NEP Rollout And AI Content Licensing Will Unlock High-Margin Opportunities

Key Takeaways

• Adoption of the new syllabus and content licensing could significantly boost revenue and positively impact margins and earnings.
  
• Operational efficiency improvements and growth in educational testing sector position the company for higher profitability and increased market share.
  
• Reliance on government syllabus changes and investment in new initiatives creates uncertainty in revenue growth, profit margins, and potential goodwill write-downs.

Catalysts

S Chand and Company Limited, an education content company, develops and delivers content, solutions, and services for the early learning, K-12, and higher education segments in India.

• The company is set to benefit from the adoption of the new syllabus content due to the implementation of the National Education Policy (NEP), which is expected to significantly boost revenue growth in FY '25 and '26 as more classes and subjects are included.
  
• S Chand's focus on content licensing agreements with leading tech majors to power AI large language models creates a new high-margin revenue stream, which could positively impact future gross margins and overall earnings.
  
• The launch of CUET coaching under the Testbook platform, targeting a large pool of exam takers, positions the company for growth in the educational testing segment, potentially increasing revenue and market share in the coming years.
  
• The reduction in net working capital days and improvement in receivable days highlight enhanced operational efficiency, which could lead to improved cash flows and better net margins.
  
• The anticipated double-digit growth in operating revenues and increased EBITDA margins guidance suggest confidence in achieving higher profitability, driven by both increased sales volumes and improved cost structures.

S Chand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S Chand's revenue will grow by 15.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 11.3% in 3 years time.
• Analysts expect earnings to reach ₹1.2 billion (and earnings per share of ₹33.23) by about February 2028, up from ₹508.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the IN Media industry at 21.3x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.12%, as per the Simply Wall St company report.

S Chand Future Earnings Per Share Growth

Risks

• Continuous reliance on government decisions for syllabus changes can delay revenue growth, as adoption of the new curriculum is uncertain and beyond the company's control, potentially impacting future operating revenues.
  
• The company has not provided specific revenue growth guidance for FY '26 and '27, introducing uncertainty and potential risk to revenue projections.
  
• The company's focus on new initiatives, such as CUET coaching, involves investment risks and uncertainty about how these new segments will contribute to overall revenue growth and profit margins.
  
• Increased paper costs following a period of lower costs could adversely affect gross margins, as the company may not be able to pass on the full cost increase to customers.
  
• The heavy goodwill on the balance sheet from past acquisitions could impact return on equity calculation and presents a risk of write-downs if those acquisitions do not perform as expected, potentially affecting net earnings and investor perception.

Valuation

• The analysts have a consensus price target of ₹305.0 for S Chand based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹10.4 billion, earnings will come to ₹1.2 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 13.1%.
  
• Given the current share price of ₹183.98, the analyst price target of ₹305.0 is 39.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.