For-profit education companies such as Apollo (NASDAQ:APOL), DeVry (NYSE:DV), and ITT Educational Services (NYSE:ESI) are seeing a jump in enrollment as newly jobless Americans look to improve their credentials and make themselves more attractive to employers.
Although most emerging markets have a significantly different employment picture, foreign workers' emphasis on using education to improve their station is just as strong as Americans'. Two years ago, the Motley Fool Global Gains team tapped into this during a stock research trip to China, and they came back with New Oriental Education & Technology (NYSE:EDU), a company that provides English and college entrance exam classes to Chinese students. The stock provided Global Gains members with a 93% return over two and half years.
Right now, Global Gains advisors Tim Hanson and Nathan Parmelee are traveling across India in search of the next opportunity for 90% returns. To receive the team's dispatches live from the road, click here. What follows is an edited dispatch from Tim and Nathan about education in India:
Even after just a few days in India, one business theme is already becoming a familiar refrain: "This government is privatization-oriented; it will expand public-private partnerships."
We most recently heard that from the leading private education provider in India, Educomp Solutions. It's a company worth more than $1 billion that has its hands in preschools, grade schools, high schools, colleges and vocational programs, teacher training, and revolutionary teaching tools for both private and government-run schools in India.
Normally, we'd criticize a company for being this unfocused. But the market opportunity here is so vast and so immediate that it makes perfect sense for Educomp to try to grab hold of as much of it as it can. Even better, the government is cheering the company's efforts and might provide more tangible forms of support, such as tax breaks or subsidized loans to build schools. That's because if it doesn't, one of India's biggest advantages -- its more than 600 million residents under the age of 30 -- will become a huge social, economic, and political liability. That's the ticking time bomb India is staring down if those young people fail to receive an education or learn job skills.
A big problem needs a big solution
The numbers behind this story are mind-blowing: 280 million illiterate Indians, 120 million kids not in school, 85% of teachers without proper certification, and a nationwide shortage of some 200,000 schools. The education system is failing the country, and enrollment at private schools continues to rise even as the government pushes free education. That's because there's a chasm between the quality of private schools and government-run schools. This effectively widens the wealth gap between the rich and the poor and puts pressure on key industries, such as outsourcing and the likes of Infosys (NASDAQ:INFY), because they can't hire enough good people to increase their businesses.
The good news is that the Indian government recognizes this significant problem and has a plan to get after it: Unleash the private sector. The new minister in charge of India's schools, Kapil Sibal, intends to spend $200 million to help private firms bring computers to India's poor, government-run schools; $100 million more on speeding the development of vocational training programs; and up to $2 billion -- a huge amount here -- to open about 2,500 model schools in partnership with private education providers such as Educomp. He's even talked about opening up higher education to foreign competition -- an idea that was heretofore unheard of.
But India realizes that if it wants results, it needs to break away from its old ways of doing things. This means knocking down regulatory hurdles to innovation and entrepreneurship, enabling greater competition in key industries (India's high-quality and low-cost mobile phone market is a shining example of what can happen when good operators are forced to compete), and cutting the red tape that can make the country so slow to act. It's now a matter of doing it.
Because at the end of the day
India is overjoyed with the fact that the country posted 7.9% gross domestic product growth in the second calendar quarter. That news was celebrated on the pages of every newspaper here -- The Times of India, Hindustan Times, The Business Standard, etc. -- in big, bold type.
Yet while that overall number is loud and showy, there were pockets of economic disappointment. India's agricultural sector, for example, grew just 0.9% -- well below the rate of inflation. That number is expected to worsen in the third quarter because India had a bad drought over the summer. That weakness disproportionately affects India's poorest citizens. Although officials at the National Institute for Public Finance and Policy told us it didn't matter if higher incomes were growing faster than lower incomes as long as both were growing, the fact is that a country's economic growth isn't sustainable if it leaves the majority of its population behind.
An education system that better meets the needs of India's population is the only way to address this problem.
Hearing all of this, you might be tempted to run out and buy shares of Educomp today. Alas, you can't ... unless you live in India. Educomp only trades on the Bombay Stock Exchange, which we can't access through our discount brokers like E*Trade (NASDAQ:ETFC) in the U.S. The stock is also enormously expensive.
Still, we're putting it on our watch list and might be able to find a way to get exposure to it through one fund or another. We're still on the lookout for other Indian companies poised to profit from the looming explosion of public-private partnerships in other key sectors.
Stay tuned!
