Crunch time: Aakash’s $150-million plan to stay relevant in a digital world

Aakash Chaudhry is in a dilemma. His 30-year-old coaching institute needs a revamp. But there’s no roadmap for what he needs to do.

We’re sitting across a giant U-shaped table from Chaudhry, at the headquarters of Aakash Education Services Limited (AESL) in Delhi. As Chaudhry, the company’s chief executive officer, walks us through a presentation on the company’s growth plans, his stoic expression cracks as he says, “It’s such a complex time. I’m taking new decisions everyday without really knowing how they’ll pan out.”

It’s an odd predicament for AESL—one of India’s leading exam coaching chains. But as a digital wave sweeps through the coaching space, many legacy players have been caught unawares. Where decades-old chains like FIITJEE, Allen, and Aakash once stood topmost in the minds of the India’s students, younger, online-only players like Vedantu and Unacademy are now the talk of the town.

Unsurprisingly, one decision features prominently in Chaudhry’s presentation—the intention to take the brick-and-mortar business digital. It’s a bold move, especially when rival coaching firms—Allen, Resonance Eduventures and FIITJEE—are yet to establish a significant digital footprint, despite running “digital learning programmes” for the last few years.

Clearly, Aakash—the man and the institute—are in uncharted waters.

AESL’s shift to digital isn’t just an inevitability. In the larger context of the offline test-prep market, it’s a calculated survival strategy: stay relevant.

And it’s aware that a storm is brewing. Traditional coaching businesses are staring directly in the face of a slowdown. Owners of coaching businesses that The Ken spoke with confirm that enrollments for engineering prep courses are dipping year-on-year, with growth in metros slowing. According to the All India Survey on Higher Education, the number of students enrolled in undergraduate engineering courses has declined by 11% since 2014-15, while those pursuing Master’s have more than halved. The online test prep market, meanwhile, is expected to reach $515 million by 2021, growing at a CAGR of 64%, according to a KPMG and Google report.

With this sort of imperative weighing heavy, Chaudhry is setting lofty goals. “We want digital to be 25% of our total revenue in the next four years,” he says, a marked increase from the 3% it currently stands at. AESL’s revenues for the financial year ending 31st March 2018 stood at Rs 980 crore ($138 million), with a profit of Rs 162 crore ($22 million).Its revenues went up by 34% from a year before, while its profit shot up sharply by 165%.

TV face time

According to industry sources, AESL’s USP is its marketing. ‘Others focus on training and hiring. AESL blows big bucks on TV ads. In fact, in 2017, AESL was ‘knowledge partner’ for the uber popular game show Kaun Banega Crorepati.

While it has offered a digital product in some shape or form since 2012, it was only last year that the company made a conscious effort to take the digital leap. For starters, Aakash Digital—with its three products iTutor, Live and PracTest—was spun-off as a separate entity within AESL and has ramped up hiring across verticals like product design and engineering.

Growing a digital arm from scratch is not just a personnel challenge for AESL. Founded by Chaudhry’s father JC Chaudhry in 1988, AESL grew from 12 students in a single west Delhi classroom to 189 centres across India. According to information shared by the company, a total of 218,379 students enrolled in AESL courses in 2018, up 13% from the previous year. 

AESL has had a good run in India’s hyper-competitive coaching industry. In the old, offline world order, the company knows its competitors inside out. Their turf wars included poaching each other’s teachers and students, undercutting prices whenever they could.

“AESL could become like Hotstar, who really hired the best talent and pumped in the right technology to compete with Netflix. They have great cash flows. They can make it work if they’re serious about it”

Delhi-based edtech investor

But going online brings AESL a completely new set of rivals. Edtech players like Byju’s, Unacademy and Vedantu, all of whom have raised significant war-chests from an indulgent universe of venture capitalists. Solely created for the digital world, these companies don’t have an offline legacy to contend with.

The 30-something Chaudhry believes that his team has the necessary talent, content and, perhaps most importantly, brand name, to match the younger crop, if not beat it. But optimism and ambition aside, AESL’s digital transition will be anything but easy. “AESL doesn’t want to be clubbed with the old, dying coaching businesses. It wants to align with the newer edtech wave. But is the shift to digital urgent enough for them?,” says an edtech investor who asked not to be named.

Indeed, just staying ahead in the $6.6 billion offline coaching market is hard. Over 30 years, AESL has carved out a 5% market share for itself. So, straddling both offline and online will be a Herculean feat to pull off. AESL does have one ace up its sleeve, the involvement of PE firm Blackstone Capital, which bought a 37% stake in the company for $150 million in 2018. Blackstone’s strategic input, could be the difference in whether AESL reincarnates as a consummate brand or leaves behind a legacy of half-measures.

Fight to win

It’s crunch time in the offline coaching world.

Even Pramod Maheshwari, founder of coaching chain Career Point, thinks so. Like AESL, Career Point, too, has digital aspirations. Through e-Career Point, Maheswari hopes to stem the decline he sees coming to offline enrolments. “It isn’t just the digital wave. Engineering isn’t as lucrative a career option anymore. We saw a drop in enrolments this academic year,” he adds.

