SSI announced yesterday that it would in a phased manner, over the next 4 years, sell a majority of its owned centers, and Education Service Provider (ESP) centers, to franchisees. Of the companyís existing 601 centres (including ESPs), 559 are owned by franchisees. This effectively translates to a sale of maximum 42 centres by the company. The ESPs account for 232 centers, and caters to smaller cities and towns across the country.
The ESP model is a hybrid between company owned and franchisee centers, where SSI provides seed capital to fund suitable entrepreneurs. The 232 ESP centers have provided SSI penetration into non-metro regions. The ESP partners will now be encouraged to own the assets in their centers and evolve into franchisees in a phased manner over the next 4 years i.e. give SSI back its money.
The company expects this exercise will decrease the working capital requirement, improve cash flows, and reduce the capital intensity that has been increasing continuously as SSI grows. But the company owned centres have higher operating margins than the franchise owned centres. Consequently, operating margins for SSI might move southwards in future. Since the break up of revenues is not available between company owned and franchise owned centres, the magnitude of the impact is difficult to determine. However, considering the fact that the number of franchise owned centres is 559 (including 232 ESPs) and the number of company owned centres is just 42 the impact could be marginal.
Number of centres
Contribution of revenues from software
Revenues for the latest quarter (Rs m)
Revenues per centre* (Rs m)
Market price (Rs )
Note Revenues, EPS for quarter ended March 31, 2001.
Contribution from education business to revenues from NIIT assumed.
One of the reasons that could have caused the company to take this step could be the fact that SSI is facing tough times. Aptech and NIIT have admitted to the fact that their education business is facing drop in registrations. SSI has almost 85% of its revenues coming from the education business. Also, in the software business SSI does not have a strong brand. Thus, in either case it becomes a likely candidate to see a drop in business. It is very interesting to note that this move comes after the companyís decision of borrowing Rs 500 m from IDBI, inspite of having Rs 2,500 m worth cash in its books. SSIís explanation for taking loan was that it wanted to earn interest spreads.
However, SSI will retain few company owned centers in each geographical region to focus on training, corporate programs, and testing of new curriculum. These centers will also serve as regional control offices to overlook the operation of the franchisee centres.
No doubt this move of the company will help it to trim costs and be more agile. But the million dollar question is that are these moves by the company for reasons that it cities or has the tough business environment and cash flow problems force it to do so?
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