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

Ladies and gentlemen, good day, and welcome to the Q2 FY '20 Earnings Conference Call of S Chand & Company hosted by Prabhudas Lilladher Pvt Ltd. [Operator Instructions] Please note that this conference has been recorded. I now hand the conference over to Ms. Shweta Shekhawat from Prabhudas Lilladher Pvt Ltd. Thank you, and over to you, ma'am.

On behalf of Prabhudas Lilladher, I welcome you all to the second quarter FY '22 earnings call of S Chand. We have with us the management represented by Mr. Saurabh Mittal, the Group CFO and Mr. Atul Soni, the 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 up the floor for Q&A. Thank you, and over to you, sir.

Yes, thank you, Shweta. Good afternoon, ladies and gentlemen. I'm Saurabh Mittal, the Group CFO for S Chand. I would like to take -- welcome you all to our second quarter results conference call for FY 2022. Thank you all for taking this time out and joining us here today. I trust each one of you and your loved ones are safe in these times. On the business front, Q2 saw good traction in high education and test population segment, with examinations being held for various admission and job vacancies. We are also school openings across all states in the country for the senior classes. We expect the annual classes to open during Q3 across the country as well. The pace of school openings is heartening, and we expect higher volumes for the coming season. We would be going into the upcoming sales [indiscernible] on the back of stock [indiscernible] of school reopenings, especially with students in rural areas, going back to school after a gap of almost 2 years, and we also expect an increased price realization across our product portfolio. On the higher education front, engineering and medical colleges are seeing admissions for the first year happening during Q3. We saw our second year students starting a new session during Q2 itself. This is different from the usual cycle of higher education, where colleges used to start new sessions in July/August versus October/November. Please see Slide #5 and 6 for details around the opening of education institutes across the country. On the business front, we have launched S Chand Academy, a new Youtube channel focused on engineering and test preparation segment to help students bridge the gap on difficult concepts. The present day needs of the learner have been taken into account for this. We are looking to increase the number of videos in this channel, multifold in coming months to ensure we reach out student community through this medium as well. We've also launched a new and revamped e-commerce website for S Chand during the quarter. This should help -- this should be helpful in increasing direct customer sales and engagement for us. Additionally, we would be launching Learnflix Bangla during the current quarter in West Bengal and Tripura. We expect to onboard at least 100,000 users by March '22. Madhubun Educate360, our K-12 learning [indiscernible] system has now gotten implemented in 25 schools post a successful pilot. We expect more schools to be using this product as the year goes by. In terms of the numbers for the second quarter, our consolidated operating revenues came at INR 518 million. Our gross margin stood at 56%, and our net loss came in at INR 412 million. On a year-on-year basis, the increased sales was 42%, reduced EBITDA losses by 40% and reduced PAT losses by 13% from the same quarter last year. On a first half year basis, H1 FY '22 is not comparable with H1 FY '21 since H1 FY '21 has a sales overflow from Q4 FY '20, which was impacted by the national lockdown in March '20. In our opinion, H1 FY '22 should be compared with H1 FY '20, where we have had equivalent sales but lower EBITDA losses by 58% and lower PAT losses by 26%. This shows the impact of our S Chand 3.0 implementation and focus on cash flow during the last 24 months. Thank you. Over to you. I'm happy to share that we are continuing our good work on the working capital and debt front. In terms of working capital, receivable days stood at 182 days versus 192 days in the same quarter last year. Our net working capital days also decreased by 16 days on a year-on-year basis to 50 days to 60 days to 66 days in Q2 FY '21. Do keep in mind that this improvement is despite having lockdowns during in the country across the country during COVID wave 2. And in terms of debt, we ended the quarter with gross debt INR 1,952 million and net debt of INR 1,356 million. We have moved to a fundamentally lower debt profile during the -- for the company. Our gross debt has reduced by INR 319 million on a year-on-year basis, and net debt has reduced by a large INR 653 million on a year-on-year basis. I would like to reiterate that we are looking to reach net -- debt zero levels by Q4 FY '23 on the back of increased cash flow generation and higher sales. On the inventory front, we are moving to a structurally lower inventory level in the company. We ended quarter -- this quarter with an inventory of INR 1,476 million versus INR 1,785 million during the same quarter last year, which is a reduction of 17% 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. We are targeting INR 800 million to INR 1000 million inventory wide FY '22 year-end. In terms of cash flow, we generated operating cash flows of INR 122 million versus INR 130 million at the same time last year. I wish to highlight that there is a strong reduction in credit receivables in H1 of INR 1,114 million versus INR 822 million last year. This is in spite of COVID challenges that we faced in the past 18 months. This also represents better quality of sales achieved in FY '21. As we move through FY '22, I would like to call out a few highlights for this year. Firstly, we will be taking a price hike across our product mix to the tune of 5% to 10%. We are also mapping our books as per the NEP 2020 and are also preparing for the NCS, which may be launched in the coming months. Secondly, with increased number of vaccinations and lower COVID cases being currently reported, we expect schools and colleges to fully reopen by year-end and which will lead to higher volumes during Jan to March '22. Thus if COVID situation holds up, then we can get a dual benefit of higher product prices and normal sales season in FY '22. Thirdly, on the debt side, we want to become net debt free by fourth quarter FY '23 and further optimize working capital going ahead. Fourthly, the biggest drivers for our business would come from the introduction of new syllabus post the announcement of NCF. This should lead to strong revenue and profitability growth for 2, 3 years. As of now, our base cases that NCF should impact financials from FY '22 onwards. Finally, the focus on cost and working capital has ensured that we have stronger liquidity than a lot of our peers, and we are forced to take advantage of the disruption that COVID has brought. With this, I would like to open the call for your questions.

