navneet anand rathi report

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Anand Rathi Research 1 Navneet Education is a niche player, focused on supplementary educational books (a ~65% market share) for state Board students in Maharashtra and Gujarat under the Navneet, Vikas and Gala brands. We expect the change in syllabus in these two states to drive a 13.5% revenue CAGR over FY14-16 in its publishing division. The worsening ratio of students per teacher (32 in FY2014 vs 15 in FY1981) indicates the rising need for supplementary books. Also, a 20.5% CAGR over FY07-12 in the number of students opting for professional courses intensifies that need. (A 5.6% CAGR was seen in the number opting for general courses.) We initiate coverage with a Buy, and a price target of `77, at a PE of 12x FY16e. Key Risks. Increase in raw material prices and competition Key data NELI IN / NAVN.BO 52-week high / low `65/ `50 Sensex / Nifty 22715/6796 3-m average volume US$0.1m Market cap `14bn / US$240m Shares outstanding 240 m Navneet Education Healthy growth, attractive valuations; we initiate coverage with a Buy Financials (YE Mar) FY12 FY13 FY14e FY15e FY16e Sales (`m) 6,189 8,057 8,755 10,110 11,228 Net profit (`m) 783 1,067 1,139 1,335 1,507 EPS (`) 3.3 4.5 4.7 5.6 6.3 Growth (%) (1.2) 36.3 6.0 17.2 12.9 PE (x) 18.3 13.4 12.6 10.8 9.6 PBV (x) 3.9 3.4 3.0 2.6 2.3 RoE (%) 22.6 27.0 25.1 25.8 25.7 RoCE (%) 22.4 28.4 28.1 29.7 30.6 Dividend yield (%) 2.3 3.0 3.3 3.8 5.0 Net gearing (%) 21.1 28.1 21.6 17.8 15.6 Source: Company, Anand Rathi Research Rating: Buy Target Price: `77 Share Price: `60 Shareholding (%) Dec’13 Sep'13 Jun'13 Promoters 61.8 61.8 61.8 Foreign Institutions 5.1 6.0 6.3 Domestic Institutions 12.2 11.1 10.5 Public 20.9 21.1 21.3 Aniruddha Joshi +9122 6626 6732 [email protected] Shilpi Taparia [email protected] 11 April 2014

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Navneet Anand Rathi report

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Anand Rathi Research

1

■ Navneet Education is a niche player, focused on supplementary educational books (a

~65% market share) for state Board students in Maharashtra and Gujarat under the

Navneet, Vikas and Gala brands. We expect the change in syllabus in these two

states to drive a 13.5% revenue CAGR over FY14-16 in its publishing division.

■ The worsening ratio of students per teacher (32 in FY2014 vs 15 in FY1981) indicates

the rising need for supplementary books. Also, a 20.5% CAGR over FY07-12 in the

number of students opting for professional courses intensifies that need. (A 5.6%

CAGR was seen in the number opting for general courses.)

■ We initiate coverage with a Buy, and a price target of `77, at a PE of 12x FY16e. Key Risks. Increase in raw material prices and competition

Key data NELI IN / NAVN.BO

52-week high / low `65/ `50

Sensex / Nifty 22715/6796

3-m average volume US$0.1m

Market cap `14bn / US$240m

Shares outstanding 240 m

Navneet EducationHealthy growth, attractive valuations; we initiate coverage with a Buy

Financials (YE Mar) FY12 FY13 FY14e FY15e FY16e Sales (`m) 6,189 8,057 8,755 10,110 11,228 Net profit (`m) 783 1,067 1,139 1,335 1,507 EPS (`) 3.3 4.5 4.7 5.6 6.3 Growth (%) (1.2) 36.3 6.0 17.2 12.9 PE (x) 18.3 13.4 12.6 10.8 9.6 PBV (x) 3.9 3.4 3.0 2.6 2.3 RoE (%) 22.6 27.0 25.1 25.8 25.7 RoCE (%) 22.4 28.4 28.1 29.7 30.6 Dividend yield (%) 2.3 3.0 3.3 3.8 5.0 Net gearing (%) 21.1 28.1 21.6 17.8 15.6 Source: Company, Anand Rathi Research

Rating: Buy

Target Price: `77

Share Price: `60

Shareholding (%) Dec’13 Sep'13 Jun'13

Promoters 61.8 61.8 61.8

Foreign Institutions 5.1 6.0 6.3

Domestic Institutions 12.2 11.1 10.5

Public 20.9 21.1 21.3

Aniruddha Joshi+9122 6626 [email protected]

