Why Is Byju’s In Trouble?
While Byju's plans for an initial public offering have already been delayed by the tough macro environment, its ability to raise capital after the earnings fiasco remains to be seen.
Think and Learn Private Limited, which runs the ed-tech Byju finally filed the audited results for the financial year 2021 (FY21), after a delay of more than a year.
The company saw its revenue fall by three per cent in FY21 to Rs 2,428 crores, while losses jumped nearly 20-fold to Rs 4,589 crores. While new-age start-ups and their investors are used to huge losses, Byju’s results attracted attention due to several reasons.
Currently valued at $22 billion, Byju’s is India’s highest valued start-up – and a delay in filing results is bound to attract public attention. In recent months, Byju’s has faced increased media and investor scrutiny after its investors Oxshott and Sumeru Ventures failed to come up with $300 million after a round of fundraising.
At the same time, Byju was reportedly struggling to pay Blackstone Rs 1,983 crores for the Aakash deal. Though the payment was due in June, it had been deferred to September. Byju’s delay in filing results did not help its case either.
The delay stemmed from Byju’s auditor Deloitte Haskins and Sells seeking two changes in Byju’s financials.
Without these changes, the auditor refused to sign off on Byju’s results. Companies with external investors usually have to comply with the auditors’ requirements, since an auditor’s resignation is always seen as a red flag by investors.
The auditor had two demands from Byju’s:
a change in the manner of revenue recognition;
and changing the accounting of interest paid by Byju’s to its lending partners.
In order to recognise revenue from a subscription, a company must recognise revenue over the period of the contract, rather than recognising it upfront.
For example, you pay Rs 10,000 a year for a software subscription and you plan to use the software for two years. The software provider cannot simply recognise the entire Rs 20,000 as its revenue during the first year. Rather, it must record each of the Rs 10,000 payments separately over the two years.
Recognising revenue in such a manner matches revenues with costs, and provides a clear image of the business' position.
However, Byju’s went ahead and booked a significant portion of its subscription revenues in the current year – which inflated its revenue significantly.
Consequently, the numbers looked much better than they truly were, since the company was recognising revenues that wouldn’t be paid until a while later. Deloitte asked Byju’s to reverse Rs 1,156 crores that it had booked in revenues because it was improbable that Byju’s would be able to collect the amount.
Secondly, Deloitte asked Byju to adjust the interest it paid its lending partners under the revenue item, rather than expensing it as a finance cost. Since customers might be unable to pay for Byju’s products, Byju offers them financing through its lending partners.
In order to protect its lending partners from losses, Byju guarantees to compensate its lending partner up to a certain percentage of the loan amount in case of a default. Byju’s is obligated under the first loss default guarantee to pay up for monthly instalments that are unpaid for 75 to 90 days.
The Reserve Bank of India has expressed its reservation about the use of FLDG since it can encourage financial entities to give out riskier loans while creating risks over which the central bank has no oversight.
Byju’s must now adjust the payments made by it towards customers’ delayed payments in its revenues, rather than accounting for these expenses under finance costs.
Before these changes were implemented, Byju’s revenues were higher by almost 67 per cent. Byju’s rapidly growing costs indicated the pace at which the company was trying to grow. Marketing costs accounted for the bulk of the company’s revenues.
Of the total expenses of Rs 7,027 crores, Rs 2,250 crores went into marketing and promotional expenses. In FY20, marketing and promotional expenses stood at Rs 899 crores, indicating an increase of 150 per cent.
With Byju’s rapid hiring through the pandemic, employee costs for the ed-tech giant grew from Rs 420 crores in FY20 to Rs 1,943 crores - a jump of more than 460 per cent. Costs have grown even as accounting revenues shrank by three per cent, resulting in the huge losses the company is currently seeing.
However, filing the earnings is only one of Byju’s multiple problems. It must still face other problems such as paying up the balance amount to Blackstone for the Aakash sale.
With the payment deadline just seven days away, Byju’s might have to defer the payment once again.
In addition, it is yet to receive the stalled funding from Sumeru Ventures and Oxshott.
Byju’s image has already taken a beating over its aggressive sales tactics, refund issues, high-pressure work culture, subsidiary advertisements etc. In order to fund its losses and continue growing, Byju must raise capital as well.
Its plans include investing Rs 1,000 crores into growing its Indian physical classroom footprint while expanding into other countries. While its plans for an initial public offering have already been delayed by the tough macro environment, its ability to raise capital after the earnings fiasco remains to be seen.
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