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S.Chand IPO (Indian Publisher) - IPO Date (26 - 28th April, 2016)

Leader in the Indian market; tough competition from regional and global publishers

S.Chand is a leading Indian education content company that delivers content solutions and services across the education lifecycle with focus on CBSE/ICSE schools in the K12 segment. The company operates in three segments 1) K-12 education (c.73% of FY16 sales) 2) Higher Education (c.24%) and 3) Early Learning segments (3%) with strong presence in CBSE/ICSE affiliated schools. In FY2016, the company sold c.35.4 million copies (FY16 Av. Price: ₹150) of a total of 11,114 titles. The company witnessed a top line growth of c.13% in FY16. This is way below the K-12 content education 2011-15 CAGR of 19.3%. With global publishers such as Pearson, Oxford, Cambridge and HarperCollins eyeing to increase market share in Indian K-12 and Higher Education market, we believe S.Chand may face tough competition in domestic market.

Acquisition of Chhaya Prakashani Pvt Ltd (CHPL) - a bargain buy for S.Chand

In December 2016, S.Chand acquired 74% stake in CHPL for a total consideration of ₹1,700mm at LTM EBITDA multiple of 4.6x (EV: c.₹ 2,300mm) which in our view is a bargain buy for the company. This acquisition is expected to play a vital role in the future growth of S.Chand. CHPL has a strong presence in east India with long term contractual relationship with c.24 authors. CHPL has witnessed at attractive top line CAGR growth of 51% in the last 5 years. In FY16 the company revenue grew at a whopping 82.3% (vs. S.Chand standalone top line growth of a meagre 12.8%). CHPL is one-quarter the size of S.Chand in terms of revenue (CHPL FY16 Sales: ₹1.3bn vs. S.Chand FY16 Sales: ₹5.4bn) and 2/3rd in terms of PAT (CHPL FY16 Net Income: ₹302mm vs. S.Chand FY16 Net Income: ₹466mm). The acquisition also comes to the rescue of Everstone (for its partial exit from S.Chand) as we believe without this acquisition due to low teen top line growth and low PAT margins, S.Chand may not have been priced at 660-670 range leading to a below par exit for PE investor. (XIRR: 26.5% on an investment of ₹2.6bn at different intervals since Sept-12, assuming Everstone exit all its shareholding at an upper price band of 670 on listing).

Highly cyclical business with revenue and cash flow visibility in the fourth quarter

The content and publishing business is highly cyclical in nature. The company receives majority of the orders in Jan - March quarter that is primarily the reason for its high working capital requirement. The company had a receivable turnover ratio of 1.4x in FY16 (ex. CHPL) and a cash conversion of 271 days. The high working capital requirement may lead to negative FCFF for S.Chand in the near term. We believe after debt repayment of ₹2.4bn from the proceeds of fresh issue, the remaining proceeds of ₹600mm will be used to only fund working capital.

Valuation: Richly valued; still has potential to provide good returns in the long term

We believe the stock is richly valued and need a lot of factors such as 1) successful integration of CHPL 2) continued high top line growth for CHPL (similar to FY15 and FY16) 3) low penetration of digitization in the content / publishing business and 4) sustained gross high margins by controlling raw material costs; to work in S.Chand favor to sustain such a valuation. We have a target price of 750 on the stock which implied FY18 EBITDA multiple of 11.6x and P/E of 24.2x. The stock may provide good returns to long term investor if the above four risks are appropriately mitigated and working capital requirements are reduced in the future.

Key catalyst for S.Chand performance post listing

Q: Can the acquisition of CHPL improve the operational efficiency for S.Chand?

In our view, the acquisition of CHPL may turn out to be turnaround story for otherwise a lagging S.Chand performance. Although the acquisition is not going to provide S.Chand a marquee name in the international market, as CHPL is a regional publisher with focus on K-12 segment in the eastern region of India, still the acquisition will provide four triggers to the S.Chand story 1) better growth prospects 2) strengthens the sales and distribution network of S.Chand in eastern India. 3) Entry into state board curriculum as S.Chand itself is primarily a CSBE/ICSE board focused publisher and 4) the much need reduction in working capital and generation of FCF.

Trigger 1

CHPL has witnessed an aggressive growth in top line driven by continual focus on low and mid segment market in eastern India. The average price of printed copies of titles sold by Chhaya is c.₹130 which is about 15% lower than average price of printed copies sold by S.Chand in the K-12 segment. Secondly the focus of CHPL is state boards where the syllabus changes more frequently vs. CBSE/ICSE Boards. The low price range of copies of titles has helped CHPL to witness a growth of 77% / 82% in FY15 / FY16. We expect the growth in top line to continue in the near future and have projected a growth of 25% in the revenues of CHPL in FY20.