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

Congratulations for the entire team of S Chand for continuous improvement in balance sheet. So firstly, I wanted to understand now with schools opening across the country and also you told in the presentation that we are looking for a normal sales season in FY '22, so are we seeing our revenue run rate coming back to INR 600 crores to INR 700 crores sales with strong Q4 numbers expected this year?

See we're still targeting about between INR 500 crores and INR 550 crores because, again, you are looking at quality sales for the current year also. We would not be pushing too hard because -- There is still a lot of stress in the system. We do not want to supply to certain customers because they do not liquidate the past stand. So we will be a bit conservative as far as that is concerned, so we'll continue to work with our premium channel partners and ensure that we will keep our working capital and cash flow efficiency going. So yes, we're targeting about between INR 500 million and INR 550 million. If things really open up well enough and everything goes back to normal, then of course we can see higher.

So Deepan, as of now, the data points that we have in our hand, it is one that the COVID cases are low as of now, okay? We don't know what the situation will be in Feb and March. We have taken a price hike that will definitely be there in the system. We are going to work with our premium channel partners. We are not going to dilute our stand on that. So I mean there are a couple of moving parts there. We don't want to give you a higher number, just for the sake of a higher number and then there is a issue, okay? So we would like to be conservative at this point of time. Probably when we interact next in Feb, at that time we would have had some idea about how the season is panning out or how the initial peelers are for the season. So I think that probably will be a better time to give this kind of a prediction whether it's INR 500 million, INR 600 million or INR 700 million. Right now, I don't think we will be doing a right thing by calling out that, that kind of a number.

That is helpful. And secondly, like, during the last few quarters, we have been discussing that a lot of rural schools underserved and they are not able to conduct online classes and therefore, our revenue is also being impacted. So are we seeing the trend reversing, now they are able to open to their conducting classes or online places, we're able to receive fees, so any updates on that?

