S Chand is a leading education content and services provider across the education lifecycle, with a commanding share in the CBSE/ICSE K-12 segment. The company also operates in the higher education and early learning segments. S Chand is ideally positioned to capitalise on the burgeoning education market in India, with its strong brand equity comprising 59 consumer brands and high consumer recall. After three major acquisitions over the past five years, the company clocked revenue CAGR of 31.6% and EBITDA CAGR of 46.3% over FY12-17. Further penetration-led growth opportunities, strong execution of its inorganic growth strategy and a healthy balance sheet ideally positions the company to benefit from the overall growth in India’s education sector.
We forecast a c.14% EBITDA CAGR over FY17-FY20E and value the stock at 9x EV/EBITDA FY20E to arrive at a fair value of Rs 675/share, implying an upside of 25%+. We initiate with a ‘Buy’ rating. India’s economic growth and expansive young population has led the share of education-related spending – within India’s consumption expenditure segment – to increase from 4% in 2005 to 5% in 2015. S Chand’s integrated in-house editorial/sales teams, 2,400+ author relationships, 59 consumer brands across the consumer lifecycle and 6,500+ pan-India distributor network has enabled the company to capitalise on India’s burgeoning education market.
S Chand’s net sales nearly quadrupled over FY12-FY17 to Rs 6.8bn as the company expanded its school board presence and subject matter offerings through strategic acquisitions of brands such as Saraswati, Vikas, Chhaya and Madhubun. The company is likely to gain further momentum in EBITDA as it furthers its presence into the State Board market via acquisitions similar to Chhaya. High cash flow from operations and limited capex are expected to keep free cash flow positive with an FCF yield of 4.4%/3.8% for FY19E/FY20E, respectively.