Navneet Publications – a good com in education sector

A short research report with updated developments.

This report was originally written in FY21 as part of personal investment record. Updates have been made wherever necessary.
Business Overview:

1. In the business of publication of books for Maharashtra and Gujarat State board schools and CBSE books under the brand name Indiannica (erstwhile Britannica).
2. Cyclical nature of business with bulk of revenues coming in Q1 and Q4.
3. Stationary products(paper/non paper), exports of which contribute majorly to revenues.
4. E-Learning solutions under the brand name E-sense Learning.
5. Managing schools under the brand name Orchid International Schools. (K12-Techno).
6. Majority of the revenues is through publishing and stationary business.
   Probable reasons for current valuation:
7. Loss making business verticals
8. Significance of publishing business in a digital age (probably a newspaper moment for the business).
9. Love and excitement among the people for edtech platforms.
10. Has failed to capture CBSE publishing market share(yet).

Reasons why current valuation is wrong (mispricing exists):

1. The drop in revenue for FY21 was caused by the lock down which was announced by the Central Govt. in the last week of March. Most of the revenues are generated by the company in the months of April-May as students buy books for the Academic Year which starts from June. This should normalize by FY22.

2. Revenues have normalized by FY23.

3. There is a virtual monopoly of the company in the publishing business in Maharashtra and Gujarat state board schools.

4. There are approx. 24,000 CBSE schools pan India. But there are more than 24,000 state board schools in Maharashtra itself and new schools keep opening every year to pick up on the schools that have shut down.

5. And the students of Maharashtra and Gujarat schools are captive customers as they are dependent on the books and guides published by the company for exams.

6. Plus, there is high competition in the CBSE space among publishers and to add to that schools have themselves started publishing their own books.

7. On the ed-tech front, the company is venturing into the field and leveraging the long old relationships it has established with the schools to get the product rolling.

8. But the argument against the significance of the company’s core business (publishing and stationary) does not hold up. The reason being, the amount of fees charged by the darling ed-techs (Byjus, Unacademy) is more than the fees of the state board schools (where the company has a monopoly). The parents cannot afford these exorbitant fees charged by the ed-techs.

9. Update FY24- Massive correction in valuation of Byju’s.

10. Plus, the ed-techs are not officially affiliated to any Education Board, while Navneet’s books and guides strictly follow the prescribed curriculum. And the experience and expertise of all these years in the business is an intangible asset which translates into the brand name.

11. The company witnesses a more than normal revenue and profit growth once in every 4-5 years when the syllabus is changed and students buy new books. This will be the case in the next two years on account of the New Education Policy.

12. The company is also trying a pilot project where it will also sell books through its website in a digital medium which if successful will reduce the capex as no physical copies have to be printed. Update – Seems unlikely.

13. Update – Company has 20% stake in K12 Techno valued at 800 Cr as of Q2FY24.
    Some Numbers…

Key takeaways from my crunching of the Annual Reports (not from Screener)

1. Current valuation (as of 04/02/2021) is almost equal to the revenue.

2. Current Ratio>2

3. Negligible Debt

4. ROE & ROCE>20% (presence of moat/competitive advantage as suggested above as a monopoly in Maharashtra and Gujarat).

5. Intrinsic Value based on DCF of Owner Earnings,
   Where Owner Earnings = (Net Profit+ Depreciation&Ammortization – Capex)
   Note: did not take working capital changes into account while calculating owner earnings.
   Discount rate – 10 Yr G-Sec yield.

Intrinsic Value= 4500-5500 Cr
Update- Could be significantly higher if company unlocks value by selling 800Cr stake in K-12 Techno. Management would think about it in coming 2 years.

6. Margin of Safety >50%
7. Probable correction of mispricing Q4FY22-Q2FY23 with opening up of schools and syllabus changes which will also give a boost to the ROE and ROCE. Update- Current market cap (September 2023) around 3100 Cr.
8. Recommendation – Buy at 3100 Cr levels as well despite run-up in price as Board is highly vigilant as they cracked down on loss making ventures and Management (Gnanesh Gala,MD) is honest about headwinds and tailwinds alike and wants to create minority shareholder value.