S Chand has a 2% share in a fragmented market. K-12 formed 80% of its FY17 revenue, and higher education about 18%. It has been investing in digital capabilities to complement its growth.
S Chand, operational for over 70 years, is a leading player in the Indian education content market, especially in K-12. It sold 48+mn copies in FY17, has 9,500+ active titles, about 2,400 author relationships and 6,500+ distributors. It has offerings in K-12, higher education and early learning segments. The K-12 content market has grown at a 20% CAGR over FY11-15 to $3.2 billion and the higher education market has grown at 25% to $1.1 billion. Key drivers are a large and young population, the growth of private schools and an increasing share of education in consumers’ discretionary budget. S Chand has a 2% share in a fragmented market. K-12 formed 80% of its FY17 revenue, and higher education about 18%. It has been investing in digital capabilities to complement its growth. It has acquired several companies to expand its portfolio and presence, the most recent being Chhaya in K-12, and these have been earnings accretive. Its K-12 business has grown at a 45% CAGR, 20% organic, over the last five years while its higher education business has grown at 8%. Last five-year EPS CAGR is 28%. We estimate 14%/13%/25% of revenue/EBITDA/ EPS CAGR between FY17 and FY20. Working capital has been high in K-12, especially so in Q4, but we estimate a 4% FCF yield in FY19, ex-acquisitions. Our TP is DCF-based and implies FY20 P/E of 16x. Key risks: CBSE’s (Central Board for Secondary Education) advisory to the affiliated schools to use only NCERT text books, high seasonality and any digital disruption.
As per Technopak, India has a large market, $84 billion education market and $6 billion content market and the increasing share of education in consumers’ discretionary budget make Indian education products and services structurally well positioned. Also, the number of private schools (to whom S Chand largely caters to) is growing at almost 9% annually. The K-12 and higher education content and publishing market sizes were close to $3.4 billion and $1.1 billion, respectively, in FY15, as per Nielsen estimates, and these markets have grown 19% and 25% CAGR, respectively, between FY11 and FY15. We estimate 14%, 13% and 25% revenue, EBITDA and EPS CAGR, respectively, between FY17 and FY20, excluding new acquisitions. Key drivers are the K-12 business, stable margins and lower interest costs and taxes. Working capital has been high in K-12, especially so in Q4, leading to low ROE but we estimate a 4% FCF yield in FY19, ex-acquisitions. We initiate with an ‘outperform’ rating and a TP of `625, a 28% upside. We value the company using a DCF model, using WACC of 11.6% and a terminal growth rate of 5%. We have assumed a 14% revenue CAGR over FY17-20 and a 9% CAGR beyond that.