Shilpi [email protected] 11 April 2014

Anand Rathi Research

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Income statement (`m)Year-end: Mar FY12 FY13 FY14e FY15e FY16eNet revenues 6,189 8,057 8,755 10,110 11,228 Revenue growth (%) 10.4 30.2 8.7 15.5 11.1 - Op. expenses 4,876 6,144 6,709 7,735 8,557 EBIDTA 1,313 1,913 2,047 2,375 2,671 EBITDA margin (%) 21.2 23.7 23.4 23.5 23.8 - Interest expenses 58 79 85 82 80 - Depreciation 171 235 248 279 310 + Other income 112 37 43 47 48 - Tax 417 547 597 701 792 Effective tax rate (%) 34.8 33.6 34.0 34.0 34.0 Reported PAT 783 1,067 1,139 1,335 1,507 +/- Extraordinary items - - - - -+/- Minority interest (3) 19 20 25 30 Adjusted PAT 783 1,067 1,139 1,335 1,507 Adj. FDEPS (`/sh) 3.3 4.5 4.7 5.6 6.3 Adj. FDEPS growth (%) (1.2) 36.3 6.0 17.2 12.9 Source: Company, Anand Rathi Research

Balance sheet (`m)Year-end: Mar FY12 FY13 FY14e FY15e FY16eShare capital 476 480 480 480 480 Reserves & surplus 3,138 3,712 4,289 4,993 5,658 Net worth 3,615 4,192 4,769 5,473 6,138 Total debt 1,437 1,677 1,577 1,527 1,527 Minority interest (6) 1 1 1 1 Def. tax liab. (net) 45 48 48 48 48 Capital employed 5,091 5,918 6,396 7,049 7,714 Net fixed assets 1,647 1,799 1,951 2,097 2,237 Investments 652 500 500 500 500 - of which, Liquid 652 500 500 500 500

Net working capital 2,742 3,584 3,861 4,357 4,867 Cash and bank balance 51 35 84 95 110 Capital deployed 5,091 5,918 6,396 7,049 7,714 Net debt 831 1,226 1,126 1,076 1,076 WC to Sales (%) 44.3 44.5 44.1 43.1 43.4 Book value (`/sh) 15.4 17.8 20.1 23.0 25.8 Source: Company, Anand Rathi Research

Cash-flow statement (`m)Year-end: Mar FY12 FY13 FY14e FY15e FY16eConsolidated PAT 783 1,067 1,139 1,335 1,507 +Depreciation 171 235 248 279 310 Cash profit 954 1,302 1,387 1,614 1,816 - Incr./(Decr.) in WC (1,299) (705) (277) (496) (510)Operating cash-flow 59 645 1,110 1,118 1,306 - Capex (518) (387) (400) (425) (450)Free cash-flow (440) 281 710 693 856 - Dividend (386) (221) (561) (632) (842)+ Equity raised - 12 - - -+ Debt raised 769 240 (100) (50) -- Investments (5) (327) - - -- Misc. items - - - - -Net cash-flow (62) (16) 49 11 14 + Opening cash 113 51 35 84 95 Closing cash 51 35 84 95 110 Source: Company, Anand Rathi Research

Ratio analysis @ `60Year-end: Mar FY12 FY13 FY14e FY15e FY16eP/E (x) 18.3 13.4 12.6 10.8 9.6 P/B (x) 3.9 3.4 3.0 2.6 2.3 EV/sales (x) 2.5 1.9 1.8 1.5 1.4 EV/EBITDA (x) 11.8 8.1 7.6 6.6 5.8 RoAE (%) 22.6 27.0 25.1 25.8 25.7 RoACE (%) 22.4 28.4 28.1 29.7 30.6 Dividend yield (%) 2.3 3.0 3.3 3.8 5.0 Dividend payout (%) 42.6 40.2 42.1 40.4 47.8 RM to sales (%) 48.5 48.0 48.4 48.3 48.0 Admin exps to sales (%) 16.2 14.6 14.6 14.6 14.6 EBITDA growth (%) 2.7 45.7 7.0 16.0 12.5 EPS growth (%) (1.2) 36.3 6.0 17.2 12.9 PAT margin (%) 12.6 13.2 13.0 13.2 13.4 Income tax rate (%) 33.5 34.8 33.6 34.0 34.0 Staff cost to sales (%) 9.6 9.9 8.5 8.5 8.5 Source: Company, Anand Rathi Research

Navneet Education: Financials

Anand Rathi Research

■ With the rising number of students, Navneet will see more consumers for its products

■ The last five decades has seen the number of students enrolling for higher education recording a 6.5% CAGR, indicating fewer dropouts in school grades

