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

Ladies and gentlemen, good day, and welcome to S Chand and Company Limited Q2 and H1 FY '21 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.

Good afternoon, everyone. On behalf of Prabhudas Lilladher, I welcome you all to the 2Q FY '21 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. I would now like to hand over the call to the management for opening remarks. And after that, we can open the floor for Q&A. Thank you, and over to you, sir.

Thanks a lot. This is Himanshu Gupta, the Managing Director of S Chand and Company. A very good afternoon to all the ladies and gentlemen. I would like to welcome you to our second quarter results conference call for FY 2021. And thank you all for taking the time out and joining us here today. I trust each one of you and your loved ones are safe in this pandemic time. As you are aware, H1 of this year was a time when the COVID-19 pandemic stuck the world, which led to schools remaining physically closed since March in the country. In spite of the challenges, we have achieved 23% Y-o-Y growth in our operating revenues, reduced our EBITDA and PAT losses by 71% and 41%, respectively, during the first half of the year. We have reduced our operating expenses by 29% during this time period as well. Saurabh will discuss more about these numbers in his introductory remarks. The K-12 and Higher Education segment continued to face uncertainty around the timing of the start of the classes during the July to September quarter. Admission to higher education institutions are now in progress after the examinations were held at the end of the last quarter. The positive news on this front is that now we're increasingly hearing about opening of the schools and colleges across India from November onwards. We expect this trend to fasten and see more traction by the end of the current quarter. On the digital front, I'm happy to share that we continued to see strong traction in Learnflix during the quarter. Learnflix has already been downloaded over 110,000 times, and we have over 19,000 paying subscribers as of October end. The app has notched up a higher review rating over 4.3 on the Google Play Store. During the quarter, we launched our -- pilot of our latest edtech platform called Educate-360 across the pre-schools. Educate-360 is our new online learning platform developed based on feedback and challenges of schools, which would deliver a holistic array of product features, as we strive to enable the school to conduct online classes, assessments, homework and give access to content to the teachers, students, et cetera. Additionally, we have shared extensive details on our leading edtech platform, including Learnflix Mylestone and Educate-360 in the investor presentation slide #9 to #28. The reason behind this was to give you an idea about what we have to offer to our customer during these trying times, to enable them to continue the process of educating students at affordable costs. We are looking to carve out some of the edtech platforms, which have matured into a separate subsidiary, and raise growth capital for the businesses from investors for higher growth in these ventures. This would lead to value unlocking for our investors as well as we get more appropriate valuations for edtech business in these entities. Saurabh will discuss these in more detail and answer any questions that you would have around the same. We believe that we have a great opportunity in coming time for digital learning as a medium of education. We are confident of the value-add at our edtech platform, along with a strong content that was built over 8 decades will provide. We feel that these products and services would be the future growth drivers for the group in the coming years. With that, I would like to wish all of you a very happy and prosperous Diwali from the whole S Chand family. I would now request our CFO, Mr. Saurabh Mittal, to apprise us on the financial performance of S Chand. Thank you.

Good afternoon, everyone, and thank you, sir. Thank you for taking out time. I'm Saurabh Mittal, CFO of S Chand. I'm delighted to inform you for the first half numbers of our consolidated revenues have come at INR 1,080 million versus INR 879 million during the same time last year. Our gross margins have increased by 130 bps, a 69% year-on-year growth from previous year based on product rationalization and lower paper prices. On the back of our cost rationalization exercise that we've been undertaking in the last 2 years, we saw our operating expenses lowered by about 29% on a comparable basis. We reduced our EBITDA losses considerably by 71% to a loss of INR 262 million versus a loss of INR 902 million in the corresponding half year. So that's almost INR 64 crores lower than the previous year. Our net loss also reduced by 41% to INR 578 million versus a net loss of INR 981 million in the same period last year. In terms of working capital, debtor days have reduced to 192 days versus 285 days at the end of -- from -- at the end of Q4 FY '20. Our net working capital days also decreased to 266 days versus 321 days at year-end. On the back of the COVID crisis this year, we have seen a shift of the working capital cycle between quarters and a lumpiness of collections in the second half of the year. In terms of our debt, we ended the quarter with a gross debt of INR 2,271 million and net debt of INR 2,009 million, which is on similar level as of September last year, despite the lag in business and collections. In terms of our cash flow, we have seen a massive improvement in our operating cash flows coming through from the full implementation of the S Chand 3.0 plan in the past 18 months. We ended the period with a positive OCF of INR 130 million versus a negative OCF of INR 27 million last time same period. This translates into an improvement of INR 157 million in operating cash flows over the previous period. We expect the focus of cash flow efficiency to be maintained in H2 as well and end the year with strong cash flow generation. On the edtech front, we have announced the carving out of our matured edtech platforms into a separate subsidiary for raising funds for the next phase of growth of these businesses, leading to value discovery and better monetization of our edtech platforms. This would allow us to onboard investors, specifically in these edtech platforms, who would put up capital, which is required for the next level of growth of these platforms. We would keep you posted for these -- any developments on this front in the near future. With this, I would like to open the call for questions. Thank you.

