ILL loss hurts consolidated earnings growth May 14, 2018 Keyur Pandya keyurpandya@plindia.com +91 22 66322247 R Sreesankar rsreesankar@plindia.com +91 22 66322214 Rating Accumulate Price Rs140 Target Price Rs161 Implied Upside 15.0% Sensex 35,557 Nifty 10,807 (Prices as on May 14, 2018) Trading data Market Cap. (Rs bn) 32.8 Shares o/s (m) 233.6 3M Avg. Daily value (Rs m) 19.1 Major shareholders Promoters 61.78% Foreign 6.00% Domestic Inst. 16.98% Public & Other 15.24% Stock Performance (%) 1M 6M 12M Absolute (9.7) (11.5) (15.7) Relative (13.6) (19.4) (33.5) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 7.0 1.0 597.3 2020 8.0 1.0 703.8 Price Performance (RIC: NAVN.BO, BB: NELI IN) (Rs) 200 150 100 50 0 May 17 Jul 17 Source: Bloomberg Sep 17 Nov 17 Jan 18 Mar 18 Navneet s (NELI) Q4FY18 standalone results were marginally below expectations with 1.8% YoY revenue growth and 10.6% YoY earnings contraction in a seasonally lean quarter. However, disappointment came from Indiannica Learning Ltd (ILL) which reported loss of Rs193.9m for FY18 impacted by operating deleverage, higher employee cost and lower revenue recognition due to change in accounting policy for sales return to the tune of ~Rs170m. Management is confident of (i) steady double digit growth in publishing aided by syllabus change in key states (ii) better stationery export visibility for FY19 and (iii) double digit growth coupled with improved margins with large expansion in titles in ILL ILL earnings impacted by operating deleverage & accounting policy: Indiannica Learning Ltd (ILL) reported loss of Rs193.4m in FY18 vs. net profit of Rs254m in FY17 (as consolidated only from Q4FY17) impacting the consolidated earnings. We believe that this is a one off accounting impact due to INDAS. However, management is confident of growth prospects at ILL with growth expectations upwards of 20% for FY19 on the back of expansion of product titles. Management is hopeful to reduce the losses in FY19E and to be profitable beyond FY20E Valuation and Outlook: In our view, NELI is well placed for growth opportunities over FY18 FY20E period considering ILL acquisition and the impending syllabus changes. Further strong Balance Sheet with negligible debt, superior return ratios upwards of 20%, strong generation of cash profits (~Rs2bn p.a.) and management bandwidth with proven track record give further comfort. NELI has been a value stock over the years with a payout ratio of ~50%. While we continue to remain optimistic on long term growth prospects of the company, near term outperformance may be lower with synergy with ILL being a key factor to watch out for. Downgrade to Accumulate with TP of Rs161 (from Rs198 earlier) valuing at 20x FY20E Key financials (Y/e March) 2017 2018 2019E 2020E Revenues (Rs m) 11,962 12,040 13,576 15,016 Growth (%) 25.5 0.7 12.8 10.6 EBITDA (Rs m) 2,981 2,225 2,624 2,977 PAT (Rs m) 1,946 1,275 1,629 1,877 EPS (Rs) 8.3 5.5 7.0 8.0 Growth (%) 65.9 (34.5) 27.8 15.3 Net DPS (Rs) 2.5 1.5 2.4 3.1 Profitability & Valuation 2017 2018 2019E 2020E EBITDA margin (%) 24.9 18.5 19.3 19.8 RoE (%) 26.7 17.6 20.4 20.9 RoCE (%) 21.9 12.7 14.7 15.1 EV / sales (x) 2.9 2.9 2.5 2.3 EV / EBITDA (x) 11.5 15.7 13.2 11.5 PE (x) 16.9 25.7 20.1 17.5 P / BV (x) 4.7 4.4 3.9 3.5 Net dividend yield (%) 1.8 1.1 1.7 2.2 Source: Company Data; PL