Navneet Publications - a good com in education sector


(Vinod MS) #1

Hi,

Promoted by Gala family, Navneet Publications (India) Ltd. is a leading Educational book products and service company providing an array of Educational,Children and General based Publication and Scholastic Paper & Non-Paper Stationery products.

It is a dominant player in Maharashtra & Gujarat with a market share of more than 65% in these states and has more than 5,000 titles to its credit.In 2008, the company ventured into E-Learning space which has now gained significant momentum with more than 1600 schools using its products by 2013.

In 2011 Navneet picked up a minority stake in Kâ12 Techno Services â a school management company that oversees 93 schools(65k students) in AP under the brand name “Gowtham Model School”.In line with its strategy to expand its presence, it has forayed into new geographies of AP and Delhi with an objective to target the students from CBSE and ICSE Boards as well.

Navneet is one of the largest paper stationery brand in India and it enjoys leading position in the premiere stationery markets of the Middle East, parts of Africa, U.S.A. and Europe.

50-55% revenue and 75-80% EBITDA is contributed by Publication segment. Margins here an in excess of 30%, stationery has margins of 10-13%. E-sense is expected to have high margins in excess of 30%.

Navneet’s publishing business is in an interesting phase which is quite different from what it has seen till now.

The syllabus change playing out in Gujarat and Maharashtra now is different from previous syllabus changes as this is more drastic.The relatively more drastic change is an effort by the state governments to align more closely with the CBSE syllabus. This has given two great opportunities for Navneet.One, the difficult changes increase the requirement for supplementary books and learning aids.Secondly, the CBSE focus has given Navneet enough content to penetrate the non-West market and CBSE Schools. They have already started marketing in AP and North belt.

Ministry of HRD is trying to implement a common curriculum across states which should again help Navneet with its market leader status and CBSE content. This has already started some states. Its partnership with K-12 Techno services of AP, a com in which Navneet acquired 24% stake in 2011, has opened up doors to more than 90 schools and 50000 students there.Navneet is also expected to replicate the school management business in Maharashtra and Gujarat.For the first time the state gov of Maharashtra decided to supply supplementary books for the government schools so that students can compete with their private school counterparts.Navneet received a 35 Cr order for this in 2013. This is a good new sub-segment opening up.

Navneet’s stationery business is also in an interesting phase. It has recently entered the big foreign retail markets with major orders from USA.This can sweat its existing stationery manufacturing capacity to increase revenue in the current offseason time. Dec 2012 quarter had a 48% growth in sales due to this.Navneet’s recent efforts in digitising schools with its product called “e-sense” is yielding good results with 1600 schools signing up already.This is a high margin business and Navneet can exploit its strong bond with 24000 schools in Gujarat and Maharashtra.The product is receiving great response and achieved break even last year. This should start contributing to net profit from this year onwards.The com has also received a 750 Cr order for digital learning from Maharashtra government expected to be executed over next 3 years. This is again a new sub-segment.

With multiple growth drivers the company should clock a 20% growth in revenues for next 3-5 years compared to 15% CAGR in the last 5 years.With margins above 20%, low capital intensity and great dividend payouts in excess of 40%, the ROE is above 25% and is expected to improve further.The management has exhibited high integrity and transparency with good investor communication.A good company in the high growth, recession proof education sector can catch the fancy of the market and trade at a PE of above 15.Both FIIs and DIIs have upped their exposure in the last one year.

With a market cap of 1445 Cr the com looks attractive with sales expected to cross the landmark 1000 Cr mark in FY14.At CMP of 60, the company is trading at a forward PE of 11 on an expected FY14 EPS of Rs 5.6.

Since Q-1 is a major quater for Navneet, it looks worthy of investing now.

Cheers

Vinod MS


(Manish Vachhani) #2

Excellent effort Vinod! Keep it up.


(Hitesh Patel) #3

Navneet is the best play in the education sector.

Good management, excellent brand strength esp in gujarat, consistent growth, clean balance sheet, high div yield and favorable circumstances for next 2-3 years should provide good returns.

If the Mah govt order contributes to sales and profits then it can easily double in a time frame of 2 years. Without that too it looks attractive.

bought recently.

hitesh.


(Vinod MS) #4

Thanks to Om and Hitesh for suggesting to look at Navneet. Once the stock passes their screen it calls for a full fledged analysis.

Thank You Manish Bhai!

