Navneet Education: Steadfast; growth gaining momentum

Navneet Education

BSE Sensex

29,531

S&P CNX

9,144

Navneet Education

Initiating Coverage | Sector: Publishing

CMP: INR153

TP: INR210 (+37%)

Buy

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

M.Cap. (INR b)

M.Cap. (USD b)

1, 6, 12 Rel. Per (%)

Avg Val, (INR m)

Free float (%)

Financial Snapshot (INR b)

Y/E Mar

2017E 2018E

Sales

10.9

13.7

EBITDA

2.5

3.3

1.6

2.0

EPS (Rs)

6.6

8.6

EPS Gr. (%)

53.2

29.3

BV/Sh. (INR)

26.2

31.0

RoE (%)

26.0

30.0

RoCE (%)

21.1

23.7

P/E (x)

23.0

17.8

P/BV (x)

5.8

4.9

Shareholding pattern (%)

As On

Promoter

DII

FII

NELI IN

233.5

155 / 81

35.3

0.5

4/46/69

Navneet Education Limited (NELI), founded by the Gala family, is in the business of (a)

publishing – educational, supplementary, children’s and general books, (b) stationery

products, and (c) digital education. It derives 54% of its revenue from publishing and

43% from stationery. NELI's products are sold under the brand names

Navneet, Vikas,

Gala, Grafalco, Boss, Youva

and

eSense.

It recently acquired Britannica India’s

curriculum business for INR880m; this would be synergic to its CBSE curriculum

business & did buyback of shares to tune of INR580m.

Steadfast; growth gaining momentum

CBSE curriculum opportunity sizable; future-ready with digital offerings



2019E

16.1

4.0

2.5

10.5

22.6

37.1

30.9

25.8

14.5

4.1



NELI dominates the market for supplementary educational material for the

Maharashtra and Gujarat State Education Boards. Its domineering position makes

it a key beneficiary of the sustained demand for new supplementary material &

workbooks, driven by periodical syllabus overhaul by the State Boards.

Change of Syllabus in X and XII in Gujarat in FY18 and X and VII in Maharashtra in

FY19 provides strong triggers for growth in next two years.

Common curriculum in Mathematics and Science across India triggers a huge

opportunity for NELI to sell textbooks to CBSE-pattern schools across India. With

the recent acquisition of Encyclopedia Britannica India (EBI), NELI is well poised to

gain meaningful share in the growing CBSE market.

In the stationery business, while competitive intensity in the domestic market is

high, NELI’s growth would be largely driven by exports. In the exports segment,

which constitutes 43% of its stationery business, NELI has begun focusing on value-

added products that command premium pricing.

NELI also has various digital content offerings through its subsidiary, eSense.

Though this segment hasn’t seen rapid growth since its launch in FY09, we believe

this will change with increasing thrust on digitization and growing penetration.

We expect 22% revenue CAGR and 26% PAT CAGR over FY17-19. We value the

company at 20xFY19E EPS with a target price of INR210 & initiate with a Buy rating.



Sep-16 Jun-16 Sep-15

61.8

15.2

6.8

61.8

15.2

6.5

61.8

15.2

2.5



Navneet Education

Steadfast; growth gaining

momentum

Change of Syllabus in standard X in FY18 and FY19, key triggers for

growth

State Education Boards (SEBs) change their syllabi for standards I to XII in a

phased manner every six years. This provides sustainable demand for

supplementary material like guide, workbook and 21 most likely sets as students

are compelled to buy material updated as per new syllabi. However, Standard X

being critical year for a student, change in syllabi is a big trigger for growth for

companies like NELI. Standard X constitutes ~17% of the total revenue for NELI.

NELI deals in supplementary books like Guide (40% of revenue), workbook (45%)

and 21 most likely sets (15%) and has a strong hold in states of Maharashtra and

Gujarat with a market share of ~65%. Students in Xth Standard generally prefer

to buy all kinds of supplementary materials and in year of change of syllabus

students go for new supplementary materials and not second hand ones. Change

of Syllabus in X and XII in Gujarat in FY18 and X and VII in Maharashtra in FY19

provides strong triggers for growth in next two years. Thus, we expect strong

revenue CAGR of 18% over FY17-19E vs revenue CAGR of 4% over FY14-16.

Niket Shah

91 22 3982 5426

Niket.Shah@motilaloswal.com

Please click here for Video Link

29 March 2017

Navneet Education

Stock Performance (one-year)

Common curriculum, EBI acquisition – huge opportunity in CBSE space

Common curriculum in Mathematics and Science across India triggers a huge

opportunity (INR30b market) for NELI to sell textbooks to CBSE schools across India.

Unlike schools affiliated to State Boards, CBSE schools use other private publishers’

textbooks apart from board-approved textbooks. Currently, NELI operates under the

brand

Grafalco,

and besides its two core states, markets textbooks in five regions – NCR,

Karnataka, Andhra Pradesh, Kerala and Tamil Nadu. NELI has recently acquired

Encyclopedia Britannica India (EBI), which provides curricular material for the

CBSE/international boards – has a presence in 6,000+ schools. The acquisition will help

NELI to significantly improve market visibility, enhance curriculum offerings, fill title

gaps, and deepen penetration in CBSE and international boards. NELI has limited

presence in EBI’s key markets – Punjab, Rajasthan, Haryana, Andhra Pradesh, Uttar

Pradesh and Delhi/NCR. Also, EBI has a well-distributed revenue mix across India, which

supports NELI’s quest to transition from a regional entity to a pan-India entity. We

believe EBI acquisition would be synergic to NELI and grow at 30% CAGR to INR 1,454m

over FY17-19. We expect it to garner meaningful market share in this growing segment

(market size to expand 3x to INR100b in five years, with many schools opting for

conversion from the State Boards to CBSE/CBSE-pattern schools).

