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

Yes. Thank you. Hello, everyone. On behalf of Prabhudas Lilladher, I welcome you all to the 3Q 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, Strategy and M&A. 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.

Thank you. Thank you so much, and very good afternoon, ladies and gentlemen. I'm Himanshu Gupta, the Managing Director of S Chand and Company Limited. I would like to welcome you all to our third 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 these times. 2020 has been a very challenging year for each one of us. However, with a sharp decline in COVID-19 cases and the rollout of the vaccine, the overall business environment has been boosted in the last few days. As you are aware, H1 of this year was the time when the COVID-19 pandemic struck the world, which led to schools remaining physically closed since March in the country. The pandemic has enabled us to reassess and restructure our business and making it cost effective, working capital efficient, resulting in generating of positive cash flows. In spite of the challenges, we have achieved 46% year-over-year growth in our operating revenues, reduced our EBITDA and PAT losses by 66% and 40%, respectively, during the first 9 months of the year. We have reduced our operating expenses by 31% during this period as well. Saurabh will discuss more about these numbers in his remarks. On a positive note, we are seeing opening of schools for classes 6 to 12 and higher [ Technical Difficulty ]

Hello?

Hello. Mr. Gupta, we are not able to hear you.

Is he dialed in? I mean have you lost the connection or...

Sir is connected.

I'm there. Is it -- can you hear me now?

Yes, sir, we can hear you.

Okay. So should I...

Himanshu, I think we lost you where you were about to say -- about the school openings. So can you please start from there again?

Okay. Okay. Sure. Let me just go back to that. Yes. So on a positive note, we've seen opening of schools for classes 6 to 12 and higher education colleges and universities across the country from January onwards. CBSE and ICSE have come out with a circular stating that the new school academic sessions will start from March-April itself. This augurs well for quarter 4 outlook, indicating that normalcy is returning to the educational institutions which have been impacted for the most part of the pandemic. Slide 7 in the presentation covers this in more detail. On the EdTech front, I'm happy to share that we continue to see strong traction in Learnflix during the quarter. Learnflix has already been downloaded over 175,000 times, and we have over 19,500 paying subscribers. We also expect schools, which we -- which were provided with free usage during COVID-19, would convert to paying customers in FY '22. We plan to launch this in vernacular languages with Learnflix Bangla slated for release by quarter 2 FY '22. During the quarter, we conducted a pilot for our blended learning platform, Madhubun Educate-360 across 50 schools. The pilot reached to over 7,000 students and spread over 2 classes and covered 5 subjects. Madhubun Educate-360 will deliver a holistic array of product features, as we strive to enable the schools to conduct online classes, assessments, homework and give access to content to the teachers and students, et cetera. We believe that the blending learning is here to stay, even post the pandemic, and Madhubun Educate-360 will be the bridge between in-school learning and at-homes learning for students. The schools have given very positive feedback, and we are hopeful of a strong conversion ratio of pilots to paid subscriptions. The engagement with stakeholders, including schools, teachers, students and parents, would increase with this platform. This period also saw a marked increase in subscription of eBooks. Our total eBooks sales across B2C platform and B2B sales to institutions has jumped over 100% on an April to December year-on-year comparative basis. We also saw a marked jump in ordering of books across e-commerce platforms. As a channel, e-commerce now accounts for around 8% of our revenues in the first 9 months and continues to show strong traction. We continue to build on these channels, both internally and through strategic partnerships. We are in the process of transferring Mylestone and Learnflix, our school and student solution, into an SPV, Convergia Digital Education Private Limited through a slump sale with the view of raising capital separately for this business to grow exponentially. Shareholder approval has been sought through postal ballot, and we expect that process to be completed by early March 2021. We are also of the view that additional matured edtech solutions may also be hived into this entity, if needed in the future. Do keep in mind that Convergia will be a subsidiary of S Chand only to be diluted through capital raise or ESOP allotment. With that, I now request our CFO, Mr. Saurabh Mittal, to appraise us of all the financial performance of S Chand. Thank you so much.

