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

Ladies and gentlemen, good day, and welcome to S Chand Q4 FY '24 Conference Call hosted by Prabhudas Lilladher Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Stuti Beria from Prabhudas Lilladher. Thank you, and over to you, ma'am.

Thank you. On behalf of Prabhudas Lilladher, I welcome you all to the Q4 FY '24 earnings call of S Chand Private Limited. The management represented by the Mr. Himanshu Gupta, MD; Mr. Saurabh Mittal, CFO; and Atul Soni, Head of Investor Relations, Strategy and M&A. I would now like to hand the conference call to management for opening remarks, and after that we will open the floor for Q&A. Thank you, and over to you sir.

Thank you. Good afternoon, ladies and gentlemen. I'm Himanshu Gupta, the Managing Director of S Chand Company Limited. I would like to welcome you all to our fourth quarter and full year results conference call of FY '24 and thank you all for taking the time out and joining us here today. I'm extremely happy to share that FY '24 has been a milestone year for S Chand on many parameters. I would like to highlight the following key points for the year gone by. We delivered the highest operating revenues in 5 years, up 9% on a Y-o-Y basis. We delivered the highest gross margin of 66% in 5 years, up 12% on a Y-o-Y basis. We delivered highest EBITDA and EBITDA margin in 5 years, up 14% on a Y-o-Y basis. We delivered the highest operating cash flow in the company's history. We delivered the best working capital in the company's history, demonstrating the quality of business that we're conducting. We are proposing a final dividend of INR 3 per share. And to top it all, the company continues to be net debt free company in the last -- 3 of the last 4 quarters of FY '24. The biggest achievement for this year has been the strong improvement in our working capital metrics, which are at historic lows. This unrelenting focus on working capital management had led us to significantly free up cash from the system and help us to continue being a net debt free company in 3 of our last 4 quarters FY '24 with net cash balance of INR 600 million. On the cash flow front, we have ended the year with the highest ever operating cash flows in the company's history. We continue to be free cash flow positive as well. Saurabh, our CFO will give you more details on these financial metrics in his remarks. On the National Curriculum Framework or NCF front, FY '24 was a landmark year in terms of the announcement of the National Curriculum Framework for school education in August 2023. This long-awaited announcement has come after a gap of 18 years. We look forward to utilizing this opportunity to the fullest over the next 2 to 3 years. During FY '24 contrary to our expectation, announcement of NCF for the school education did not impact the FY '24 season much since NCERT did not come out with new syllabus books even till March '24. That led us to a lower adoption of new syllabus books and most schools continue with the old syllabus books. On the higher education and test prep segment, we saw continued challenges in the segment as the semesters are shortened in certain universities and NEP implementation was not uniform even within states. There were also lower number of job vacancies announced by the government, which impacted test prep segment, along with stiff competition from youtubers. We are working towards improving the performance of the segment by increasing collaboration with influential youtubers and coming out with content, which is relevant to larger audiences. On the ed-tech front, our YouTube channel S Chand Academy continues to have phenomenal success. We now have over 1,800 videos focused on higher education and secondary segment in topics covering science, engineering and test preparation and so far the channel has already notched up over 20 million views and 234,000 subscribers. This further enables the promoting of our content, which can spur demand in that segment. This channel enables students to learn critical areas through top notch educationists, which will not be available in Tier 2 and Tier 3 colleges. We expect to add more than 700 videos for both the school and college segment this year. We launched Solid Steps, our integrated K-5 curriculum solution, keeping in mind the core concepts of the new education policy 2020 during the year. The K-5 program is meticulously designed to meet NCF 2023 guidelines, empowering young minds with essential skills, critical thinking, creativity and a love for learning. Mylestone, our K-8 curriculum solution also continued to provide holistic learning to schools both in India and the Middle East. Looking ahead, we expect FY '25 and FY '26 to see maximum adoption of new syllabus books in the school segment which should help our growth trajectory for the company. Our strategic partnerships and collaborations have helped us to expand our offering and meet the changing needs of our customers. Our commitment is to continue this positive trend and enhance our financial position over the long term. With that, I would now request our CFO, Mr. Saurabh Mittal to apprise all of us on the financial performance of S Chand. Thank you.

