S Chand & Company: Good read for long-term investors

S Chand Publications (S-Chand), a well-established educational content provider for schools, colleges and universities, has close to seven decades of experience in the business. Besides, they are making in-roads into the digital and entrance examinations segment as well.

The company is making an initial public offer, comprising fresh issue of ₹325 crore and an offer-for-sale of close to ₹400 crore. Of the fresh issue, the company expects to use ₹255 crore to repay its loan and use the rest (₹70 crore) for other corporate purpose. The consolidated debt-to-equity will come down from 0.8 to 0.2 times post issue.

At the upper end of the price band, the offer is being made at a price earning multiple of 33 times, when the projected earning of FY 18 is considered. Navneet Education, another listed entity in similar business, trades at around 26 times.

Strong brand recall among schools, teachers and students, good growth prospects and ongoing measures to increase its presence in the digital media, place S-Chand on a strong footing for the long-term. But due to the relatively high asking price and the small market capitalisation, only long-term investor with a high risk-taking capacity should invest in this offer. Others can accumulate the shares in market corrections.

Business segments

The K-12 segment that accounts for 77 per cent of the operating revenue has good earnings visibility due to S Chand’s strong brand proposition in the CBSE and ICSE segment. Although CBSE and ICSE schools account only for about 1 per cent of the 1.5 million schools in India, both CBSE and ICSE schools continue to expand at a healthy pace.

Besides, S Chand’s strong pan-India presence in print content in Science and Mathematics, the recent acquisition of Madhuban, Vikas and Saraswati brands that have well acclaimed academic content in subjects such as Hindi, French, languages and arts & crafts, will help the company strengthen its hold in this market.

The recent acquisition of Chhaya Prakashani, West Bengal based publishing company, should help S-Chand foray into the state board segment in the eastern regions of India. The company has plans to increase its market share across state board schools in different states.

Also, hybrid offerings (both print and digital contents) have contributed a meaty portion of the K-12 revenue.

The higher education segment (19 per cent of operating revenue), caters to colleges, university and competitive exams. Between FY2012 and FY2016, this segment is growing at a rate of about 15 per cent annually. A portion of revenue is also derived from early and vocational education training.

The company has a strong contractual relationship with nearly 2000 authors and co-authors. Of this, nearly 50 per cent of the operating revenue is contributed by 20 authors.

Risk and finances

On consolidating S-Chand’s and Chhaya’s financials, the gross revenue for FY 2016 stands at ₹667.6 crore. Revenue has grown at a CAGR of 40 per cent over FY2012 and FY2016. The operating profit margin for FY2016 was 26.4 per cent. The net profit for FY2016 is ₹56.7 crore with net profit margin at 8.5 per cent.

Interest cost that has grown at about 50 per cent CAGR to ₹30 crore between FY2012 and FY2016 should decrease post issue.

Since 80 per cent of the revenue is booked in the January-March quarter, there could be some pressure on working capital management. Also, increase in open source platforms for content sharing can induce pricing pressure for the company.

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