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

Ladies and gentlemen, good day, and welcome to the S Chand And Company Q1 FY '22 Earnings Conference Call hosted by Prabhudas Private Limited. [Operator Instructions] Please note that conference is being recorded. I now hand the conference over to Ms. Shweta Shekhawat from Prabhudas Lilladher Private Limited. Thank you, and over to you, ma'am.

Thanks. On behalf of Prabhudas Lilladher, I welcome you all to the first quarter FY '22 earnings call of S Chand Limited. We have with us the management, represented by Mr. Himanshu Gupta, the MD; Mr. Saurabh Mittal, CFO; and Mr. Atul Soni, who is Head of Investor Relations. 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, and 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 first quarter results conference call for FY '22. 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 extremely difficult times. The pandemic has impacted billions across the country. For the formal education sector, it began in March 2020 and continues to date. As you are aware, Q1 of this year was a time when COVID wave 2 had engulfed the country with large parts of the country under various stages of lockdown. The intensity of wave 2 was unparalleled and impacted most of us in one way or the other. From our perspective, schools announced preponing of the summer holidays, board examinations have been cancelled class 10 and 12, entrance examination are postponed, and all educational institutions are physically closed during the entire quarter. COVID basically also impacted online teachers. A lot of educators were impacted directly or indirectly by the pandemic. The focus was for us as also as a company was to ensure the well-being of our employees and stakeholders during the critical phase. We started seeing school opening up and more states in the country around home schools opening from August to September onwards. This should help normalcy return, and we are seeing sales to shift from Q1 to Q2 for K-12 segment. As for the Higher Education segment, board exam results were announced in July in IAT. And the admissions entrance exam was also announced for September and October, respectively. Engineering and medical college will see delayed college admissions for first year from October onwards. We expect second year students to be able to start their new sessions during Q2 itself. This is different from the usual cycle of Higher Education when colleges used to start new sessions in July, August versus October, November. Humanities and commerce segment session will start from September onwards, since board examination results have already been announced. We have given more details around this in our investor presentation from Slides 4 to 7. The publishing business has had a couple of years of disruption, which has impacted a lot of small- and medium-sized content providers. This offers up an opportunity for larger, financially strong organizations to increase market share once the ground situation improves. With S Chand 3.0, we have improved our working capital efficiency and cost base, and are now poised to grow once the NCF is announced. On the edtech front, we're taking strong strides in getting ready from increased adoptions of our digital solutions in a post-COVID world. The Mylestone app has been upgraded for students, teachers, and parents to enable the 150,000 students using Mylestone with a platform for enhancing the learning process. Mylestone have been enabled with feature functionality to bridge the gap between school and after-school learning. Our most affordable learning app [indiscernible] 2.5 lakh downloads and over 21,000 paying subscribers. We expect schools which we provided with free usage during FY '21 would convert to paying customers in FY '22. We also have plans to launch Learnflix Bangla during the current quarter. Madhubun Educate360, our K-12 learning online system, has now gotten implemented in 21 schools post a successful pilot project. We expect more schools to use this product as the year goes by. The process of transferring Mylestone and Learnflix, our school and student solution, into a separate subsidy, Convergia Digital Education Private Limited, with the view of raising capital separately for this business to grow exponentially has been completed. And we are now looking forward to raise capital for funding the future leg of growth for these businesses. We are also looking to enable our key bestsellers with teaching videos to engage and enable learners to understand difficult concepts from experts. We partnered with investee company, Testbook, to launch a next-generation SmartBook to aid students preparing for competitive examinations for government jobs, especially for rural areas in the country. The SmartBook is a physical book created after processing performance data of lakhs of Testbook students. It combines the convenience of physical study material with the power of edtech. This product is being sold at local bookshops, S Chand web portal and e-commerce website. We expect to come out with more such innovative products, harnessing our technology with our distribution reach in the coming times. We believe that we have a great opportunity in coming times of blended learning as a medium of education. We are confident of the value add that our digital solutions, along with the strong content repository built over 8 decades we 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 now request our CFO, Mr. Saurabh Mittal, to apprise us all on the financial performance of S Chand. Thank you so much.

