S Chand & Company

Focused on organic as well as inorganic growth

The company has pan-India presence and provides content across the student lifecycle

CM RATING

45/100

Incorporated in 1970 and promoted by Dinesh Jhunjhnuwala, Neerja Jhunjhnuwala and Himanshu Gupta, S Chand & Company,(S Chand) is a leading education content company in India. The company develops and delivers content, solutions, and services in the K-12 education, higher education, and early learning segments. It is involved in publishing, printing, sale, purchase, export, and import of various books and other literary work; agency ship and distribution of publishers for books and other literary work; selling of educational toys; and publishing books for children, schools, colleges, and universities, as well as digital content and interactive learning systems to schools and running pre-schools.

S Chand along with its 12 subsidiaries also provides digital data management services and digital content books to schools and colleges; solutions for higher education in colleges, universities, and technical institutes; and DTP printing, DTP jobs, page making, editing and proof reading, and cover designing services of books, journals, tabloids, magazines, bulletins, brochures, and periodicals in the form of hard copy, compact disks, and e-forms.

In December 2016, the company acquired 74 % stake in Chhaya Prakashani (Chhaya), which gave an access to four brands, with volumes of 433 titles from 24 authors and an additional reach of 771 distributors and dealers. As of December 31, 2016, the company has distribution and sales network (not including Chhaya) consisted of 4,932 distributors and dealers. The company has an in-house sales team of over 838 professionals working from 52 branches and marketing offices across India.

As of December 31, 2016 it offered 55 consumer brands across knowledge products and services including S.chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor as well as the Chhaya and IPP brands pursuant to Chhaya Acquisition. The company also exports its printed and digital content to Asia, the Middle East, Africa, and internationally.

K-12 is its largest business segment, contributing to 72.49% of its consolidated operating revenue in FY 2016, when it sold 26.78 million books, reflecting its wide reach to the student community. Higher education segment constitute around 23.9% of its consolidated revenue in FY 2016, when it sold 2.0 million copies of 109 titles in test preparation, and 2.9 million copies of 2,920 titles in college and university/technical & professional segment in FY 2016.

The company has fully integrated printing needs and capabilities, in FY 2016, over 85% of its printing requirements were met by its facilities located in Sahibabad (in Uttar Pradesh) and Rudrapur (in Uttarakhand). Its facilities have a capacity to print up to 64.24 million pages per day. The company works closely with the educators and authors, and regularly integrates feedback received from authors, educators and students into its knowledge products to improve and innovate its offering. The company has a contractual relationship with at least 1,958 authors (including co-authors) for over five years as on March 31, 2016. In FY 2016, it sold 35.47 million copies of its own titles, and 67 of its titles has sold at least 50,000 copies each.

The Offer and the Objects

The offer comprises fresh issue of Rs 325 crore, which at lower price band of Rs 660 per share, works out to 49.24 lakh shares and at higher price band of Rs 670, the issue size works out to 48.51 lakh shares. The offer also comprises offer for sale of 60.23 lakh shares, which at lower price band of Rs 660 per share, works out to Rs 397.53 crore and at higher price band of Rs 670, the issue size works out to Rs 403.56 crore. The minimum bid lot is 22 equity shares and in multiples of 22 equity shares. The issue is made through the book-building process and will open on 26^th April and will close on 28^th April, with anchor investor bidding date of 25^th April 2017.

The offer for sale of 60.23 lakh shares is made by selling shareholders, which comprises promoters and group (around 9.55 lakh shares), around 48.15 lakh shares by Everstone Capital Partners II LLC and rest around 2.54 lakh shares by other individual shareholders.

The objects of the issue are prepayment or repayment of debt facility availed of by the company and its subsidiary Eurasia Publishing House (EPH), which was utilized towards acquisition of Chhaya, repayment of certain other loans availed by the company and its subsidiaries New Saraswati House India and Vikas Publishing house and for general corporate purposes, apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

S Chand has total debt of around Rs 417 crore including debt of around Rs 150 crore taken for Chhaya acquisition. Debt of around Rs 256 crore will be repaid from the proceeds of the issue, which will bring down interest costs.

Strengths

The content, solutions and services of the company, addresses the education lifecycle including early learning, K-12 and higher education of a student. Company's business is a key beneficiary of the increasing share of education within the discretionary expenditure of the Indian consumer, and company's presence across the student lifecycle allows it to generate recurring revenue throughout student‘s lives.

S Chand has managed to grow pretty impressively on the back of consistent organic as well as inorganic growth, evident by its impressive 33% and 47% CAGR in net sales and PBDIT, respectively, between FY 2012 – FY 2016. Vikas Publishing House, New Saraswati House, DS Digital Pvt Ltd and Edutor Technologies are some of the acquisitions made by the company in the past three years.

Government's initiatives on promoting primary education and increasing consumers preference for privately unaided schools as compared to government schools due to better infrastructure and more conducive environment for learning augers well for the company's business.

A seven-decade of presence in content and knowledge development and a strong brand with popular titles and author recognition augur well.

