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Navneet: What to expect?

Dec 21, 2004

Performance Summary
Education books publisher, Navneet, has had a turbulent 2004 on the stock markets. The stock lost over 40% of its market capitalisation by March 2004 from the start of the year. From there on, however, the stock recovered and is currently trading at levels witnessed at the start of 2004. On a net basis, investors did not gain anything from the investment in Navneet stock during 2004. Let us have a look at the company's recent performance and its prospects.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales37250936.8%1,7471,98013.3%
Expenditure31644340.3%1,3171,54617.3%
Operating profit (EBDITA)566617.1%4304351.2%
EBDITA margin (%)15.1%12.9% 24.6%21.9% 
Other income97-16.1%171810.2%
Interest 5626.1%12137.6%
Depreciation22220.0%4343-0.5%
Profit before Tax384518.3%3913971.5%
Tax141614.3%1211264.6%
Profit after Tax/(Loss)242920.6%2712710.1%
Net profit margin (%)6.5%5.8% 15.5%13.7% 
No. of Shares (m)19.119.1 19.119.1 
Diluted Earnings per share (Rs)*5.16.1 28.428.4 
Price to earnings ratio (x)    8.1 
*(annualised)      

What is the company’s business?
Since 1959, Navneet Publications is a dominant player in the field of educational books, publishing more than 3,500 titles every year in English, Hindi, Marathi and Gujarati. The company's products are sold under the 'Navneet', 'Vikas' and 'Gala' brand names. Navneet's portfolio of syllabus based books includes supplementary books like Guides and Question Sets among others, in the aforesaid four languages. Navneet has a near monopoly in the states of Maharashtra and Gujarat where the company continues to enjoy over 50% market share. Its brands ‘Navneet’ in Maharashtra and ‘Gala’ in Gujarat have been in existence for over 3 decades.

Even the relatively newer brand, ‘Vikas’ (for children’s books), is now a decade old. Competition exists from smaller players like Jeevandeep and Balvidya, which are comparatively much smaller in size. The company also produces around 990 titles in the children and general books category, which are not based on syllabus (activity books for children, health series books, cookeries, mehendi, feng-shui, etc). Apart from India, the company also has a presence in the Middle East, parts of Africa, U.S.A. and Europe in the stationery segment. It has also launched Navneet Edutainment Limited, a subsidiary, to leverage the Internet and provide localised educational content.

What has driven performance in 1HFY05?
Revenues: The company’s revenues come primarily from two divisions – publications (63% of 1HFY05 revenues) and stationery (36%). In the first half of FY05, the company's publications business grew by over 17%, but the stationery business grew in single digits (6.6% YoY). The strength in its publications business was led by a buoyant September quarter performance, where revenues grew by 60%. This was owing to the new semester, as well as new syllabus. It must be noted that almost 50%-55% of the company's publishing revenues occur between May to July. On the stationery front, increasing globalcompetition and an appreciating rupee have put pressure on profitability.

Segmental snapshot
(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Publications revenues20132360.5%1,0741,25717.1%
% of revenues54.1%63.5% 61.5%63.5% 
PBIT margin (%)19.7%15.9% 31.3%32.4% 
Contribution to PBIT (%)85.7%92.3% 80.1%84.4% 
Stationery products revenues1691827.9%6707146.6%
% of revenues45.5%35.9% 38.4%36.1% 
PBIT margin (%)3.4%1.8% 12.3%10.2% 
Contribution to PBIT (%)12.3%5.8% 19.6%15.1% 
Others23126.7%38171.0%
% of revenues0.4%0.7% 0.2%0.4% 
PBIT margin (%)60.0%32.4% 51.6%27.4% 
Contribution to PBIT (%)1.9%2.0% 0.4%0.5% 
Net Sales/Income from Operations37250936.8%1,7471,98013.3%
Total PBIT margin (%)12.5%10.9%24.0%24.4% 

Profitability: The company's profits continue to be driven by its mainstay publishing business. Margins in this business are more than double of what they are in the stationery business. Consequently, the business contributes over 80% of Navneet's total profits. There was no profit growth in the first half of 2005, but the September quarter profits were up over 20% YoY.

Over the last five years…
Since September 1999, the company's revenues have clocked a CAGR of 13%. But profit growth has been staid at 9% during this period, largely owing to higher depreciation provisioning, interest and tax outgo.

(Rs m)Sep-99Sep-00Sep-01Mar-03 (18 months)Mar-04CAGR since 1999
Revenue 1,441 1,748 2,173 3,235 2,528 13.3%
Gross Profit (PBDT) 351 437 517 646 608 13.0%
Depreciation 40 44 52 114 89 19.4%
Tax 73 111 143 163 167 20.2%
Net Profit (PAT) 237 282 322 369 352 9.1%
Dividend per share (Rs) 10.1 4.1 5.5 8.5 7.5  
Source: Navneet website

What to expect?
At the current price level of Rs 230, the stock trades at a price to earnings multiple 8 times annualised 1HFY05 earnings. The market capitalisation to sales ratio stands at 1.1 times annualised 1HFY05 revenues. The dividend yield works out to be around 3.2% at this price. The company is likely to benefit from moves to expand its publication business in Madhya Pradesh. Its stationery business too, is likely to improve profitability owing to the company's focus on efficiency. Another positive for this business is that major US buyers have started to focus on sourcing from India instead of fully relying on China. Navneet too, has started receiving inquires on this front.

However, the concern is that the company’s business is very seasonal (May-July dependent). As a result, challenges exist in the form of managing inventories, maintaining unsold inventories and clearing the ‘older’ syllabus study material. However, with a future possibility of a uniform national syllabus, some of the concerns could be taken care of.

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