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CD Equisearch Pvt Ltd Sep 21, 2015

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Navneet Education Ltd (NEL)

No. of shares (crore) 23.8

Mkt cap (Rs crs) 2227

Current price (18/09/2015) 94.1

Price target (Rs)

120

52 week H/L (Rs.) 120/88

Book Value (Rs.) 27.8

P/BV (FY15e/16e/17e)

4.4/3.6/3.2

P/E (FY15/16e/17e) 18.2/15.3/13.4

BSE Code 508989

NSE Code NAVNETEDUL

Bloomberg NELI IN

Reuters NAVN.BO

Daily volume (avg. monthly) 39678

Shareholding pattern % Promoters 61.8

MFs / Banks / FIs 15.1

Foreign 7.2

Govt. Holding 0.0

Non-Promoter Corp. 2.0

Total Public 14.0

Total 100.0

As on Jun 30, 2015

Recommendation

BUY

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

Figures (Rs crs) FY13 FY14 FY15 FY16e FY17e

Net revenues 805.66 882.12 979.48 1083.64 1201.99

Other Income 3.65 3.51 2.26 2.76 2.78

EBITDA (other income included) 194.55 211.50 239.47 260.96 291.36

Net Profit 107.29 114.95 130.14 146.77 167.51

EPS (Rs) 4.50 4.82 5.46 6.16 7.03

EPS growth (%) 39.3 7.1 13.2 12.8 14.1

Company Brief Navneet publishes education, children and general books and supplies paper

and non-paper stationery products. Its portfolio of education books include

supplementary books like digests (guide), workbooks, and most likely

question sets. It has a major presence in Maharashtra and Gujarat.

Highlights � Plagued by poor show of its publication business, Navneet posted just

4.6% growth in revenues (the lowest first quarter growth in twelve years)

in the first quarter compared to the same period a year ago. Torrential

rains in Maharashtra and Gujarat in the month of June affected the flow of

orders for both stationery and educational books. Navneet hopes to

recoup large part of the order loss in the current quarter.

� For reason mentioned, Navneet's publication business revenues, which has

grown at double digit rate in the first quarter of last four years, advanced

by an anemic 4.7%. EBIT margins though moved up 30 bps to 40.3%. Its

stationery business mirrored the overall trend to post 3.6% growth in

revenues to Rs 196 crs. Not only the growth rate slowed to the lowest level

in four years, but also the absolute addition to sales was one-seventh of the

previous year's Rs 46 crs. However, it managed to boost EBIT margins by

20 bps to 16.7%.

� Partially helped by lower tax provision, net profit increased by 9.5% to Rs

98.39 crs compared to year ago level. It marks a sizeable cut down in

earnings growth: 26.5% in Q1FY15 and 14% in FY15. Yet all is not dreadful.

Navneet reckons that revenues of publication business would grow by 12-

13% (our estimate: 10.5%) in the current fiscal. Exports of paper stationery,

particularly in North American markets, would also pep up growth.

Domestic stationery business though would remain lackluster. Despite

perceived rebalancing, publication business would continue to account for

nearly 56% of sales and four-fifths of allocable EBIT.

� The stock currently trades at 15.3x FY16e earnings and 13.4xFY17e

earnings. Perceived slowdown in Navneet’s publication business has

precipitated cut in average earnings growth (FY15-FY17) by nearly 100 bps

to 13.5%. But its foray in newer areas in education space deserves heed –

though the benefits would not be immediate. We therefore retain our buy

on the stock with revised target of Rs 120 (previous target: Rs 133) based

on 17XFY17e earnings (peg ratio: 1.3 compared to historical 1.6) over next

9-12 months.

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CD Equisearch Pvt Ltd


Outlook & Recommendation

Content business – varied trends

Navneet's content business represents a catalogue of diverging business trends. While supplies for CBSE and CBSE pattern

schools and that to government departments would grow at a brisk pace, existing content businesses (including syllabus

changes) would grind at 3-4% (syllabus changes normally trough in last two years of a six year cycle). Navneet plans to make

the most of the emerging trend of English medium private SSC schools positioning themselves as CBSE pattern schools up to

the eighth standard - wherein they use private publishers’ text books. Having launched textbooks up to the seventh standard,

Navneet would unmask the full range of products by the end of current fiscal.