Trigger 2

CHPL is a state board focused regional publisher in eastern India. The acquisition of CHPL provides better sales and distribution network to the company as it results in the addition of c.750 distributors and dealers into the S.Chand distribution network. With this acquisition the total sales and distribution network consists of 5650+ distributors and dealers across India. We also believe the acquisition will provide S.Chand with an opportunity to push its own S.Chand brand publication in the CBSE/ICSE board schools in the eastern parts of the country. We also believe that S.Chand will also customize its own products to fully ripe the benefits of the distribution network of CHPL.

Trigger 3

The acquisition provides S.Chand an entry into an unexplored territory i.e. the entry to state boards' schools and students. India has c. 1.5 millions schools which are affiliated to state board. In eastern India itself there are c.250K state board schools. The acquisition of CHPL provides an easy access to the state board schools without investing much on content. With competition in private / private aided schools intensifying after global publishers such as Pearson (associated with c. 10K schools in India providing different services), Oxford (5K+ schools) and Cambridge (c.2.5K schools) entered into India with deep pockets, the strategy to penetrate in the state board affiliated schools is definitely going to help S.Chand in the long run. We believe no global publisher will be interested in State Board affiliated schools primarily due to a small ticket size per copy.

Trigger 4

S.Chand has a highly cyclical business 1) cash conversion cycle of 271 days in FY16 and 2) c.10% of its total realized revenue was tied up in working capital in FY16. On the contrary, CHPL has negative working capital (WC) requirements. Although we would like to understand from the management about the reason for this as both the businesses are similar in nature in the next management call. Based on our estimates we believe that acquisition of CHPL will reduce the cash conversion cycle to 200 days (25% improvement vs. FY16) by FY20. In addition to reducing the WC for S.Chand, we also believe that by FY20, CHPL will contribute significantly in generation of positive FCF for S.Chand by FY20. Based on our estimates the consolidated entity will generate FCF of ₹600+ mm in FY20 while S.Chand (standalone) will be generating negative FCF only.

Q2: Can digitization and online content development be a threat for S.Chand?

In our view, disruption may prove as a blessing in disguising for S.Chand as the company is already prepared to compete with the Edtech startups and has made some good investments in both the K-12 segment and Higher education segment already. The company has developed in-house solutions in K-12 segment such as multimedia content and assessment solutions, interactive learning platform provided on handheld devices, and a mobile application that provides interactive videos covering courses such as physics, chemistry and biology. In addition to this, S.Chand has invested in disruptive technology companies in the K-12 and higher education segment to stay upbeat. We believe the company is on the right track to compete and outperform the Ed-tech startup ecosystem.

Q3: Did S.Chand bought CHPL at a bargain price?

We strongly believe that S.Chand bought CHPL at a bargain price primarily due to two reasons 1) CHPL has a strong enough and established business model and 2) at a price band of ₹670 S.Chand, Everstone (PE investor) in the company is making a partial exit at FY16/ FY17EBITDA multiple of 20.0x / 17.8x on a standalone basis and 15.4x / 11.6x on a consolidated basis.

S.Chand bought CHPL for a consideration of ₹1,700mm to purchase a 74% stake in the target at FY16 EBITDA multiple of 4.6x (Implied EV: c ₹2.3bn). CHPL is a regional brand in the publishing sector but still 1) for a top line growth that the CHPL witnessed in the last two years (77%/ 82%), 2) asset light model, 3) strong sales and distribution network in the eastern regions of India and most importantly 4) negative working capital requirements, we believe it is a real bargain buy for S.Chand. In addition to the current 74% stake S.Chand also has an option to buy the remaining 26% in CHPL by FY18 provided the target is able to achieve a certain agreed EBITDA.

IFC and Everstone Capital acquired stake in November, 2015 in the company at a share price of ₹392 per share. The average acquisition price for Everstone Capital for c. 32% stake in S.Chand is ₹270 per share. The PE fund is offloading 50% of its stake (4.8mm share) at a upper price band of ₹670 per share which implies a return of 70% for the PE fund in just 18 months after it participated in the last round in November, 2015. The XIRR generated for Everstone Capital (assuming the PE fund offload its entire stake in the IPO) is 26.5% on an investment of ₹2.6bn.