Thank you, Himanshu. Good afternoon, everyone, and thank you for your time. I'm Saurabh Mittal, CFO of S Chand. In terms of numbers for the first 9 months, our consolidated operating revenues came at INR 1,425 million versus INR 975 million during the same period last year. Our gross margins increased by 260% as a result of product rationalization, distribution of eSpecimens, higher eBook sales and lower paper prices. On the back of our cost rationalization exercise, impact of the pandemic, which reduced payrolls, rentals, travel costs, conducting workshops in webinar mode and general reduction of selling expenses, we saw operating expenses lower by 31% on a comparable basis. Our EBITDA losses are considerably low by 66% to a loss of INR 592 million versus a loss of INR 1,726 million in the corresponding period last year. Our net loss also reduced by 104 -- by 40% to INR 1,042 million versus a net loss of INR 1,729 million in the same period last year, although the tax expenses was not comparable, as we've been conservative with the recognition of deferred taxes during the current period reporting. I would also like to bring to your attention Slide #8, which compares 9-month performance for the past 4 years. And it indicates that the steps taken during the past 2 years towards building a cost-effective and working capital organization with focus on positive cash flow has finally yielded results for us, and we continue to focus on working capital rationalization, product rationalization and growing margins. Also, I would like to bring to your attention Slide #9, where we've shown our performance on a calendar year basis. We have turned profitable on calendar year basis during calendar year 2020 at a PBT level. Additionally, we managed 21% EBITDA margins during the past 12 months, despite loss of revenue and higher provisioning during the pandemic. We continue working towards achieving this on a financial year basis also. In terms of working capital, debtor days have reduced to 157 days versus 285 days at the end of Q4 FY '20. Our net working capital base also decreased to 226 days versus 321 days in Q4 FY '20. Do keep in mind, this receivable balance currently includes 9-month sales of INR 145 million as well. Thus, in terms of March receivables, we have collected a major portion of the receivables. In terms of debt, we ended the quarter with a gross debt of INR 2,292 million and net debt of INR 1,991 million, which is a similar level as of last year despite the lag in business and collections. I'm also happy to report that in terms of cash flows, we saw a massive improvement in operating cash flows coming through from the full implementation of S Chand 3.0 in the past 18 months. Our strategy of focusing on cash flows has yielded results with net cash generated from operations of INR 251 million in the 9 months FY '21 versus INR 96 million in FY '20 and negative OCF of INR 920 million in 9 months FY '19. On an overall basis, there is a INR 538 million improvement in cash flows generated over last year in spite of the pandemic times. We also turned overall cash positive of INR 56 million in April to December period, which is a step in the right direction. We expect FY '21 to be a much stronger year versus FY '20 from a cash generation perspective. With this, I would like to open the call for questions. Thank you.

[Operator Instructions] The first question is from the line of Nitin Dharwan (sic) [ Niteen Dharmawat ] from Aurum Capital.

Am I audible?

Yes, sir. We can hear you.

So my questions are related with Learnflix. I wanted to understand what is the internal growth targets that we are having for this platform? We have grown from 19,000 to 19,500, as you mentioned in the PPT for the paid users, and we have substantial growth in the number of downloads. So what is the strategy going forward for Learnflix, the growth numbers and the strategy? Because the amount that we are charging is miniscule over there because I learned about that charges as well and I found the platform to be quite good. So what is the strategy over there? One. Second is about the P-funding related with this platform. So where are we in terms of that? And any valuations that we have taken considered? And any numbers that we have in mind?

So Saurabh, are you answering or should I answer?

I'll answer that, sir. So in terms of Learnflix, the strategy is largely to do a B2B because B2C is more heavy in terms of the marketing spend. Currently, we are not looking at that till the time we are able to raise capital for that. Once, of course, we raise capital, we will look at the B2C space. But we will largely focus around B2B because that's where our strengths lie. And we have -- we go out to about 45,000 schools. So we'll continue to meet the schools, show them the product. And long term -- I mean, in the next 1 year, we hope to have about 100,000 paid subscribers and at least 1 million downloads for the solution. In terms of the P-funding, we continue to meet investors, and it's still premature to say anything on that, but we keep getting interest for it. And once we have something on the -- which is term sheet, we will inform the market.

[Operator Instructions] The next question is from the line of Deepan Shankar from Trustline PMS.

Good to hear positive outlook, school turning positive. So just want to understand how has been the order book for Q4 with now most schools have formed up plans for next financial year for their classes to begin? So how has been the order book so far?