Yes, so see, Deepan, the rural schools are probably schools, which were charging below INR 10,000 or INR 12,000, were never doing any online classes, okay? So that segment doesn't do online tapes. Yes, over there, when the schools actually open, which we are currently seeing that they are actually opening up that means that student will be starting to come in into the physical schools now. So once that happens then obviously it's all good news for us. So that segment, if let's say, if there is a school which is charging INR 1,000 a month, they do not do online classes. And because of government restrictions, those schools are not allowed to be open. But now as you have -- you can see in our investor presentation also that barring primary classes, class 6 onwards all or -- majority of the state governments have allowed physical classes to open. So we definitely expect traction to happen in that segment.

Okay. Okay. And Also, one of the challenges we are facing in terms of fund raising for our digital initiatives. We have been hearing for quite some time, but we are not able to track through any fund raising in that side. So any key challenges we are facing in that side?

Yes. I will take this one. See what has happened is our structure is not ready really last year, and the structure has just got ready in July this year. And this has just been the first quarter for us, right? And now we will just start the process now, probably in December. And let's see, I mean, let's see what we can come up with because currently our own cash flow situation we are not facing that kind of challenge. Currently, we were able to fund it internally. So with look the kind of growth that we are getting right now, we will want to dilute right now, maybe 6 months, 7 months down the line when things are a bit better because this is probably the time that we might have to take a discount on the valuation. So let us get some more traction on this. And once Learnflix has more traction with B2B in Feb and March once schools open, then I think we need better projects to take it up then. So no challenges on cash flows. Hence, we are taking it slow at this point of time.

And in between, we are also launching Learnflix Bangla by this month end. So what we think is that let's say by March of next year, when schools are fully opened across the country, then you will see strong numbers from both, I mean, Bangla Learnflix as well as the normal Learnflix. So I think once we have that kind of a tailwind behind us, the number will be much better for us to get a higher valuation for that business.

Okay. Okay. So as you're saying, so these paying subscribers will also increase post March you are saying, right, for Learnflix.

Yes, that's the target.

Okay, because that has been flat for last 2,3 quarters.

I mean even if you look at it, whatever paying subscribers we got, we basically got, I mean, before, I mean, just after launch, we got that many paying subscribers, right? So bulk of them came during that initial days only.

Okay. Okay. So with schools opening up and schools start subscribing for this, that paying subscriber base will improve substantially.

Yes, absolutely.

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

So instead of question, let me just share some of the observations that I have, and then I'll ask the question. Regarding this funding part for our digital initiatives, what I gather from the market or from the people those with whom you were interacting, so independently, when I was talking to a few of those VC companies, the feedback that I got, I don't know if they shared that with you or they intent to share that with you that frankly, and it's a very private feedback that I got. That they feel that no S Chand is completely confused as far as the strategy is concerned. What they feel is you are attempting both retail as well as the B2B side, which is not workable. They feel that it has to be B2B while the presentations that you shared, has B2C as well, the component as well. And my personal experience, we bought S Chand subscription for my daughter from the retail category. I see the kind of efforts your team has done, was phenomenal, INR 1800, I'm sure that you would have lost in that despite having very good content. It was very, very good content, no doubt about it. We did not renew the subscription. Next year, our subscription was with a company, which is there in the school of my daughter, okay, Mindspark, which is from Ahmedabad. And it is not a great content compared to S Chand, but we have gone to someone, who is already present in the school. So that is one part of it. And the second part is from the S Chand investor, like me, who has come into the company for overall S Chand business and I have felt that you will go for digital initiative earning from the other sources and not from your internal sources as you are now saying that you will be funding from your internal accruals for the digital initiatives. So VC are scared because you are putting in money for the retail side, and we feel that you're not going to compete with the world of Byju's. And for the investors like who are from -- for S Chand business, they feel that you may end up diverting money for the digital initiatives. So both the sides, there is a loss-loss kind of a scenario. So you will have to take a call on that. Maybe you are better in a better position to take that call. Just wanted to highlight that.

