S Chand & Company's H1FY20 results (Neutral) - Cost control visible, Revenue/NWC improvement awaited...

H1FY20 Financial Results Highlights

• Q2 is insignificant for SCHAND and we believe H1 comparison is better to see costs/NWC movement.
• Revenue: Cons. Revenue grew ~29% yoy to ~Rs879m in H1FY20. 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 ~9% yoy in H1 (reported SG&A fell ~13% yoy). Although COGS were up ~7% yoy, lower SG&A still meant that EBITDA loss came off ~22% yoy to ~Rs1bn (reported EBITDA loss down ~27% yoy).
• NWC: Since March 2019, DSO has fallen ~154 days by Sep 2019 and currently stands at 157. There is a noticeable improvement compared to Sep 2018 (182 days), but is still higher versus ~148 days reported in Sep 2016/2017. Nevertheless, the performance is healthy. NWC reduction over H1FY20, however, was lower at 79 days (238 days as of Sep) due to lower payables as SCHAND has delayed paper purchases. NWC movement would be important going into Q3.
• Cashflow: OCF outflow shrank to ~Rs27m in H1FY20 vs ~Rs535m yoy, a reflection of cost savings. WC release, however, is lower yoy due to sharp decline in payables.

Key positives: Lower SG&A costs / DSO.

Impact on financials: 24% FY20E EPS inc. due to Ind-AS 116/tax cuts

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 would also be high on the minds of market participants. Although valuations are undemanding, the same could remain capped in the near-term, given these uncertainties and the low appetite for small cap stocks. Maintain Neutral with a TP of Rs95 (0.35x FY20E P/B). ​