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Focus on enhancing digital content augurs well…

About the stock: Navneet Education (NEL) is an educational syllabus based content provider in print and digital medium and a manufacturer of scholastic paper stationery for domestic and international markets.

* Over the years, the company has built a strong brand in the educational content & scholastic stationery

* In the state boards of Maharashtra and Gujarat, the company has a market share of 65%. It has also entered into CBSE syllabus books in other states

Q2FY22 Results: NEL reported an improved performance for Q2FY22 with revenues reaching 93% of pre-Covid level.

* Revenues grew 43% YoY to | 229 crore (Q1FY22 | 318 crore, Q2FY21: | 160 crore, Q2FY20: | 247 crore)

* Though gross margin was lower by 21 bps YoY to 52.4%, EBITDA margin improved 815 bps YoY to 13.9% due to operating leverage

* EBITDA was higher by 3.5x YoY to | 31.8 crore. Consequently, PAT increased by 8.9x YoY to | 22.6 crore

What should investors do? Over the last three years, the stock has underperformed with three-year price CAGR at -10%.

* NEL has a strong business model with dominant share in state board supplementary books in Maharashtra and Gujarat. The company has strong return ratios and is reasonably valued

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value NEL at | 125 i.e. 12x FY23E EPS

Key triggers for future price performance:

* NEL is gradually expanding its footprint in states other than Maharashtra, Gujarat and is looking to make inroads into CBSE/ICSE boards

* The company is also expanding its presence in the digital content segment, which has gained significantly owing to the pandemic

* Growth in the formal education segment is expected to rebound by 10-12% over the medium term on the back of urbanisation, increased enrolment in tertiary segment and overall economic rebound

* The stationery export business is experiencing strong demand from global clients and the company expects double digit growth in the segment

Alternate Stock Idea: Apart from NEL, we also like Trent

* Inherent strength of brands (Westside, Zudio, Star, Zara) and proven business model position Trent as a preferred pick

* We have a BUY with a target price of | 1300/share

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