Yes. So Niteen, I think we've been very, very clear on our strategy in terms of what we want to do. I think there is absolutely no confusion from our side and our communication. B2B is our strategy. So we are going to schools for Learnflix and that is something that we are doing from day 1. We do not want to spend much. However, we had specified that in case there is a large fund raise, then we would crack the B2C market. But till the time no fund raise happens, we will not be investing even internal money or any other money onto the B2C promotions. So that strategy is very clear, without external funding, B2C is not going to be done.

So that is what I'm saying. That VC people are saying that it would be better to have only B2B rather than going to for B2C. So when you tell them B2C, they step back, they are not interested. That is what I got as a feedback from them.

Yes. See both have to work together because what is the point of having an S Chand brand name and not pushing our product as a B2C, right? We do have a good product. We have good content in there. It's only about promotion. Now promotion requires a push...

Ultimately, we want funds. If our strategy is not working out for raising those funds, it may not work. So what I would say that instead of stressing and harping upon on B2C while going for the funds, I would say that let's concentrate on B2B. And then whenever you feel a reason to have to B2C, you introduce that as well. It's your call. I don't want [indiscernible] on that. But just the feedback that I got, I wanted to share that with you.

See that conversation we've had with the investors because the numbers that we can project on a B2B basis and a B2C basis, of course, are completely different.

I understand.

B2B requires sales too, which has its own limitations that we can go up to only -- one guy can go up to a maximum 80, 100 schools promotion in a year. So that's the kind of market that we can maximum get. So you go to 100 schools, you probably end up getting 10 adoptions and that kind of funnel will not take the revenue that high. But B2C with a push will definitely open up much more and having the S Chand brand in bad advantage is always going to be there. But yes having said that, we are continuing to relook at our promotion process also, and we'll have to rediscover what in the way we want to promote it. Currently, it's more B2B. And we are also doing it along with Milestone in the schools that Milestone is going to K-8, Learnflix is also going there. So we're trying to do a bundled deal also. So a lot of things we are doing. It's not that the work is not happening. But again, since it's a seasonal kind of business, the numbers will not throw up in Q3 or Q2. So whatever will come, will come in Q4.

So Niteen, I'll also like to add here. See from whatever feedback you got and what you have shared with us, I would just like to point out that from our perspective, I would say a huge percentage, like a 90% plus kind of our focus is on B2B only. I mean if we have a product, if we have a brand, and I am not saying that we are going -- it's not the other way around. The moment you say that we are focusing onB2C, I mean I would assume you would think that we are focusing, let's say, 50-50 on B2B or B2C or maybe a higher percentage to B2C. But that is not the case for us. I mean, for us, all of our focus, when I say all, I need like a huge majority, which is probably 80%, 90% kind of a focus from a management bandwidth side, from our financial side is on B2B only. So actually, what you are seeing, we are already doing. But just that if I have a brand tomorrow, I cannot say that we are not going to take any retail subscription, like you said, like you took a retail subscription, right? I mean, you would have taken a retail subscription for reasons known to you. But I think it's not as in we would have spend INR 100 crores on our advertisement discrete for launching or for promoting Learnflix that way. So in are very much going B2B way only. I mean, whatever feedback we have got, that is exactly what we are doing. What I fail to understand is why do you think that we have -- I think where the difference between what you are saying and what we are saying is that probably your impression we are doing lot more focus on B2C, which is not the case for us. We are -- I mean, if I have to give any number, say I would have kept 90% more focus on B2B because that is where our immediate funnel is.

No, wonderful. And I appreciate your feedback on this. There seems to be a complete communication gap and perceptions, which is built. So it can only be overcome if you are more clear about your communication rather than harping upon B2C, which is not your focus areas as you mentioned, wherein only 10% of the focus...

We tell you we have never -- let me put it this way. In all our investor communication across the last 15-odd months, we have never said that we are going to focus on B2C.

You never said, but you still include that. When it is not a focus, why you include that? Why you talk about it?

We've had more conversation with the...

