>Navneet Publications (Navneet) is a dominant publication house in Maharashtra and Gujarat

Navneet Publications (Navneet) is a dominant publication house in Maharashtra and Gujarat producing both curriculum and non-curriculum books. We expect the growth momentum to pick-up backed by a change in syllabus in the states of Maharashtra and Gujarat leading to 12.3% CAGR in revenue over FY11-14E. The strategy of the company is to focus on its content business which has a stronger business profile that leads to profitable growth. We like 1) the business profile, 2) consistency in terms of growth rate and operating margin which is slated to improve with better sales mix and 3) consistent dividend payout (dividend paid since listing). We initiate coverage on the stock with a Buy rating and a target price of Rs75, implying 15x FY14E earnings.


■ Strong track record: Over the years, the company has demonstrated solid track record which is visible from its leadership position (especially publishing business in its areas of operation in Maharashtra and Gujarat) and its financial performance. Over FY06-11 (5 years) the company has achieved revenue CAGR of 13.5% and EBITDA margin in the range of 20-22%. We believe that this leadership status will be maintained with pick up in growth profile going forward.


■ Publishing revenue to deliver 15% CAGR: Publishing business, 60% of revenue, caters to both curriculum (state board) and non-curriculum books. Our expectation of higher growth for the next two years stems from the change in syllabus in the states of Maharashtra and Gujarat. Navneet is expanding its market in the content business to Andhra Pradesh which together will contribute 15% CAGR over FY11-
14E.


■ Margin to improve with better sales mix: We expect EBITDA margin to improve by 200bp as 1) Sales mix changes in favour of publication business which generates 33-34% operating margin; 2) stationery business reaches its bottom in terms of sales and margin in FY12E and 3) the turnaround of its subsidiaries.


■ Valuation to pick up on better growth prospects: With 60% revenue coming from publishing business, revenue visibility of the company is strong and is fairly insulated from the volatile macro economic environment. We expect revenue and net profit to register 12.3% and 21.3% CAGR respectively over FY11-14E driven by better sales mix and improvement in EBITDA margin. Also, the return ratios would improve consistently and go up to 25-26% by FY14E on the back of profitable growth and limited capex needs. We believe these reasons force us to build a case for multiple rerating and return to one year forward price-earnings of 15-18x. The company has been distributing dividend since listing and the dividend yield stands at 2.6% considering FY11 payout. We initiate our coverage with a Buy rating on the stock with a target price of Rs75, implying 15x FY14E earnings.

RISH TRADER