High-margin exports to drive growth in stationery business

NELI’s stationery business (43% of total revenue) will be largely driven by growth in

exports (~44% of stationery revenue). Given the high competitive intensity in the

domestic segment, NELI is focusing more on exports. The company has moved from

exporting low-margin commoditized products to value-added products like embossed

stationery, 3D cover page design, and patented stationery. It has 100% in-house

production for export products and margins in the export segment are 300-400bp higher

than in the domestic segment. The US is its export hub (NELI being a preferred supplier

to Walmart), accounting for 73% of its exports. We expect 12.5% CAGR in the stationery

business, led by higher growth of ~19% in the export segment. This is expected to

increase contribution of exports business to 50% by FY18 aid margin expansion.

eSense to capture “next gen” digital opportunity

NELI has various offerings in the digital business through its subsidiary, eSense, and is

looking to grow in both B2B and B2C segments. Among its digital offerings are an online

portal (TopScorer), CD ROMs, tablets, and pen drives containing curricular content. To

increase adoption rate, NELI has increased its ad spends to INR80m-100m for FY17

(~INR60m in FY16). This segment hasn’t seen a rapid growth since its launch in FY09.

However, we believe with increasing thrust on digitization and growing penetration (so

far, it has tapped only ~3,500 of 39,000 private schools in Maharashtra and Gujarat),

eSense will achieve 20% CAGR over FY17-19.

Valuation and view

In the publication business, we believe NELI is perfectly placed to capture multiple

growth triggers like changing syllabus, common curriculum across India, increasing

conversion of SEB schools to CBSE. We remain excited about export-led growth in the

stationery business and NELI’s future-ready eSense platform. We expect 21.7% revenue

CAGR and 25.9% PAT CAGR with 120bp margin expansion to 24.5% over FY17-19.

Despite EBI acquisition (~INR880m) & equity buyback (INR580m) in FY17E, RoCE is likely

to improve from 21.1% in FY17 to 25.8% by FY19. We initiate coverage with a

Buy

– our

target price of INR210 (20x FY19E EPS) implies 37% upside.

29 March 2017

Navneet Education

Company description

Navneet Education Limited (NELI; formerly known as Navneet Publications (India)

Limited), founded by the Gala family, is in the business of educational, children’s and

general book publishing, scholastic papers, non-paper stationery products, and

digital education. The company has built a strong brand in publications and

stationery, and has gained a leadership position. Since 1959, NELI has been a major

force in the dissemination of knowledge. It is a dominant player in the field of

publishing, with more than 5,000 titles in English, Gujarati, Hindi, Marathi, Tamil,

Urdu, and other Indian and foreign Languages.

Over the decades, NELI has emerged as a preferred brand for educational products

among teachers and students in India. The company's products are sold under the

brand names

Navneet, Vikas, Gala, Grafalco, Boss, Youva

and

eSense.

Its portfolio of

educational books includes high quality supplementary books like digests (guides),

workbooks, and 21 most likely question sets, most of which are published in five

languages – English, Gujarati, Hindi, Marathi, and Urdu.

NELI has a dominant market share of about 65% in West India. Also, with the new

range of text books targeting students from the CBSE and ICSE boards, its

educational products are now available in seven states of India. It also publishes

various titles in the children’s and general books category, which are not based on

syllabus – coloring and activity books, board books, story books, and books on

health & hygiene, art & artist, cooking, mehendi, embroidery, etc. These are sold

pan India.

Exhibit 1: Navneet’s business

Navneet Business

Publication (54%)

Stationery (43%)

E-sense and other (3%)

Direct Education

(K12 Techno Service

Which runs CBSE

Schools under the

brand Orchids - The

International).

Indirect Education

(E-learning, Cirriculum

& Non-Cirriculum

Publication)

Paper Stationery (94%)

Non Paper Stationery

(6%)

Source: Company, MOSL

29 March 2017

Navneet Education

Evolution over the years

1959

First Digest/Guide

published for Std X

1970

Workbook concept

introduced to standardize

teaching across classes

and divisions

1975

Published 21 Most

likely Question sets

for X & XII

1990

Children Books

introduced

1993

Started Stationery

division

1994

First and only

Educational Publisher to

be listed on BSE & NSE

2000

Stationery capacity

reached 100tns/day.

ISO Certification

awarded

2011

Ventured Direct

Education space

2003

Implementation of

SAP & KAIZEN

2008

Entered B2B Digital

Learning space

2014

Entered B2C Digital

Learning space

2016

New Stationery

brand YOUVA

launched

29 March 2017

Navneet Education

Multiple triggers in print publication

Signs of sustainable growth visible



State Education Boards (SEBs) change their syllabi for standards I to XII in a phased

manner every six years. This provides sustainable demand for supplementary

material, as students are compelled to buy material updated as per new syllabi. Given

its domineering position in Maharashtra (~65% market share) and Gujarat (~70%

market share), NELI is a major beneficiary.

