S Chand And Company Limited (SCHAND.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the S Chand And Company Q2 FY '26 Earnings Conference Call, hosted by PL Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Stuti Beria from PL Capital. Thank you, and over to you, ma'am.

Thank you. On behalf of PL Capital, I welcome you all to the 2Q FY '26 earnings call of S Chand Limited. We have with us the management represented by Mr. Himanshu Gupta, MD; Mr. Saurabh Mittal, CFO; and Mr. Atul Soni, Head Investor Relations, Strategy and M&A. I would now like to hand over the call to the management for opening remarks, after which we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you. Good afternoon, ladies and gentlemen. I'm Himanshu Gupta, the Managing Director of S Chand Company Limited. I would like to welcome you all to our second quarter results conference call for FY '26. And thank you all for taking the time out and joining us here today. Quarter 2 FY '26 was a steady quarter for the School and Higher Education segments in terms of sales on Y-o-Y basis. Do note that the second quarter is the smallest quarter in terms of revenue in the whole year. As guiding quarter 1, there was a shift in the content licensing, AI Datasets revenue from quarter 1 to quarter 2, which led to increased billing in that segment during quarter 2 versus last year. We continued our journey of improvement in terms of delivering one of the lowest working capital metrics for Q2 in the company's history. We remain net debt-free at the end of the quarter, the net cash balance of INR 235 million versus net cash of INR 93 million in quarter 2 FY '25. On the K-12 business front, I'm happy to share that the PDF versions of the new NCERT books have been released and available for Class 4th, 5th, 7th and 8th on the NCERT website. We would wait and watch for physical availability in the market. We expect the full adoption of the new syllabus books for classes K-12 by FY '27 and are fully equipped to utilize this opportunity over the next two sales seasons. We have entered multiple partnerships for content and licensing -- licenses -- licensing, including Allied Books for ICSE books. Discovery, [indiscernible] Kitab, MoneyPrep for financial literacy, SpeEdLabs for JEE and any NEET foundation, et cetera. These various initiatives will help us expand our catalog offering to schools. The digital initiatives, Smartkey and TestCoach continue to move forward with high adoptions and enrollments. Our industry companies also continue to improve and both are profitable in H1 and continue to build and grow the business. With that, I would now request our CFO, Mr. Saurabh Mittal, to apprise us all on the financial performance of the S Chand.

Thank you, sir. Good afternoon, everyone, and thank you for your time. I'm Saurabh Mittal, Group CFO of S Chand Company Limited. Now coming to the numbers. During Q2 FY '26, we delivered consolidated revenues of INR 493 million, up 32% Y-o-Y. There was an EBITDA loss of INR 601 million and a PAT loss of INR 536 million. We saw a reduction in the gross margin percentage during the first half, due to the change in the content licensing revenues versus H1 of FY '25. The pricing in AI Datasets in H1 has resulted -- in H1 FY '25 has resulted in higher gross margin versus H1 FY '26, where pricing was lower, but volumes improved. So, on an absolute basis, we delivered content licensing like AI Datasets revenue of INR 142 million during H1 FY '26 versus INR 160 million in H1 FY '25. The AI Datasets business is evolving and the deal timings may vary quarter-to-quarter. We are working towards making this as a steady business through various initiatives and increasing the number customers to 4 versus 2 in the previous period. With the AI LLM's evolving, the need to train the LLMs on quality verified research and copyright data will continue in the near future. Our large repository of text, illustrations, images, videos, question banks and audio data is in multiple languages will hold us in good state. One of the strongest features of Q2 FY '26 is our continuous focus on working capital metrics, receivable days, inventory days and net working capital days. All of these efforts resulted in S Chand Group becoming net debt free with a net cash balance of INR 235 million versus INR 93 million in the previous year, previous quarter. Do keep in mind that this cash balances in spite of the dividend payment of INR 141 billion in first half itself as compared to INR 105 million, which was paid in Q3 of last year. With this, we are on track to be net debt free for 3 quarters in FY '26 as well. I would like to bring your attention to Slide #7 and #8, which showcases the results of steps taken during the last 5 years, towards building a cost-effective and lower working capital organization with focus on positive cash flows. I would also like to highlight Slides 20 to 25 in our investor presentation where we have compared S Chand on various parameters with leading Pan India publishers. This benchmarking exercise on parameters like EBITDA margins, PAT, receivable days and operating cash flows, showcases our position versus the industry for the benefit of our analyst and investor community. This should also help you in understanding how we are placed within the industry. We've been successful in finding the right balance between revenue growth and maintenance an efficient level of working capital. This helps us generate cash flows to be used in investments, acquisitions, and CapEx. With this, I would like to open the call for questions.

