S Chand and Company is entering the primary market on Wednesday, 26^th April 2017 to raise Rs. 325 crore via fresh issue of equity shares of Rs.5 each and an offer for sale (OFS) of upto 60.23 lakh equity shares by PE investor Everstone Capital and promoters, both in the price band of Rs.660 to Rs.670 per share. Representing 31.34% of the post issue paid-up share capital, total issue will raise Rs. 729 crore at the upper end, of which OFS portion is Rs.404 crore. Issue closes on Friday, 28^th April and is likely to list on NSE and BSE on 9^th May. 

S Chand and Company, a 70 year old publishing house printing books and study material for K-12 and higher education segments, accounting for 73% and 24% of revenues respectively, has 2 printing facilities in UP and Uttarkhand which meet 85% of its printing requirement. Its distribution network comprise of 4,932 distributors, 838 sales professionals and 62 offices pan India. While company has forayed into digital learning, it is still a very small portion of business (<3% of revenue).

The likes of Wren and Martin (English Grammar) and Shukla Grewal (Accountancy) are among the ~2,000 authors with whom the company has contractual relations. However, revenue generation is highly concentrated among few, as top 20 authors accounted for 49% of FY16 consolidated sales of Rs. 541 crore. EBITDA of Rs. 128 crore was earned in FY16, leading to EBITDA margin of 23.7% while net profit came in at Rs. 47 crore, translating into net margin of 8.6% and EPS of Rs. 17, on equity of Rs.  14.92 crore, adjusted for 73:1 bonus and stock split from Rs 10 to Rs 5, effected in April 2016.

Since company publishes material mainly relevant for schools affiliated to CBSE and ICSE education boards, which begin new academic year in April, almost 75% of its sales are generated in Q4 i.e. Jan-March quarter. Hence, financial results for the first 9 months of the fiscal are quite frail. For 9MFY17, on consolidated revenue of Rs. 151 crore, even at the EBITDA level, company incurred loss, with negative EBITDA of Rs. 84 crore, as net loss swelled to Rs. 88 crore. Like-to-like data for 9M ended Dec 2015 is not presented in the RHP.   

Company has made 3 acquisitions, aggregating Rs. 460 crore, since FY13. Most recent one being 74% buy in East India focused publishing house Chhaya Prakashini for Rs. 170 crore, in Dec 2016. Balance 26% stake in Chhaya will be acquired after 14 Nov 2018, for a consideration based on adjusted operational FY18 EBITDA. To understand dynamics of this acquisition, company has presented proforma FY16 consolidated financials (assuming Chayya acquisition undertaken on 1/4/15), based on which FY16 revenue and EBITDA stood at Rs. 668 crore and Rs. 176 crore respectively (EBITDA margin 26.4%) while net profit was reported at Rs. 67 crore (8.5% margin), leading to EPS of Rs. 19. In FY16, company sold 45.4 million copies (including Chhaya).

As of 31 Dec 16, company’s networth stood at Rs. 506 crore, leading to BVPS of Rs.170 per share. Promoter holding of 58.3% will shrink to 46.7%, post IPO, while PE investor Everstone Capital’s stake of 32.3% will contract to 13.9%. World Bank’s IFC holds 9.40% stake in the company since Nov 2015, and is not participating in the OFS. Fresh issue proceeds of Rs. 150 crore will be used to repay debt taken to fund Chhaya acquisition, while Rs. 105 crore debt of 2 subsidiary companies will also be re-paid. Company’s total consolidated debt of Rs. 418 crore, as of 31-12-16, will reduce to Rs. 163 crore post issue.   

At Rs. 670, company’s market cap will be Rs. 2,325 crore and EV Rs. 2,458 crore. Based on estimated FY17 and FY18 EPS of about Rs. 21 and Rs. 26 respectively (including Chhaya), the PE multiples are 31x and 25x respectively. EV/EBITDA multiples are 14x and 12x for FY17 and FY18 respectively, which are quite rich.

Sole listed peer Navneet Education, with Rs. 1,100 crore topline, split 60:40 between publishing and stationery, is a cash-rich company with market cap of less than Rs. 3,900 crore. Navneet’s publishing business clocks much superior margins of 33%, at the EBIT level (23% blended for the entire company, including single-digit margins of stationery business) while S Chand, which is pure-play publishing, has only 19% EBIT margins. Thus S Chand is not reaping lucrative enough results from its specialized and sole business, despite both the companies having similar topline of about Rs. 600 crore from publishing sales. Moreover, Navneet is shielded from quarterly losses which S Chand suffers from – a big negative. Besides poorer margins (8.6% net margin vs 13.1% for Navneet), S Chand’s IPO valuation is superior to Navneet, with the latter trading at PE of 23x and EV/EBITDA of 13x, on FY17 estimates.

Taking a broader view, the business risk is not low in this case, as many schools have now embarked on developing their own content, as also CBSE board (accounting for a large portion of company’s topline) has recommended that all CBSE affiliated schools use only NCERT books upto class 8. Such risks and similar others in the future can impact business profoundly.

Another point to be highlighted is that companies from the education sector have rarely rewarded investors. Both MT Educare and Career Point drew a lot of investor fancy for their respective issues few years ago, but their fate is out in the open. Very recent issue of CL Educate in March this year also invoked lukewarm response, besides listing at 20% discount and still quoting 13% below IPO price. Thus, education sector has rarely had a good run on the bourses.

To conclude, on expensive valuations, investors can give this IPO a miss.

Disclosure: No Interest.