The next two years should mark a period of high growth for NELI, given the significant

changes in standard-X syllabi scheduled over FY17-19 in its two core states (refer

exhibit 12).

Its (a) presence in multiple regional languages, and (b) strong pool of ~225 authors,

with NELI paying 2-8% royalty (highest in the industry) act as significant entry barriers.

Barring NELI, no publisher of educational supplementary books is present in more than

two states in India.

Every state has a different regional language and no publisher can be successful

without regional language publication as ~80% students study in regional medium

(except few southern states where number is ~60%; infringement of IPR risk creates a

huge entry barrier due to which no publisher in educational supplementary book

except Navneet is present in more than 2 states across India.

After a tepid FY16, the publishing segment has grown 16% in 1HFY17, led by (a)

syllabus change, (b) strong growth in the CBSE segment, and (c) enhanced curriculum

offerings. We expect this segment to grow at 18.1% over FY17-19, led by significant

changes in standard X curriculum in core states.

Barring class X, no single

class contributes over 10%

of revenue

The ~INR135b K-12 (Kindergarten to 12

) print publication market is growing at 12%

per year. It is a fragmented industry in India, with a large number of regional

players. It consists of textbooks and supplementary books like workbooks,

guides/digests and question banks. It is a content-driven business, with

publishers/authors developing course material based on latest syllabi prescribed by

respective state education boards.

Exhibit 2: Navneet’s K-12 print publication portfolio

Curriculum segment

Supplementary

Textbooks

Target market Caters to State board curriculum in Caters to CBSE

Maharashtra and Gujarat

curriculum in

Maharashtra, Gujarat,

Andhra Pradesh,

Karnataka, Tamil Nadu,

Kerala and NCR region

Products

Offers Supplementary Educational Offers Textbooks for

Publication( Workbooks, Digest

grades kindergarten to

and 21 Most likely questions) for VIII

K12 segment

Revenue split 89% of total publication revenue 4% of total K12 print

(Workbook: 48%, Digest/Guides: content revenue in

35%, 21 Most likely questions:17%) FY16

Non-Curriculum segment

Presence all over India

and overseas

Diversified revenue streams to ensure sustained growth

Caters to children and

General books

7% of total publication

revenue in FY16

(Domestic: 69%, Exports:

31%)

Source: Company, MOSL

29 March 2017

Navneet Education

NELI provides workbooks, guides and last minute revision books as supplementary

material for students to prepare for their curriculum. Workbooks and guides are

available for all standards, while last minute revision books are available only for

class X and class XII. NELI’s publication revenues are diversified across categories

and classes. Barring class X, no single class contributes more than 10% of revenue.

Workbooks (48% of publication revenue) are recommended by teachers – ‘pull’

model. Guides (35% of publication revenue) and last minute revision sets (17% of

publication revenue) are demanded by students to assist them in their studies –

‘push’ model. NELI’s revenues are diversified geographically as well, with

Maharashtra contributing ~60% and Gujarat contributing ~40%. Its plans to expand

to new states will further diversify its revenue streams.

Exhibit 3: Break-up of revenue based on various classes

Revenue share

Standard

XII, 9%

Standard XI,

Exhibit 4: Geographical revenue break-up

Statewise revenue contribution

Standard I-

IV , 24%

Standard X,

17%

Gujarat

~40%

Maharashta

~60%

Standard

VIII - IX,

21%

Standard V-

VII, 24%

Source: Company, MOSL

Exhibit 5: Supplementary segment split

Particulars

Classes for which book is available

% of Print Publication Revenue

Sales Model

Recommendation

Workbooks

Class II to X

48%

Pull model

Schools

Guides

Last Minute Revision

Class I to XII

Class X & XII

35%

17%

Push model

Informal suggestion

Self-study

by teachers

Source: Company, MOSL

Exhibit 6: Snapshot of product portfolio of syllabus-based books

Source:

29 March 2017

Navneet Education

Exhibit 7: Snapshot of product portfolio of non-syllabus books

Source: Company, MOSL

The publishing business is seasonal, with April-June (Q1) accounting for 50-55% of

sales. However, for sales to happen in Q1, NELI starts its printing activity from

November. Paper procurement happens over November-December and

manufacturing commences for the next season. Marketing activity starts during the

January-March period. Working capital requirement is at its peak in March and at its

trough in September.

Exhibit 8: Quarter-wise activity

Quarters

Oct-Dec

Activities during the quarter

Paper purchase contracts

Start of printing activity

Sales ~10-15%

Printing activity continues

Jan-Mar

Marketing activity starts from next academic year

Sales ~15%

Apr-June

Jul-Sept

Printing activity continues

Major Sale ~50-55%

Major debtors realized

Sales ~15-20%

Huge Manufacturing expenditure

Inventory at its peak

Short term borrowings from banks

Highest revenue amongst all quarters

Major profits realized

Thin Balance Sheet

Zero debt

Source: Company, MOSL

Effect on P&L and Balance Sheet

Huge Manufacturing expenditure

Inventory rises

Market leader in Maharashtra and Gujarat

Navneet is the market

leader in both Maharashtra

and Gujarat, with a market

share of ~65% and ~70%,

respectively

NELI is the leading publisher in both Gujarat and Maharashtra, with rich experience

of over 50 years in both regions. It has ~65% market share in Maharashtra; other

publishers like Chetana, Jeevandeep, Reliable, and Bal Vidhya Prakashan have single-

digit to low double-digit share. Gujarat is dominated by two players – NELI is the

leader, with ~70% market share, followed by Bhavik Publisher, with 15% market

share. An advantage of being market leader is that authors have an incentive to be

associated with large publishers, as their compensation is linked to the number of

copies sold. (NELI pays royalty on sales every year unlike other publishers that pay

lump sum royalty). We believe NELI will continue to dominate the two states and

penetrate more to gain operating leverage.