Cheers

Vinod

Discl: Looking forward to recommend this for others and buy for my portfolio shortly


(Ankit Gupta) #5

Hi Manish,

I have personally used Navneet’s books when I was in school and they were pretty good. Also, my wife’s cousin is a distributor of Navneet’s books in Anand and nearby regions. He told me that the promoters are pretty ethical and management is pretty good in marketing. He also told me that there very less errors in the books printed by Navneet (guides and reference). I am meeting him tomorrow and will get a detailed feedback from him. I would also like to add one more thing here, with semester system coming in 11th and 12th in Gujarat (am not 100% sure about other standards [Hitesh bhai and Manish bhai will know better]), the sales of the company’s books will increase in future.

Regards,

Ankit


(Hitesh Patel) #6

Regarding experience of using navneet products, I personally have used navneet supplementary books all throughout my schooling career with good results. And quality wise there is practically no competition. People go to book stores and tell him “give me navneet of science 10th std” – and shopkeeper guesses its the guidebook. Its like using the name of colgate for toothpaste. But this is limited to gujarat and maharashtra.(no experience of maharashtra but in guj atleast I can vouch for its quality)

Now I have been buying navneet books for my kid and same story repeating itself. Still no serious competition in sight.

Coming to their stationery products, I always feel that their notebooks and such other products are of the best quality.

Regarding semester system, yes in gujarat semester system is on so kids and parents have to buy books twice a year so that applies to supplementary books as well. In effect the lumpy quarterly earnings might get smoothened out to some extent.

At 3% div yield, and PE of around 11 or so with good return ratios, and better than before prospects this looks quite attractive.


(Utkarsh Patel) #7

Regarding stationary products, the quality of Navneet is noteworthy

And Yes, the changing course is a big thing in favor as the old materials (Previous year digests)become somewhat useless and all the students need to go for new personal guide or digest.My digests (old course) were first used by my 2 cousins, my sister and then finally by me. This new syllabus should increase the sales of this segment, according to my knowledge.

Standard 11 course was changed in academic year 2011-12 batch and Standard 12 course was changed in Academic Year 2012-13

Other publications like Jamnadas publications, Kumar were first one to tap the market with their guides. This publication has tremendous amount of errors. You can expect an error every 2nd page and becomes frustrating for students (I was one of them 3 years back).The digests of Navneet are always better than any other publications (with much less error) but they were introduced late in the market last year for STD 12.Navneet is undoubtedly the preferred one . I suggested my students to only go for Navneet Digest if they needed to, nothing else was necessary. So there is some moat here ! Also, Navneet Gala Paper Set is very famous and most of the students have it (Partly to do with parents who won’t compromise single buck for the study of their child). But this has least errors. Even this would have to be bought new by students as the pattern of examination has changed dramatically. In Gujarat, odd semesters has 100 marks Multiple Choice questions and even semesters have 50 marks Multiple Choice Questions and 50 marks theoretical questions+Numericals. Hence, new guide according to this pattern will be needed which can further augment the sales from this segment. Another point is increasing weightage of the state board result in the admission process of various premiere colleges like NIT, IIT, hence students will be required to concentrate on state boards and buy state board reference books. (Navneet has good brand and books for state boards but doesn’t have good publications for competitive exams. Competitive exams publications require higher amount of expertise. Most of competitive exams have only Multiple Choice Questions(MCQ) )
OPPORTUNITY: As more and more competitive exams are going online , many website and portals (worked for one of them) have come up to give students online test practice for MCQ i.e chapter wise and section wise and whole course paper online and check their speed of solving papers online. Results are produced instantly. They also show in which area the student is strong and weak. (Like MOCK online tests) Slowly but surely, most exams are going in this direction and pen paper test are decreasing. If Navneet starts taking this segment seriously, revenue and margin will be very high as content creation requires a one-time effort. The content of Navneet will be preferred by students for board exams. Students are sold the package of different test sets at price ranging from Rs.900 to Rs.3000 by few players who are present in the market currently. (Such packages are available for Std 5 -12 ) Aggressive marketing and seminar in schools are required to take this initiative forward (especially in rural area) Navneet has launched a tablet with educational content which can be checked out at link below http://www.esense.in/products.html Link: http://www.esense.in/products.html Use of technology can be a huge driver going forward. Most publishers will go for this opportunity, slowly but surely.
Disclosure: Not Invested


(Ankit Gupta) #8

In stationary segment, my wife’s cousin also told me about the increasing competition from ITC’s (Classmate) stationery product who have quality at par with Navneet.


(Raj Panda) #9

Good write up Vinod.

I have come across their books in many of my friends place in b’lore and also at small Marwari shops who keep mostly gift materials and other small stationary items. The books are mostly not related to school curriculum and are story books or that kind of stuff which can be gifted. the trend of birthday gifting and return gifting among small kids in apartment complex calls for keeping such stuff handy :slight_smile:

The books are mostly priced to perfection with a price tag of not so cheap for a gift yet not too expensive for a book kind of pricing. I didn’t know, they are so huge in Gujarat and Maharashtra.


