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

Ladies and gentlemen, good day, and welcome to the S Chand and Company Limited Q3 FY '20 Earnings Conference Call, hosted by Prabhudas Lilladher Private Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Jinesh Joshi from Prabhudas Lilladher. Thank you, and over to you, sir.

Thank you. On behalf of Prabhudas Lilladher, I welcome you all to the 3Q FY '20 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 management for opening remarks, after which we can open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Jinesh. Good afternoon, ladies and gentlemen. I'm Himanshu Gupta, the Managing Director of S Chand Company Limited. I would like to welcome you on to our third quarter and 9 months period results conference call for FY 2020. And thank you all for taking the time out and joining us here today. In Q3 last year, we embarked upon S Chand 3.0, which was to focus on operational and working capital efficiency. This involved focusing on better terms of trade with our channel partners, rationalizing costs, focusing on our inventory optimization, improving use of data for business and achieving timely payment cycles. It gives us great satisfaction in saying that we have successfully done the implementation which has resulted in us achieving operational cash flows of almost INR 1,400 million over the last 4 quarters. On back of our focus on S Chand 3.0 implementation, we have turned operating cash flow positive during the first 9 months of FY '20 period. Operating cash flow for 9 months FY '20 stood at positive INR 96 million versus loss of INR 920 million in the same period last year. This represents an improvement of INR 1,016 million in operating cash flow over last year, which is largely on account of improved collection cycles, optimum inventories, rationalized costs during the non-peak season and better working capital management. Q3, we are focused on a few aspects that is engagement with schools for existing and new products, including monthly term books; engaging with channel partner for clear defined terms and segment of accounts; production planning, considering the impending NEP, the National Education Policy; and B2C marketing of India's most affordable learning app, Learnflix. We have launched a marketing campaign for Learnflix with our brand ambassador Sourav Ganguly in January, with a full page advertisement in Times of India Delhi edition and event in Kolkata. I'm happy to report that Learnflix was already downloaded over 5,000 times, and we are looking at adoption in the coming years in schools by over 100,000 students in coming months. We already have a few schools signed through our B2B campaigns. Mylestone, our school curriculum business, has already signed about 300 schools for the next academic year, and we are looking to a stronger year end in this vertical. Test Coach, our mobile mock exam app, has seen strong 5x spike in downloads and installation post a change in our marketing strategy. We feel that these products and services will be the future growth drivers for the group in the coming years. With that, I would now request our CFO, Mr. Saurabh Mittal to apprise us of all the financial performance of S Chand in quarter 3 of FY 2020.

Thank you, sir. Good afternoon, everyone, and thank you for your time. I'm Saurabh Mittal, the CFO of S Chand. During the first 9 months of this year, our consolidated operating revenues came higher at -- by 34% at INR 975 million versus INR 729 million in the same period last year. Our EBITDA loss has reduced by 16% over the corresponding period. And our net loss has reduced by 8% over the same period, adjusted for some tax adjustment related to price change. Specifically on cost rationalization, our fixed overheads, net of provision for expected credit loss and adjusted for lease payments are lower by INR 500 million from INR 2,305 million to INR 1,705 million for the same period last year. We are well ahead of the guided cost rationalization targets that we had set for ourselves under the S Chand 3.0 plan. We have also seen a huge improvement in receivables, inventory and net working capital levels in the company. Most of the levels stand at a historic low in comparison to the previous years. On the net receivables front and NWC front, we have improved these levels by approximately 2x than what we historically have done over the 9-month period. This speaks about our unrelenting focus on these metrics for the company. More specifically, we have seen strongest collection in working capital parameters in the past 5 years. We have seen a reduction of 209 days in receivables for 9 months ended FY '20. And historically, it's been about 120 to 140 days. This is the lowest level receivable achieved in the last few years, details of which can be shared in the investor -- can be seen in the investor presentation, Slide 6 and 7. On the inventory front, our efforts to enter the season with optimal inventory levels -- levels of inventory to essentially measure working capital in the company has borne fruit. We have entered the peak season with 16% lower inventories versus last year, lower by almost INR 460 million. This is one of the lowest inventory levels that we have seen in the past few years this peak -- while entering our peak season and impending the New Education Policy. On the net working capital front, we've reduced net working capital by 133 days, which has been historically reduced by about 30 to 70 days. So this is also 2x the normal reduction. On the debt front, our gross debt and net debt stood at INR 2,247 million and INR 2,075 million, respectively. We are at a comfortable debt equity of 0.25, and we expect debt levels to reduce going ahead on the back of higher free cash flow generation from the business. Do note that our working capital debt stands at a much lower of INR 1,260 million versus INR 1,924 million at the end of Q3 FY '19 and INR 1,409 million at the end Q4 FY '19, a reduction of INR 664 million versus the same period last year and INR 149 million versus March last year. We are targeting our net debt to be at least 30% lower than last year on the back of increased cash flows. We look firmly on track to deliver much better operating cash flows for the year than our guided 50% of EBITDA conversion rate. With this, I would like to open the call for your questions. Thank you.