29 March 2017

Navneet Education

Exhibit 9: Market share in Maharashtra

10%

5% 3%

Navneet Education

Chetana Publications

Jeevandeep Prakashan

Reliable

10%

65%

Bal Vidya

Others

Source: Industry, MOSL

70%

Source: Industry, MOSL

Navneet Education

15%

Bhavik Publication

Others

Exhibit 10: Market share in Gujarat

15%

Syllabus changes lead to sustainable growth

Complete syllabus change

every six years brings

sustainability in the

business

According to the directives of the SSC Board, the syllabus is changed in a phased

manner over every 5-6 years for all standards. All text books provided by the state

are changed and so is the supplementary material (workbooks, guides and last-

minute revision sets). NELI is a preferred brand in supplementary material; it has

~65% market share in Maharashtra and ~70% market share in Gujarat. NELI’s

supplementary material is updated regularly and its better format makes it the first

choice amongst students. Changing syllabus does away with old and second hand

books from trade and students buy new books (as per revised syllabus), which leads

to sustainable growth; NELI being the preferred choice, there is long-term visibility

in the business.

Exhibit 11: Syllabus change schedule- Significant changes in Std X curriculum

Academic year

2013-14

Maharashtra

Standards

Subjects

All subjects (All mediums)

All languages

History and Political science

Geography, Economics

Science - Environment

All subjects (All mediums)

Gujarat

Standards

VII

VIII

Subjects

All subjects (Eng and Hindi medium)

2014-15

III

2015-16

2016-17

VII

VIII

All subjects (All mediums)

2017-18

2018-19

All subjects (All mediums)

Marathi & Hindi( Paper Pattern)

All Subjects( All Medium)

All Subjects(All Medium)

All Subjects( All Medium)

All Subjects(All Medium)

III

XII

All subjects (Gujarati medium)

All subjects (English & Hindi Mediums)

All subjects(Gujarati Medium)

All subjects except Maths and Science(All mediums)

All commerce & Art subjects (All mediums)

Not Yet Announced

Source: Company, MOSL

29 March 2017

Navneet Education

Exhibit 12: Publishing revenue to grow at 18.1% CAGR in over FY17-19E

Total publishing revenue(INR m)

29%

18%

12%

-3%

2,766

FY10

2,993

FY11

3,540

FY12

4,572

FY13

4,751

FY14

5,319

FY15

5,160

FY16

5,897

FY17E

6,904

FY18E

8,222

FY19E

14%

17%

19%

Growth(%)

Source: Company, MOSL

Regional languages, different evaluation patterns an entry barrier

Navneet has ~225 authors,

aged 55-85 years, who have

published ~5,000 titles

Most schools in India are regional medium schools, which require specialization to

develop content and having a panel of authors is a key success factor. With over 50

years of experience in the publication industry, NELI has developed strong

relationships with renowned authors. The biggest risk in the business is IPR

infringement. If a new author ends up copying material from some other publisher,

it leads to a huge liability for the company. Publishers are, therefore, cautious while

selecting authors. Given that authors are language specialists, a publication

company cannot simply replicate the success a particular author has had in one

state in another. In this industry, no publisher in educational supplementary books is

present in more than two states, catering to state board supplementary books.

Currently, NELI has ~225 authors, aged 55-85 years, who have published ~5,000

titles (2,700 school publication titles and 2,300 non-school publication titles).

Authors are compensated in the form of royalty ranging from 2% to 8% of the

revenue generated by their titles (other publishers make a lump sum royalty

payment). Royalty for workbooks is usually lower, as these are recommended by

teachers (‘pull’ demand). Guides and last minute revision sets are demanded by

students based on content (‘push’ demand); royalty on these is higher. For FY16,

NELI paid INR170m (3.5% of publication revenue) as royalty. On an average, royalty

accounts for ~3.5% of sales.

Exhibit 13: Most schools in India are regional language medium schools

Regional Medium

15%

22%

English Medium

40%

85%

78%

60%

NCR,Karnataka, AP,TN

Source: Company, MOSL

Gujarat

Maharashtra

29 March 2017

Navneet Education

Strong marketing team ensures reach even in remote areas

Navneet has a strong

marketing team of 350

canvassers that visits

schools regularly,

promoting the books &

ensuring brand visibility

Of the total number of schools in India, 1.45m ~99% follow the SSC format. Of these,

~1.1m schools are government schools. The remaining ~330k are private schools, of

which ~80k are English medium schools. The curriculum of these schools is governed

by the respective state education boards and the government chooses the

textbooks and authors. NELI provides supplementary material for students from

class I to class XII in Maharashtra and Gujarat. Of the ~330k private SSC schools in

India, ~38k schools (15%) are in Maharashtra and Gujarat. Of these, NELI targets

75% schools – the remaining schools are in the interiors and servicing becomes

difficult. NELI has a strong marketing team of 350 canvassers that visit the targeted

schools regularly, promoting the books and ensuring brand visibility. The company

has a strong fleet of executives, who reach out to schools even in relatively remote

areas.