According to two education experts The Ken spoke to, the average ticket size for a year-long JEE course has stayed flat at Rs 1.5 lakh ($2,107) for the last five years. This is troubling for an industry that, according to insiders, saw a year-on-year growth of around 8-10% in course fees until 2012-13. And if a slowing enrolment rate and stagnating ticket size weren’t enough, there’s also the constant threat of competition, which will only intensify as the tier-1 market plateaus.

In such an environment, one metric counts above all else—results. “Ranks are limited. If one coaching institute doesn’t get them one year, students will flock to another,” says a coaching industry veteran. It’s a fickle market, and expanding to tier-2 and -3 towns is even tougher. “Any location outside the North has been a challenge for us,” admits Chaudhry.

Kerala, for instance, was a really hard geography to crack, where everything from language to preferred class timings was different. The language and culture in this southern Indian state are completely different from AESL’s comfort zone in Delhi. To establish a market fit, Chaudhry claims it had to hire and train local talent, than make do with north Indian tutors.

“We could have multiplied the number of cities we are present in. But availability of good teachers is a real challenge. We have tried to find a solution through our solid faculty training programme”

Partha Haldar, Centre Head at FIITJEE

To carve out new territories for itself, AESL has introduced new programs, changed languages, hired local teachers and created a curriculum for each state-level engineering entrance exam. It has also had to convince tier-2 and -3 audiences that all subjects can be covered well at one institute, and break the pattern of students attending multiple coaching classes after school. New centres don’t come cheap either, costing anywhere between Rs 1.5-2 crore ($210,000-280,000).

But all their best efforts could be in vain if the average course fee of Rs 1.5 lakh ($2,107), is still too expensive for students from smaller towns like Kanpur, Solapur or Bulandshahr. Local IIT graduates often seize this opportunity to offer the same coaching at half the cost of the pan-India brands. Without regulations and cheaper rental costs than metros, the entry barriers are negligible.

Bottom line: expanding offline is a hard task. With its back to the wall, AESL must take the digital bull by its horns.

Digital deus machina

Online expansion allows for the control of factors like quality, discipline and pedagogy. This is catching on with other traditional coaching chains as well. “We have been consciously growing our digital business because we feel that the return on investment is much better. The faculty can be anywhere and we don’t need to invest in fixed assets such as real estate,” says Sujit Bhattacharya, co-founder of test-prep chain CL Educate. 

However, in its short life, AESL’s digital run hasn’t been stellar.

Back at  AESL’s boardroom, Chaudhry charts Aakash Digital’s timeline. In 2012, AESL launched iTutor, a CD-based series of recorded lectures. “We hardly sold 50 in the first year,” admits Chaudhry. Online live tuitions weren’t popular yet, and the Byju’s super successful tablet model was just beginning to catch on.

From CDs, content moved to SD cards. But with more interactive content available online, AESL also had to refine its game. The chalk-and-talk setting of the old videos was gradually replaced with interactive smartboards. As the market moved towards live tuitions, with edtech companies like Vedantu and Unacademy launching test-prep packages, AESL too launched Aakash Live—its online tutoring product—in 2016.

“Growing the classroom model is hard. 75% of enrollments from Aakash Digital come from beyond the metros. From towns and cities where we won’t ever plan to open centres,” says Chaudhry. Its digital products—especially Aakash Live—cater to those students who can’t access a quality coaching institute, because it’s either too expensive or too far. While Chaudhry didn’t go into the details of the price differential between its offline and online products, he mentioned that iTutor would cost 60% of its offline equivalent, with Live cheaper still.

110

The highest rank, so far, to come out of Aakash Digital’s online classes

The use-case is clear. But how does AESL actually acquire these customers?

“We have a really low customer acquisition cost. A large portion of the leads are in-bound. Our branding helps attract customers,” says Chaudhry. AESL spent $13.49 million on branding and marketing in the year ended March 2018. This spend, according to industry sources, is the highest among offline institutes, and represents a nearly 30% jump in two years for AESL.

“In our online business we have positive EBITDA. Because of our brand name, we hardly have any customer acquisition costs,”

—Aakash Chaudhry, Director & CEO, AESL

AESL has the benefit of building its digital play on the strength of its brand. But as the coaching veteran points out, branded curriculum is only half the story. What matters is analysing the learning gap of a student without being there in person. “This is where superior Artificial Intelligence and Machine Learning kicks in,” he adds. Companies like Vedantu, Unacademy and Byju’s have invested tens of millions of dollars developing such backend technology, as The Ken has previously reported. 

Chaudhry claims that AESL has pumped in Rs 30 crore ($4.2 million) last year—both to upgrade its tech and bolster its staff—to achieve its digital mandate. For instance, a large part of Aakash Digital’s product engineering team, including its chief executive officer, come from a mix of e-commerce startups and edtech firms like Unacademy, Snapdeal, Uber and LinkedIn. Out of Aakash Digital’s a 290-member team, 140 recruits work on product and sales, while only 70 teach. The rest comprise of operational staff and senior academicians.

