Initiating coverage: S Chand & Company (Outperformer) - Clean play on India’s growing K-12 education space

S Chand & Company (SCHAND) is one of the largest education content publishers in India’s K-12 market and a play on India’s discretionary education spends (at 7% of GDP by 2025 versus 5% in 2016). 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 14.2% cons. revenue CAGR, led by like-to-like 15% CAGR in the K-12 content segment, which should result in strong 32% net profit CAGR (on lower interest expenses) over FY17-20E. Strong earnings growth and a healthy balance sheet are factors that underpin our positive stance. We initiate coverage with an Outperformer rating and a target price of Rs520 (13.5x FY20E EPS).

K-12 content market has huge potential: India has the largest K-12 system in the world (~250mn students). Aspirations of a better life through quality education have driven ~8.8% CAGR in private unaided school additions and ~4.8% CAGR in enrolments over 2011-16. As per Nielsen, K-12 content market (SCHAND’s primary market) is set to grow ~20% CAGR over 2015-20E to Rs542bn.

Competitive advantages in place; growth to come from increasing reach: SCHAND competitive moat is its battery of star authors, repository of titles coupled with its pan India distribution network. Despite being India’s largest player in the K-12 content market, it just reaches 40K schools out of the total ~400K private schools, implying a long runway for growth. We expect its core K-12 content revenue to post 15% LTL CAGR led by ~10% volume growth and ~5% realisation improvement (price hike + mix).

Strengthening balance sheet to help inorganic growth: As schools restrict a publisher to 1-2 titles per semester per academic grade, SCHAND retains the distinct brand of acquired companies. Post IPO, SCHAND used most of the cash it raised to repay its long-term debt. As the K-12 content market is ripe for consolidation (led by the inability of smaller players to scale, disinterest of 2nd generation, etc), SCHAND’s balance sheet strength would permit inorganic acquisitions (5 in last 5 years) to scale up and improve margins.

Growth prospects make it attractively priced: SCHAND’s return ratios are subpar versus Navneet but growth is structural and superior at 32% CAGR over FY17-20E. We initiate coverage on SCHAND with an Outperformer rating and value SCHAND at 13.5x FY20E EPS (15% discount to Navneet) to arrive at our target price of Rs520. Key risk to our call is regulatory changes, lower growth and poor working capital management.