Research Q4FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Publishing expected to improve after a washout year : Publishing segment reported anaemic growth of 3% YoY in FY18, hurt by loss of sales on account of delay in publishing of 9 th grade text book by board in Maharashtra (As panic buying of books from small/regional players by students). However, management is confident to tackle similar situation going forward with reduced lead time. Management is confident of double digit business growth with syllabus change visibility for FY19 in Maharashtra (grade 1, 8, 10) and Gujarat (Grade 9 & 11). Stationery to perform well backed by better visibility in exports: Stationery revenue grew only 3.1% YoY in FY18 to Rs5bn impacted by (i) destocking by channel in H1FY18 due to GST implementation (ii) sluggish export growth after an abnormally high growth of 33% in FY17 and (iii) INR appreciation against USD. However management is expecting recovery in growth with better visibility in export orders for FY19E and pick up in domestic stationery demand post GST, especially for large organised players. Exhibit 1: Revised estimates to factor in slower growth in ILL Particulars Earlier estimates Revised estimates % revision FY19E FY20E FY19E FY20E FY19E FY20E Net sales (Rs m) 14,259 15,700 13,576 15,016 4.8% 4.4% Adj. PAT (Rs m) 1,935 2,123 1,629 1,877 15.8% 11.6% EPS (Rs) 8.3 9.1 7.0 8.0 15.8% 11.6% May 14, 2018 2
Exhibit 2: Q4FY18 Result Overview (Rs m) Y/e March Q4FY18* Q4FY17* YoY gr (%) Q3FY18* FY18 FY17 YoY gr (%) Net Sales 2,126 2,090 1.8 1,744 12,040 11,722 2.7 Expenditure Raw Materials 1,034 1,021 1.3 801 5,849 5,447 7.4 % of Net sales 48.6 48.9 45.9 48.6 46.5 Personnel 287 234 22.8 296 1,468 1,187 23.7 % of Net sales 13.5 11.2 16.9 12.2 10.1 Selling, dist & Other Exp 568 545 4.2 444 2,499 2,348 6.4 % of Net sales 26.7 26.1 25.4 20.8 20.0 Total Expenditure 1,888 1,799 5.0 1,540 9,816 8,981 9.3 EBITDA 238 290 (18.1) 205 2,225 2,741 (18.8) Margin (%) 11.2 13.9 (271)bps 11.7 18.5 23.4 (491)bps Depreciation 64 64 0.6 62 307 284 8.1 EBIT 174 226 (23.4) 143 1,918 2,457 (22.0) Interest 17 11 50.9 1 77 43 80.4 Other Income 79 29 173.6 44 260 223 16.3 PBT 235 244 (3.6) 186 2,100 2,638 (20.4) Tax 84 75 12.2 67 825 827 (0.2) Tax Rate (%) 35.9 30.8 36.1 39.3 31.3 Adjusted PAT 151 169 (10.6) 119 1,273 1,706 (25.4) Reported PAT 151 169 (10.6) 119 1,273 1,706 (25.4) * Quarterly numbers are on standalone basis Exhibit 3: Segmental Snapshot Y/e March Q4FY18* Q4FY17* YoY gr (%) Q3FY18* FY18 FY17 YoY gr (%) Segment Revenue Publishing Content 543 536 1.3 845 7,000 6,772 3.4 Stationery Products 1,578 1,553 1.6 893 5,010 4,860 3.1 Segment EBITDA Publishing Content 84 133 (36.8) 172 1,903 2,236 (14.9) Stationery Products 212 155 36.4 58 507 553 (8.3) EBITDA Margin Publishing Content 15.5% 24.8% (935)bps 20.3% 27.2% 33.0% (584)bps Stationery Products 13.4% 10.0% 342 bps 6.5% 10.1% 11.4% (126)bps * Quarterly numbers are on standalone basis May 14, 2018 3