Let me answer that question. Thank you for asking this. The order book is seemingly doing good now because we are seeing the momentum starting from, I would say, the end of -- 15th, 20th of January. And after the circular of CBSE and ICSE coming in and the schools opening up, the order book momentum is looking much better now. And we feel till March, the order book and the supplies that we are going to make would be much, much better. Obviously, it's very difficult right now to give an exact number on that because seeing the whole situation in the country and people have started to -- the dealers and the customers have started to place the orders. And they are -- the schools, as they're opening up on everything as the children going from 9 to 12 and even 6 to 8, and very soon, the children from class 1 to 5 will be also going to schools. And there's quite positive, I would say, news in the market regarding the order status.

Okay. Okay. So earlier, we have been guiding for INR 600 crores top line for FY '21. So in that sense, we will have to do numbers of Q4 FY '19. So is that still possible for us?

Right. Saurabh?

Yes. So I mean we are targeting the same numbers, and we hope to achieve them. So we're watching how the schools open up, and since March and April is a very -- and anything could move from March to April. So there is a bit of a timing issue, but I think most of the things should happen by March. Once the circular has come in, the momentum has started. So we are positive that most of it would happen in March.

Okay. Okay. Great to hear that, sir. And finally, any updates on the time lines of new education policy implementation? Is it well on track?

I think the new education policy because being a government matter, we believe that we hope so that in FY '22, we will see very positive results as the education policy and the national curriculum framework is announced, and we're hoping for that. And when we look at the positive news, we will share with the market. But as of now, we are feeling that FY '22, we will start seeing the positive results in the national curriculum framework coming in.

[Operator Instructions] The next question is from the line of Anmol Grover from Albatross Capital.

Actually, my question was answered on the national education policy. So like if you could shed some more light on the education policy? I mean how would it affect our company? And what could be the growth going forward if and when this gets implemented?

So as for the education policy, if the education policy comes in and the whole syllabus changes, that will be a very positive news for the industry, especially for the company as well because it will bring in the new curriculum, and the new curriculum will require to get the new books. So whatever the books they are there in the market, which are the secondhand books or the used books in the market, these books will not be in circulation after this. And that also impacts the business. So for the next 2 to 3 years, we'll have a good runway of having new books being sold in the market, and that will take us to a high -- I would say, high-growth path for the company. And that will be a positive result for the company as well as the whole industry also.

So Anmol, just to add here, see, I mean, Anmol, the last time, NEP came, the new curriculum came, we saw that it was implemented over a 2-year period. So we expect that this time, when the new policy comes, we expect that it will have a similar kind of impact, where it will be implemented over a 2-year period for our target schools, which we cater to. And during that 2-year period, you will see a huge jump in growth because of the fact that the secondhand market goes out of the window. So since this is a government prerogative, we cannot give an actual time line, but we are hopeful within the next 6 months, the curriculum will come out. And based on that, all publishers will be making their books. Obviously, bigger publishers like us, like S Chand, who have their own editorial tools and their own printing assets, we'll be able to do a faster turnaround on the newer books and capture market share.

[Operator Instructions] The next question is from the line of [ Rajan Natarajan ], an individual investor.

My question is more of on the expenses. I think the cost of material has reduced drastically in this 9-month compared to earlier periods. Is this sustainable going forward? Or it just because -- due to COVID-19 behind this?

Yes. So in terms of cost, I would say most of it is sustainable because there has been a change in the way what was happening in terms of bringing down the number of offices across and bringing in efficiencies as far as holding workshops for schools is concerned. Certain costs like travel costs and employee costs may be slightly higher in the next year, but then that will definitely come in with revenue growth post the NEP. Rest of it, of course, I think we have learnt from the pandemic new ways to do work more efficiently. And those costs are structural changes that have happened and will continue to be like that.

And the Q4 cost also can be -- there can be a similar reduction compared to previous periods?

Yes, yes, definitely. I mean there's a substantial cost reduction from Q4 last year to Q4 this year. So that across all line items will definitely be there.

[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.

So just one query on the margin front. So we are still kind of looking at 20% kind of a band that we have been speaking earlier as well?

On which margin is this?

Yes. I think we were looking at about 20% margin. So is there -- is that intact? Or is there any change in that?

Yes. So in terms of gross margin, our target is anywhere between 55% to 60%, which we continue to maintain. And in terms of the EBITDA margin, yes, 20% EBITDA margin is something that we -- in the short term, we'll focus on that. But eventually, once the NEP is implemented, we should definitely go back to be between at 23% to 25%.