Even its newly launched initiative (of providing supplementary books to public school students) has gathered steam - we

estimate 40% growth in business in current fiscal. Opportunities thrive for the Indian governments have emphasized (meekly

though) the role of digital education and need to reduce the flab of school bags.

Yet the existing content business would at best grow by 4%. Some of the proposed syllabus changes for both academic years

2015-16 and 2016-17 have been shelved. For current year, syllabus change in Maharashtra for VIth standard has not gone

through, while for the next year change would only be effected for standard VIth as against earlier announced changes for

standards VII & VIII (see table). In Gujarat, for instance, syllabus change in 2016-17 for commerce subjects for standard X has

been dropped.

e-learning business - conjuring new products

Navneet has harped on growing its e-learning business in a big way. For B2B products, it has not only seen higher demand

from new schools in metros, Tier I and Tier II schools but also higher off take from existing tie ups - wares already installed in

2600 institutions covering 16000 classrooms. Ample opportunities exist as the company has so far tapped less than a tenth of

the total school count of 34000 in Maharashtra and Gujarat alone.

For B2C, it has launched windows and android platforms of 'topscorer.com' for both SSC and CBSE students. It appears ready

to sell B2C retail offerings like online portal, CD roms and pen drives for state boards curriculum of Maharashtra and Gujarat.

e-Sense, Navneet's e-learning business arm, has undertaken plans to develop cloud based products. Some of its game-

changing products include e-learning tablets, cloud based interactive exams and application based audio visuals.

Yet this business is too small to make any dent. It barely contributes 2% to consolidated revenues and chips away profits of

other businesses (posted Rs 29 lakh loss last fiscal). That says nothing about the vulnerability of this business - revenues

tumbled 4% last fiscal as the company stopped providing hardware on lease to schools.

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[ [ [

[

Stationery exports revving

Bar exports of paper stationery, Navneet's domestic stationery business (paper & non -paper) has failed to live up to our

assumptions not least due to cut throat competition. 80% of domestic paper stationery is unorganized in India. While exports

grew by 30.2% last fiscal, domestic supplies of paper and non-paper stationery grew by 0.3% and 4% respectively. Thanks to

consistent growth in paper stationery exports over the last few years, it share in total stationery business has now increased to

40% from 22% three years back. No shift in demand is in sight. Backed by robust demand for its paper stationery in US retail

chains, Navneet reckons 15-20% revenue growth is highly probable; though it would also target new locations overseas.

Despite its plans to tap other overseas markets, its affinity with North & Central American markets has only grown over time -

the region currently accounts for more than three-fourths of exports from less than half few years back.

Risks

Foreign exchange risk

Volatility in fx rates have a large bearing on Navneet's business as exports form nearly a fifth of Navneet's total revenues; its

net foreign exposure at 15.4% of sales (standalone). To mollify concerns, Navneet hedges as and when favourble rates are

available.

Input costs

Raw material costs, particularly paper, account for almost half of total sales. Recent increases in paper prices and employee

costs could dent profitability, more so for the domestic paper stationery, which is mired in stiff competition.

Regulatory risk

Navneet depends a lot on the efficacy of intellectual property rights in India to determine its pricing power in the publication

business - bulk of its material is copyrighted. Its sales could suffer if it fails to protect its IPRs.

Financials & valuation

If the Q1FY16 results are any indication, then Navneet would mirror recent trends in business profitability. Spurred by

government orders for supplementary books and exports of paper stationery, overall revenue growth would average 10.8%

over the next two years. Supply of textbooks for CBSE and CBSE pattern schools would add nearly 1% to growth. But risk of

regional concentration looms. Navneet secures most of its publication revenues from two western states of Maharashtra and

Gujarat; 65% market share in supplementary book market in Maharashtra and 70% in Gujarat. Its plan to diversify to other

Indian states has not cut ice yet.

