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Business News/ Market / Stock-market-news/  S Chand IPO fairly priced but business strategy bit risky, say analysts
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S Chand IPO fairly priced but business strategy bit risky, say analysts

Priced between Rs660 and Rs670 apiece, the S Chand IPO comprises new shares worth Rs325 crore and an offer for sale of 6.02 million shares by existing shareholders

The three-day IPO of S. Chand will open for subscription on Wednesday. Photo: iStockPremium
The three-day IPO of S. Chand will open for subscription on Wednesday. Photo: iStock

The three-day initial public offering (IPO) of S. Chand and Co. will open for subscription on Wednesday, making it the first publisher of educational books to seek a stock-exchange listing in more than 10 years.

Priced between Rs660 and Rs670 apiece, the IPO comprises new shares worth Rs325 crore and an offer for sale of 6.02 million shares by existing shareholders. At the upper end of the price band, the IPO is expected to raise Rs728.55 crore.

Analysts said the issue was fairly priced and reasonable. In a report on 24 April, Angel Broking said S Chand’s pre-issue works out to three times the FY2017 price-to-book value (P/BV) at the upper end of the price band, which is lower than its peers.

Navneet Education Ltd, which in 2006 became the last Indian educational book publisher to sell shares, is trading at 6.3 times its FY2017 P/BV.

“Also, S Chand’s enterprise value to sales (EV/sales) multiple (at) 3.2 times is at a discount to Navneet’s 3.7 times. On EV/EBITDA front too, S Chand’s issue appears to be attractive at 13.4 times against 16.3 times of Navneet. However, return on invested capital for S Chand and Navneet both is in the range of 28-30%," said the brokerage firm.

EV/sales is a valuation measure that compares the enterprise value of a company to the company’s sales. Ebitda stands for earnings before interest, tax, depreciation and amortisation, an indicator of operating profitability.

Prabhudas Lilladher Pvt. Ltd says the issue values S Chand at Rs2,300 crore, implying an EV/EBIDTA of 16.4 times of FY17. According to it, S Chand’s issue offers investors an opportunity to “play the publishing segment which has limited listed opportunities."

“S Chand is looking to repay debt of Rs256 crore from the IPO proceeds and further working towards integration of Chhaya Prakashani in FY18. With virtually no immediate capex at facilities and acquisitions on cards, the cash generated from operations will be used for retiring debt in FY18. It has potential to report 20-25% earnings CAGR (compound annual growth rate) over next 2-3 years," Prabhudas Lilladher said in a note on 24 April.

S Chand’s revenues and earnings have seen compound annual growth rate of 33% over the FY12-FY16 period. It is a market leader with a share of 13% in education content. Closest peers Oxford Publication and Orient Black Swan have a share of 6% each.

“Robust distribution network, pan-India sales network and in-house printing capabilities are growth drivers for company," Angel Broking Ltd said.

Analysts say there is limited scope of improvement for its return on equity in the medium term. “The seasonality of S Chand’s business does not help in allaying fears as it earns more than 3/4th of its business in fourth quarter," LKP Securities Ltd said in a report on 21 April.

GEPL Capital Pvt. Ltd said a high degree of seasonality of the K-12 educational business materially affects operating revenue, margins and cash flow from quarter to quarter. “The company operates in a highly competitive and fragmented industry, and its business, results of operations and financial condition may be adversely affected if it is not able to compete effectively," it said.

GEPL Capital is also not convinced that its recent acquisition of Chhaya Prakashani will achieve expected benefits, which could materially adversely affect its business, results of operation, cash flows and financial condition.

“S Chand’s focus on acquiring regional leaders is a reasonable strategy as it takes a long time, between 10 and 15 years, to build content and establish a dependable brand. However on the flip side, the risk might be paying irrational premium for acquisition and inability to smoothly integrate the acquisition," Prabhudas Lilladher added.

The acquisition of Chhaya Prakashani in December is expected to add 18-20% to revenue and help expand its eastern India portfolio.

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Published: 25 Apr 2017, 10:17 PM IST
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