Government orders to aid overall growth

In FY14, the government

decided that all its orders

would be through tenders;

Navneet did not receive any

government order

Availability of quality teachers is a major problem in India, especially in rural areas.

Government school students do not have resources to buy supplementary material.

Departments like the Tribal Department, Social Welfare Department, and Women

and Child Development Department buy supplementary books and distribute them

free of cost to students. In FY14, the government decided that all its orders would

be through tenders; NELI did not receive any government order. Later, the

government issued a resolution that orders involving intellectual property rights

(IPR) would not be through tenders and visibility of government orders returned.

Considering government impetus on improved education and digital India, this

segment remains a dark horse with significant upside potential. Digital classroom

tender in Maharashtra alone has a potential of INR7.5b.

29 March 2017

Navneet Education

Common curriculum, EBI acquisition – huge opportunity

in CBSE space

Scale-up likely with deeper penetration



Common curriculum in Mathematics and Science across India triggers a huge

opportunity (INR30b market) for NELI to sell textbooks to CBSE schools across India.

Unlike schools affiliated to State Boards, CBSE schools use other private publishers’

textbooks apart from board-approved textbooks.

NELI operates under the brand Grafalco, and besides its two core states, markets

textbooks in five regions – NCR, Karnataka, Andhra Pradesh, Kerala and Tamil Nadu.

NELI has recently acquired Encyclopedia Britannica India (EBI for ~INR880m), which

provides curricular material for the CBSE/international boards – has a presence in

6,000+ schools. The acquisition will help NELI to significantly improve market visibility,

enhance curriculum offerings, fill title gaps, and deepen penetration in CBSE and

international boards.

NELI is making healthy inroads in the CBSE segment, and has grown by 30% in 1HFY17.

We expect it to garner meaningful market share in this growing segment (market size

to expand 3x from INR30b to INR100b in five years, with many schools opting for

conversion from the State Education Boards to CBSE/CBSE-pattern schools).

Common curriculum in Mathematics and Science across India a big trigger

From FY14, the MHRD

made it compulsory to have

a common Science and

Mathematics curriculum

across India

The Ministry of Human Resource Development (MHRD) issued a circular mandating

common curriculum for Mathematics and Science across India to offer a level

playing field to all students for various competitive examinations for higher

education. From FY14, the Ministry made it compulsory to have a common Science

and Mathematics curriculum across India. Currently, NELI provides supplementary

material like guides and workbooks to SSC school students. This ruling opens an

opportunity for it to supply textbooks to CBSE schools across India. International

publishers dominate the market for CBSE books. S Chand, the leader with ~17%

share in the INR30b CBSE market, is the only Indian player. Oxford, Macmillan, and

Pearson share about 10% each. We believe NELI’s entry into the CBSE market will

drive long-term growth.

‘CBSE affiliated’ and ‘CBSE pattern’ schools provide huge opportunity

Navneet has entered the

CBSE space; it provides

textbooks in five regions –

NCR, Karnataka, Andhra

Pradesh, Kerala and Tamil

Nadu

About 98% of the schools in India follow the SSC curriculum. However, there is now

a trend of private SSC English medium schools (overall ~80,000 in India) converting

themselves into CBSE-affiliated or CBSE-pattern schools, where they use private

publishers’ textbooks up to Grade VIII. To be CBSE-affiliated, schools need to satisfy

stringent norms and requirements such as availability of playground, advanced

computer laboratories, etc. SSC schools that are unable to meet these norms but

still want to follow the CBSE curriculum are doing so by calling themselves CBSE-

pattern schools. CBSE-pattern schools can follow a curriculum similar to CBSE up to

class VIII, with class IX and class X still governed by the SSC board. There are ~80,000

English medium SSC schools in India, of which Maharashtra and Gujarat have

~11,000 schools.

29 March 2017

Navneet Education

Unlike SSC schools, CBSE schools also use other private publisher’s textbook apart

from board-approved textbooks. They have the liberty to choose their own

textbooks, subject to their fulfilling certain guidelines. This gives NELI immense

opportunity to provide textbooks to CBSE-affiliated and CBSE-pattern schools set by

National Council of Educational Research and Training (NCERT). NELI has entered the

CBSE space and started marketing textbooks in five regions – NCR, Karnataka,

Andhra Pradesh, Kerala and Tamil Nadu apart from Maharashtra and Gujarat.

Exhibit 14: Distribution of schools by various boards

School

Education

system

National

Board

Internatio

nal Board

SSC

CBSE

ICSE

CIE(IGCSE)

15,05,000

17,315

2,231

316

143

Source: Company, MOSL

NELI offers a range of textbooks marketed under brand name Grafalco up to Grade 8

and is looking to build the entire library for CBSE grade in FY17. It is also targeting

South India’s private schools instead of those in North India due to better literacy,

leading to increased market opportunity. This is a new stream for NELI – providing

direct textbooks to schools – and is a scalable business.