Story in charts Exhibit 4: Publishing remains cash cow while Stationery leverages Brand Navneet Exhibit 5: Working capital requirement has inched up due to ILL & competition in stationery segment Publishing Division Stationery Division Inventory days Receivable days 20000 Creditor days WC Days (Rs m) 15000 10000 5000 250 200 150 100 50 193 178 183 203 0 FY15 FY16 FY17 FY18 FY19E FY20E FY15 FY16 FY17 FY18 Exhibit 6: Consistently high Dividend payout creates comfort (%) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 47.0 48.4 48.4 Incluidng buyback of Rs591m in FY17 52.7 75.7 33.0 FY13 FY14 FY15 FY16 FY17 FY18 Exhibit 7: Strong balance sheet shows prudence Net Debt/Equity (x) 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 FY16 FY17E FY18E FY19E FY20E Exhibit 8: High return ratios & strong cash generation over the years RoAE (%) RoACE (%) Cash Profit (Rs m) Avg Cash Profit 30.0 2500 25.0 20.0 15.0 10.0 5.0 2000 1500 1000 500 Rs 1.9bn 0.0 FY15 FY16 FY17E FY18E FY19E FY20E 0 FY15 FY16 FY17 FY18 FY19E FY20E May 14, 2018 4
Income Statement (Rs m) Net Revenue 11,962 12,040 13,576 15,016 Raw Material Expenses 5,447 5,849 6,571 7,222 Gross Profit 6,515 6,191 7,005 7,793 Employee Cost 1,187 1,468 1,625 1,821 Other Expenses 2,348 2,499 2,756 2,996 EBITDA 2,981 2,225 2,624 2,977 Depr. & Amortization 284 307 348 365 Net Interest 43 77 85 87 Other Income 223 259 270 280 Profit before Tax 2,878 2,100 2,461 2,804 Total Tax 827 824 822 937 Profit after Tax 1,946 1,274 1,629 1,877 Ex Od items / Min. Int. (105) (1) (10) 10 Adj. PAT 1,946 1,275 1,629 1,877 Avg. Shares O/S (m) 233.6 233.6 233.6 233.6 EPS (Rs.) 8.3 5.5 7.0 8.0 Cash Flow Abstract (Rs m) C/F from Operations 773 759 1399 1525 C/F from Investing (771) (326) (185) (108) C/F from Financing (63) (119) (356) (544) Inc. / Dec. in Cash (61) 313 859 873 Opening Cash (15) (77) 237 1,095 Closing Cash (77) 237 1,095 1,968 FCFF 2 432 1,214 1,417 FCFE 1,807 1,026 1,256 1,511 Key Financial Metrics Growth Revenue (%) 25.5 0.7 12.8 10.6 EBITDA (%) 44.8 (25.4) 18.0 13.5 PAT (%) 62.6 (34.5) 27.8 15.3 EPS (%) 65.9 (34.5) 27.8 15.3 Profitability EBITDA Margin (%) 24.9 18.5 19.3 19.8 PAT Margin (%) 16.3 10.6 12.0 12.5 RoCE (%) 21.9 12.7 14.7 15.1 RoE (%) 26.7 17.6 20.4 20.9 Balance Sheet Net Debt : Equity 0.2 0.3 0.2 0.1 Net Wrkng Cap. (days) 183 165 297 296 Valuation PER (x) 16.9 25.7 20.1 17.5 P / B (x) 4.7 4.4 3.9 3.5 EV / EBITDA (x) 11.5 15.7 13.2 11.5 EV / Sales (x) 2.9 2.9 2.5 2.3 Earnings Quality Eff. Tax Rate 28.7 39.2 33.4 33.4 Other Inc / PBT 7.8 12.4 11.0 10.0 Eff. Depr. Rate (%) 7.8 7.7 8.0 7.9 FCFE / PAT 92.9 80.5 77.1 80.5. Balance Sheet Abstract (Rs m) Shareholder's Funds 6,938 7,520 8,464 9,486 Total Debt 1,594 2,253 2,403 2,630 Other Liabilities (1) 2 1 1 Total Liabilities 8,532 9,775 10,868 12,116 Net Fixed Assets 2,094 2,131 2,130 2,040 Goodwill 457 457 457 457 Investments 413 807 792 797 Net Current Assets 5,568 6,381 7,490 8,823 Cash & Equivalents 97 68 657 1,332 Other Current Assets 7,146 8,074 8,640 9,455 Current Liabilities 1,676 1,761 1,807 1,964 Other Assets Total Assets 8,532 9,775 10,868 12,117 Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 Net Revenue 5,638 1,834 1,744 2,126 EBITDA 1,624 281 205 238 % of revenue 28.8 15.3 11.7 11.2 Depr. & Amortization 53 56 62 64 Net Interest 26 16 1 17 Other Income 123 47 44 79 Profit before Tax 1,668 256 186 235 Total Tax 572 89 67 83 Profit after Tax 1,097 166 119 152 Adj. PAT 1,097 166 119 152 Key Operating Metrics Segment Revenues Publishing 6,139 6,402 7,235 7,958 Stationery 4,860 5,010 5,561 6,061 EBIDTA Publishing 2,270 2,113 2,387 2,626 Stationery 553 501 567 618. May 14, 2018 5
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