Shall we begin the Q&A session?

Yes.

Yes, we can go ahead with it.

[Operator Instructions] We have a first question from the line of [ Piyush Chadda ].

Our peak revenue, just before the IPO, was around 790...

Sir, I'm sorry to interrupt, your voice is echoing. Please use the handset while asking the questions.

Can you hear me now?

Yes.

Yes, a little better.

Okay. Our peak revenue before the IPO was around INR 800 crores, INR 795 crores to be exact. After we go through all of the measures that we are taking to rationalize working capital and remove old stock from the system, what do we expect our PR annual revenue to be like, I mean, just in terms of order of magnitude?

So just to correct you, the peak revenue post the IPO was INR 79 -- INR 795 crores, pre the IPO was around, I think, INR 545 crores for FY '16. '17, I think we were at INR 674 crores. So -- see normalized for -- so the normalized revenue for last year, if we don't take into account the onetime provision, the incremental provisions, would have been around INR 620 crores. And we feel for the level of working capital efficiency that we want to work with which will generate free cash flows, the -- for this year should be in the range of between INR 650 crores and -- yes, so it will be in that range between INR 650 crores and INR 700 crores. And that's normal revenue that we are targeting.

And this would be -- is this a number that can grow at between 8% to 15% a year?

Our guidance has largely been 10% -- 10% to 11% for this period till the NEP comes. And post NEP, we may see a double-digit in the higher teens because then for 2, 3 years, we would have a visibility where all the old books would get obsolete. So there you would have a higher growth for 2, 3 years.

Okay. And in terms of the free cash flow that we generate, would the priority be in paying down debt or would the priority be in investing in the electronic and e-commerce forms of education that you are looking up?

Two -- yes, so we've got 3 -- 2, 3 priorities, of course. The first being, of course, is to reduce debt immediately as far as possible because the investments in digital since we are largely B2B player would not be substantial in the e-learning business. However, of course, we were also looking to pay some dividend out of whatever profits that we would generate. So that's also one of the key priorities because last year we were unable to do that, and we feel this year we should be able to pay dividends from profits also.

Okay. So the priority would be: One, reduce debt; two, pay a dividend; and then look at fresh investments in the business.

[Operator Instructions] That was [ Piyush Chadda ] from [ Serendib Investments ] [Operator Instructions] We have next question from the line of Deepak Poddar from Sapphire Capital.

So sir, can you throw some light on your Learnflix? So currently, what percentage -- I think it's very small of your total business, how big can that be? Yes. So some though process on Learnflix would help.