Thank you. Good afternoon, everyone, and thank you for your time. I'm Saurabh Mittal, Group CFO, S Chand. Q1 FY '22 sales were impacted with the COVID wave 2-related lockdowns across the country and extension of the school vacations till June end and cancellation of board examinations. We expect shifting of some portion of K-12 revenues to Q2. Q1 FY '22 is also not comparable with the Q1 FY '21, since Q1 FY '21 had sales overflow from the previous Q4 FY '20, which was impacted by the national lockdown on 21 March 2020. However, if you compare the first quarter with Q1 FY '20, then we have a lower EBITDA loss by 38%, and our PAT loss is lower by 17%. So in terms of numbers for the first quarter, our consolidated operating revenues came at INR 358 million. Our gross margin stood at INR 57 million (sic) [ INR 227 million ], and our net loss to net, INR 340 million. I'm happy to share that we have continued our good work on the working capital and debt front. In terms of working capital, debtor days have reduced by some 43 days this quarter to 233 days versus 276 days at the end of Q4 FY '21. Our net working capital days also have decreased by 16 days on year-over-year basis versus 298 days of Q1 FY '21. Do keep in mind that this improvement is despite having lockdowns across the country by COVID wave 2. In terms of debt, we ended the quarter with a gross debt of INR 1,862 million and a net debt of INR 1,297 million. We have moved to a fundamentally lower debt profile for the company. Our gross debt has reduced by INR 328 million on a year-on-year basis, and our net debt has reduced by INR 497 million on a year-on-year basis. We are looking forward to reaching net-debt-zero levels by Q4 FY '23 on the back of increased cash flow generation. On the inventory front, we are moving to a structurally lower inventory level in the company. We ended the quarter with an inventory of INR 1,480 million versus INR 1,909 million the same quarter last year. This is a reduction of 29% on a year-on-year basis. This improvement in inventory is driven by various steps that we took in controlling print runs and optimizing book titles. By the year-end, we are targeting INR 800 million to INR 1,000 million in inventory. In terms of cash flow, we generated operating cash flow of INR 99 million. I want to highlight from a cash flow perspective, the strong reduction in receivables in Q1 of INR 721 million versus INR 365 million last year in spite of the COVID wave 2. This represents better quality of sales achieved in FY '21. We also saw a strong reduction in borrowings in Q1 FY '22 of [ INR 169 million ]. As we move through FY '22, I would call out a few things for this year. Firstly, we will be taking a price hike across our product portfolio to the tune of 5% to 10%. We're also mapping our books as per the New Education Policy and are preparing for the NCF, which may be announced once the COVID situation improves. Secondly, we are seeing a portion of Q1, Q2 -- Q1 revenue move to Q2 on the back of school closures during Q1. But Q2 and Q3 are expected to be better quarter in comparison to the previous years. Also, the inventory levels with channel partners is lower than the usual years. Thirdly, with the increased number of vaccination and lower COVID cases, we expect even colleges to gradually reopen, and this will lead to a normal sales season during Jan to March '22. Plus, if the situation holds up, then we can get a dual benefit of higher product prices and normal sales season in FY '22. So hopefully, on the debt front, we [ aim to be ] debt-free by fourth quarter of FY '23 and further optimize working capital going ahead. Fifth and the biggest growth driver for our print business would come from the introduction of the new syllabus post the announcement of the NCF. This should lead to a strong revenue and profitability growth for 2, 3 years. Our base case is that the NCF should impact financials from FY '23 onwards. An early announcement can [ impact ] in our FY '22 financials as well. Finally, the focus on cost and working capital has ensured that we have a stronger liquidity and our -- than a lot of our peers. And we are poised to take advantage of the disruption that COVID has dealt. With this, I would like to open the call for questions. Thank you.

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

Congratulations for good improvement on balance sheet parameters. So firstly, I want to understand if schools are opening by Q3 or Q4 in most of the states, so what is the kind of expectations in terms of top line for FY '22?

So in terms of -- if schools are actually physically reopening, maybe [indiscernible] we would have a normal season. And we should expect a offline of -- in excess of INR 500 crores.