Because that is the perception, which we form. Based on that, what they are saying...

Niteen...

When I talk to them, what they are saying that they will not be able to compete with the world of Byju's if they are having B2C and company is not clear about what they want to achieve. While you are saying that you are clear and I am sure you are clear about it, but the perception which is formed is just opposite, and that's where we're having a struggle.

So Niteen, we are sitting at November. The last conversation that we've had on fundraising was probably around April, right? We've not had any conversation with any investors post April because we understand the...

I'm talking about that only. I'm talking about period before April only and the...

What happened 6, 7 months ago, it's completely different. We are focusing on B2B and B2C has never been a focus except that we are trying to promote Learnflix through our books also, through other various platforms where we are already there, it does not incur any cost for us, right? We're trying to do tie-ups with certain people who further distribute through online channels and all that. So we're doing things on a revenue share basis as and where it will work on -- in the B2C segment without any cost to us. So that's one part of it, and our strategy is very clear. The document that probably the investors have is almost more than a year ago. So I can't say anything about that because we had very good preparations after April. So we will relook at our document as and when we market. Your feedback is taken. The other public feedback we did get was with S Chand owning such a large percentage of it and there being more young founders into that company. That is one thing that they were also raising as a concern. And that is something that we're not sure how to address because having invested all the money to dilute all of it just for the heck of it is not something that we were comfortable with. Hence -- and of course, that would also not help the investors of S Chand. So that is one thing we take a step back, and we will say we will not dilute the existing fund. The team running it more than 10% to 20%. We will not do that. So we want some people wanted 50% dilution, we said now we will take a step back. We will not take funding if we are asked to dilute on a certain point of time.

[Operator Instructions] The next question is from the line of Devang Patel from NAFA Capital.

Sir, firstly wanted to understand the difference between Educate-360 and Milestone? And why Educate-350 is outside of the entity that you've created?

So see while both of them are on the same platform, which is the signature platform, though this platform remains the same in terms of technology, the difference between Milestone and Educate-360 is, Milestone is curriculum with lesson plans, which are fixed. So when you go to a school, the school will have to adopt, if they want to adopt Milestone, it is a complete solution for the school that the complete handholding from training to lesson plans to content, everything comes in a bundle for them, and they have no other option for the school to take any other books of content, except for this, and this is for the K-8 segment, right? So this is a complete solution for the school, who wants to get its education part outsourced to some third entity to ensure that learning outcomes are improved. So that is where is Milestone. Milestone is more about improving outcomes. And it is targeted towards your affordable private schools, where the quality of teacher is not that great. And their management probably has other businesses. They have less focus on their schools. So they want to increase the learning outcome for students, ensure that their standardization in terms of what is thought across various sections in a class. So Milestones are completely that tells you what to teach, when to teach, how to teach. So that's Milestone. Now Educate-360 is basically an element where the school has an option of taking content from you or not taking content from you. So it's basically a platform where the school can take e-books from you. It enables assessment. It enables e-books to be [indiscernible] online classes also. So that platform is -- as this can go to any kind of school, maybe A category school or B or a C school. Anybody who wants to conduct online classes and any kind of content, of course, from the group company will take Educate-360. And it's not separated. Educate-360 is a part of Vikas Publishing House, and it's run by -- it's basically being promoted by the team, Madhubun, which is a subsidiary investor.

Would it be part of the monetization whenever a fund raise that you do in the future because it's...

Not yet, not yet because see Milestone is something that has already gone to a certain level of 300-odd schools. Learnflix also has got enough traction of 20,000, 25,000 students. Educate-360, still it's in its initial stages. Once it crosses all a certain level, maybe 100,000, then of course, we can look at pushing it down there. But currently, it's not because we like to incubate it till the time it's large enough to monetize.

Sir, when you say it'd be promoted by the team at Vikas, are you seeing a different team has developed this platform and -- compared to Milestone, although they are very similar?