[Operator Instructions] We have our first question from the line of Jinesh Joshi from Prabhudas Lilladher.

Sir, in the last call, you mentioned about this exercise of fundraising with respect to your edtech initiative. And even this time around, there are a lot of details in your presentation with respect to how you plan to scale up this digital initiative of yours. So can you kind of highlight what kind of funds are required for this initiative? How are we going to manage it? Will we kind of look to raise more debt? Or will we -- will it be an external fund raise? So if you can talk a bit about that, it will be really helpful.

Yes. Thank you, Jinesh. So the matured platforms that we have, Mylestone and now Learnflix, both of these are in the process of being carved out into a separate subsidiaries, where we are hoping to raise capital. We are estimating around $8 million to $10 million for that. And we are in discussion with multiple investors for the same. And we will not be picking up debt. This would be completely equity funded. We've had a few discussions, very preliminary, but we've just started to exercise a month or so back. So that's the status of that. And we hope that with these investments, we can scale those platforms which are now ready to grow further.

8 Okay. And sir, with respect to cost savings, I mean what are the year-end targets? Because last time around, you had mentioned that a reduction of 15% to 20% is planned for FY '21. So are we on track to achieve that? Or is there any change with respect to the cost reduction program?

So in terms of cost, if you would have seen in the first half, we've already looked at costs reducing by 29% in the first half. So I think that we are well on target to achieve that 20% cost reduction. It may be slightly more because we are -- in terms of costs, we're being very, very conservative. And we're looking at what is actually required on the ground. And yes -- and with the visibility that we have for the season, we are being very careful with money.

Okay. And my last question to Himanshuji. Sir, what are your thoughts on the upcoming sales season in second half, considering that in the opening remarks, you mentioned that schools and colleges might get opened around the November end? So what are the initial trends you are seeing for the second half?

Yes. So that's a nice question, but you have to understand that the schools are opening and some schools have opened up in some parts of the country also like some schools have opened in UP, some schools have opened in Andhra, some schools have opened in different states of the country. But it is still in a matter of -- because the parents are not fully sending their children to the school, so attendance are quite low. But we are hoping that after Diwali, the schools might open in most parts of the country because as the festive season will come to an end and it's already 8 months when the pandemic has started. So I think the schools will open up, but how many students go to their schools and what takes place is a very difficult situation to say. But one thing I will tell you is -- for sure, that's going to happen this year, that the children are going to be promoted to the next class in -- after this academic year. So if the child is studying in 6th class, he will go to the 7th class by March or April, whenever the academic year starts in whichever state, and CBSE starts at that time. So we believe the children will need to buy a new set of books when they get promoted to the next class. Last time what had happened was the lockdown happened so suddenly in India that we didn't have time to sell the books, neither the parents had the time to purchase the books, neither the distributors in the schools had time to distribute those books. So this time, hopefully, there will be no sudden lockdown. We are just hoping for that. And if the regular academy session, children will be promoted to the next class, so the sales should happen normally this year. That's what we believe.

[Operator Instructions] We have next question from the line of Sanket Goradia from VEC Investments.

Hello team, a great set of numbers and definitely look very optimistic from here. If you could just give us some color on where the robustness of our revenue is coming from. We've seen a great Q2, we've seen a great H1. So if you could just throw some color, that will be my first question. And my second question will be on your guidance going forward, where do we see this -- do we see this momentum continuing 6 months, say, 18 months down the line? And my third piece would be on, if you could also throw some color on how the whole industry dynamics is changing. Of course, the off-line to online shift compared -- and also with what our peers are up to?

So in terms of revenue, I would say, see, there's been a shift from Q4 to Q1 and Q1 to Q2. So it's very difficult to give you exact point to where it's coming from. Wherever we had strong adoptions with schools, we've been able to retain those adoptions. And that is the reason that considering our size and our ability to deliver to our customers, we managed to -- we recovered some of the losses of March. I wouldn't say we've managed to recover completely. But I think 60%, 65%, we've managed to recover our March revenue loss. So that's where the revenue growth has come from. In terms of momentum, with schools opening up and with students getting promoted, as Himanshu had said, we expect year-end to be -- for supply of books, whether schools open or not -- physically open or not, we expect our supply of books to be relatively normal this year. Last year, a lot of students did not buy books. So we are hoping that this year, of course, where schools did not open, books will anyway go to the students. Industry dynamics. Of course, the industry is going through some flux because last one year, in terms of cash flows, it has been very difficult for some of the players. So we do see some consolidation coming. And in the next 18 months, of course, with the new curriculum framework coming in by December or January, it will separate the men from the boys. And ultimately, people who can invest into new content development under the new education policy will definitely benefit for the next 2, 3 years. I hope that answers your questions.

