Why Byju’s is willing to pay $1 Bn for Aakash Educational Services

Byju’s confirmed the reports that it’s in talks with promoters of Aakash Educational Services to acquire the 33-year-old coaching institute. The Bloomberg report pegged the deal to be valued at $1 billion which will make this the highest valued deal in the edtech space till date. 

The reported billion-dollar figure also raised quite a few eyebrows along with the fact that this acquisition would propel Byju’s to compete directly with the conventional exam prep companies such as FIITJEE, Allen Institute Vidyamandir Classes, among others.

Let’s take a closer look at how the numbers look for Aakash Institute which was started back in 1988 by founder Jagdish Chand Chaudhry, who along with his family members still holds a majority stake in the company.

Aakash Educational Services recorded gross collections of a little over Rs 1,261 crore for the fiscal ended in March 2020. Healthy collections coupled with a healthy EBITDA margin of nearly 34%, one can figure out how lucrative the exam prep market is in India.

If Byju’s goes forward with the acquisition at the reported $1 billion number, it would put Aakash’s valuation at a revenue multiple of 5.8X. In comparison, Byju’s raised $200 million in February 2020 at a revenue multiple of 41.5X while Unacademy raised its Unicorn round at revenue multiple of nearly 158X in September 2020. One can also call back to the reported $300 million dollar acquisition of WhiteHat Jr with negligible revenues in its first year, eye-popping valuations are a dime a dozen in the edtech space.

Aakash Educational Services had filed a draft prospectus with SEBI in July 2018 looking to offload 1.85 crore shares held by the promoters. While the IPO never took place, American private equity firm Blackstone poured in Rs 1,350 crore in Aakash after CCI approval in October 2019. The deal valued the business a little over Rs 3,700 and Chaudhry & family offloaded their respective stakes in the transaction. 

Aakash’s revenue from operations grew by 8.7% to Rs 1,214 crore during FY20 from Rs 951.5 crore in FY19. Around 86% of this income was earned through income from direct coaching while the rest 14% was earned through franchise fees and product sales collected from franchise holders. 

Moving over to the expense sheet, we discover that employee benefit expenses stood out as the single biggest cost element for Aakash, accounting for nearly 52% of the total expenses incurred. These expenses grew by 17% to Rs 516.3 crore during FY20.

Further, we see an unusual uptick in the costs related to depreciation & amortisation which quadrupled to Rs 121.7 crore in FY20 from only Rs 30.7 crore booked in FY19. This can be attributed to the fact that the company has let go of a leased property during FY20 and amortised the leftover ROU. Consequently, costs related to rental, power and security dropped by 67% to a little over Rs 51 crore during FY20.

Aakash spent another Rs 111 crore on advertisement and promotions which pushed the total expenditure to Rs 998.96 crore for the fiscal ending in March 2020. The total expenses grew by 18% as compared to Rs 843.3 crore spent in total during FY19.

Aakash Educational Services spent Rs 0.82 to earn a single rupee of operating revenue during FY20. It recorded profits of Rs 244.7 crore during FY20 at an EBITDA margin of 33.89%.