Prabhudas Lilladher's research report on S Chand and Company
S Chand reported strong performance by turning PAT positive for first time ever in 1Q on the back of strong tailwinds from school re-openings. Even after adjusting for revaluation gain of Rs 98mn on Smartivity (EdTech investment), losses were meagre at Rs36mn when compared with past 1Q performance. Management commentary for FY23E is bullish with a top-line guidance of Rs6,000mn+ complemented by a price hike of 15%+. However, given persistent inflation in paper prices, GM is expected to remain under pressure in near term. Subsequent to turning PAT positive after a gap of 3 years in FY22, we believe S Chand’s turnaround is complete and the company is back on growth track. Though the stock has appreciated by 33% since our last update report we increase our target P/E multiple to 10.5x (earlier 9.5x) and maintain BUY given 1) strong growth guidance 2) strengthening BS (net debt of Rs279mn in 1QFY23 with an intention to be net debt free by 4QFY23) and 3) improved NWC metrics (cash conversion cycle to improve from 226 days in FY22 to 188 days in FY24E). S Chand trades at 14x/8x our FY23/FY24 EPS and valuations are undemanding for a business that commands FCFF yield of ~14-17% over FY23-FY24E.
Apart from valuation comfort, NEP implementation represents an option value in the business and can result in sharp re-rating. Retain BUY with a TP of Rs185 (earlier Rs156).
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