Sure. Definitely helpful. Just one last piece, and I'll come back in the queue again. If you could just kind of give a guidance even on working capital. I mean is this sustainable given we've seen a great reduction in the working capital days?

To be honest, the working capital has not reduced to our satisfaction. There's a lot to be done on the inventory liquidation this year, and we are very, very focused on that. We would want to continue looking at working capital and improving cash flows. If you compare cash flows of the first half to 2018, we're almost -- I mean shifted almost INR 60 crores in the first half. So cash flow efficiency is definitely benefiting the organization in terms of lower payouts in the first half of the year and being conservative with inventory and production. So that, I think, will help us be lighter in terms of working capital. Our target is when half year, we should be around 120, 130 days instead of what we are at this moment. Year-end also, we should be under 280 days, as far as I'm concerned. So that's our targets going forward.

And it's primarily coming from inventory day reduction?

Inventory reduction, being very careful with the revenue that we are doing in terms of quality customers. And of course, with cost reduction, the payout, of course, is lower. So with improving margins, that helps the working capital also.

[Operator Instructions] We have next question from the line of Pankaj Prasoon from HNI.

Yes, this is Pankaj Prasoon calling from Mumbai. So I need to understand that what is the market size going to be, because what I understand that in India, the population is around 130 crores. And out of that, around 35 crores, 40 crores are the students. So management can -- Himanshu, can you clarify that how much is the old book circulation in terms of percentage right now, one macro view? And what is the market size is going to be? Because since last 15 years, we see a lot of old books are being circulated in the system. And my broadly assessment is there that around 25 crores of students are there. And as for your last con call and others, I went through them, INR 750 per student books are required. So market assumed to be very big. But the actual number is coming in the total -- this segment is around INR 8,000 crores. So I want to overall view. So once this new educational policy has come in and new core curriculum being printed. So 3, 4 years, how big is the market and how much we are going to capture? Can you throw some light on that?

Yes. Thank you, sir, for your question, and I'll take it up. So basically, sir, you have to understand that India has around 270 million students going to schools, to approximately there are 1.6 million schools in the country. 1.1 million schools are government schools and 500,000 are private schools. As a company, we mainly cover the private school market, which is divided into CBSE, ICSE, state board affiliated and nonaffilated school. And we cover around 40,000 to 45,000 schools, we cover every year. And as per the Nielsen report that had shown what the publishing industry in India, the industry is approximately, you can say, close to $5 billion, $5.5 billion in the school publishing industry, which includes the government also, the state board. So the private industry is around $3 billion, $3.5 billion is a private school book industry in India, publishing industry, which is approximately INR 20,000 crores, INR 25,000 crores, approximately the amount that we have come to know from a study that was being done. And as for the secondhand books, secondhand books are more prevalent in state boards and other areas. But in CBSE, secondhand books are not much there because the students who go to the school need to buy the complete set of books. They cannot only choose and pick the books which they want to buy. The bookseller or schools sell the complete set. So there is not much of, I would say, secondhand books happening in the market. But because of the corona situation, which happened this year, there was a circulation of secondhand and used books, which children either took from their relatives or their friends or their neighbors or from some people. So this time, it would happen. But otherwise, in a normal year, secondhand books are not much prevalent. So the student needs to buy a complete set of new books that they do. But in state board schools, yes, there is a prevalence where the students take used books or secondhand books, which are cheaper in nature. And some of those secondhand and used books are taken in college and competition examinations and some 9 to 12 classes, secondhand books -- some books are being used. Exact percentage of secondhand book market in India would be very, very difficult to assume. I hope it answers your question, sir.

0 Yes. Still some queries are there. So basically -- so if we see the new education policy coming in the future, so what could be our potential addressable market size would be for us as, as S Chand? So I want to say that in next 3, 4 years, can we reach to a revenue like INR 1,200 crores to INR 1,500 crore size?

So difficult to exactly predict the revenue what we will be. But definitely, the new education policy comes in, we'll be looking at high double-digit growth numbers for 2 or 3 years. That's what we believe in. And we believe that is going to be a big advantage to the industry and to our group as well. And we will be ready for taking that advantage in terms of marketing, sales, production and development of new content, we would be ready for it. But how much exactly it will translate to in terms of number is very difficult to say as of now. But we expect a high double-digit growth happening when the NEP comes in.

Okay. I had joined a little late. So can you just -- it may be repetition. So where do you see our digital platform is going to be in next 5 years?

Saurabh, you would like to comment on this?