S Chand and Co. Ltd IPO review (May apply)

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Review By Dilip Davda on April 20, 2017

New Delhi based S Chand and Co. Ltd (SCL) is the leading Indian education content company in terms of revenue from operations and an established player for more than 75 years and the largest K-12 player in India providing educational contents for Early Learning, K-12 and Higher Education segments with Pan India presence. K-12 segment has been contributing nearly three fourth of the total revenue mix.

SCL delivers content, solutions and services across the education lifecycle through its K-12, higher education and early learning segments with a strong presence in the CBSE/ICSE affiliated schools and increasing presence in the state board affiliated schools across India. As of December 31, 2016, Company offered 55 consumer brands across knowledge products and services including S. Chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor. According to the company, these brands have benefited by its strong brand management philosophy which embraces consistent efforts to upgrade content quality and to update content regularly. Further, in December 2016, the Company acquired 74% of the outstanding share capital of Chhaya Prakashani Private Limited, and the Company now offers four Chhaya brands including Chhaya and IPP. On the said date SCL has more than 11577 titles, 1982 plus author relationships. It has been posting 40 per cent CAGR in revenues since 2012. In FY 16 it sold over 45 million books.

To meet partial repayment of loans, raise general corporate funds the company is coming out with a maiden IPO comprising offer for sale of 6023236 equity share of Rs. 5 each via book building route with a price band of Rs. 660-670 and fresh equity issue worth Rs. 325 crore. Thus the total issue size will be of Rs. 728.56 crore (Approx. at the upper price band). Minimum application is to be made for 22 shares and in multiples thereon, thereafter. Issue opens for subscription on 26.04.17 and will close on 28.04.17. Post allotment, shares will be listed on BSE and NSE. BRLMs to this offer are JM Financial Institutional Securities Ltd, Axis Capital Ltd and Credit Suisse Securities (India) Pvt Ltd. Link Intime India Pvt Ltd is the registrar to the issue.

Having issued initial equity at par during 1970 - 2001, the company raised further equity in a price range of Rs. 19838 to Rs.116040 (based on Rs. 5 paid up value) from 2012 to 2015 and also issued bonus in the ratio of 73 shares for every 1 share held in April 2016. The company will be issuing around 4850746 fresh shares (at the upper price band) taking its current paid up equity capital of Rs. 14.92 crore to Rs. 19.77 crore.

On performance front, the company has (on a consolidated basis) reported turnover/net profits of Rs. 370.95 cr. / Rs. 42.57 cr. (FY14), Rs. 478.50 cr. / Rs. 32.76 cr. (FY15) and Rs. 540.63 cr. / Rs. 46.64 cr. (FY16). Thus despite growth in top line, the company has posted inconsistent bottom line. For the first nine months ended on 31.12.16 it has posted loss of Rs. 88.49 crore on a turnover of Rs. 150.80 crore. According to the management, the company has history of posting losses for first three quarters and generates almost 75 per cent of total revenue and commensurate profits in the final quarter of every year and hence the first nine months figures cannot be compared due to seasonality of the company's business having more than three forth revenues from K-12 segment. Due to negative performance for the first three quarters, company's EPS turns negative. The offer price is at a P/BV of 3.5 plus. Based on 31.3.16 performance, the asking price is at a P/E of 28 plus against its peer (though not comparable in strict norms as it also has stationery business) trading at a P/E of 25.

To understand company's claims for over 75 per cent revenue coming in last quarter as stated on page 440 and 441 of RHP when asked for giving breakup of turnovers for the nine months ended on December 2013, 2014 and 2015, management declined to share the info.

However, based on management's claim of seasonality of business if we attribute the perception of revenues, then, company has to clock in turnover of Rs. 450 crore plus in the fourth quarter and to stay at previous year's net level, it has to show net profit of Rs. 135 crore plus for the last quarter, that appears a remote possibility.

On BRLM's front, the three BRLM's associated with the offer have handled 26 public issues in the past three years out of which five issues closed below the offer price on listing date.

Conclusion: Considering the pricing aspect and the seasonality of the business, risk savvy cash surplus investors may consider moderate investment for long term. (Other)

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