So I would like to tell you that Learnflix is -- we are not the first player in the market to launch a learning app, a personalized learning app. Yes, there are bigger players than, I would say, which have a bigger marketing budget, bigger revenue than us. But the difference between us is that the pricing today of, if you see, a personalized learning app varies from INR 20,000 per student per class per year and ranging up to INR 60,000 or INR 70,000. So that is the price range. And we have priced Learnflix very affordably between INR 2,000 to INR 2,500 per student per class. And we believe the B2B2C segment, which is right now completely unexplored because of the high price point of these players, and we feel that there is -- the strong point of this -- our company where we have an access to close to 40,000 schools that we go to. And we believe in the coming months, we will be giving more demos and more presentation to the schools to garner more subscribers through the school, plus B2C channel is definitely available. So we believe the -- our strategy of affordable app with targeting B2B2C segment would be different than the others. And it is just we believe that we want to penetrate and seize options in the coming months, up to 100,000 adoptions even by, I would say, the end of third quarter. And but it will only -- we will only come to know about all these things in a much better light after, I would say, a couple of months because right now the exams are going on in CBSE schools. We are promoting our products. But I think by April or May, we will be able to guide the investors better. In our next Q4 presentation, we will be able to guide you better with the numbers due to Learnflix. But the response from the market and the feedback from the customers is quite positive.

Okay. And like you mentioned about 1 lakh downloads. So how does that translate to revenue, like subscription?

We're talking about 100,000 paid subscribers.

So you're talking about 1 lakh paid subscribers?

Sorry, basically in the next 2, 3 -- next 3, 4 months, we are looking at 100,000 downloads around 20,000 to 25,000 paid subscribers. And then we will be able to guide you better after that, what is the strategy going forward. Because 1 paid subscriber will pay us anything between INR 1,200 to INR 1,500 per paid subscriber.

The revenue would not be substantial. It will be about INR 3 crores, INR 3.5 crores.

But it will be a good push in the learning -- digital area.

So just to add to what Himanshu is saying, this is a large segment of personalized learning which is now delivering. And thanks to multiple players, there's a huge opportunity in this. And we believe that being a credible company with top-quality content, we -- at an affordable price, we have a very strong case, and we are going -- using the existing network of schools and channel partners, and we're leveraging that to penetrate into more and more schools and hence reach more and more students.

Okay. So like, do you seize at a big opportunity over next 3, 4 years, this app? Or -- so how do you see that?

Yes. Yes, so I think if you look at -- this is one of the big trends in education, primarily fueled by the ecosystem. If you see the mobile devices, smartphones and internet penetration has really improved. And because of that, the usage of mobile phone and usage of internet by kids as well as teachers has also improved. If you look at the KPMG Score, mobile search has grown 3x in last year, video consumption for education has grown 4x. So there is a usage trend. There are user habits which are changing, and we want to bank upon those trends. And thanks to many players in the market, the category is also getting created because of all the marketing noise which has got created.

See, if you see the largest player in the market, like they are sponsoring the Indian cricket team also now, if you see that. And the valuations are in the $8 billion range. So there are a lot of now new investments in the EdTech, which is coming in, which is pouring in. So we always thought that why -- when we are sitting on such a large content repository that we have built over the last 8 decades in S Chand, why don't we also be in this game? Why should we be left out? And we believe that in the B2B2C category, where there are so many children going to schools, if the school is adopting our app and that the student has to use it, and the teacher can also send homework, assignments, tests through that app. So it's to a two-way communication from the school, from the teachers to the student and the student to the teacher. So we believe that in the future, this is what is going to be a more lucrative, I would say, business. Print will always remain, print will be there. But this is also one side of the business that we now believe has a huge potential.

Fair enough. And my second question is, you mentioned that this year we were looking at INR 650 crores, INR 700 crores, kind of a top line rate.

Right, right.

Right. And in terms of margins, you have earlier guided, I think, around 20%, 22%. So are we sticking to that FY '20 margin?

For average fee, we guided around 18% to 20%. Yes, so we still -- we'll stick to that.

[Operator Instructions] We have next question from the line of [ Piyush Kay ] from [ JM Financial ].

Sir, just wanted to know that about the...

I'm sorry, we're not able to hear you.

Can you please speak a little louder?

Are you able to hear me now?

Yes, please.

Sir, just wanted to inquire about this digital learning what you were talking about. We have several competition over there, like that Byju is there. So just wanted to know what is the mode we have or what is different what we are giving to the customers that they would prefer our app instead of the other competition?