Thank you, sir. Good afternoon, everyone, and thank you for your time. I'm Saurabh Mittal, group CFO of S Chand. In terms of numbers for the full year, our consolidated operating revenues came at INR 6,626 million versus INR 6,103 million during the same period last year, registering a growth of 9% for the year gone by. The school segment has grown by 13% and the higher education segment sales are lower by 27%. We have achieved one of the highest annual gross margins at 66% versus 64% in FY '23 on the back of better product mix, lower paper prices and efficiencies. Our EBITDA profits crossed INR 1,000 million for the first time in the past 5 years. We've reported an EBITDA of INR 1,098 million versus INR 963 million up 14% in the corresponding period. Despite taking salary hikes, higher travel spends, spends on developing new content as per the NCF during the year. I'm happy to share that our operating income went up 65% with profits of INR 484 million versus INR 292 million in the same period last year. We reported a PAT of INR 511 million in FY '24. On the back of solid profitability, we have recommended a dividend of INR 3 per share. Our greater achievement during FY '24 has been the commendable work done in improving the working capital metrics, which has resulted in the highest operating cash flows in the company's history at INR 1,211 million versus INR 811 million last year, this was up 49%. The healthy cash flows have enabled us to reduce debt, negotiate better terms and focus on marketing our products and services better. I would like to bring your attention to Slide #8 to Slide #10, which showcases the results of the steps taken during the past years towards building a lower working capital organization with focus on positive cash flows. In terms of working capital, trade receivables reduced to INR 2,601 million during Q4 FY '24 versus INR 2,653 million during Q4 FY '23. This is a INR 52 million decrease in receivables in spite of achieving incremental revenue of INR 523 million over last year. In terms of receivable days, it stood at 143 days versus 159 days in the same period last year, a reduction of 16 days during FY '24. This is the lowest Q4 receivables in the company's history. Inventory increased to INR 1,761 million versus INR 1,562 million. The inventory increase is driven by higher raw material paper of -- paper inventory of INR 633 million versus INR 436 million. Finished goods inventory was almost the same level as last year. Net working capital reduced to 157 days versus 188 days, which is a reduction of 31 days during FY '24. This is the lowest Q4 net working capital days in the company's history. In terms of net debt, the company was net debt free in 3 of the last 4 quarters of the year, we were net cash positive as of March '24 at INR 600 million versus a net debt of INR 60 million at the same time last year. As we go into FY '25, our guidance for the coming year is as follows. Firstly, we are looking to grow operating revenues in double digits for the year. Secondly, we would be taking a single digit price hike across our product portfolio. Thirdly, gross margin should be stable barring exceptional movement in the paper prices during the year. Fourthly, we have upgraded our EBITDA margin band guidance to 17% to 19% versus 16% to 18%. Fifth, we look forward to continuing our focus on working capital metrics and cash flow to continue. Finally, we shall continue to create content based on the new syllabus during CY '25. This should lead us into FY '25 sales season with a much larger repository of new syllabus books for our target customers. We expect the promotion of sales seasons of FY 25 to see higher adoption of new curriculum books by schools versus FY '24. We should also see further announcements of new syllabus books from NCERT for more classes to happen during this year. This should lead to strong volume, revenue and profitability growth for next 2, 3 years period. With this, I would like to open the call for your questions.

[Operator Instructions] The first question is from the line of [ Ranadeep Sen ] from Mass Capital.

While NCF was launched in August of 2023, but NCERT kind of spoiled the party by not implementing it. Are you confident of it being implemented for the next 2 years?

So, Ranadeep, it's not as if they haven't implemented it, they have announced classes third and sixth syllabus in April of this year. So our belief is that they will continue to announce new classes, and that is how the rollout will happen.

Sure, sure. I wanted to also understand there was -- I think in some of the earlier calls, you mentioned about monetizing the YouTube channel, S Chand Academy. Have you made progress in that space?

Not yet, to be honest, and we're still reviewing our strategy on the S Chand Academy at the moment because the focus was for the last year has been to bring out content according to the NCF. So that is why we are focused on. The S Chand Academy, we are reviewing what we wish to do, and we probably by the next quarter call, we will have a definitive strategy on that.

Sure. Next, I wanted to understand, if I look at Pearson, which is a $6 billion company globally and dominates the U.S. publishing space. Have we tried emulating business models from them?

