S Chand & Company's 9MFY20 results (Neutral) - Lower SG&A + Lower DSO = Positive OCF over 9M!

9MFY20 Financial Results Highlights

• Q3 is insignificant for SCHAND and we believe 9M comparison is better to see costs/NWC movement.
• Revenue: Cons. Revenue grew ~34% yoy to ~Rs975m in 9MFY20. The growth is on a relatively weak base due to higher sales returns depressing revenue over FY19.
• Profitability: SCHAND 3.0 is now fully implemented. While revenue performance would be visible only in Q4FY20E, operating cost improvement has started coming in. Adjusting for Ind-AS 116, SG&A costs fell ~15% yoy in 9M (reported SG&A fell ~19% yoy). While, COGS were up ~67% yoy, lower SG&A still meant that EBITDA loss came off ~13% yoy to ~Rs1.9bn (reported EBITDA loss down ~17% yoy).
• NWC: Since March 2019, DSO has fallen 209 days by Dec 2019 and currently stands at 102 (vs 150 yoy; lowest since data reported from FY17). NWC reduction over 9MFY20, however, was by 133 days (184 days as of Dec; 195 yoy).
• Cashflow: Cost savings + receivables release has led to ~Rs96m positive OCF in 9MFY20 versus ~Rs920m outflow yoy.
• FY20E Guidance: ~Rs6.5-7bn revenue with EBITDA margin of 18-20%.

Key positives: Lower SG&A costs / DSO.

Impact on financials: N/A

Valuation & View

SCHAND 3.0 has started delivering results on the costs/receivables front while its impact on revenue would be visible only in Q4. Although the company believes that overall sales should not be affected due to working on stricter credit periods and weeding out higher WC distributors out of the system, in our opinion, the markets would want to wait for evidence before taking this new normal into account. The NEP, whenever it is implemented at the ground-level, would set the stage for strong growth for the next 2-3 years as older books are removed out of the system, but the uncertainty of possible inventory losses prior to the new curriculum is also high, even though the risks appear receding for FY21E given the lack of updates on this end so far from the government. Valuations remain undemanding, but execution track-record in the new WC environment remains to be seen. Maintain Neutral with a TP of Rs95 (0.35x FY20E P/B).