The technical team is the same, the back-end technology is the same, and this technology, the subsidiary called Edutor Technologies, which became a subsidiary last year, and we had invested in that company in 2014. So the base technology for Educate-360, Learnflix and Milestone remain the same. It's on the same platform of Edutor. And -- but just the front end and the usage is different.

Okay. And from what you said earlier, Learnflix will also be a very seasonal business, and we'll have more subscriptions at the start of the academic year?

Definitely, we're going to do B2B. B2C, of course, at any time on way. But see we are going to do B2B. B2B will have to be parallel with the academic year, which starts in April. So whatever subscription we will get probably we will get in March, April, May, June, July, upto July, when we have admissions. So some places, the sessions start from June and July. So these largely happen around that period.

Okay. One of slides there is a medium-term target of reaching 5 million users. Would that -- bulk of it comes from B2C?

We're trying to do more of it on B2B there, so because each -- one single school can get you 500 adoptions at a single point of time or a large school can get you even 5000. So that is where we are focusing on because we focus on bulk selling. Because this is not a retail -- to sell retail again the cost of acquisition is very high, right. So we are preferring to promote it through our group companies who are -- thruogh the S Chand team, through the Milestone team. So the multiple teams already promoting Learnflix across schools.

Okay. Sir, lastly, on the NCF, what -- it seems like the curriculum will be in place before the academic year begins or starting April, July '23. What is the risk of this slipping by one more year, and till they are not in place before that. The risk is very real because again it depends -- it is dependent upon how far the government moves, something beyond our control, but we have [indiscernible], we are monitoring how the progress is going. And accordingly, we are working around it. But having said that, all the new books, all the books that have come out this year already are being made compliant with the recommendation to the new education policy in terms of -- the various facets of NEP have already been mapped to the books and each of these books are being enabled as per NEP. So that differentiation is already starting from this year. So hopefully, we will already get some traction. And as and when the NCF comes up then the books will undergo the kind of change that is required. But we are already preparing for that because a lot of it is already there in the NEP.

So actually, our turnaround time will be a lot shorter than probably what it would have been, let's say, 2 years ago or 1 year ago. So because we are already starting to change our content, so that it aligns with the NEP, which is already out, when the final NCF comes, then we would be able to turn back the contents of the books to totally align with the new curriculum in a much shorter fashion, much shorter time fashion.

Definitely, what would be the backstop date? By when you would need clarity on the NCF that you are ready for the next academic year?

So if you are talking for -- I mean, if you're talking for April '23 academic session, then it will be great if the NCF is launched by, let's say, October/September of next year.

Okay. And does it seem to be on track or right as of now?

So I mean, this is a government thing, right? We cannot -- we don't have a tracker for it. So I mean, that time is also still almost 10, 12 months forward. Very difficult to give you an answer on that.

See we understand that -- we understand from our various interactions with stakeholders that what has already started that we don't know the extent of work that is started and when the final approval will come in. But it should happen by next year, best case scenario. Again, as it is going to be implemented over 2, 3 years, it's not going to be a 1-year thing. So that impact will have to be taken in 2, 3 years.

[Operator Instructions] The next question is from the line of Shweta Shekhawat from Prabhudas Lilladher.

So I would like to understand where do we see the debt level for our company from 2 years from now?

We already specified that by the end of March '23, we should be net debt free. So that's our target. We should be -- see minimum/maximum, say around between INR 20 crores to INR 30 crores at max at that point of time. So that's what we're looking at right now.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you so much for joining us. And we hope to continue to do our work on the working capital side and improving the quality of business. We are also poised to do a couple of more tings on the digital side, which we will be announcing soon month. And we're seeing traction in a couple of new areas, which we would like to -- we would probably get back to the shareholders as soon as possible. Thank you so much.

Thank you. On behalf of Prabhudas Lilladher Pvt Ltd., that concludes this conference. Thank you for joining us, and you may now disconnect your lines.