It has ventured into states

like NCR, Andhra Pradesh, Karnataka, Kerala and Tamil Nadu, apart from

Maharashtra and Gujarat, to tap CBSE schools in these regions over last two years

and has made good inroads.

It has grown by a healthy 30% in 1HFY17 in the CBSE

textbook market and we believe this growth will continue over the next few years.

Exhibit 15: Market share in CBSE curriculum publication

Market share

S Chand

Publishers, 17%

Oxford

Publication, 10%

Others, 53%

Macmillian

Publication, 10%

Pearson

Publication , 10%

Source: Industry, MOSL

29 March 2017

Navneet Education

Britannica acquisition to enhance market footprint and penetration

NELI announced its acquisition of Britannica’s India (EBI) curriculum business on

October 26, 2016 (expected to complete in 40 days) for INR850m-INR900m in cash

(17m shares amounting to 100% of EBI’s share capital). Britannica India’s curriculum

division designs and develops educational products used by 5m students across

schools in India and Indian schools abroad.

Post-acquisition, the Britannica business unit will become an independent company

within NELI and realize considerable synergies. It will market its existing India-

specific curriculum titles such as

Know for Sure

and

The English Channel,

and also

develop new titles under Britannica’s brand, editorial supervision and guidelines for

seven years (post which the arrangement can be extended by paying fees). The

acquisition will help NELI to enhance its footprint and access newer markets,

significantly augmenting EBI’s intellectual property.

Encyclopedia Britannica India (EBI) is one of India’s leading K-12 curricular book

publishers. It began publishing operations in India in 2009. It has an extensive

product catalogue comprising educational, instructional and information products &

technology solutions, and is fast transforming into a major digital player designing

products for 21st century classroom and home learning environments. EBI’s revenue

has grown from INR458m in FY14 to INR600m in FY15 to INR749m in FY16.

Revenues for EBI are highly concentrated in December to March season with 80% of

revenues from it.

EBI and NELI – significant synergies



EBI & NELI are expected to

have synergies in terms of

product offerings, school

footprint, deepening

penetration & filling gaps in

title libraries.



Product offerings:

While NELI’s product offerings are mainly targeted at

students following the Gujarat/Maharashtra SEB syllabi, EBI’s product offerings

are targeted at students following the CBSE syllabus.

School footprint:

EBI has footprints in 6,000+ schools in India, mainly CBSE,

ICSE, and international schools, where NELI has limited presence. EBI has

negligible presence in the schools NELI has a stronghold in.

Scale benefits:

As a larger entity post-acquisition, NELI’s bargaining power with

both suppliers and the marketing chain improves. Also, the advantage of a

common distribution channel helps NELI to gain operating leverage and enhance

its brand visibility.

Region-wise penetration:

Maharashtra and Gujarat, the two core states for

NELI, constitute only ~3% of EBI’s revenue. Similarly, NELI has limited presence

in EBI’s key markets – Punjab, Rajasthan, Haryana, Andhra Pradesh, Uttar

Pradesh and Delhi/NCR. Also, EBI has a well-distributed revenue mix across

India, which supports NELI’s quest to transition from a regional entity to a pan-

India entity. The acquisition grants NELI EBI’s rights across CBSE schools

worldwide (besides India, CBSE schools exist mainly in the Gulf countries),

further enhancing brand visibility.

Title library:

EBI’s acquisition helps NELI to fill gaps in its title library, which

otherwise would have taken a considerably long period.

Limited follow-on investments:

Apart from the acquisition amount, NELI only

needs to invest in incremental working investments. No material follow-on

investments are required.

29 March 2017

Navneet Education

Exhibit 16: Britannica India revenues to grow at 30% CAGR over FY17-19E

Britannica revenues(INR m)

31%

25%

15%

25%

Growth(%)

35%

458

FY14

600

FY15

749

FY16

861

FY17E

1,077

FY18E

1,454

FY19E

Note: EBI nos would be consolidated with NELI likely from FY18 onwards Source: Company, MOSL

Exhibit 17: Britannica curriculum learning products…

Exhibit 18: ..and digital products

Source: Company, MOSL

Exhibit 19: Income Statement for Encyclopedia Britannica India

Income Statement (INR m)

Revenue

COGS

Employee expense

Other expense

Total Expense

EBITDA

EBITDA Margin (%)

Depreciation

Interest

Other Income

PBT

Tax

PAT

PAT Margin (%)

FY14

523

134

270

494

5.40%

2.30%

FY15

679

153

130

354

637

6.10%

3.40%

Source: ROC, MOSL

29 March 2017

Navneet Education

Exhibit 20: Balance Sheet for Encyclopedia Britannica India

Balance Sheet(INR m)

Share Capital

Reserve & Surplus

Net Worth

Long term provisions

Short term borrowings

Short term provisions

Trade Payables

Other current Liabilities

Total Liabilities

Tangible Assets

intangible Assets

Total Fixed Assets

Deferred Tax Assets

Long term loans and advances

Other non-current assets

Inventories

Trade recievables

Cash& Equivalents

Short term loans

Other current Assets

Total Assets

FY14

-6

399

523

410

523

FY15

100

113

421

740

123

536

740

Source: ROC, MOSL

29 March 2017

Navneet Education

High-margin exports to drive stationery business growth

Export of value-added product to give next leap



Indian paper stationery market is largely unorganized with 80-85% of the market

dominance. Organized stationery market is highly competitive and largely driven by

ITC and Navneet. Non-paper stationary market consists of ~60% dominance of

organized players.