[Operator Instructions] The first question is from the line of Mr. Niteen from Aurum Capital.

Sir, you mentioned last time that we are looking for some acquisitions for inorganic growth. So, is there any progress on that front? And if we have -- are looking for companies, what kind of profile the company will be and which geography or board we are considering, if you can elaborate more on that?

So yes, we've finalized one acquisition, which is in the international curriculum space. I can't share anything beyond that, but this should be completed in Q3.

Okay. Any idea about the amount, quantum of that we'll be spending for this acquisition? And how will we source? Will it be through internal accrual? Or are we going for some debt also?

It's not very large, to be hones. Because the international curriculum we are doing for the first time. And this is -- it's almost around $1.5 million and we might do some part of it as debt, although we have cash, but foreign currency debt is always easier, so.

And my second question is about the NCF. As Himanshu sir mentioned about the books are available now on NCERT in the digital form. So, what kind of impact will it have on our revenue stream? And is there any change in the guidance that we are having either side? So if you can elaborate that.

The guidance remains the same, as we have said earlier, and physical availability of books is still not there, and we are waiting for it. And now after this, more or less, curriculum will be complete of NCERT after the release of these books physically. And we expect that then the market will definitely look forward to get -- because right now, the market is confused, because NCERT released their books in a piecemeal basis, not in the full stack basis. So, this time, after doing this, the market, I think, would be not that confused as well last year. So they will look in how these new syllabus has come out and the physical NCERT books is also out. So, market would be clear in that regard.

Got it. So, the revenue and EBITDA guidance remains the same as of now?

Yes. Yes.

Okay. And my third question is about the raw material pricing. How do you see that? Where it is heading? And will there be any impact on our expenses ahead, when we are doing heavy lifting towards the third -- towards the end of third quarter and fourth quarter.

So raw materials remains largely the same only. There's not much of, I would say, difference in price, where it is a little lower only than last year. So we are, I would say, lower by 5% or below that. But there is a GST impact, because GST on paper was earlier 12%, and now it has become 18%. So the price softening of the impact has been covered by the GST now. So, there will be no positive impact on lower pricing. It's 18% GST.

18% GST. Okay. Got it.

Yes. Before it was 12%. Now it is 18%.

[Operator Instructions] Next question is from the line of Mr. Pranit, an individual investor.

Sir, I was wondering in terms of understanding the licensing arrangement. So, we do content licensing like -- could you explain structure on how you are build for this? Because as far as I understand it, licensing, you told it's a lumpy business. Could you explain why is this lumpy?

Yes, because these are deals that happen at different points of time. Okay? It depends upon the customer's requirement. So, between various customers, this keeps -- the requirement keeps changing and the content, of course, that also keeps changing. And these are -- some of them are -- some of them are perpetual deals, some of them are period deals. So, that keeps changing. So it's a new business. And of course, there is no quarter-to-quarter trajectory as of now.

Understood. So what percentage of the overall deals would be for perpetual versus past limited duration?

So for last year, I would say it was 50-50. But this year, it's gone to 25% being renewal ones and 75% being perpetual.

Understood. And we also mentioned that gross margin impact because of new licensing other from -- you expanded just to be on your own content to other third parties licensing that content also. Could you explain what's the business model strategy behind that?

Strategy is simple here. I mean, if a customer has a requirement, I mean, he wants us to arrange for that. So, we become the single source for them to get content. So, if they want something in a single language, no single publisher would have that much of content. So, we go out and source from multiple sources and provide them as a one-stop solution. So, that's where it is. Of course, since we have to pass substantial percentage of it down the line. So there, of course, our margins would be lower on third-party content.

Would you be able to give a number -- difference between, let's say, your own content gross margin versus for licensing specifically versus a third-party?

Sorry, I can't share that on a call.