S.Chand - Business Overview

S.Chand is a leading Indian Education content company and delivers content, solutions and services across the education lifecycle through K-12, higher education and early learning segments. The company offers 53 consumer brands across knowledge products and services including S. Chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor. In December 2016, the company acquired 74% of the outstanding share capital of Chhaya Prakashani Private Limited (CHPL), and now added four Chhaya brands including Chhaya and IPP after the acquisition to its existing brand of 53 consumer brands. In FY16, the company sold 35.47 million copies of a total of 11,144 titles, while Chhaya sold 9.88 million copies of 433 titles. The top ten best-selling titles accounted for 2.96 mm copies and 15 of the authors have each sold over one million copies of their titles during the last five fiscal years.

· Contractual Relationships

The company has long term contractual relationship with at least 1,958 authors with contract terms of five years as of FY16. Additionally CHPL has contractual relationships with at least 24 authors for next five year.

· Sales and Distribution (S&D) Network

The company has strong sales and distribution network that currently consists of 4,907 distributors and dealers, add to it a sales team of 697 in-house professionals working across 58 branches and marketing offices across India.

The acquisition of Chhaya further strengthens the sales and distribution network primarily in the eastern region of India where S.Chand itself has less penetration. In December 2016, through CHPL acquisition the company added additional 746 distributors and dealers to its already strong S&D network.

· Supply Chain, procurement and logistics

The company has a strong supply chain network to drive sales and the supply chain network has been efficiently rationalized by integrating procurement, manufacturing and logistics capabilities. In FY2016, about 85% of the printing requirements of were met by the facilities located in Sahibabad (operational since 2016) and Rudrapur. The print facilities s and distribution network is well supported by 42 warehouses in 19 states in India that allows pan-India coverage to the company. In FY15 and FY16, S.Chand did a capital expenditure of ₹454 million to setup its printing facility in Sahibabad. The expansion enhanced the printing capacity from 15 tons of paper per day in FY14 to 55 tons of paper per day in FY16.

Shareholding Pattern - Pre / Post IPO

The promoters of the company (including promoter group) owns 58.3% stake (Pre-IPO) in the company. The promoters are offloading 11.1% stake in the company in this IPO. Everstone invested ₹ 2,600mm in the company from Sep-12 to Nov-15 and owned 32.3% (pre-IPO) that may reduce to 14% as the PE fund plans to offload 4.8mm shares in the IPO process. S.Chand also plans to raise fresh capital of ₹ 3,000mm, at an upper price band of ₹ 670.

K-12 Segment (72% of sales in FY16)

In this segment, the company offers K-12 textbooks, reference materials and hybrid content products with strong presence in CBSE/ICSE Boards. In order to cater to State Boards and low income K-12 segment students, the company acquired a couple of regional brands including Madhubun and Vikas in FY13 to boost its Hindi language titles and in FY15 it acquired Saraswati brand to strength its arts and crafts titles. These brands have played an important role in diversifying the S.Chand K-12 segment top-line which has grown at a CAGR of 46.8% from FY12-16. In FY16, the company sold 26.8 million books in K-12 segment. The acquisition of CHPL strengthens the position of the company in the eastern region of India as CHPL is focused in eastern India and witnessed a top line growth of 77% / 82% in FY15/ FY16.

Higher Education Segment (24% of sales in FY16)

The higher education segment primarily operates in two sub-segments 1) Test Preparation 2) College and University / Technical and Professional. The company printed content and hybrid content products in higher education.

· Test Preparation: The Company provided material for competitive exams, including entrance examinations and examinations required for government positions. The company has made a conscious effort to complement its printed content with digital learning solutions and online assessment tools. Key brands include S Chand, Ignitor, Testbook and Online Tyari. In FY16, the printed 109 titles, and sold 1.98 million test preparation books.

· College and University / Technical and Professional: The Company provides students, instructors and institutions with content for college and university courses in accounting, economics, physics and medicine, as well as customized content for distance learning. Key brands include S Chand and Vikas. In FY16, the company sold 920 titles and over 2.86 million books in our college and university/technical and professional business.

Early Learning Segment (3% of sales in FY16)

The early learning business segment caters to youngest customer market (0-4 year age kids) and exposes them to S.Chand products and services at an early age. In our view it is an excellent strategic segment for the company as it creates a brand recall for S.Chand in the mind of the kids at an early age. Key brands include:

· BPI: children's books, educative board games, activity packs, puzzles and stationery

· Smartivity: offers activity based 'experimental' learning, including 'do-it-yourself' kits and augmented reality enabled products

· RiseKids: operates seven pre-school centers in the National Capital Region

Key future trends

The company has identified the signals of paradigm shift in the Indian education industry and has already initiated its focus towards digital and technology platform to strengthen both its core segments of K-12 market and higher education. In the last couple of years the company has started to provide hybrid solutions to supplement its already strong print content portfolio. The initiative has helped the company to create an extensive library of digital content (offered over 7,700 hours of e-content till FY16 end). The company provides multimedia solution called Destination Success that can be customized to provide software solutions for schools and can be bundle it with hardware offerings if required. The company also provides Edtech platforms such as Intellitab and Mystudygear for uniform learning in the classroom and during after class hours and a LMS platform Ignitor to institutions to enhance teacher student productivity. In our view, these solutions if pursued with diligence can bring excellent results for the company and will also let S.Chand compete with the new generation startups in the education sector. In the higher education market the company has already invested in couple of companies (Online Tyari and Testbook) to capture the growth in the online test prep market.