(Prashanth Mysore) #10

Yes, Navneet books are available in almost all stationary shops inBangaloreand I have personally used them during my school days.

Here is a very good analysis of Navneet Publications by an IIMB student. Though it is an old one, provides a good insight:

http://tejas.iimb.ac.in/articles/49.php


(Vinod MS) #11

Hi,

Some of the risks/bearish view points

  • Highly competitive business can have technology related innovators grabbing market share. So far Navneet has been an early adopter.
  • In the domestic stationery market there is formidable competition from backward integrated ITC and Camlin. Growth will be in single digits in this segment.
  • Needs to be seen how the tablet revolution will affect the printing and publishing industry. Navneet has sold its own Tablet for students (1000 nos in FY13) AT Rs 10000.
  • Exchange rate risk for its export business. Company hedges its exposure to tackle this. Weak INR should help the com in the coming quarters.
  • Promoters had pledged 16% of their stake as on Mar 2012. As on Mar 2013 there is no pledge.
  • There is a 50 lac investment in Wings Intellect Pvt Ltd. Need to find out the basis for this venture.
  • Seasonal business with 50-55% sales in June Quarter. This should moderate going forward with semester system, higher stationery export and digital business.
  • Very slow adaptation of common curriculum or other gov related orders not getting executed etc can affect the com.
  • General dependency on syllabus change and periods of slow growth can limit valuation growth.
  • Stationery exports to the USA can get affected by higher anti-dumping duty as before.

Cheers

Vinod


(Excel Monkey) #12

Hi Vinod,

Business Looks very interesting. But in the last 3 years stock has been hovering between 55-65.

What is the catalyst here which will put this one in the next orbit?

The digital challenge is also quite real.

It is so easy to copy the digital file who would be ready to pay for the book?

Thanks

Educational,Children credit.In


(Vinod MS) #13

Hi,

Regarding sales growth if you see theirs is a cyclical business but the cycle is well defined as 4 years decent sales growth during syllabus change and then 2 year’s lean period. The last cycle ended with 2 lean years in 2010 and 2011. If you see, 2008 and 2009 were the high points of last cycle with 25% growth.

Market must be valuing the com as a cyclical, but here the cycle is a predictable one unlike other cyclicals. Since uncertainty is less probably valuation is above 10. But this time around the growth drivers are stronger and comes from various sources, so the good period of the cycle could be better and longer.

The old driver (syllabus change) itself is much more stronger, there is geographical expansion outside its turf similar to Atul Auto, stationery business is emerging strong in the export front, received government orders for books and digital classrooms for the first time, digital classroom business by in itself has turned profitable in a short period and will add to PAT now-on and then there is this cross selling potential with the stake purchase in K-12 Techno. So I think the growth could be more meaningful and sustainable

If all these playout, we will have a well managed com with good growth visibility in the fancied education sector.

Inputs from everyone regarding usage of their supplementary books/guides in AP and north (not their notebooks and other stationery) will be great as it would validate their ability to expand outside West.

Cheers

Vinod


(Donald Francis) #14

Vinod,

I had a quick look. Havent studied/read up previous years ARs, etc. My observations just from the numbers and your excellent write-up. You make a pretty good case from the text, but there are gaps:))

You have made a strong case on the Positives. Let me attempt a strong case on the Negatives.

1). Balance Sheet - don’t think one can give a clean chit here. No mention of the abnormally high working capital at ~49-53% of Sales for last several years. What are the reasons for the same, what is the management saying/doing to mitigate this; what is a realistic picture for next 2-3 years on this front.

The Altman-Z score highlights just how bad this is - with 67% of Assets tied up in Working Capital. Only 9% in Retained Earnings and a somewhat respectable 25% in EBIT. I have really become fond of this score:))… a quick filter for_separating the Wheat from the Chaff_

2). Cash Flows - Operating Cash Flows story is very erratic. FY12 was abysmal - What were the reasons. It has usually been lagging Net Profits by some margin. what’s the picture for FY13. Can your provide an estimated figure for FY13 by adding up

3). Return on Invested Capital - Even in the best years hasn’t crossed 19%. Unimpressed. Despite a pretty high OPM, which only indicates one thing Capital Turnover is pretty low.

4). Investment Case - Seems to be predicated on a 15x fair valuation? is that right?