I understood. Got it. And in terms of viability, sustainability of the licensing business over the long term, what are your remarks on that? Because you also mentioned the aspect of limited time deals also, right? Could you explain how might it work going -- in the 4 years down the line? Will these players stop licensing? Or will there be a perpetual use for this licensing?

So, that was like asking me, how relevant would AI be 4 years down the line? I think, nobody can answer that question as of now. But what we have understood is that, the models continue to involve the kind of data that is required. But the requirement continues to change. So, what we licensed probably last year was more of STEM. This year, is more on languages, probably text -- sorry, images will be more important, maybe the videos become more relevant at some point of time. So that, the models are continuing to evolve. So -- and between different technology companies that continues to change in what -- how -- what specialization they are looking at for their own models. So, I think, there is a trajectory there. And of course, we are looking at now improving our datasets, making them more relevant so that the models can be trained better. So, we are also investing in upgrading our datasets to final datasets also. So that's a different thing that we are doing. It doesn't require too much of expenditure, but we have to look to the next level. And there are -- I mean, there would be a lot of customers that we've not reached out to so far. So, to reach out to them, of course, we need a different level of data.

Understood. And in terms of client concentration, how many clients do you have for this particular business plan?

Last year, we had 2. This year we've got 4, and we are speaking to the 5th one also.

Understood. Got it. So -- and regarding the -- so the growth rate of this particular business, we had high growth rates that we're expecting. So will we expect to continue at the same level for the next year? Or could you give some more clarity on that?

So last year, we did about INR 19.5 crores. This year, we're looking at about INR 25 crores as of now. So, that's where we stand. This number could go anywhere. One single deal is about $1 million. So I mean, it can really change. The INR 25 crores can become INR 35 crores at any point of time. So -- we'll continue to having conversations, but of course, once you sign on the dotted line is only when you confirm it.

Understood. And one more thing. You also mentioned your competitors' financials on the presentation, right? So, I was wondering in terms of the PAT margins, your competitor one has significantly higher profitability margins compared to S Chand. I was wondering why is that the case?

So, we will not be able to comment on other players' margins. This is just a reference point. You can see out of the seven players mentioned, only one has higher, I think, margins. Rest of the others are below. But we would -- I mean, it's a different company. We don't have access to their internals. See, the product mix, of course, depends upon the product mix, what segment, the size of that business and whether they are growing or not. So, I think the growth rate in that, yes, depends upon a lot of them.

So, you won't be able to comment specifically what will be happening...

Yes. I mean, I think as a listed entity, we slightly have some higher costs, to be honest. Again, location also of where the business is also impacts the costs. So, a lots of factors, I would say. I mean, one-to-one comparison may not be there, maybe -- and plus, of course, we do have higher education with slightly a lower margin business as compared to -- so again, product mix would differentiate that. Following, we try for the higher margin.

Understood. Got it. So, in terms of the future growth forward, what do you expect to change any substantial like growth metrics with the changing dynamics? Because, previously, you mentioned that it's coming after a long delay. So for the next 3 years' guidance, what -- when do you expect -- what kind of growth do you expect in your Publishing division?

Yes. To be honest, we are focusing more on making this more sustainable and cash-generating than just revenue growth, right? That's something that has really done well for us. From the last 5 years, we've been able to generate almost INR 100 crores of operating cash flows. Over the last 5 years. I mean, if you look at the industry, I mean, month, we put in the 10 players all together, consolidated they have not been to generate so much of money. So, I think, our strategy continues to be conservative growth, but not very aggressive. So, I mean, we will not push too much to ensure that, we are only growing revenues and not the bottom line. Our focus is to ensure bottom line and cash flows are important.

Understood. So, can we expect the INR 100 crores mark to be in a steady state going forward? So, can we expect the OCF to remain at -- around the INR 100 crores?

We don't give a guidance on OCF.

Yes, we -- I mean, and regards to OCF, is something that we'll continue to try to do.

That is something what we have done successfully in the past couple of years as well. But to give it as a guidance, I don't think will be appropriate at this point of time.

So, what could be the factors that could affect the OCF going forward?

No, I don't see that challenge. I think that number should continue to be there.

[Operator Instructions] The next question is from the line of Mr. Diwakar Rana from Prudent Equity.

Sir, a few months back, you have hived off one manufacturing unit into our step-down subsidiary. So, what was the rationale behind this?