S Chand & Company's Q4FY19 results (Neutral) - FY19 a lost year; Lurking uncertainties in FY20E!

FY19 result highlights (consolidated)

• Revenue fell ~34% yoy to ~Rs5.2bn. SCHAND has booked (1) ~Rs740m of incremental provisions for future book returns (~Rs1bn+ in FY19 vs ~Rs400m in FY18), and (2) ~Rs500-600m of incremental sales return during FY19 (higher than anticipated). However, even adjusting for the same, revenue performance was far weaker than anticipated and far lower than the earlier guidance of ~flattish growth for the year.
• FY19 saw lower book orders due to uncertainty regarding the implementation of New Education Policy (NEP), and with slowing orders, SCHAND too decided to rationalize its distribution strategy – focusing higher sales with partners who pay earlier. These impacts have hit revenue performance during the year.
• K-12 revenue fell ~34% yoy to ~Rs4.2bn. Higher Education (HE) revenue fell ~52% yoy to ~Rs680m. Digital grew ~15% to ~Rs360m.
• Weak topline performance led to all profitability metrics going haywire. While gross margin saw a ~240bps yoy cut at 56.8%, mainly on account of higher paper costs, negative operating leverage meant that SCHAND reported an EBITDA loss of ~Rs312m (vs ~Rs1.9bn profit yoy). Adjusted net loss stood at ~Rs436m.
• SCHAND’s FCF stood at ~Rs380m in FY19 (vs ~Rs400m in FY18). Net debt stood at ~Rs1.6bn in FY19 (~Rs640m yoy).

Key positives: FCF flattish yoy despite EBITDA loss in FY19.

Key negatives: Huge miss on rev, profitability.

Impact on financials: FY20E EPS cut by 83%; refrain from introducing FY21E fins. given lack of clarity on NEP and its timeline of implementation.

Valuation & View:

SCHAND’s FY19 shocker sets it back by almost three years in terms of revenue. While we appreciate the company’s approach of focusing on cash generation over sales (given high WC business), we remain sceptical if these new stricter WC measures would hold if and when sales growth resumes post the NEP uncertainty gets cleared. The NEP too brings to fore a new uncertainty of possible inventory losses in FY20E, depending on when it is implemented. Although the stock appears attractively valued on book value terms it is still not cheap in terms of PER, and we believe the stock would remain out of the radar of investors given that clarity on FY20E’s financials will come only in March 2020. As of now we are maintaining Neutral (valuing it at 0.5x FY20E P/B).