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Microsec Research 14 April 2011

NAVNEET PUBLICATIONS (INDIA) LTD. KNOWLEDGE IS WEALTH

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Microsec Research 14 April 2011

We rate Navneet publications a BUY. Navneet Publications incorporated in 1984 was founded by Gala Family. It is engaged into publishing educational and children books and stationery products. Navneet is a leading player in the field of publishing, with more than 5000 titles in English, Hindi, Marathi, Gujarati and foreign languages. The company markets its products under the three brand names namely 'Navneet', 'Vikas' and 'Gala'.

Investment Highlights

Syllabus change in Maharashtra and Gujarat to increase income in FY12E : Maharashtra Board has proposed to change the syllabus for 1st standard, 2nd standard, few of the subjects in 4th and 8th standards, few of the subjects in 10th and 11th standards for the year FY12. Also Gujarat Board has proposed to change the syllabus of Class IX of Maths and Science subject. Since the company is a dominant player in both the states for supplementary books, the said move will benefit the company in increasing its income in double digits.

Sound Financials with higher EBITDA Margin, Higher ROE and low D/E ratio: Navneet has been maintaining an EBITDA Margin of ~20%, Average ROE of ~22% and lower D/E ratio of 0.28 from the last 5 years. PAT has been continuously rising gradually from the last 5 years. In 9M FY11, PAT jumped by 16% to INR70.2 crore

Developed brands & pricing power The Company has got major brands like Navneet, Vikas, Gala and ‘FfUuNn’. The brands allow the company to maintain its leadership. Due to the brands and quality of content, Navneet has the pricing power for its product which is visible in its EBITDA Margin.

Penetrating into high margin Digital learning busines : Navneet is penetrating into high margin E-learning or digital learning business through its subsidiary ‘e-Sense’. As on date in class-room teaching modules it has installed 460 schools and the company is focusing on signing newer schools to achieve a target of 475 schools in FY11 with a curriculum based content gaining acceptance in two core areas which is Maharashtra and Gujarat. It is expected to reach 2000 schools by FY12.

Exhibit 1. Navneet Publication – Historical Financials and Projections

Particulars FY2008A FY2009A FY2010A FY2011E FY2012E

Net Sales (INR CR) 411.10 516.90 532.50 571.60 690.00

Growth (%) 25.74% 3.02% 7.34% 20.71%

EBITDA 82.90 104.10 107.80 124.70 160.20

EBITDA Margins (%) 20.17% 20.14% 20.24% 21.82% 23.22%

Net Profit 54.20 56.40 64.00 75.70 98.20

Net Profit Margins (%) 13.18% 10.91% 12.02% 13.24% 14.23%

Net Profit Growth (%) 4.06% 13.48% 18.28% 29.72%

EPS 2.28 2.37 2.68 3.18 4.12

BVPS 9.60 10.84 12.34 14.50 17.60

P/E 27.54 26.50 23.43 19.75 15.24

P/BV 6.54 5.79 5.09 4.33 3.57

RoE 25.0% 23.0% 23.1% 23.7% 25.7%

Source: Bloomberg , Microsec Research (In INR CR)

Navneet Publications (India) Ltd.

BUY Sector – Publications

Current Market Price (INR) 63.00

Target Price 76.00

Upside Potential 21%

52 Week High / Low (INR) 76 / 46

Market Capitalization (In INR CR) 1,500.70

Market Data

BSE Code 508989

NSE Code NAVNETPUBL

Bloomberg Ticker NPI IN

Reuters Ticker NAVIN.BO

Face Value (INR) 2.00

Equity Share Capital (INR CR.) 47.64

Average 2 Year P/E 18.5x

Beta vs Sensex 0.85x

Average Daily Volmes (6 M) 690,000

Dividiend Yield (%) 1.59

Stock Return (1 Yr) 25%

STOCK SCAN

Shareholding

DII

5.55%

Public

28.76%

FII

3.88%

Promoters

61.81%

Analyst : Naveen Vyas

Email : nvyas@microsec.in

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Microsec Research 14 April 2011

Key Product

Books - It has a wide range of products such as Digests (Guides), Workbooks and 21 Question Sets, most of which are published in four languages - English, Hindi, Marathi and Gujarati. It also publishes story books, health related books, cookery books, mehendi and embroidery books.

Stationery - NPL’s stationery business is split into two categories: Paper based, which comprises notepads and notebooks, and non-paper based, which comprises pencils, erasers, sharpeners, crayons, geometrical boxes, etc. under the brand name ‘FfUuNn’.

E-learning - Navneet has expanded the product portfolio in its content business by creating a digitized version of the textbook based on the state level curriculum with some basic and easy-to-use features. Navneet operates in this segment through its 91% subsidiary eSense Learning Private Limited. It has developed interactive notes with visuals and animations.