In terms of acquisitions?

Not just acquisitions, I think their business model varies across electronic media, publishing, they have various interesting business models. So I just wanted to understand, has the management kind of spent time understanding their business model, given they are the global leaders.

Pearson is already in India. Pearson have an office in India, but according to our sources and information Pearson is not really faring well in India and have sold its school education division to a company called LEAD last year and those things are already happening. So Pearson is not doing well in India. The things that work in India, we will -- we're already working with them -- with our strategies. And because everything which happens globally cannot be replicated as is in India. So we are very careful that what works in India, where the market for us lies, so we should be -- we are continuing on those strategies.

Sure, sure. One last question. Given we are a debt-free company now and generating good cash flows year-on-year, how far have you progressed in your latest acquisition? I think you mentioned last time, I think we are towards the closure of our new acquisition. Any update on that?

Yes. I mean, so there's a gap in between. We are reviewing that in terms of the acquisition because there are certain things that they did not work out so we are in the review process, we're still in negotiation with them.

The next question is from the line of Niteen S. Dharmawat from Aurum Capital.

A couple of questions. So we mentioned double-digit revenue growth for next financial year. Now double digit is -- can be from 10% to 99%. So can we be a little more specific in terms of this guidance because that will help us understand where are we heading?

So, Niteen, I mean, to be honest, having looked at last year and reviewing, we will be in a better position once we start seeing the adoptions of schools somewhere around the mid of the third quarter. So I mean to give any kind of guidance, I mean, of course, the baseline should be around 12% to 13% but of course, we're targeting higher number.

So, Niteen, there is a level of uncertainty right around this. So this is precisely the reason why we have not given a numerical guidance.

And, Niteen, the elections also just finishing up around the corner. So that will also depend on if the same government continues or the new government which comes in, what will be their policies, what will be the theme. So very difficult to say right now.

So I think we will be better equipped to answer that probably by the third quarter.

By the third quarter because most of our business comes in the last quarter of the year, I understand that.

Yes. Yes.

But one, for example, after 4th June, we may have some clarity if the government is continuing or not continuing that way. And that would give us some indication about the possible revenues by implementation of NCF or discontinuation of NCF, whatever happens post 4th June, right. So we'll have some idea about that.

Yes. So if the existing government comes then it's obviously a continuation of the previous policies. That part is correct. But I think let's wait for 4th June.

Got it. Okay. Okay. My next question is about the paper prices. So how is paper prices now and overall inventory level? And how do we expect the paper prices in coming months? Because a lot will depend on paper prices as well and if NCF is getting implemented and the demand for paper could be difficult and the prices would determine lot of profitability concerning the publication of book, though we may be taking some hikes, but there's still -- paper prices will help us understand where are we heading?

Yes. So paper prices right now, I think last -- year before that have come down last year. And right now, as of -- as of now we speak, I'm not seeing any increase in paper prices, but people in the market are saying maybe after the second quarter or third quarter -- second and the third quarter, the prices might increase because of maybe buying from the government, buying from even export market and even domestic market consumption will increase. So right now, it's very difficult to say where the paper prices will go, but I feel paper prices largely should be constant with minor increases this year.

And, Niteen, having said that, we've got a large inventory already in hand. So paper procurement this year should be 20% to 30% lower than the previous year.

Yes. So paper procurement in terms of this year will be less than last year, much less.

I got it. I got it. And any other plans of acquiring any companies in the foreseeable future now. Are we looking for any opportunities for inorganic growth as well?

We always are open, we always look out for opportunities, if the right opportunities strike us when we evaluate it, and if the deal happens, it happens. So we always are on the lookout. It's nothing like we have stopped looking out. But the problem is getting the right opportunity, the right value that becomes a little tough.

My final question is related with our investments in new-age companies wherein we are providing some small capital or capital over there. So what are our plans, are we investing looking for any other opportunity now actively? Or we are continuing where we were? And are we planning any exits over there in any of the invested companies?

So currently, we have 2 investments, not exactly looking at exit in any of them. Both of them are doing -- Smartivity is doing exceedingly well, iXambee, we had a very stable year last year. We always are -- we continue to get investor decks for investments. There are some ongoing discussions but not anything to talk about at this stage. As and when something comes up, we will definitely inform.

