S Chand & Company's Q4FY18 results (Outperformer) - Good performance; underappreciated story…

FY18 result highlights (consolidated)

• Revenue grew ~20.5% yoy to ~Rs7.9bn (1% miss) as Chhaya Publication was consolidated for the full year (vs 1 quarter in FY17). Assuming Chhaya was fully consolidated in the base year, revenue would have grown at a healthy ~16.1% yoy.
• K-12 revenue grew ~17.1% yoy to ~Rs6.4bn (including ~10% volume growth) while Higher Education (HE) revenue bounced back during FY18, growing ~14.6% yoy to ~Rs1.4bn (entirely led by volume). Early Learning/Misc income grew ~20.7% yoy to ~Rs186m.
• Gross profit declined ~220bps to 59.2% due to (1) higher paper prices yoy (up ~17%)/ inability to take input tax credit on GST paid, (2) negligible pricing improvement in HE, and (3) higher royalty (6.4% vs 6.25% yoy) post GST. EBITDA margin decline, however, was only 90bps to 24.3% due to lower increase in employee expenses and flat other expenses. EBITDA grew 16.2% yoy to ~Rs1.9bn (3% miss).
• Depreciation fell ~27.0% yoy as the company shifted from WDV to SLM method and revised useful lives for various assets under Ind-AS. Other Income was also higher (~3x yoy) due to a one-time write-back gain from its Walldorf OCD arbitration case (~Rs90m).
• Adj. net profit (for one-off OI) at ~Rs981m grew by 46.6% yoy and came in 18% ahead of estimates due to lower D&A. Reported net profit grew 70.5% yoy to ~Rs1.07bn.

Key positives: K-12 revenue growth / Lower depreciation.

Key negatives: Gross margin pressure.

Impact on financials: EPS upgraded by 18%/11% for FY19E/20E respectively as we revise depreciation lower for these years.

Valuation & View:

We believe SCHAND is a strong play on India’s rising consumer spends on education. New school additions (especially private) coupled with higher enrolments are tailwinds that will propel growth in the K-12 content market. SCHAND with its strong content line-up has the competitive moat to capitalize on growth in this market. We expect SCHAND to post a ~23% LTL earnings CAGR led by ~15% K-12 revenue CAGR leading to an improvement in return ratios. The recent stock price correction provides an attractive entry point in our view (trading at 8.9x FY20E PE); maintain OP with a revised PT of Rs576. (13.5x FY20E EPS).