Reliably forecasting syllabus changes is no easy task. Some of the syllabus changes proposed earlier for both academic years

2015-16 and 2016-17 have now been shelved. Even the current syllabus changes could invoke modification. Had it not been for

the buoyancy in exports of paper stationery, overall revenue would have grown by a measly 7.6%.

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Yet margins have stayed rock solid to say the least. Publication business margins peaked to the highest level in at least a

decade at 33.3%. Stationery business too has started stabilizing at 11-12%. Navneet’s asset light model in stationery business is

palpable in its asset turnover and return on capital ratios. It liquidity ratios would also bet a boost from repayment of short

term debt.

The stock currently trades at 15.3x FY16e earnings and 13.4xFY17e earnings. Perceived shortfall in revenues of publication

business has triggered cut back in earning estimates (FY17e EPS cut by 5%). Yet incredible market shares in supplementary

books in Gujarat and Maharashtra prods its economic moat (though a narrow one) as manifested by 24-25% EBIT margins. Its

foray in newer areas in education space can barely be dismissed. We therefore retain our buy on the stock with revised target

of Rs 120 (previous target: Rs 133) based on 17XFY17e earnings (peg ratio: 1.3 compared to historical 1.6) over next 9-12

months.

Cross Sectional Analysis

Company Equity* CMP Mcap* Sales* PAT* OPMa NPM

a

Int

Cov. ROEa

Mcap/

sales P/BV P/E EV/EBITDA

Kokuyo 10 102 1025 570 6 3.9 1.1 1.8 2.3 1.8 4.7 168.0 34.6

MPS 18.6 804 1498 234 58 35.8 25.0 279.7 32.5 6.4 5.5 25.6 15.4

Navneet 47.6 94 2241 982 138 24.5 14.0 34.4 24.3 2.3 3.4 16.3 9.8

Repro India 11 392 428 417 16 12.0 3.7 2.4 9.5 1.0 2.1 27.5 11.1

TTM P/E; * Figures in Rs crs; companies given here are not truly comparable.

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Financials

Quarterly Results Figures in Rs crs

Q1FY16 Q1FY15 % chg. FY15 FY14 % chg.

Income from operations 516.28 493.67 4.6 959.37 861.31 11.4

Other Income 1.28 0.67 91.0 2.57 3.52 -27.0

Total Income 517.56 494.34 4.7 961.94 864.83 11.2

Total Expenditure 358.99 343.39 4.5 726.10 659.14 10.2

PBIDT (other income included) 158.57 150.95 5.0 235.84 205.69 14.7

Interest 2.98 5.81 -48.7 9.10 9.99 -8.9

Depreciation 6.22 6.60 -5.8 28.19 22.01 28.1

PBT 149.37 138.54 7.8 198.55 173.69 14.3

Tax 50.98 48.69 4.7 69.26 60.52 14.4

PAT 98.39 89.85 9.5 129.29 113.17 14.2

Extraordinary Item 0.00 0.00 - 0.47 0.16 191.7

Adjusted Net Profit 98.39 89.85 9.5 128.82 113.01 14.0

EPS (F.V. 2) 4.13 3.77 9.5 5.41 4.74 14.0

Segment Results Figures in Rs crs

Q1FY16 Q1FY15 % chg. FY15 FY14 % chg.

Segment Revenue

Publishing content 317.31 303.05 4.7 531.90 475.12 12.0

Stationery products 195.79 188.99 3.6 422.40 381.15 10.8

Others 3.18 1.63 95.1 5.07 5.04 0.6

Total 516.28 493.67 4.6 959.37 861.31 11.4

Segment EBIT

Publishing content 128.00 121.20 5.6 182.91 159.50 14.7

Stationery products 32.68 31.09 5.1 48.79 44.57 9.5

Others 0.39 0.50 -22.0 0.39 1.14 -65.8

Total 161.07 152.79 5.4 232.09 205.21 13.1

Interest 2.98 5.81 -48.7 9.10 9.99 -8.9

Other Unallocable Exp. (net of income) 8.72 8.44 3.3 24.44 21.52 13.6

PBT 149.37 138.54 7.8 198.55 173.70 14.3

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Income Statement Figures in Rs crs

