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Publication segment revival to improve performance

Navneet Education reported a subdued financial performance in Q4FY21. Revenues de-grew 8% YoY to | 191 crore on a low base (Q4FY20: YoY revenue decline of 16%). Gross margins declined 340 bps YoY to 58.2%. Though staff cost (as percentage of sales) grew 212 bps to 18.9%, other expenses declined 533 bps to 23.8%, which enabled the company to restrict the decline in EBITDA margin to 20 bps YoY to 15.9% with absolute EBITDA declining 9% YoY to | 30.3 crore. However, a decline in interest cost by 80% YoY to | 80 lakh enabled the company to report a flattish PAT of | 16.9 crore (Q4FY20: | 16.8 crore). For FY21, revenues declined 45% YoY to | 835 crore with PAT declining 72% YoY to | 56 crore.

Gradual reopening of schools to aid publication segment

The pandemic impacted Navneet’s publication segment the most as schools remained closed during FY21 with publication segment revenues declining ~58% to | 296 crore. Revenue from the publication segment is heavily skewed towards Q1 every year (50%+). Q1FY22 has been disrupted owing to resurgence of pandemic and revenues may get deferred to Q2FY21, though entire revenue loss may not be recouped in FY22E. The management indicated that schools for 8-12 standard could open in a staggered manner from June-July 2021 in Gujarat and Maharashtra. The reopening of schools would lead to a recovery in the publication segment. We expect FY22E to be a better year compared to FY21.

Strong exports to drive stationery demand

Demand for stationery exports continues to remain strong and the management expects stationery exports in FY22E to clock revenues of ~| 500 crore (FY21: 389 crore). The company indicated that it was getting enquiries for larger quantities of existing products along with new product enquiries from both existing and new clients. Global brands are re-arranging their sourcing and supply chain with efforts to reduce dependence on China, which is leading to improved business traction for players in countries like India. The shift may happen gradually but players with strong capacities and good product bouquet like Navneet are expected to be beneficiaries.

Valuation & Outlook

Expectations of a gradual reopening of schools in FY22E augur well for Navneet as its publication segment derives revenues from supplementary books for state board based school curriculum. After a weak FY21 with publication revenues declining ~58% YoY, we expect publication revenues to revive with re-opening of schools in FY22. We also introduce FY23E estimates and expect revenue, earnings CAGR of 38%, 97%, respectively, over FY21-23E (on a low base). Navneet has, over the years, maintained balance sheet prudence having a virtually debt free status and generating healthy RoCE of 24%. The stock is available at reasonable valuations trading at 8.9x FY23E EPS. We reiterate our BUY rating on the stock with a revised TP of | 100 (~10.0x FY23E EPS, earlier TP: | 95).

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