Digital Platforms of S.Chand

K-12 Segment

· Destination Success: Classroom solution that offers rich multimedia content and assessment solutions in 642 schools in India and 10 schools in the Middle East (June, 2016).

· Intellitab: Interactive learning platform provided on handheld devices including practice material and tests that enables teachers to carry out assessments easily and quickly, and provides analytics regarding students' performance.

· Mystudygear: Mobile application that provides interactive videos covering courses such as physics, chemistry and biology. The videos can be accessed by the students after scanning the QR codes provided in the print content. Students can also attempt the previous year board examinations through this application. The application had c.135K downloads till October, 2016

Apart from this to enhance its digital offerings the company has also invested in early stage education companies. The two investments and the progress of the companies is provided below:

· IGNITOR: Mobile learning platform helping educational institutes deliver courses on mobile devices and tablets. We intend to expand Ignitor's distribution footprint by leveraging the strength of our K-12 relationships. Till October, 2016, Ignitor had 54,284 users and relationship with 40 content providers

· Flipclass: offers a technology platform connecting students to tutors which provides an adaptive assessment platform to assist tutors in enhancing students' learning experience. The marketplace model of Flipclass provides the company access to tutors and learners on a single platform.

Higher Education Segment

In this digitization era, most of the exams are moving online, the test preparation market has an enhanced demand for online content and assessment solutions. We believe in the higher education market also the company is well prepared to meet the challenges faced by digitization and has already taken steps in the right direction to compete with other upcoming startups in the online test prep market. The company has made investment in two early stage startups to develop its skill set in the online test preparation market.

· Testbook: Web and mobile platform that provides online preparation for competitive exams, such as GATE and government jobs. Till September, 2016, Testbook had 819,698 users (including registered users, paid users and monthly users).

· Online Tyari: Mobile based test preparation platform that offers derivative content of partner publishers, teachers and educational organizations. The platform provides students with content to prepare for competitive exams, such as GATE and government jobs, including IAS, NDA and defence related jobs. The platform also enables students to buy and read content in a variety of languages which downloads on to the user's device immediately after the user has paid for it.

Financial Overview

Key highlights

· We expect 16.2% revenue CAGR over FY17-20E driven by state board school penetration (aided by acquisition of CHPL) and digital content business.

· We expect EBITDA to post 15.3% CAGR and PAT to post 31.3% CAGR over FY17-20E with a PAT margin expansion of 440bps over FY17-20E to 16.0% primarily driven by reduction in the debt of the company.

· We expect steady improvement in operating cash flow and free cash flow to the firm (aided by acquisition of CHPL). We also expect the company to post positive levered FCF (from FY19) and a FCF margin of c.5.0% in FY20.

· We expect return ratios to improve over the period; RoE is expected to improve from 12.3% in FY17 to 21% in FY20E primarily due to operational efficiencies and decline in debt of the company after the proceeds from the fresh capital issue are received by the company.

· We also expect the cash conversion cycle of the company to improve from 271 days in FY17 (S.Chand only) to 200 days in FY20E aided by acquisition of CHPL (that has a negative working capital).


We believe the stock is richly valued and need a lot of factors such as 1) successful integration of CHPL 2) continued high top line growth for CHPL (similar to FY15 and FY16) 3) low penetration of digitization in the content / publishing business and 4) sustained gross high margins by controlling raw material costs; to work in S.Chand favor to sustain such a valuation. We have a target price of 750 on the stock which implied FY18 EBITDA multiple of 11.6x and P/E of 24.2x. The stock may provide good returns to long term investor if the above four risks are appropriately mitigated and working capital requirements are reduced in the future.

In Dec 2016, S.Chand acquired CHPL for ₹1,700mm at an EBITDA multiple of 4.6x. We believe that this acquisition is a turnaround story for S.Chand as CHPL is a mid market publisher with focus on eastern region of the country. The company has witnessed 82% /77% growth in FY16 / FY15. We believe CHPL will contribute c.42% to S.Chand revenues by FY2020

Additional disclosure: The stock is yet to list on Indian Stock exchange