FY13 FY14 FY15 FY16e FY17e

Income from operations 805.66 882.12 979.48 1083.64 1201.99

Growth (%) 30.2 9.5 11.0 10.6 10.9

Other Income 3.65 3.51 2.26 2.76 2.78

Total Income 809.31 885.63 981.74 1086.40 1204.76

Total Expenditure 614.76 674.13 742.27 825.44 913.40

EBITDA (other income included) 194.55 211.50 239.47 260.96 291.36

Interest 8.77 9.99 9.11 5.71 2.38

EBDT 185.78 201.51 230.36 255.24 288.99

Depreciation 23.45 25.80 30.76 31.15 33.23

Tax 55.02 60.49 69.25 77.31 88.24

Net profit 107.31 115.22 130.35 146.78 167.52

Minority interest & associate p/l 0.63 0.07 0.01 0.01 0.01

Net profit after MI 106.68 115.15 130.34 146.77 167.51

Extraordinary item -0.61 0.20 0.20 0.00 0.00

Adjusted Net Profit 107.29 114.95 130.14 146.77 167.51

EPS (Rs.) 4.50 4.82 5.46 6.16 7.03

Segment Results Figures in Rs crs


Segment Revenue

Publishing content 472.03 495.93 552.01 610.13 680.60

Stationery products 325.96 381.15 422.40 468.34 516.11

Others 7.67 5.04 5.07 5.17 5.27

Net sales 805.66 882.12 979.48 1083.64 1201.99

Segment EBIT

Publishing content 148.45 161.51 184.00 202.08 225.85

Stationery products 44.06 44.57 48.79 53.86 60.39

Others 0.71 1.14 0.39 0.78 0.79

Sub Total 193.22 207.22 233.18 256.72 287.03

Interest 8.77 9.99 9.11 5.71 2.38

Other Unallocable Exp. (net of income) 22.12 21.52 24.47 26.91 28.89

PBT 162.33 175.71 199.60 224.09 255.76

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Balance Sheet Figures in Rs crs


SOURCES OF FUNDS

Share Capital 47.98 47.98 47.64 47.64 47.64

Reserves 371.19 430.67 495.61 573.58 660.82

Total Shareholders Funds 419.17 478.65 543.25 621.22 708.46

Minority Interest 0.07 0.06 0.05 0.06 0.07

Long term debt 2.42 0.00 0.00 0.00 0.00

Total Liabilities 421.66 478.71 543.30 621.28 708.53

APPLICATION OF FUNDS

Gross Block 331.58 367.25 374.11 399.11 424.11

Less: Accumulated Depreciation 157.42 179.81 204.17 235.34 268.57

Net Block 174.16 187.44 169.94 163.77 155.54

Capital Work in Progress 5.73 4.51 4.00 0.00 0.00

Investments 31.00 47.46 49.23 49.23 49.23

Current Assets, Loans & Advances

Inventory 275.15 333.69 348.36 372.75 391.38

Sundry Debtors 165.93 196.11 188.56 197.99 207.89

Cash and Bank 3.52 6.92 5.51 7.01 10.43

Other Assets 34.57 47.35 38.31 41.42 44.07

Total CA & LA 479.17 584.07 580.74 619.16 653.77

Current liabilities 224.80 297.95 202.17 150.20 78.97

Provisions 53.86 57.43 68.06 72.81 84.68

Total Current Liabilities 278.66 355.38 270.23 223.01 163.64

Net Current Assets 200.51 228.69 310.51 396.15 490.13

Net Deferred Tax (net of liability) -4.84 -5.89 -4.05 -2.05 -1.05

Other Assets (Net of liabilities) 15.10 16.50 13.68 14.19 14.68

Total Assets 421.66 478.71 543.30 621.28 708.53

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Cash Flow Statement Figures in Rs crs