NELI’s stationery business (43% of total revenue) will be largely driven by growth in

exports (44% of stationery revenue). Given the high competitive intensity in the

domestic segment, NELI is focusing more on exports.

The company has moved from exporting low-margin commoditized products to value-

added products like embossed stationery, 3D cover page design, and patented

stationery. It has 100% in-house production for export products and margins in the

export segment are 300-400bp higher than in the domestic segment.

The US is its export hub (NELI being a preferred supplier to Walmart), accounting for

73% of its exports, while the balance 27% comes from other countries.

We expect 13.3% CAGR in the stationery business, led by the export segment.

Synergic to Navneet’s product offerings

NELI was the first organized brand to enter the stationery business in India in 1995,

offering (1) standardized products with number of pages and MRP (maximum retail

prices) printed on them, (2) full-size note books, and (3) shrink-wrapped packets in

carton packing. Its stationery business gives NELI higher bargaining power in buying

paper, and helps it to build a national brand and target highly-profitable exports.

Exhibit 21: Stationery segment snapshot (INR m)

Market Size in India

Organized players market

Navneet's market share in

organized segment

Production

Market

Products

Revenue share(FY16)

Paper Stationery

INR100b

15%

Non-paper Stationery

INR50b

60%

1.50%

~70% in house( all exports

Outsourced

products in-house)

Domestic as well as export

Sold pan India

Notebooks, Drawing books,

Pencils, Erasers, Crayons, Geometric sets,

Writing pads, Index cards etc

Rulers, Dough, Colour Pastels etc

94% of segment( 55% Domestic,

6% of segment

45% Exports)

Source: Company, MOSL

NELI has two centralized offices in Mumbai and Ahmedabad, and two manufacturing

locations at Silvassa (Union Territory) and Khaniwade (Maharashtra), with a capacity

to produce 150tpd (blended capacity utilization of ~70%). It also outsources

manufacturing from Vapi, Vasai, Kanpur and Bangalore for its domestically-sold

stationery, but manufactures all export items in-house. Its 14 branch offices, 1,200+

distributors, 16 C&F agents, three mother depots and 450+ sales personnel ensure

NELI’s presence across all major markets in India. Its stationery products reach over

85,000 retail outlets in more than 600 towns across 23 states and three union

territories in India.

29 March 2017

Navneet Education

Value-added products to drive high-margin exports

The US, which accounts for

73% of its exports, is the

export hub for Navneet

NELI’s stationery business posted a revenue of INR4,077m (43% of total revenue) in

FY16, of which exports constituted 43%. It has been in the international stationery

business for 18 years and has grown at a healthy pace. The US alone accounted for

73% of its exports in FY16. NELI is a “preferred supplier” to Walmart (white label

brand), which is a testimony to its brand quality. It is moving from a commodity

business, where competition is huge and margins are lower, to various value-added

products like embossed stationery, 3D cover page design and patented stationery,

which will command premium and drive up margins. Apart from supplying white

label goods, it has also launched its own brand,

American Scholar.

NELI’s international products are marketed under the brand names,

Navneet,

Grafalco

and

American Scholar,

and are exported to various territories across the

globe, specifically the US, Europe, Africa, and Central and Latin America. It has three

dedicated factories in and around Mumbai to cater to the stationery division. The

presence of in-house printing and finishing equipment, supported by in-house

product development and design team helps create tailor-made products for the

fashion range, with premium effects like glitter, metallic, flocking and embossing.

We believe that growth in the stationery business will be driven largely by exports,

going forward, with NELI expanding its footprint in the Middle East, Africa, and

Europe. The company will be able to achieve 20% CAGR growth over FY17-19E in the

high-margin (300-400bp higher margin than domestic segment) export segment,

largely driven by value-added products and its own brand.

Exhibit 22: Exhibit 25: Stationery revenue break-up

Exports

Domestic

Exhibit 23: US is the major market for exports

Export revenue

Middle

East/Africa/

Europe/RO

W, 27%

69%

71%

77%

78%

65%

66%

60%

57%

31%

FY09

29%

FY10

23%

FY11

22%

FY12

35%

FY13

34%

FY14

40%

FY15

43%

FY16

US, 73%

Source: Company, MOSL

Exhibit 24: Region-wise export distribution

North & Central America

9% 0%

32%

54%

FY09

11% 0%

32%

50%

FY10

20%

29%

45%

FY11

Africa

16%

10%

30%

44%

FY12

Europe

Australia & Oceanic

11%

6% 1%

24%

59%

FY13

18%

16%

60%

FY14

Rest of World

7% 0%

10%

77%

13%

11%

73%

FY15

FY16

Source: Company, MOSL

29 March 2017

Navneet Education

High competitive intensity in domestic market

The Indian stationery

market is largely

unorganized; organized

players account for just 15-

20% of the market

The Indian stationery market is largely unorganized; organized players account for

just 15-20% of the market. The organized stationery market is highly competitive

and dominated by two large players – ITC and NELI (ITC has ~20% market share,

while NELI has ~7%). Over the last few years, ITC (paperboard, paper and packaging

revenue of INR9b in FY16) is increasingly focusing on the stationery segment due to

reduction of import duties under free trade agreements, especially with ASEAN

(effective January 2014) – increased competition from imports has impacted the

profitability of the domestic paper and paper board industry. Recently, ITC has been

gaining market share due to the following: (1) higher advertisement spend, (2)

higher dealer margins, encouraging dealers to push ITC products, and (3) higher

credit period to dealers. The domestic market accounts for 51% of NELI’s overall

stationery revenue. Given the mounting pressure from ITC, we expect NELI to

achieve modest 8% growth over FY17-19E.