New tricks

Technology like facial recognition—to track if a student is paying attention in an online class—is now one among many hi-tech tools. “It’s easier to make interventions in a physical class. I can pick up on physical clues. Online, I need to develop facial recognition, do pop quizzes and constantly send feedback to the students on their performance,” says Anuj Tiwari.

Most of the team is young, with the on-screen faculty younger than the average AESL tutor, according to Anuj Tiwari, the head of Aakash Digital. This is because younger people are more tech-savvy and easier to train on tech tools than veteran offline tutors.

AESL is keen to get a seat at the edtech table. But even a cursory comparison of Aakash Live with a live class from any of the other online incumbents shows a clear gap in quality and sophistication of the graphics. Efficacy though, doesn’t necessarily lie in optics. According to data shared by the company, one in every four Aakash Live students qualified in the JEE last year. 

Brand and butter

Tiwari isn’t nearly as concerned about the content or design of the product. He is fixated on developing a unique brand identity for Aakash Digital and quickly producing top-ranked students from his online classes. The distinction in format is clear, but branding has been a double-edged sword.

On one hand, the brand name has created a wide funnel for potential leads. Students from remote areas calling in to find out about Aakash coaching are directed to the digital team. It’s also allowed the Aakash Digital team to work like a startup, but with the ample resources of an established institution. 

It’s exactly this kind of interdependence that’s made it difficult to launch Aakash Digital as a separate brand. It’s been difficult to rebuff the latent advantages of the parent brand.

AESL’s online rivals believe the company’s not actually serious about pivoting to tech. “It’s not a cost issue. It’s about focus. Even Byju’s had to de-prioritise its offline centres to build its online brand,” says the founder of an edtech firm, who wished not to be identified. 

200,000 vs 21,000

Aakash Digital is at the foot of its online summit. It aims to have 21,000 enrolments by the end of this year. The number pales in comparison to the number of students who annually join its offline coaching centres

This divided focus is visible when it comes to Chaudhry’s plans. Despite tapping into a new audience with its online products, AESL’s still aiming to grow by 10-15 centres every year. Tiwari, too, reveals that his growth tactics for Aakash Digital also rely on 70-odd AESL franchises across the country. “First comes Live, then iTutor and finally the online test-prep series,” says Tiwari, describing the AESL sales pitch. 

For its edtech rival mentioned above, this massively complicates things. Why would a centre in-charge, who’s tasked with meeting a certain number of target enrolments, bother with pushing a digital product, he asks. Instead, education experts claim this dual identity could end up curtailing the growth of Aakash Digital. 

AESL’s refusal to take its eyes of the offline ball, though, could be the consequence of the company’s research— “Our research tells us that a student will always prefer going to a classroom, if there is a good one within reach,” says Chaudhry.

IPO ready?

It wouldn’t be wrong to assume that a large part of the Blackstone fund raise will go towards these digital growth plans, alongside other expansion efforts. Chaudhry, however, insists the company didn’t need money. “We felt our financials were strong enough to raise money from the public market,” claims Chaudhry.

In an ideal world, this is where an initial public offering (IPO) comes in. But previous education listings have been, to say the least, disastrous. Take CL Educate, for instance, which was the last education company to be listed. Back in 2017, the MBA test prep firm’s IPO priced at Rs 502 ($7.05). It listed at a 20% discount at Rs 398 ($5.59). CL shares currently trade at Rs 80 ($1.12).

Chaudhry, despite his confidence that AESL’s Rs 4,000 crore ($563 million) valuation would’ve been well received by the public market, says not listing was a blessing in disguise. Apart from the cold reception his competitors received from the market, the market crash post the IL&FS debacle further vindicated its choice. “We took this as a blessing that we didn’t go public this year,” says Chaudhry. 

More importantly, though, an IPO would have only led to a funding, while the Blackstone deal also gives Aakash strategic direction. In addition to that, “it’s the access that global PE funds have in terms of technology and talent, that’s going to really help us,” says Chaudhry.

“The Chaudhrys are savvy. They’ve been in market to raise funds because they saw the sector heating up. They saw this as an opportunity to take some money off the table”

PE Investor

With Blackstone in house, an expansion to the diaspora marketing in the middle east and acquisitions for Aakash Digital,  may also be on the cards. AESL’s use for Blackstone is evident, but why did the PE firm choose Aakash? FOMO, says an investment banker, who wished not be identified. His theory is that since Blackstone missed out on the opportunity to participate in Byju’s and Unacademy, it now wants to create a challenger digital brand through Aakash. That may be true. Byju’s has Carlyle, another bulge bracket PE as one of its investors.

For now, AESL has found a comfortable wedge. Before Chaudhry heads back to the public market though, it’s clear that his bet on digital has to pay off. The brand must reinvent itself in a manner that’s elastic enough to contain both its offline legacy and its fledgling online business.

If he can pull this off, Chaudhary would’ve achieved something no one has yet: the first-ever offline-to-online model for the test-prep market in India.

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