(Rewrites with comments, context throughout)
By Ana Mano
SAO PAULO, Nov 4 (Reuters) - Ser Educacional SA is braced for a potential drop in the number of students financed through the Fies state loan program, a sign Brazil's No. 3 college operator is uncertain about the sustainability of the program in coming years.
In a conference call on Friday to discuss third quarter results, Ser management said the number of students enrolled through Fies, currently nearly half of Ser's base, could drop to 35 percent amid higher financial expenses and budget restrictions that are hampering expansion of the program.
To compensate for the potential revenue losses should that occur, Chief Executive Officer Janyo Diniz is luring more students into higher-priced courses, enhancing course quality and considering alternatives to make up for a decline in low-income students.
For Recife, Brazil-based Ser Educacional, an alternative to replace Fies could be becoming a first-tier lender for the students, Diniz said. Still, Ser is keeping "a conservative stance" in approving such loans in an effort to keep a lid on delinquencies and loan-loss provisions, he said.
Diniz made his remarks as Ser Educacional beat analysts' quarterly profit estimates after adding more students paying higher tuitions. Net income totaled 48.6 million reais ($15.04 million) last quarter, compared with a 44 million reais consensus estimate.
Shares rose as much as 1.5 percent to 20.75 reais in mid afternoon trading in São Paulo, underscoring investor optimism that Diniz's strategy may succeed amid heightening competition. Ser is up 174 percent this year.
Earnings before interest, taxes, depreciation and amortization, a metric of profitability known as EBITDA, rose 32.5 percent last quarter from a year earlier to 81.4 million reais, also above the average forecast.
Tuition fees in arrears totaled 60.9 million reais in the quarter, down 13.5 percent from the fourth quarter of last year. At the same time, the coverage of Ser Educacional's own student credit through the Educred and Pravaler programs financed no more than 1.5 percent of the student base.
Rising average tuition per student, to 684 reais in the on-site graduation courses, came in above analysts' expectations as the company lured more pupils to higher-ticket courses such as medicine, law and engineering. In the quarter, Ser enrolled 20,100 new students, a 16.2 percent rise from the same period a year ago, according to a securities filing Friday. ($1 = 3.2324 reais) (Reporting by Ana Mano; Additional reporting by Silvio Cascione; Editing by W Simon and Grant McCool)