■ More students opt for professional courses

■ Rising number of students per teacher increases the need for supplementary educational books

Growing number of students in Maharashtra

Source: Company, Anand Rathi Research

Increase in student enrollments*

Source: Marketing Whitebook 12-13* Higher education in India

Annual growth rate of enrollment

Source: Marketing whitebook 12-13

3

Worsening students-per-teacher ratio

Source: Marketing Whitebook 12-13

Investment argumentInvestment argument

Education: A growing market in India

Anand Rathi Research

■ A syllabus change in Maharashtra and Gujarat is underway. We expect this to help the educational publishing business to report a 14% revenue CAGR over FY14-16

■ If revenue is `100 in the base year, revenue from guides would rise to `250 after the syllabus change

■ The company generates highest revenue from the 8th, 9th & 10th standards, ~38% of educational publishing revenue

Change in syllabus in Maharashtra and Gujarat

Source: Company, Anand Rathi Research

Revenues* according to standard

Source: Company *Publishing segment (FY13)

Revenue pattern after change in syllabus

Source: Company

4

Maharashtra Gujarat

Standard Subject Medium Standard Subject Medium

FY14

I, II All subjects All VI, VII, VIII All subjects English, Hindi

XLanguages, History, Geography,

Economics, ScienceAll

FY15 III, IV, V All subjects All I, II, III, IV, V All subjects Gujarati

FY16 VI, VII, VIII All subjects All I, II, III, IV, V All subjects English, Hindi

I6% II

6%III

6%

IV6%

V9%

VI9%

VII9%

VIII10%

IX10%

X18%

XI4%

XII7%

Investment argumentInvestment argument

Syllabus change to drive growth

Anand Rathi Research

■ Navneet continues to be the market leader in educational publishing with healthy ~65% market share

■ The company is working on various new initiatives to drive revenue in educational publishing

■ Though revenue growth rates are volatile due to syllabus change, EBIT margins are stable

Market shares in educational publishing

Source: Company, Anand Rathi Research

Revenue growth volatile due to syllabus change

Source: Company, Anand Rathi Research

Key growth drivers for educational publishing

Source: Company, Anand Rathi Research

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EBIT margins in this segment stable

Source: Company

Books as per CBSE syllabus

Books as per ICSE syllabus

Orders for supplementary books from public schools

Introduction of Mathematics & Science books for other state boards as the curriculum will be same

Investment argumentInvestment argument

Market leader in educational publishing

Anand Rathi Research

■ The EBIT margin of the stationery business is on an uptrend due to an increase in the share of value-added products

■ Improving revenue contribution from stationery exports and non-paper stationery is reducing dependence on the domestic paper stationery business

■ Higher share of the unregulated market indicates vast scope for Navneet to grow

Domestic stationery: Growing at healthy rates

Source: Company

Huge unregulated market*- Healthy scope

Source: Company, Anand Rathi Research

Improving profitability of stationery segment

Source: Company, Anand Rathi Research

Reducing dependence on domestic stationery

Source: Company, Anand Rathi Research

6

Investment argumentInvestment argument

Stationery business: Healthy performer

Anand Rathi Research

■ The company has maintained a ~50% gross margin despite volatile raw-material prices

■ Paper is the major raw material. Its price has seen a 3.4% CAGR in the past decade

■ Despite higher crude oil prices and rupee depreciation, ink prices have seen a 1.9% CAGR in the past decade

Gross margin maintained despite volatile costs

Source: Company, Anand Rathi Research

WPI of Ink

Source: GoI

WPI of Paper

Source: GoI

Reducing manufacturing expenses

Source: RIL

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Investment argumentInvestment argument

Maintained gross margin despite volatile RMs

Anand Rathi Research

■ We expect a 13% CAGR in revenue. The publishing and stationery division are expected to report revenue CAGRs of 13.5% and 13%, respectively

■ We expect the EBITDA margin to be a steady ~23% over FY14-16

■ We expect PAT at a 15% CAGR, driven by healthy revenue growth

■ Over FY14-16, we expect healthy return ratios (more than 25%)

Expect a 13% CAGR in revenue over FY14-16

Source: Company, Anand Rathi Research

Healthy return ratios

Source: Company, Anand Rathi Research

Margin to be steady, at ~23%

Source: Company, Anand Rathi Research

PAT to see a 15% CAGR over FY14-16

Source: Company, Anand Rathi Research

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FinancialsFinancials

Financial overview

Anand Rathi Research

■ The stock is trading at between Mean PE & -1 SD due to subdued growth rates in FY14