I got it. Regarding Smartivity, have they taken any other funding now or the last one that they have taken, after that they haven't done anything. Any idea about that?

So they are cash positive, they're generating money. So as of now, they really don't have a requirement to raise debt, but as and when there is something that comes up definitely we will -- I mean they have the -- discussions are continuing on that line. But as of now, there is no fund raise in the next 6 months as I see.

And what was the last valuation around when they have raised the capital?

I think around INR 120 crores odd.

[Operator Instructions] our next question is from the line of [ Pradeep Rawat from Yogya Capital ].

So my first question is regarding our margins. So we had margins like 20% plus kind of margin before 2018. And now it's much lower than that. So what I can understand is paper pricing has much to do with it, with this lower margin. So are there any other factors which are limiting us to achieve those margins back?

Yes. So if you look at prior to '18, of course, there's a lot of aggressive growth during that period. I mean the working capital metric also was not great, what we have also done is, relooked at our working capital metrics. I mean just margins -- to increase margins of 2% to drive that kind of volume growth is not efficient to working capital. So that's the 2, 3 factors, which have led to the decline in margins as of now but we, of course, have already upped our EBITDA margin guidance for the current year. So 2, 3 issues. One, of course, was the implementation of GST in 2017, which has had about 100 bps to 150 bps impact because we do not get input credit on any of our products so there have been issues of reverse charge GST on royalty and increase in the GST of printing outside plus the GST rate at 18% for almost everything. So that's one. The other thing, of course, is because of -- during COVID, of course, the volumes and the revenues were lower. Of course, the baseline costs, which we had done quite a bit on the baseline cost, but of course, beyond a point you can't really go low. So as and when volumes start going up post the NCF implementation, the margins will improve. But of course, they should improve on a regular basis. There can't be any knee jerk movement of margins. We are working around looking at each and every aspect of it. If you look at most of our working capital metrics, we are far better than what we were pre-COVID. I mean these numbers in terms of net working capital days, in terms of receivable days are far better and even on the operating cash flows. INR 800 crores, even at 20% EBITDA margins we were making...

We're making around INR 38 crores of operating cash flows at that time.

So we are at INR 120 crores plus. I think that's more important for us in terms of generating cash rather than just looking at one part of it, which is the margin percentage.

So also if you look at the operating metrics, most of them -- I mean, most of them are down by 50% -- 50% from 5 years ago.

Sorry to interrupt. Sir, your voice is sounding very muffled.

Okay. So can you hear me now?

Yes, sir.

Yes. So what I was saying was that if you look at our operating metrics, most of them have -- they have declined by 50% over the last 5 years. So we have to look at these numbers in terms of the cash that we are generating, which is probably up 3x in the last 5 to 6 years and the operating metrics, which have seen a huge improvement. So I think we would like to look at it like that.

Okay. And so with respect to sustainable margin. So could we expect a margin near 18%, 20% or more than that in coming years?

So see, we are looking at it year-on-year. And I think in a year where we have paper prices declining a bit, of course, we could look at that 20%. But a lot of factors involved in this. I mean, of course, product prices cannot increase beyond a point. Paper, of course, is the biggest lever in terms of that. And of course, everything depends upon volume growth. So once you have volume growth. I think we can look at improving margins.

[Operator Instructions] The next question is from the line of Bharat Sheth from Quest Investment.

Pardon my ignorance, my question will be this new course that we are talking, which is announced in August '23, how does it really going to play out for us as well as overall on the whole education, what NCF new course.

Sorry, you want to ask how will play out for us with the new syllabus you mean to say?

As well as the overall industry because see ultimately overall industry, because what will differently will it be then from the exiting one?

The new syllabus means getting new books in the market. And when you get new books in the market, the used books or secondhand books come out of the market and the schools take all the new books for their use and that increases the market share of companies, which have good brand, good content and good relationship with the schools that affects them positively. So that's how it will have a positive impact in the group for the next 2 to 3 years.

Okay. And what I understand that you said that it is not yet, only implemented from standard third to standard six. Is that correct understanding?

No, no. They have announced the new books for only Class third and Class sixth as of last month. We expect over the next couple of months, there should be more announcements of more classes. So, so far, the new syllabus is only there from classes prep to third and now sixth.

So for whatever change, so that will be at least to that extent will benefit this year, correct?