S Chand & Company's Q3FY19 results (Downgrade to Neutral) - NWC focus to hit P&L performance in the near-term

Q3FY19 Financial Results Highlights

• Q3 is a relatively small quarter for SCHAND (~9% of total revenue in FY18). EBITDA/PAT losses accrue over the 9M period before recovering it entirely and posting a full year profit in Q4.
• Revenue: Cons. rev. fell ~93% yoy to ~Rs46m ascertain successful sales schemes were shifted to Q4 which were part of Q3 in FY18.
• EBITDA: Reported EBITDA loss increased to ~Rs852m (vs ~Rs368m yoy) during Q3. SCHAND has booked ~Rs226m as exceptional costs for unusually high book returns. Although it expects this to reverse partially in Q4 as it redistributes these books to new distributors, we consider this as a normal business expense. Adjusting for the same, EBITDA loss would have stood at ~Rs~1.1bn.
• PAT: Net losses increased from Rs269m to Rs814m yoy.
• NWC: Overall WC days is up 22 days qoq to 224 (and 235 days as of Q1; 253 days as of Q4FY18) mainly due to rise in inventory days. Debtor days have fallen 23 days qoq to 155.

Acquisition Updates

• Chetana LLP: Certain pre-requisites prior to the transaction going through were not met after repeated deadline postponements. As a result, both SCHAND and Chetana have mutually called off the acquisition. No impact expected on SCHAND’s FY19E financials.
• Chhayya Prakashani: In final stages to acquire balance 26% stake. Payout expected in February 2019 (~Rs640m payout).

Valuation & View

SCHAND’s recent announcement of focusing heavily on net working capital during the current sales period comes as a surprise for us. While we appreciate the company’s approach of focusing on cash generation over sales (given the high WC nature of the business), it remains to be seen if the company can crack the status quo of the current K-12 business model of high DSO days. This would mean that while the revenue (and correspondingly EBITDA/PAT) would take a knock immediately, the benefits of lower WC/higher CF generation would not be visible until end FY20E at the earliest (and possibly later). As a result, we downgrade the stock to Neutral. We value the stock at 0.7x FY20E P/B (vs 1x earlier). Our revised target price stands at Rs238. We would wait to see visible changes on the NWC /costs front before turning constructive on SCHAND.