Buy Navneet Education Ltd For Target Rs. 182 - Prabhudas Lilladher Pvt. Ltd.
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We cut our FY25E/FY26E EPS estimates by 14%/12% as we re-align our assumptions for publishing business amid rising growth challenges in the near term. NELI reported weaker than expected performance with EBITDA margin of 1.6% (PLe 9.1%) as publishing top-line declined by 7.2% YoY led by higher sales return of Rs180mn amid rising prevalence of 2nd hand books. Higher than expected sales return for 2 quarters is likely to result in rising provision buffer going ahead. In addition, NELI is still awaiting curriculum change announcement schedule for FY25E indicating volumes would continue to remain under pressure. Consequently, we expect publishing business to grow at a CAGR 7% over FY23-FY26E as realization of NCF benefits will be back ended. We expect sales/PAT CAGR of 8%/21% over FY23-FY26E and retain ‘BUY’ rating with revised SOTP based TP of Rs182 (earlier Rs 206) as we cut our core business target multiple to 11x (earlier 12x) amid delay in realization of NCF benefits.
Consolidated sales decreased 2.1% YoY: Consolidated revenues declined 2.1% YoY to Rs2,588mn (PLe Rs2,967mn), primarily due to a 7.2% YoY decline in publishing sales to Rs844mn (PLe Rs1,114mn) while stationery sales increased 0.2% YoY to Rs1,733mn (PLe Rs1,850mn).
Consolidated gross margin at 49.9%: Gross profit decreased 3.7% YoY to Rs1,291mn with GM of 49.9% (PLe of 52.0%) due to lower than expected revenues. Consolidated EBITDA decreased by 60.9% YoY to Rs40mn (PLe of Rs270mn) with a margin of 1.6% (PLe 9.1%). Consolidated stationery EBIT margin stood at 4.9%, while publishing business reported an EBIT loss of Rs106mn. Consolidated net loss stood at Rs225mn (PLe PAT of Rs114mn).
Con-call highlights: 1) The syllabus change schedule for FY25E is still awaited. 2) Domestic stationery business is expected to grow by ~12-15% in FY24E. 3) Stationery EBIT margins to be at 11-13% in FY24E. 4) There is a revenue spill-over of Rs150-170mn in 3QFY24 due to change in paper pattern of Gujarat Board. 5) ~10-12% volume de-growth was observed in 9MFY24. 6) Red Sea crisis has significantly raised freight costs, resulting in a current slowdown in demand for export stationery. 7) In FY23, NELI reached 8,500 schools, with 5,300 schools prescribing their titles. Current reach is 11,000 schools and management anticipates 6,000 schools to prescribe their titles this year. 8) 70% of the paper has been procured, and balance will be procured by April end, while paper prices are down 20% from peak level. 9) Ed Tech loss stood at ~Rs600mn in FY23 and is expected to contract to Rs450mn/Rs300mn in FY24E/FY25E. 10) Losses in ILL increased due to higher returns in 3QFY24. 11) Domestic stationery segment is expected to grow by 20% in FY25E.
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