Monday, April 24, 2017

S Chand & Company IPO analysis

About the issue
The company offer comprises of fresh issue of shares and offer for sale to raise around Rs 728.5 crore. The company is going to raise Rs 300 crore through fresh issue, while the balance amount will be raised through offer for sale of 60,23,236 equity shares of face value of Rs 5 per share. The issue will remain open from April 26, 2017 till April 28, 2017 with a price band of Rs 660-670 per share.
Purpose of the IPO
The company plans to utilise net proceeds from this offer for prepayments or repayments of own and its subsidiary EPHL, VPHPL and NSHPL debts. The company also proposes to use these funds for general corporate purposes.
Industry Outlook
India is one of the fastest growing economies in the world GDP growth of approximately 7.6% in FY16 and is expected to grow at 8% in FY17. India’s increasing GDP growth has aided the rise in income levels and spending power. As India’s per capita GDP levels and spending levels have increased, the share of spend in discretionary items has also increased from 53% in 2005 to 59.4% in 2016.
Growth in urbanization, increase in disposable incomes, growing literacy rate, increase in government spending on education are some of the major key drivers for the education sector to grow in India. The Right to Education Act (RTE Act), a policy initiative by the Government of India, emphasizes the need to implement various educational initiatives which would lead to increasing enrolment across all education segments in the coming years.
Company Outlook 
The company is one of the leading Indian education content company that delivers content, solutions and services across the education lifecycle through the K-12, higher education and early learning segments. It offers 53 consumer brands across knowledge products and services. In December 2016, the company has acquired 74% of the outstanding share capital of Chhaya Prakashani Pvt Ltd.
As of June 30, 2016, its distribution and sales network consisted of 4,907 distributors and dealers, and the in-house sales team consisted of 697 professionals working from 58 branches and marketing offices across India. Additional 746 distributors and dealers joined the network through Chhaya as of December 1, 2016. It has developed a robust supply chain by rationalizing and integrating its procurement, manufacturing and logistic capabilities. In FY16, its logistics network comprised of 42 warehouses located in 19 states across India. Also, its hybrid offering contributed 38.82% and purely digital offerings contributed 5.55% of their consolidated operating revenue from the K-12 segment.
Till FY16, K-12 contributed 72.49%, higher education segment contributed 11.28% and the early learning business segment contributed 3.21% of consolidated total revenue of the company. The company further plans to expand its leadership in the K-12 market. In order to increase the share of content by CBSE/ICSE schools, it is focusing to develop subject bestsellers and introduce new titles to fill portfolio gaps. The company is also planning to increase its presence in state board markets by acquiring leading regional content houses. Also, it is focusing on being comprehensive education content provider through digital media. To achieve this goal, it has started investing in early stage education companies and education related technology so that it can leverage both the strong content offering and sales and distribution network as these new technology driven offerings capture market share.
Financial Performance 
The company’s consolidated revenues grew at a CAGR of 32.64%, consolidated EBITDA grew at a CAGR of 47.47% and consolidated PAT grew at a CAGR of 33.48% over FY12-16. It delivered RoNW of 7.82%.

Peer Comparison & Valuation
S Chand & Company is valued at an upper price band of Rs 670 with P/E of 39.20x and EPS of Rs 17.09. The company has only one listed peer, i.e. Navneet Industries Limited which is valued at P/E of 25x with EPS of Rs 4.34 and delivered RoNW of 17.73%. Navneet’s consolidated revenue has grown at a CAGR 11.62% and PAT has grown at a CAGR 8.28%.
Our View
As we can see from the financials, the additional growth for the company is at the cost of margins. Margins have been eroding due to higher paper prices and also inability to pass on the cost of customers. Prices in paper industry are soaring up which is affecting EBITDA and PAT margins adversely. As compared to its peer, Navneet Industries, S Chand & Co is lacking in innovation of latest technology through digitization. As dependence on digital media is growing, S Chand & Co which has limited presence in digital space will see contained growth. Also, Navneet Industries has stationery segment as a growing market whereas S Chand & Co is lacking behind in this segment. The education sector currently is growing at a stable rate and competition is intense. In the long run, we expect the company may give returns of about ~10% to its investors which is not so promising. Looking at margins pressure, lower growth prospects and high valuation, we recommend our investors to avoid subscribing to this IPO.

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