PRESCHOOL MARKET: MULTIFOLD GROWTH Playschools, more popularly known as preschools, traditionally cater to the 1.5-3 years age group. Increasing awareness among parents about the benefits of a quality preschool education has been driving penetration levels and price discovery in the segment. Led by these factors, we expect the market to expand by more than 3x in size by 2012. While the market is currently highly fragmented and unorganized in nature, increasing prosperity is driving a shift towards the organized segment. A largely urban phenomenon, there has been rapid proliferation of organized preschool chains beyond metros and tier 1 cities in the last five years.

1. PRESCHOOL MARKET Preschools – a snapshot

3. Increasing awareness among parents about the benefits of a quality preschool education has been driving penetration levels and price discovery in the segment.Market to expand 3x to $1bn by 2012E In 2008 pre-schol Market Total population 1.15bn HHs with income>Rs200,000(8%) 91m 2-4 yrs (6%) 5.5m 2-4 yrs enrolled (12%) 661,246 Average spend (Rs pa) 8,000 Market size (Rs m) 11900 Market size ($ m) 300 Source: IDFC-SSKI Research PRESCHOOL MARKET: MULTIFOLD GROWTH

4. Preschools – a snapshot

6. Organized preschool market in India

7. Preschools have a limited target area – maximum of 2km radius Any preschool, however strong the brand, ideally has a customer pull within a 2km radius (parents prefer to send toddlers within a limited radius for safety/ comfort reasons). The segment caters only to customers who can afford annual fees of Rs20,000-45,000, which further limits the scope of the market. Tail wags the dog – rental costs! Preschools are currently being run primarily on the franchisee model, which has so far evolved largely on the back of two factors- 1.low cost of setting up a franchisee, 2.housewife occupation that typically does not consider the opportunity cost of lease rentals (schools are being set up on existing premises which otherwise also do not generate returns). Franchisee Model

8. Considering the economics of the preschool business, lease rent forms the largest expense for running a preschool and can eat into profitability of the business. Soaring rental costs – mounting pressure on cost structures

9. The unorganized neighbor With awareness levels still low, the unorganized market provides ‘the same’ care butat a much lower price. With more than 80% of the target market still with the‘trustworthy’ neighbor, it may take some time before organized players are able to establish the importance of a quality preschool education. A non-regulated market – low entry barriers The preschool market is non-regulated and hence entails no regulatory barriers for new entrants. Given the relatively low investment required, competition is intensifying in this segment. unorganized neighbor Market

10. franchisee has to pay a brand/franchisee fee (Rs60,000-5,00,000pa) some part of the revenues to the franchisor (~20% of total) in lieu of using the latter’s brand name and for the handholding required to run a preschool. Except for a few preschool chains (Kangaroo Kids going in for JVs with developers and Tree House with largely owned schools), Assumptions: We have assumed a model premise of 1200 sq. ft with rent at Rs70 per sq.ft. Only 60% of the total area can be used for classrooms and a minimum of 10-15 sq.ft per student is considered optimal. The one-time capex broadly comprises furniture and fittings cost and excludes brand fee (we have assumed an average franchisee fee of Rs2,00,000, which is renewable every three years and amortized over a period of three years). We have assumed three classes and two batches a day, which translates into a maximum capacity of 20 students per class (thereby a maximum of 120 students per preschool) and an annual fee of Rs25,000. Economics of a preschool

11. Economics of a preschool

12. Revenue modelUsing these assumptions, the model breaks even at the operational level at a fairlyhigh occupancy level of ~70%.

13. The limited catchment area for a preschool implies limited scalability per branch A large section of the franchisees being run on owned premises The model ignores lease rentals – a major cost-head The business for a franchisee runs the risk of becoming economically unviable in a scenario of high rentals . (it has been observed that while franchisees keep mushrooming, there has also been a considerable churn in existing franchisors under high rental costs). To improve economic viability of the model, some franchisors are seen to be levering The existing infrastructure beyond the 1.5-3 year age group for programmes' like mother-toddlers(children aged between 6-12 months) and activities like dance, music, pottery classes, etc (children aged three years and above) Levering infrastructure beyond preschools to improve economic viability

14. Investment Details