■ It is trading below the mean PB as well

■ With improving fundamentals, the valuation multiples should move up

■ Risks. Higher raw material prices and increase in competition

PE band

Source: Company, Anand Rathi Research

Mean PE (x) and Standard deviation

Source: Company, Anand Rathi Research

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Mean PBV (x) and Standard deviation

Source: Company, Anand Rathi Research

PBV band

Source: Company, Anand Rathi Research

ValuationValuation

Valuation

Anand Rathi Research

Discounted-cash-flow valuation

Source: Company, Bloomberg, Anand Rathi Research *FY14 over FY13 10

■ At a 3% terminal growth rate and a 13% discount rate, the value per share works out to `77

■ We expect the company to maintain growth rates of 12% over the next decade as well as a 23.5% EBITDA margin

■ Due to limited capexand strong profit margins, we expect healthy free cash flows

■ The stock trades at a discount to its peers

Source: Company, Anand Rathi Research

Relative valuation (FY14e)Growth (%)*

Company Price (`) M.Cap (`m) RoE (%) RoCE (%) Revenues EPS PE (x)

Navneet 60 14,394 25.1 28.1 8.7 6.0 12.6

MPS 370 6,223 50.0 49.9 14.3 29.6 15.1

`m FY14e FY15e FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25eNet Sales 8,755 10,110 11,228 12,575 14,084 15,775 17,668 19,788 22,162 24,822 27,800 31,136 Growth in Revenues (%) 8.7 15.5 11.1 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 EBITDA Margin (%) 23.4 23.5 23.8 23.5 23.5 23.5 23.5 23.5 23.5 23.5 23.5 23.5 EBITDA 2,047 2,375 2,671 2,955 3,310 3,707 4,152 4,650 5,208 5,833 6,533 7,317 Depreciation 248 279 310 347 388 435 487 546 611 684 767 859 Other Income 43 47 48 53 60 67 75 84 94 105 118 132 Interest Expenses 85 82 80 80 80 80 80 80 80 80 80 80 PBT 1,756 2,061 2,329 2,582 2,901 3,259 3,660 4,108 4,611 5,174 5,804 6,510 Income Taxes 597 701 792 800 899 1,010 1,134 1,274 1,429 1,604 1,799 2,018 PAT 1,159 1,360 1,537 1,781 2,002 2,249 2,525 2,835 3,182 3,570 4,005 4,492

Increase in Working Capital (277) (496) (510) (540) (593) (657) (728) (807) (894) (991) (1,098) (1,217)Capex (400) (425) (450) (504) (564) (632) (708) (793) (888) (995) (1,114) (1,248)Free Cash Flows 730 718 886 1,084 1,233 1,395 1,576 1,780 2,010 2,269 2,559 2,886

Discounted Free Cash Flows 8,464 Discounting Factor (%)Risk Free Rate 9.0

Terminal Growth Rate (%) 3 Beta (x) 0.8 Terminal Value 29,730 Market Return 14.0 Discounted Terminal Value 9,897 Cost of Equity 13.0

Net Value to Shareholders 18,361 No. of Shares (m) 240 Value Per Share (`) 77

ValuationValuation

Discounted cash-flow & peer comparison

Company background

Navneet Education is the pioneer company in educational publishing space. It was incorporated by Gala family in 1959.

The key brands of the company are Navneet, Vikas, Gala, E-Sense, BOSS and FfUuNn. Navneet has more than 5,000 books & stationery products under these brands.

The company sells supplementary educational books such as guides, work-books, most likely question sets and paper & non paper stationery products in Maharashtra, Gujarat and Goa. It also exports paper stationery to European countries and United States.

It is also engaged in the business of paper and non paper stationery products. It boasts of a portfolio of 500+ SKUs in stationery business.

The company has manufacturing units in Virar, Mehsana, Dantali and Silvassa

Anand Rathi Research

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Promoters and Management

The Gala family owns and manages the business. It has a 62% stake.

Chairman Kamlesh Vikamsey looks after strategy.

Managing Director Gnanesh (Sunil) Gala oversees all the functions of the company.

Ram Kamat is CFO.

Roomy Mistry is Head of Investor Relations.

Revenue breakup (FY13)

Source: Company, Anand Rathi Research

BusinessBusiness Company background

Anand Rathi ResearchAppendix

Analyst Certification

The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Other Disclosures

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Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.

Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.

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This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.5. As of the publication of this report, ARSSBL does not make a market in the subject securities.6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.Enclave Capital LLC is distributing this document in the United States of America. ARSSBL accepts responsibility for its contents. Any US customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC.© 2014 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without the prior written consent of Anand Rathi Shares and Stock Brokers Limited. Additional information on recommended securities/instruments is available on request