IPO review: S Chand can be a long-term bet

Strong growth and higher margins than peers are currently captured well in valuations

S Chand and Company is India’s leading education company and provides content for ‘kindergarten and the first through the 12th grade’, also known as K-12 (73 per cent of revenue), higher education (24 per cent of revenue) and early learning. Leadership position in the Central Board of Secondary Education (CBSE) board curriculum (17 per cent market share), strong recall of the S Chand brand and experienced management are among its key strengths.

However, there are concerns. Given the business’ seasonality, the company derives 75 per cent of its revenue in the March quarter every year and posts losses in the preceding three quarters. This is because schools typically place orders in the March quarter. Besides, valuation of its initial public offering (IPO) appears full, leaving little upside in the near term.

At the upper band of ~670 and assuming a healthy 40 per cent growth in earnings in FY17 (over FY16), the issue is priced at 36 times the earnings on a fully diluted share base. This is much higher than listed peer Navneet Education, which is trading at 26 times the FY17 estimated earnings. Notably, Navneet derives half its revenue from the publication business and the rest from stationery products. The latter is also a reason why Navneet enjoys higher return on equity of 22-25 per cent in the past four years; S Chand’s has been 7-12 per cent.

Publication revenues of Navneet, though, are similar to that of S Chand, even as the latter enjoys slightly higher earnings before interest, tax, depreciation and amortisation (Ebitda) margins. Some premium also appears justified, as S Chand has grown its business at a faster pace. The company has a successful track-record in inorganic growth and is also present in the digital business, through minority investments in digital content platforms. It plans to expand into the regional business through acquisition of Chhaya. These strategies, though, will bear fruit only gradually. Investors with a long-term horizon can consider the IPO. Of the ~729crore issue proceeds, ~325 crore will flow into the company, with the rest being an offer for sale. The company plans to use this money to cut its debt by 75 to 80 per cent, which will reduce its interest costs and aid earnings. A key downside risk is that CBSE recently issued circulars advising schools affiliated to it to use only National Council of Educational Research and Training-printed content. Such circulars, along with any increase in the number of schools publishing their own content, are downside risks. High dependence on the top 20 authors (49 per cent of revenue) is another.

S Chand has had a decent financial performance in recent years, with K-12 revenue growing at a compounded annual rate of 47 per cent over FY12-16. Ebitda margins, too, have remained in a band of 22 to 24 per cent. However, investors should note the seasonality of the business and its over-dependence on the last quarter of a financial year.