Structural changes in the Indian economy, such as rising disposable incomes, growing numbers of nuclear families, few quality educational institutions and high stress on marks in the Indian education system are expected to drive the coaching and test preparation industry.

The company has pan India sales and distribution network that drives deep market reach across India. Its market reach along with its customer touch points gives it a competitive advantage to grow its existing brands and build new brands.

The market size of education content in India, the space S Chand mainly operates in, is estimated to be US $ 4.5 billion, with the K-12 education content market estimated at US$ 3.4 billion, thereby clocking a 19.3% CAGR from 2011-2015. The central board affiliated schools have exhibited the faster growth at 21.7% CAGR from 2011 - 2015, aided by the participation of the private sector.

According to Nielsen, the state board content market size is around Rs 183 billion and is the largest part of the Indian K- 12 market. The company is using both organic and inorganic ways to penetrate further in this segment.

Nearly 2/3^rd of the 18,000 plus Central Board of Secondary Education (CBSE) and Indian Certificate of Secondary Education (ICSE) schools are prescribing at least one book from one of the many brands of the company to their students.

The company has demonstrated the ability to attract and retain leading authors considering its healthy track record in progressing authors' careers.

Weaknesses

Fragmented and highly-competitive industry has no entry barriers. The company faces severe competition from local and regional players. The multitude of players, brands and various sizes of competitors make it difficult to build national brand and requires a dedicated local sales team to compete effectively.

The Indian education system is governed by multiple boards; each board is further governed by separate education body and separate syllabus. Thus, content providers like S Chand have to continuously have that expertise and allocate its resources accordingly to meet varied needs of the different boards.

Any regulatory policy framework or any regulations of education body can reduce the demand for education contents of the company and can adversely affect its growth. For example, for the past two years, CBSE has issued an advisory circular advising CBSE schools to use only National Council of Educational Research and Training (NCERT) print content for all classes and may issue similar advisory circulars in the future. The company's business is currently an unregulated one and any increase in regulations from government and other legal frameworks and any restrictions in terms of contents and fees on content will impact the business.

Around 49% of total revenue is derived from contents provided by top 20 authors, who are not from the in-house content team. The company has to pay a fix plus royalty to these authors.

The company has used inorganic growth and acquisitions as a medium for establishing its pan India presence. Further, for future growth, the company will require to continuously grow inorganically, requiring additional debt or equity going forward.

Various non-profit organisations provide various educational content using digital platform which provides access to the contents to schools and educational institutions for free or nominal cost. Technological changes and such relatively inexpensive content information can affect the consumer behaviour and expectations and can affect the company's revenues or its ability to charge for its content.

Investments in new products or distribution channels, such as digital platforms, and delivery platforms such as tablets and e-readers, whether by in-house development or acquisition, may be less profitable and highly competitive as well and may not return same profitability ratios of the past.

There is very high degree of seasonality in business, affecting the cash flows and working capital requirements from quarter to quarter.

Valuation

For FY 2016, consolidated net sales were up 13% to Rs 537.75 crore. The OPM increased from 21.4% to 23.3%, resulting in a 23% increase in OP to Rs 125.37 crore. Other income shot up 56% to Rs 2.87 crore. With a 7% increase in interest cost to Rs 29.68 crore and 15% increase in depreciation to Rs 25.91 crore, consolidated PBT was up by 35% to Rs 72.65 crore. After providing total tax of Rs 23.29 crore, consolidated PAT for FY 2016 stood at Rs 46.64 crore, up by 42% YoY.

The company's business is highly seasonal, with nearly 75% of total revenues booked in the 4^th quarter every year. Hence, nine months ended December 2016 financials do not provide any clear picture. Nevertheless, for the nine months ended December 2016, consolidated net sales stood at Rs 149.51 crore and loss at PAT level stood at Rs 88.49 crore.

At a higher price band of Rs 670, the diluted equity share capital of the company stands at Rs 17.35 crore of face value of Rs 5 each. EPS for FY 2016 works out to Rs 13.4. The scrip is offered at P/E multiple of around 49.8 times FY 2016 earnings.

Navneet Education is the listed peer. It reported standalone net sales and PAT of Rs 931.12 crore and Rs 127.80 crore, respectively, for FY 2016. At the current market price of around Rs 170 the scrip trades at P/E of around 31.2 times its FY 2016 EPS of Rs 5.4.

Chhaya, which was acquired on 6 December 2016, reported consolidated net sales of Rs 128.62 crore and PAT of Rs 30.23 crore for FY 2016. The company paid around Rs 170 crore for acquiring 74% stake in Chhaya. Thus, consolidating 74% of Chhaya's performance for FY 2016, the back-of-the-envelop calculations indicate FY2016 consolidated PAT (after MI) of S Chand could have been around Rs 69 crore. This translates into EPS of Rs 19.9 for FY 2016. At the offer price of Rs 670, the scrip is offered at P/E multiple of around 33.7 times FY 2016 consolidated earnings.