So let me say, in this category, if you look at the school segment, there are, I mean, 300 million students. So if you -- even if you look at top 1 lakh schools, which are used to some kind of digital penetration using digital smart board and 1,000 students per school, there are 10 crore students which are there in that market. So I mean, I will not be rather bothered about the competition. So as of now, I think there is a need for category creation. So even if there are 2, 3 players, it's a good thing for the category. Second, I think our USP here or our value proposition is very clear and strong. We are saying we are giving top-quality content product from a credible company at a very affordable price. So in addition to that, we also have extra stuff like e-books from top authors, which only we can give. So in a way, Learnflix name wheels just -- it means actually Netflix for education. So we are providing everything that a student needs, right from e-books to digital content to assessments to [indiscernible] to remedial in one single path at an extremely affordable price, which is like INR 2,000 to INR 2,500. So I think that's a very strong proposition. And second, I think our route to the market is different from the existing B2C players. Our route to the market is leveraging our existing network of schools, our existing relationship with the schools as well as our existing channel partner network. And we will support that with lot of digital marketing, promotions, BTL and all that. That's the way we are going about it. So I think more than competition, I think, I'm more focused on my product offering, which is very strong, and the network which I already enjoy.

Okay. Sir, the other question was about the EBITDA loss reduction that we see 16% over the year. Sir, just wanted to know what else kind of propelled it or how -- what steps we have taken to kind of take care of that?

Yes, it's largely on the back of, a, lower cost. So if you look at my fixed costs, if you keep aside the provision for expected credit loss and the lease adjustments, these costs are down by almost INR 50 crore rupees. And last year, we had guided a full year cost rationalization of INR 60 crores to INR 80 crores. And we are well ahead of our guidance. And that will result in -- so even a lower revenue as compared to FY '18 would still bring us back in terms of the kind of margins that we are looking at. And it's only bringing in more efficiency into the system. So largely on the back of our cost rationalization without impacting our revenues for the first 9 months. You see, the revenues are higher despite the lower costs.

So is it -- I see the reduction in the raw material consumed also with a significant amount. So what do you have to say on that?

In terms of raw material consumption fee, this year, we are heading into the next academic year, waiting for the new education policy. So consciously, we are looking at what we are producing, and we've been very, very clear about how much we need to produce because the new education policy will also bring a lot of change in curriculum. So we do not want to be ending up with a lot of inventory at the end when it comes in. So that, we have been more efficient, and that is one of the reasons our cash flow is also better in terms of we've been to reduce the overall inventory levels. And -- so yes, that's why even our COGS are lower. We've been purchasing less. We've been pushing more of our existing stock into the market. The number of books revised this year because of the impending NEP by all publishers has been less. So the adoption of the same books will happen in most of the schools. So that is helping us across.

Okay. Sir, one more additional question to the cost, particularly when it comes to the employee expenses. I just wanted to know that what is our HR policy? Is it like we are kind of employing on the contract basis or the need based sort of a thing? Or do we have the permanent employees? Or there have been layoffs or kind of resignations going on so that we see the reduction in the employee expenses as such?

So just 2 things in that. In terms of cost rationalization of employees, we've done 2 things. So, a, for your first question, most of our employees are regular -- maximum employees are regular employees, except for some who work in the printing press, which is seasonal in nature because it works for practically 6 months from October to mid-April is the peak time. So there we do employee a contractual. But I would say probably workforce, 90% of it would be fixed. On what we did in terms of cost rationalization, just 2 things, that we have brought in our back-end together, we've been able to consolidate most of the back-end functions in terms of Publishing, HR, Finance, IT. And second, most important, we've been able to bring our warehousing in order in terms of -- we were at 22 locations all India, now we brought it down to 6 to 7 locations. So that is also a function of helping us reduce inventory in outlook. We are supplying from 4, 5 hubs across India. So that where we had 22 locations where people manning those locations and in a seasonal business it will be for 4, 5 months. We've been able to bring it back to 6, 7 locations, and that is why we -- that cost has reduced. So it's not actually having to fire a lot of people, but more about bringing in efficiencies on the supply chain, which has helped reduce costs.

So this year, we have reduced almost 25 offices and warehouses in the 9-month period.