PL Stock Report: Navneet Education (NELI IN) - Q1FY24 Result Update - EdTech strategy under review - BUY

Navneet Education (NELI IN) - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs144 | TP: Rs192

Q1FY24 Result Update - EdTech strategy under review

Quick Pointers:

♦ Investments in Ed-Tech business under evaluation.

♦ Levy of anti-dumping duty by the US led to revenue loss of Rs400mn in stationary business.

We increase our FY24/FY25E EPS estimates by 10%/19%, as we cut our Ed-Tech loss assumptions to Rs400mn/Rs300mn over next 2 years given the expansion strategy is under review. Strategic review is an indication losses are likely to narrow down resulting in an earnings upgrade. In a seasonally strong quarter, NELI reported decent performance with topline of Rs7,915mn (PLe Rs7,937mn), while EBITDA margin of 26.4% was above our estimate led by better than expected profitability in publishing division. Turnaround in Indiannica business (expected to be profitable in FY24E), back ended recovery in GM amid softening paper prices, narrowing losses in Ed-Tech and impending benefits from NEP is expected to result in sales/PAT CAGR of 12%/35% over FY23-FY25E. We retain ‘BUY’ with a SOTP based TP of Rs192 (refer exhibit 6 for more details) as we increase core business target multiple to 12x (10x earlier) and roll forward to FY25E.

Consolidated sales increase 14% YoY: Consolidated revenues increased 14% YoY to Rs7,915mn (PLe of Rs7,937mn). Publishing sales increased 18% YoY to Rs4,292mn due to strategic price hikes and higher volumes. Stationery sales growth moderated to 10% YoY due to revenue loss of Rs400mn amid levy of anti-dumping duty in the US on one of the product categories.

Consolidated Gross/EBITDA margins at 46.6%/26.4%: Gross profit increased 6% YoY to Rs3,688mn with GM of 46.6% (PLe of 48.0%). Consolidated EBITDA increased 7% YoY to Rs2,089mn (PLe of Rs1,865mn) with a margin of 26.4% (PLe of 23.5%) as compared to a margin of 28.2% in 1QFY23. Consolidated publishing/stationery EBIT margin stood at 39%/15% respectively, while EdTech business reported an EBIT loss of Rs116mn.

Consolidated net profit declines 5% YoY: Consolidated net profit declined 5% YoY to Rs1,449mn (PLe of Rs1,229mn) with a margin of 18.3%.

Con-call highlights: 1) Publication business is expected to grow by mid-teens in FY24E, and at a CAGR of 15% subsequently post implementation of NEP. 2) A product category, accounting for ~8%-10% of stationary export revenue, faces potential anti-dumping duty in the USA. Orders from this category were not received during 1QFY24, resulting in a revenue loss of Rs400mn. However, production has been relocated to a different location ensuring minimal business loss in future. 3) ILL business is expected to grow by 15-20% YoY and turn profitable in FY24E. 4) K12’s post money valuation is at ~Rs29.5-Rs30bn. 5) Publication volumes were up 11% YoY. 6) Domestic/Exports stationery business is expected to grow by ~15%/10% in FY24E. 7) NELI typically maintains 2 months' worth of RM inventory, of which ~5-7% is imported. 8) Sales is expected to be Rs19bn in FY24E.

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