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JainMatrix Investments has posted its research note on S Chand IPO which opened for subscription yesterday and has already received full subscription. S Chand IPO rating by JainMatrix Investments is BUY, although the research firm believes the publishing company’s valuations are expensive. Here are important points about the IPO:
- S Chand Ltd (SCL) has a highly seasonal business of their main K-12 business segment with 75% of their sales generated in Q4 every year. This also means seasonality in working capital.
- The valuations look expensive in terms of P/E ratio. Debt is high, with ok margins and low RoE.
- SCL operates in a highly-competitive and fragmented industry. Many of the content providers have strong brand recognition in local markets and long term relationships with schools, school authorities and educational authorities. They also face competition from the govt. National Council of Educational Research and Training (NCERT) and the State Council of Educational Research and Training (SCERT), which publish books for the K-12 market at subsidized costs.
- For the past 2 years, CBSE board has issued an advisory circular advising CBSE affiliated schools to use only NCERT books for all classes. CBSE issued the circulars in response to reports and complaints from parents that schools were asking them to buy books published by private companies. The CBSE books are much cheaper (subsidy) but there is a big difference in quality and content of these.
- A large portion of SCL revenues are derived from titles of their top authors. In FY16, their top 20 authors contributed to 48.9% of revenues. The loss of such authors could adversely affect business.
- SCL has an obligation to acquire the remaining 26% of share capital of Chhaya Prakashani by Nov 2018 which may need to be financed with additional debt.
- SCL may be impacted by the introduction of the GST. However it is likely that after making the operational alignment changes, it may be beneficial for business and ease distribution and pricing.
- The presence of 55 consumer brands sounds daunting. It may be a legacy of M&A. It may be necessary for SCL to simplify branding by merging many and focusing on 5-10 key brands.
- M&A are often risky and SCL needs to ensure success of all acquisitions, and suitable synergy gains.
- The unofficial/ grey market premium for this IPO is in the range of Rs. 160. This is a positive.
Overall Opinion and Recommendation
- India has a very young population that is underpenetrated in terms of education. A lot of govt. focus is already on improving availability and outcomes in K-12 education.
- Education content continues to be an important aspect of K12 education with textbooks, guides and question papers being key elements.
- SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is also aggressively growing across subjects and languages, from central to state boards, and from paper to online distribution. It is capturing innovation by buying good education firms to enhance offerings.
- At a PE of 36.8 TTM, the valuations are expensive. However we feel that debt can be reduced post IPO even as operational revenues gallop forward at 32.6% CAGR.
- Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.
Read the full report on S Chand IPO rating here