S Chand’s IPO Allows Everstone Capital To Make 2.5 Times Its Investment 

S Chand and Company Ltd., a publishing house popular among students for its school textbooks, is looking to raise as much as Rs 729 crore from the primary markets. This will allow private equity player Everstone Capital Partners II LLC to make a 148 percent return on its average cost of acquisition, five years after it first picked up stake in the company.

The initial public offering (IPO) which opens on Wednesday is a combination of fresh issue and offer for sale, with a price band of Rs 660-670. The issue will remain open for three days. Seven existing promoters and Everstone Capital are looking to sell 20.2 percent of the pre-issue share capital, amounting to Rs 404 crore at the upper end of the price band, while 48.5 lakh equity shares worth Rs 325 crore will be in fresh issuance.

S Chand’s Business

The 75-year-old publisher mainly focuses on educational books and has close to 2,000 authors enrolled with the company, according to the red herring prospectus. The business is divided into three divisions - early learning, kindergarten to class 12 (K-12) and higher education and sold more than 4 crore books in financial year 2015-16. The company recently entered into the digital education space. Over the years, it has also acquired brands like Madhubun, Vikas, Saraswati. The company which recently bought 74 percent stake in Chhaya Prakashani for Rs 170 crore, is obligated to acquire the remaining stake on or after November 15, 2018.

Majority of the company’s revenue comes from the school books category.

Financial Highlights

The consolidated net worth of the company is Rs 532 crore, including that of Chhaya Prakashani, as of December 31, 2016.

S Chand’s total consolidated revenue has been growing at a compounded annual growth rate (CAGR) of 35 percent, while its bottomline has grown by 47 percent over the past five years.

The company has a cyclical business and generates most of its revenue in the January to March quarter, just before the new school session begins.

The earnings per share (EPS) at the upper end of the price band stands at Rs 22.2, after issuing new shares. The price to earnings ratio stands at 30.2 times, as per financial year 2015-16, shows data compiled by BloombergQuint.

Peer Comparison

Navneet Education Ltd. is the only listed publisher which has a market capitalisation of close to Rs 3,900 crore. Navneet caters to two segments – publishing and printing, and stationery. The company generated revenue of close to Rs 500 crore from its publishing business segment in the financial year 2015-16.

Both companies have similar total debt-to-equity ratios and return on net worth, but S Chand’s higher book value per share indicates that the stock is undervalued.

The publisher will use 78.5 percent of the proceeds from the fresh issue, that is Rs 255 crore, to pare debt, which will bring down company’s total debt-to-equity to 0.3 times in the financial year 2017-18.

Education Stocks’ IPO Performance

S Chand is the sixth company tapping the primary market this year and the second one from the education sector. Tuition provider CL Educate Ltd. launched its IPO in March this year and raised Rs 239 crore. The IPO was subscribed nearly 2 times and had listed at a discount of 20 percent to its issue price of Rs 502 on the National Stock Exchange.

Brokerage Verdict

Brokerages like Angel Broking and Prabhudas Lilladher have a ‘subscribe’ rating on the issue with both of them citing the company’s high growth potential and the expected fall in debt.