CLSA has published its sector report on Indian Education. Am posting a summary of the report here. Anyone wants the full report can PM me.

With 142 million of India's 361 million school-age children not attending classes, Indian education's shortcomings are well documented. However, the opportunities it offers for organised private-sector involvement do not enjoy such recognition. In our view, turning education into a profitable, high-growth business is a long-term investment theme. Corporate initiatives are beginning to address the needs of India’s youth by tapping into the propensity of the middle class to spend more on education.

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The questions that this report seeks to answer include the following:

• How big is the market, and what are its key segments?
• Who are the players, publicly listed and private? We have mentioned at least 80 private players in the space.
• What are the regulatory issues around education? What is the future of education related regulation in India?
• What are the corresponding stocks worldwide in education, and what is the framework for education across the US, UK, Brazil, Korea and Singapore?

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A US$40bn market. We estimate the Kindergarten to Grade 12 (K-12) segment at US$20bn, private professional colleges at US$7bn and tutoring at US$5bn. These are the largest segments of the total private education market that we estimate to be worth some US$40bn. Other meaningful and fast-growing areas include vocational training at US$1.4bn, test preparation at US$1.7bn and preschools at US$1bn. Our proprietary work indicates a growing shift towards private schooling. India’s 75,000 private schools account for 7% of total institutions, but enrol 40% of the country’s 219 million students – even as some 142 million children are not in the school system.

Diversity promises consolidation. The combined market capitalisation of listed education companies in India is only about US$2.6bn, on 2008 revenue of US$450m. We see consolidation ahead, as national chains emerge. Test prep and tutoring appear most segmented, being spread thinly between small regional players; while areas such as e-learning, teacher training and online tutoring are nascent. K-12 and private professional colleges are the most scalable segments on offer.

Regulatory clarity could catalyse growth. The liberalisation debate will intensify as India’s policy planners struggle with a failed public-education system amid continued resistance to the commercialisation of education. Court judgements have talked of a “reasonable surplus” for schools and higher-education establishments, without clarifying the scale of profits that constitute the surplus. In the absence of centralised or regionally consistent regulation, profit is likely to come from the provision of services such as land leases, intellectual property and school management. Nonetheless, recent policy statements indicate a more liberal and welcoming environment ahead for private participation.

Upsides for the well-positioned. We rate Educomp and Aptech BUYs; NIIT an Outperformer, while Everonn should Underperform. Educomp stands out with sector-leading 90-100% EPS growth coupled with long-term portfolio mapping across attractive segments. Aptech’s focus in China and India, and scale in new retail initiatives gives it an EPS Cagr in excess of 50% without the need for high capex. It also enjoys attractive valuations. NIIT, despite its rampup in vocational training, appears hemmed in by its exposure to the slow-growing US corporate-training market, which contributes 56% of revenue. However, inexpensive valuations and improving financials support an Outperform rating. Everonn is most expensive but lacks the breadth of portfolio to back up its valuation multiples.