortable in FY23.

During March 2021 to February 2022, Ind-Ra affirmed the credit ratings of 77.42% of its rated educational institutes and upgraded 16.13% due to an improvement in their operating and financial performance. The institutions with ratings upgrade were less affected by the pandemic-induced disruptions relative to others as these institutions drew comfort from their strong brand positions. Ind-Ra downgraded 6.45% of its rated portfolio mainly due to liquidity pressures.