PL Stock Report: Navneet Education (NELI IN) - Q2FY24 Result Update – Growth challenges emerge in publishing - BUY

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

Rating: BUY | CMP: Rs140 | TP: Rs195

Q2FY24 Result Update – Growth challenges emerge in publishing

Quick Pointers:

§ Higher sales return, change in paper pattern for Gujarat board and rising prevalence of 2nd hand books impacted publishing business.

We cut our EPS estimates by 16%/2%3% for FY24E/FY25E/FY26E as we re-align our assumptions for publishing business amid rising growth challenges in near term. While operating profitability has undergone a downward revision in the band of ~6-11% over FY24E-FY26E, impact on bottom-line is miniscule as we adjust our tax rate forecast given demerger of Ed-Tech business into Navneet which has accumulated losses of ~Rs0.8-1bn. Navneet reported weaker than expected performance with EBITDA loss of Rs43mn as publishing business reported a 46% YoY fall in top-line led by higher sales return, change in paper pattern of Gujarat board and rising prevalence of 2nd hand books. Though there are near term challenges 1) turnaround in Indiannica business (expected to be profitable in FY24E), 2) narrowing losses in Ed-Tech and 3) impending benefits of NEP is expected to result in sales/PAT CAGR of 10%/26% over FY23-FY26E. We retain ‘BUY’ rating with a SOTP based TP of Rs195 (refer exhibit 6 for more details).

Consolidated sales decrease 19% YoY: Consolidated revenues fell 19% YoY to Rs2,658mn (PLe of Rs3,279mn), due to a 46% YoY decline in publishing sales to Rs732mn. Stationery sales decreased 1% YoY to Rs1,909mn.

Consolidated gross margin at 50.6%: Gross profit decreased 18% YoY to Rs1,344mn with GM of 50.6% (PLe of 47.5%). Consolidated EBITDA loss stood at Rs43mn (PLe of Rs184mn) as compared to an EBITDA of Rs326mn in 2QFY23. Consolidated stationery EBIT margin stood at 8.5%, while publishing business reported an EBIT loss of Rs257mn.

Consolidated net profit at Rs356mn: Consolidated net profit stood at Rs356mn with a margin of 13.4% aided by exceptional gain of Rs682mn (Rs302mn from sale of property and Rs379mn from deemed disposal of stake in K12). Adjusting for the same, loss stood at Rs326mn (PLe PAT of Rs36mn) in 2QFY24.

Con-call highlights: 1) Loss of revenue due to change in paper pattern of Gujarat board was Rs200mn. There is a revenue spill-over and related exam books will now be released in 3QFY24. 2) Volume de-growth was 10% in 1HFY24 and major impact was in guide category due to price hike. 3) NEP roll out for grades 1 & 2 will happen in FY25E and implementation for all other grades should be complete by FY28. 4) NELI plans to introduce 3-4 new products in the stationery segment, requiring an initial capex of Rs500mn, an additional capex of Rs500-600mn for land & building, and Rs200-300mn for machinery, each year, for 5 years, with an expected asset turnover of 4x. 5) Ed-Tech losses for FY25E is expected to be Rs300mn, and will reduce further in future. 6) After fresh fund infusion, NELI’s stake in K12 is valued at ~Rs8,000mn. 7) Sales returns for 2QFY24 stood at Rs360mn (management expectation was Rs200mn).

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