INR 500 crores, right?

Yes. Yes. So this is something which we have shared in the last call as well. So we are sticking to that.

Okay. Okay. Okay. And also, in terms of Learnflix, in the last 1 year, we see downloads has increased by 3.2x to 2.5x. But paid users are increasing only by 17%. So what are the steps we are taking to increase the growth in paid user base?

Yes. So in terms of Learnflix, while initially it was meant more of a B2B solution and so through schools. But unfortunately, with most schools not physically opening and having their own challenges around fees, what we are trying to do at this point of time is that we kind of marketed to our own distribution network and channel partners where we have now [ scratch cards ] starting this quarter. And we hope to increase the number of paid users over the next 5 to 6 months. But the real impact will come in when schools physically reopen and start getting their complete fees. That is the time that we can really push for the good B2B adoption.

Okay. Okay. Okay. So also, we are planning to increase the number of subjects offered in Learnflix, right? So that user fee of INR 2,000 will also be improving as the subject -- number of subjects increase.

Yes, yes, yes. So we'll be adding social studies this year, and we will be looking at English and then adding classes 11 and 12. So once we have a larger base, of course, then we can -- we get more adoptions. And the renewals across some classes 10 to 11 will also happen for this customer.

[Operator Instructions] The next question is from the line of Niteen Dharmawat from Aurum Capital.

Since you mentioned that Learnflix adoption is -- especially the paid side, [indiscernible], which is dependent on B2B business. And it will happen -- it will take some more time once the school start and stabilize. So what is the current situation with respect to the funding that we were looking for? Is this happening or it's getting delayed now?

Yes. So the structure is ready. And the larger amount of funding is for Mylestone, which is the other main business, which is -- which already has traction of about 150,000 students and almost 300 schools. So that is the larger piece of the business that we are raising funds for. Learnflix is not that -- as of today, that's not the larger part of the business. However, once we get the funding, we can move both of them together because this is a complementary product. One is within school and one is after school.

So what I understood -- I'm talking about the external funding that you were looking for. Is it getting delayed now? Or we are still working on it? Or we are not looking for the funding?

We are waiting on a structure to be in place. We still are in discussion. And we will let you know once something comes up.

Niteen, you will appreciate that a fund raise is a binary event. So as and when things get finalized, we'll be intimating the exchanges and everybody.

[Operator Instructions] The next question is from the line of Dhananjay Mishra from Sunidhi Securities & Finance Limited.

Sir, our employee cost related to revenue is very high on the half. So are we doing something on that side also to reduce the cost?

Could you repeat that, employee cost still...

High.

On the higher side because we are doing close to INR 400 crore annually and the employee cost is INR 100 crore. So can we have any scope to reduce that all as well going forward?

Well, if you have looked at our cost over last 2 years, we've done a substantial cost reduction. Our [ BSOs ], I think so -- it was INR 151 crores, 2 years ago. So we have come down from that to around INR 100 crores.

Yes, sir. But accordingly, our revenue also has come down from 2, 3 years. So we were at INR 600 crore, INR 700 crores. Now we are at INR 450 crores, INR 500 crores.

So I don't see a need or scope for reduction here. Whatever we had to do is done, and we'd like to retain the people we have. Because please appreciate that there is an NCF coming up, and to take advantage of the NCF, we need to have both team on the content side and also on the technology side and also on the marketing side. So we will not be looking at a further reduction in that cost because this is the best time to go out and attack the market once the NCF is out. So that is when we'll gain market share. So I don't see any reduction in employee costs in the next 1 year.

Also, the employee costs do have a function of operating leverage also involved. So the same employee base can actually generate much higher revenues than what has been reported in the previous years because of COVID. So you also have to keep that in mind that although it might look -- or in your view, you might think that this is a higher employee cost, but what we see is that given the future scenario where we are expecting a curriculum change to happen, this same employee cost can generate a much higher level of revenue than what we are seeing right now.

What is the EBITDA margin you are looking at this year at INR 500 crore revenue?

It should be in the range of 15% to 20% overall.