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Strong growth, attractive valuations — maintain LONG
Navneet (NELI) posted a strong 15% yoy growth in its 4Q revenues, 10% above EE, driven by strong publication & stationery performance. Publication revenues grew 14% yoy while stationery revenues grew 16% yoy on strong export orders. FY19 has been a strong year for NELI with robust performance in both publishing and stationery segments despite many headwinds like rise in paper prices and higher domestic competition etc. Going ahead, we build in 12% CAGR growth in each publications/stationery revenues driven by scheduled syllabus changes and strong traction in stationery exports. However, margins are expected to remain at current levels of 34%/10% resp. for pub/stationery segments. Valuations at 14x/12x FY20E/FY21E appear attractive given 15% EPS CAGR over FY19-21E, superior return ratios and strong dividend payout. We, however cut our target multiple from 19x to 16x due to continued pressure in domestic stationery market and greater than expected turnaround time of ILL. Maintain LONG with a Sep’20 TP of Rs 157 (Mar’20 PT of Rs 153 earlier).
Strong revenue growth in both segments:
A 14% yoy growth in publication revenues was driven by strong growth in sales of 21 Most Likely Question Sets. Stationery revenues on other hand grew 16% yoy on export demand which is now spread across the year vs. only in few quarters earlier. Despite many headwinds, in FY19, publications/stationery revenues grew 11%/12% yoy on higher standard syllabus changes and ~60% yoy growth in stationery exports. We built in 12% CAGR in each publication/stationery revenues over FY19-FY21E driven by syllabus changes in Gujarat and Mah. (Exhibit 4) and continued traction in stationery exports.
Margins to remain at current levels:
Publishing EBIT margins at 16% grew ~67bps yoy on marginal gross margin expansion. However, stationery EBIT margin at 11% declined ~200bps yoy on higher marketing expenditure in exports market. Blended EBIT margins at 8.8% expanded ~70bps yoy. Going ahead, we expect margins to remain at current levels of 34%/10% in pub/stationery segment as rise in operating efficiencies will be offset by paper price rise for publication segment and increased marketing spend in stationery segment.
Delay in turning around Indiannica (ILL) drags performance:
ILL revenues at Rs 645mn grew 18% yoy on back of 56 titles launched in FY19. However, the EBIT losses at Rs 197 jumped ~85% yoy due to initial inefficiencies and delay in getting synergy benefits. The turnaround of ILL has taken more than guided time and still does not have clear signs in future and this drags the consolidated performance of NELI
PAT declined 2% yoy:
Strong EBITDA growth was offset by higher interest expenses (~1.5x yoy) at Rs 42mn as WC loans increased to fund new title launches for Indiannica and procure inventory for next season. This along with lower other income (down 72% yoy) led to a 2% yoy decline in PAT at Rs 147mn
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