Net Income (a) 107.31 115.22 130.35 146.78 167.52

Non cash exp. & others (b) 19.74 24.08 26.73 27.27 30.33

Depreciation 23.45 25.80 30.76 31.15 33.23

Profit / loss on sale of assets / inv -0.38 -0.31 -0.34 0.00 0.00

Deferred tax & others -3.33 -1.41 -3.69 -3.88 -2.90

(Increase) / decrease in NWC (c) -63.27 -89.63 -5.50 -31.42 -27.52

Inventory -57.52 -58.54 -14.67 -24.39 -18.64

Debtors -49.53 -30.18 7.55 -9.43 -9.90

Other assets & liabilities 43.78 -0.91 1.62 2.39 1.02

Operating cash flow (a+b+c) 63.78 49.67 151.58 142.63 170.34

Purchase of fixed assets -38.65 -44.88 -18.27 -21.00 -25.00

Investments -31.50 -16.28 -1.11 0.00 0.00

Investment income & others 1.82 -0.80 12.54 1.53 1.90

Investment income 3.63 2.46 1.85 1.88 1.90

Share application money -1.00 1.00 0.00 0.00 0.00

Proceeds from asset sale 2.34 1.90 0.63 0.00 0.00

Loans & advances -3.15 -6.16 10.06 -0.35 0.00

Chnge in MI

Investing cash flow (d) -68.33 -61.96 -6.84 -19.47 -23.10

Net borrowings 23.97 65.80 -90.10 -58.58 -75.00

Dividends paid -22.14 -50.05 -55.71 -63.08 -68.81

Preference capital & others 1.16 -0.06 -0.34 0.00 0.00

Financing cash flow (e) 2.99 15.69 -146.15 -121.66 -143.81

Net change (a+b+c+d+e) -1.56 3.40 -1.41 1.50 3.42

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Key Financial Ratios


Growth Ratios

Revenue (%) 30.2 9.5 11.0 10.6 10.9

EBIDTA (%) 38.6 8.0 13.2 9.1 11.7

Net Profit (%) 39.3 7.1 13.2 12.8 14.1

EPS (%) 39.3 7.1 13.2 12.8 14.1

Margins

Operating Profit Margin (%) 23.9 23.6 24.2 23.8 24.0

Gross Profit Margin (%) 23.2 22.8 23.5 23.6 24.0

Net Profit Margin (%) 13.4 13.0 13.3 13.5 13.9

Return

ROCE (%) 20.8 18.7 19.5 21.6 23.7

RONW (%) 27.5 25.6 25.5 25.2 25.2

Valuations

Market Cap / Sales 1.7 1.5 2.4 2.1 1.9

EV/EBIDTA 7.9 7.5 10.5 9.1 8.2

P/E 12.9 11.8 18.2 15.3 13.4

P/BV 3.3 2.8 4.4 3.6 3.2

Other Ratios

Interest Coverage 19.6 18.6 22.9 40.2 108.7

Debt-Equity Ratio 0.4 0.5 0.3 0.1 0.0

Current Ratio 1.7 1.6 2.1 2.8 4.0

Turnover Ratios

Fixed Asset Turnover 4.8 4.9 5.5 6.5 7.5

Total Asset Turnover 2.0 2.0 1.9 1.9 1.8

Debtors Turnover 5.7 4.9 5.1 5.6 5.9

Inventory Turnover 2.5 2.2 2.2 2.3 2.4

Creditors Turnover 30.2 28.7 37.5 43.3 44.7

WC Ratios

Debtor Days 64.0 74.9 71.7 65.1 61.6

Inventory Days 146.3 164.8 167.7 159.4 152.7

Creditor Days 12.1 12.7 9.7 8.4 8.2

Cash Conversion Cycle 198.2 227.0 229.6 216.1 206.1

Cash Flows (Rs crs)

Operating Cash Flow 63.8 49.7 151.6 142.6 170.3

FCFF 0.1 -5.6 151.1 126.9 148.8

FCFE 18.3 53.6 55.0 64.6 72.2

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CD Equisearch Pvt Ltd - Business Standardbsmedia.business-standard.com/_media/bs/data/market...CD Equisearch Pvt Ltd Sep 21, 2015 Equities Derivatives Commodities Distribution of Mutual