In a business with 20% CAGR growth projected but also with serious working capital/cashflow issues why am I so sure of a 15x Valuation sustaining. Yes, 40%+ dividend payout is a great thing but is that enough to sustain excitement beyond Q1 results?? Is the Yield any higher than 2%??

I guess we may be arguing for Navneet for an Opportunistic mispriced bet. In which case the earnings growth has to be substantially higher. What are your projections -especially for Q1?

Others - please put on your “skeptic” hat and join in the questioning. There just may be another runaway punt here!


(rajeev shah) #15

Hi Its a highly seasonal business. They have tried to utilise their capacities by venturing into stationery books etc, albeit with lower margins. Working capital is high for part of the year & gets reflected in Q4, as its their peak season. After that working capital gets significantly reduced. It would be appropriate to check the BS of Q2.Also the interest outgo will reflect working capital utlisation for part of the year.As correctly pointed out Capital Turnover is low. The Management is very passive, they have lagged behind in the digital edu space.They are trying to catch up, but only time will tell how successful they can be in that space. Its a very high entry barrier business. Just as they are dominant in Mah & Guj, it is very difficult to break-in other states.Palms will have to be greased in every state & the incumbents would have an edge over there. Since this is the 1st year wherein there has been a major change in curriculum to be in line with CBSE , results could be exceptional. With Rupee depreciating against USD exports of stationery items can gain. Exports are highly volatile depending on the exchange rate. Stock price has been relatively stable even in this kind of market sentiment which suggests that downside is limited


(Hitesh Patel) #16

the stationery business till now was operating at very low ebit margins and now with the company doing well in the exports, this segment which was a laggard should now start contributing meaningfully to profits.

I agree with rajeev that cracking other states would be difficult. Their progress in states outside gujarat and maharashtra should be watched closely.

But the fun lies in gujarat and maharashtra… As pointed out by vinod ms, due to course change the company is likely to have another good couple of years. And if the stationery exports keep pace, things could be interesting.

Another possibility of positive surprise could be the performance of esense and the order from mah govt.

Donald, — try looking at the big picture for navneet without getting caught up by the previous data and numbers.

I think all the management needs to do is not get off track bcos the track itself is well laid for them in terms of opportunities.

I would again reiterate that this is not the typical compounder or buy and forget kind of stock. But in the short to medium term if results pan out as expected, this could provide good returns (with limited downsides based on cmp.)


(Donald Francis) #17

Let’s try and establish the “big picture” more concretely. (from a first-level familiarity, so I look to be corrected on specifics)

1). The entrenched high-margins Publications businessis in Maharashtra & Gujarat. It’s difficult to see this consistently growing at more than 15% CAGR. Attempts to gain a foothold in other states will not be easy.

2). The domestic stationery business is low-margin, highly competitive and growing in single digits. Cant see it changing these characteristics any time soon

3). The US Stationery Exports business is growing at a scorching pace for past one or two quarters. Suspect this is more specific-opportunity driven and not an entrenched assured business. There have been anti-dumping duties imposed before and can be back again. Going by overall business 19% CAGR consensus estimates for next 2-3 years its safe to assume that no one is betting on this pace of growth sustaining mid to long term

4). The K-12 schools management is a minority 24% stake, so this cant be considered

5). E-Learning - My case is that the company is late in the coming here, there are many more entrenched players in the digital education space with much more specialised offerings. It’s hard to see Navneet dominating this space. It can only make incremental gains - if only Navneet transforms itself into a more visionary and aggressive player

This is what I gathered from a first read of the business. Please guide on

a) any specifics/important revenue streams/segments I may have missed

b) errors in assessments of different segments

Where is the real “big picture” excitement?


(Donald Francis) #18

Vinod,

Can you also throw some colour on expected results range - Q1?

Base case and an Optimistic case.


(samir s) #19

Donald,

Don’t know where to write this.

Please move to appropriat post BUT PLEASE INCORPORATE THIS. MANY HERE WOULD AGREE WITH ME ABOUT THIS.

When I click on some topic, BY DEFAULT I Should See Most Recent Post(And not first post of a topic).

Normally people want to read latest posts of a topic and hence everytime they click on a topic they have to jump on new page.

This facility provided on TED.

Please incorporate this.


(Gautham U) #20

I think its peter lynch type of stock. I have bought a lot of navneet books for my daughter. In her pre school ( bangalore) they used Navneet books. Now she goes to an ICSE based proper school. I don’t know what they use there.

However , despite the strong brand name, their past numbers don’t look very impressive. And the stock price has also followed the same… So I am trying to understand what is the catalyst here. Is it the govt plan to change to CBSE content or something else also? ( Btw even in Karnataka, the schools are in the process of changing from STATE to CBSE syllabus)