Segmental Break -up

PBIT Break -up

PBIT Break -up

29% 29% 29.60%

12%10%

4%

0%

5%

10%

15%

20%

25%

30%

35%

FY10 FY09 FY08

Publication Stationery

53.8% 54.3%

66.4%

45.2% 44.6%

33.1%

1.0% 1.1% 0.6%0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

FY10 FY09 FY08

Publication Stationery Others

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Microsec Research 14 April 2011

Industry Profile

The books and stationery market is largely fragmented with large number of small, regional players dominating the market. But there are players like Navneet, Sundaram, Staples Camlin and even ITC who are now looking to grab a larger share from the unorganised segment and create a brand name for themselves. The market for books and stationery segment is expected to be in the range of INR11,000 crore. Out of the total pie, around 6000 crore is estimated to be paper stationery, while the rest is categorised as non paper stationery comprising writing instruments, art materials etc. Market players estimate the growth rate for both segments to rise to around 15% annually in the time to come, fuelled by the interest and investment in the education sector, both from public and private sector.

Thus ITC’s education and stationery products business may be just six years old, but it has a turnover of 400 crore and is clocking a growth of 20%, according to CEO, Chand Das. So the business has acquired enough traction in the market now to aim for the big bucks in the future. Global chain Staples present in India via an association with Pantaloons retail focuses more on the office supplies side of the stationery business. Staples is today the largest organised office products player in the India market, reaching 200 crores in sales in the third year of operation. Both the consumer and the business segment in India have already found great value in the model.

The common thread running between the above mentioned names is that all of them are looking to either reinforce or create a rock solid national brand name in a highly commoditised and fragemented market. Sure, we all have heard about Navneet notebooks and Camlin colour pens and even Classmate, but chances are these brands are the last thing one thinks of while actually making a purchase decision. Even if one does have a brand preference, one works just as well as the other. It’s in such a cluttered environment that these brands are looking to create a niche for themselves.

Education segment as a whole is getting priority in the Indian private as well as government sector due to the ‘focused’ approach of the central government and the education ministry. There is more market spread happening for the stationery segment, in the last few years resulting in higher consumption. There is an effort by each market player to target B and C Class cities/ towns so as to expand the market size and consequently increase their sales revenue. New players scout for new markets to gain some respectable market share as early as possible. At the same time, old players do not want to lose their market share and are consolidating on their strengths in the existing markets.

Text-content has been a major issue in Education segment because India is a very diverse market with many national languages and at times, the text books’ distribution do not make any commercial sense; especially, when economies of scale is not achieved. Players like Sundaram Publishers have started novel ways of text content distribution through pen drives addressing the e-class that stores syllabus on pen drives. Advent of Internet and other new technologies has enabled to create a knowledge library and the content can be accessed by students even on TV or laptops. Now, this makes sense as the distribution costs are much lower and wastage due to carrying non- saleable inventory is not there.

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Microsec Research 14 April 2011

New players like ITC group have focused on this market early or rather within a short period of time; by applying FMCG distribution principles in the books and stationery market. Aspects like trade marketing, merchandising (in a big way), sign-ages, school and college contact programmes are being added – all this create more touch points with the market to boost sales! Staples has a ‘back to school’ sales discounts’ schemes etc to create more avenues to boost their sales, when schools re-open after summer vacation. Camlin, one of the oldest players in this market, are getting geared up to add on to their existing large network of retailers – so as to increase the number to a stag-erring figure of 2,50,000 retailers all over India, in next couple of years.

In some sectors, brands have become commodities, while the reverse is been attempted in the books and stationery segment. The journey of product, price, packaging and distribution is bound to see some interesting chapters ahead.

Peer Comparison

Source: Bloomberg, Accord (Financial INR Crore)

VALUATION

The stock is currently trading at INR63 at a ttm P/E of 19.1x. It discounts its Consolidated FY12E EPS of Rs.4.1 by 15.3x. It’s 2 years Average consolidated P/E as per Bloomberg is around 18.5x. With Developed Brand, Consistent Financial Performance, syllabus change in Maharashtra and Gujarat and penetration into E-learning, the prospect of Navneet publication looks good. The stock should trade at a P/E multiple of around 18.5x which put our Target Price to INR76 (20.6% upside) based on FY12E EPS of INR4.12 for a time period of 12 months.

Key Concern

Publishing sales of the company is seasonal in nature: The Publishing sales of the company is seasonal in nature as maximum sales occur in the first quarter of the financial year.

Competition in stationery market: There is tough competition to the company from the organised and unorganised players which limit the margin in the stationery business.

Company Name9M Sales

9M EBITDA

9M PAT

EBITDA (%)

PAT (%)

ROE (%) FY10

D/E FY10 MCAP CMP P/BV

P/E TTM

P/E FY12E

Navneet Publication 453 112 70 24.6 15.5 23.1 0.24 1501 63 4.2 19.3 15.3Camlin Ltd. 268 22 10 8.3 3.6 18.8 0.69 462 76 6.3 32.6 20.2DB Corp Ltd. 939 324 186 34.1 19.6 40.2 0.51 4536 248 5.5 20.5 16.2HT Media Ltd. 1297 247 132 18.8 10.1 14.9 0.32 3678 157 2.9 20.3 17.3Jagran Prakashan 815 271 164 32.5 19.7 30.0 0.20 3819 121 4.9 19.1 14.8

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Microsec Research 14 April 2011

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Microsec Research 14 April 2011

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Microsec Research 14 April 2011