S Chand IPO opens today, here's what experts outlook say

Indian education content company, S Chand & Company Ltd will open its Rs 728 crore initial public offering (IPO) on Wednesday to raise 325 crore via fresh issue of equity shares of Rs 5 each and an offer for sale (OFS) of up to 60.23 lakh equity shares by PE investor Everstone Capital and promoters, both in the price band of Rs 660 to Rs 670 per share. 

According to Prabhudas Lilladher report, S Chand is looking to repay debt of Rs 2.56 billion from the IPO proceeds and further working towards integration of Chhaya Prakashani in FY18E. With virtually no immediate capex at facilities and acquisitions on cards, the cash generated from operations will be used for retiring debt in FY18E.   

As per the report, S Chand is the largest textbooks publisher in India catering to the CBSE/ICSE K‐12 market having strong Pan‐India footprint. It has created and acquired brands over the years and has been successful in increasing its school bag content share in CBSE/ICSE schools. 

Its strategy of acquiring niche players like Vikas and Madhuban to fill the product gaps in Hindi titles and Saraswati brand to bolster content strength in French & languages has contributed to growth significantly. 

They have in‐house printing facility, product across 29 states, have strong distribution back‐up of 5,000+ distributors/dealers, sales team of 700+ people and 42 warehouses in 19 states.  

Moreover, Ajcon in its report mentioned that S Chand use their track record of progressing authors’ careers and providing on-going editorial team support to authors for creating new
products and solutions and refreshing existing products to help them retain and attract the best authors. 

As of December 31, 2016, company’s distribution and sales network consisted of 4,932 distributors and dealers, and they had an in-house sales team of 838 professionals working from 52 branches and marketing offices across India. 

In a report by sptulsian, the likes of Wren and Martin (English Grammar) and Shukla Grewal (Accountancy) are among the approx. 2,000 authors with whom the company has contractual relations. 

However, revenue generation is highly concentrated among few, as top 20 authors accounted for 49% of FY16 consolidated sales of Rs. 541 crore. EBITDA of Rs. 128 crore was earned in FY16, leading to EBITDA margin of 23.7% while net profit came in at Rs. 47 crore, translating into net margin of 8.6% and EPS of Rs. 17, on equity of Rs.  14.92 crore, adjusted for 73:1 bonus and stock split from Rs 10 to Rs 5, effected in April 2016.

As of 31 Dec 16, company’s networth stood at Rs. 506 crore, leading to BVPS of Rs.170 per share. 

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Promoter holding of 58.3% will shrink to 46.7%, post IPO, while PE investor Everstone Capital’s stake of 32.3% will contract to 13.9%. 

World Bank’s IFC holds 9.40% stake in the company since November 2015, and is not participating in the OFS. Fresh issue proceeds of Rs. 150 crore will be used to repay debt taken to fund Chhaya acquisition, while Rs. 105 crore debt of 2 subsidiary companies will also be re-paid. Company’s total consolidated debt of Rs. 418 crore, as of 31-12-16, will reduce to Rs. 163 crore post issue, sptulsian report said.

At Rs. 670, company’s market cap will be Rs. 2,325 crore and EV Rs. 2,458 crore. Based on estimated FY17 and FY18 EPS of about Rs. 21 and Rs. 26 respectively (including Chhaya), the PE multiples are 31x and 25x respectively. EV/EBITDA multiples are 14x and 12x for FY17 and FY18 respectively, which are quite rich, the report added.

Moreover, Akash Jain, Analyst, Ajcon, in a report titled, "S Chand and Company Ltd. : Strong brand equity in content and publishing" said, "At the upper end of the price band of Rs. 670, the IPO is valued at 50x at FY16 post issue EPS which appears quite high. However, post merger with Chhaya growth prospects would improve and debt to be repaid post IPO."

Competitors and peers

According to sptulsian report, sole listed peer Navneet Education, with Rs. 1,100 crore topline, is a cash-rich company with market cap of less than Rs. 3,900 crore. 

Navneet’s publishing business clocks much superior margins of 33%, at the EBIT level (23% blended for the entire company, including single-digit margins of stationery business) while S Chand, which is pure-play publishing, has only 19% EBIT margins. 

Thus S Chand is not reaping lucrative enough results from its specialized and sole business, despite both the companies having similar topline of about Rs. 600 crore from publishing sales.

Moreover, Navneet is shielded from quarterly losses which S Chand suffers from – a big negative. Besides poorer margins, S Chand’s IPO valuation is superior to Navneet, with the latter trading at PE of 23x and EV/EBITDA of 13x, on FY17 estimates.

Performance of education sector

As per sptulsian report, companies from the education sector have rarely rewarded investors. Both MT Educare and Career Point drew a lot of investor fancy for their respective issues few years ago, but their fate is out in the open. 

Very recent issue of CL Educate in March this year also invoked lukewarm response, besides listing at 20% discount and still quoting 13% below IPO price. Thus, education sector has rarely had a good run on the bourses.

Another risk for the company is as many schools have now embarked on developing their own content, as also CBSE board (accounting for a large portion of company’s topline) has recommended that all CBSE affiliated schools use only NCERT books upto class 8. Such risks and similar others in the future can impact business profoundly.