Exhibit 26: Export stationery revenue CAGR at 20% for FY17-

19E

Export Stationery revenue

111%

-20% -2%

2,619 2,818 3,032

697

554

14%

30%

20% 20% 20%

YoY Growth

Exhibit 25: Domestic stationery revenue CAGR at 8% for

FY17-19E vs 5% for FY11-FY16

Domsetic Stationery revenue

19%

11%

1,886

2,114

2,528

2,338

2,509

-7%

12%

YoY Growth

1,705

1,950

542 1,146 1,303 1,697 1,738 2,086 2,503 3,004

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 27: Total stationery revenue CAGR at 13.3% over FY17-19E

Total Stationery Revenue

31%

17%

2,401

FY10

2,441

FY11

2,493

FY12

3,260

FY13

3,812

FY14

4,224

FY15

FY16

YoY Growth

11%

15%

4,077

-3%

4,705

FY17E

13%

5,321

FY18E

6,036

FY19E

Source: Company, MOSL

29 March 2017

Navneet Education

eSense to capture “next gen” digital opportunity

Increasing thrust on digitization to bolster eSense growth



NELI has developed a brand “eSense” which has 4 products to offer to next generation

student viz Top Class, Top Assessment, UTOP and Top Scorer across B2B & B2C

segments; has installed its products in ~3,500 schools and over 20,000 classrooms.

To increase adoption rate among customers, Navneet has increased its ad-spends to

INR80-100m for FY17 (~INR60m in FY16).

This segment hasn’t seen a rapid growth since its launch in FY09. However, we believe

with increasing thrust on digitization and growing penetration (so far, it has tapped

only ~3,500 of 39,000 private schools in Maharashtra and Gujarat), eSense will achieve

13.7% CAGR over FY16-19.

Navneet has entered direct education in collaboration with K12 Techno Services and

manages 12 Orchid’s International School” (CBSE Board). Current, occupancy rate in

Orchid international across all schools stands at ~50-55%( despite increase in students

from 6,500 to 9,500+ in a year), margins can go to ~30% at full occupancy levels.

eSense – product to cater to next generation

NELI is evolving from a pure play publisher to a content developer. eSense is a

content-based product, developed to meet the needs of the next generation

student, who will be technology savvy and will have access to multiple sources of

information. NELI launched eSense, which equips children with syllabus-based

multimedia animations, in 2009. Students get practical visuals relating to the

content they learned from traditional textbooks, which makes learning fun.

Navneet has installed

eSense in ~3,500 schools

and over 20,000 classrooms

Top-Class (~80% of revenues for eSense):

NELI has installed the product in ~3,500

schools and over 20,000 classrooms in Maharashtra and Gujarat. It charges INR15-

20/student/month for the content it provides. It had revenue of INR198m and loss

of INR47.1m at PBT level in FY16. We believe e-learning is a huge opportunity and

NELI will be able to scale up quickly as eSense becomes more popular. We expect

eSense to grow at ~20% over the next two years; this would drive profitability.

Exhibit 28: E-learning product details

Product

TOPClass

TOPAssessment

UTOP

Description

eSense TOPClass is a complete digital education solution. It consists of

interesting and attractive animated content for every chapter. This, making

teaching and learning easier and faster

eSense TOPAssessment is a assessment solution provider. It provides artificial

intelligence based assessment engine

UTOP is smart digital educational tool for children and communicational tablet

for parents. With smart audiovisual learning it engages children and separate

password for parents delivers full value for parents.

Top Scorer is first of its kind educational tool designed only for CBSE students.

Top Scorer smartly transforms the widest NCERT syllabus, into more involving

audiovisual content. It helps student learn better, understand faster and

remember more.

Source: Company, MOSL

TOPScorer

29 March 2017

Navneet Education

Exhibit 29: Growth drivers for e-learning segment

Product

Huge Untapped B2B

market

B2C Market

Description

Out of 39,000 private schools, only 3,500 have been tapped till 1HFY17,

creating a huge potential market only in the two states of Maharashtra and

Gujarat

B2C market has started flourishing in India. Navneet is ready with B2C retail

offerings like Online portal, CDs, Tablets and Pen Drives for State Boards

curriculum of Maharashtra and Gujarat. Also has Pen drives for CBSE curriculum

for grades I-X

Acceptability by teacher and students due to ease of use

Source: Company, MOSL

Acceptability

Exhibit 30: eSense revenue to grow 20% over FY17-19E

164%

104%

61%

40%

-3%

FY10

FY11

FY12

149

FY13

208

FY14

201

FY15

-2%

198

FY16

202

FY17E

E-sense revenue(INR m)

YoY Growth

20%

242

FY18E

20%

290

FY19E

Source: Company, MOSL

Being a digital representation of a textbook, Top-Class is syllabus-focused, and is

preferred and recommended by teachers in Maharashtra and Gujarat. It has already

developed over 65,000 minutes of content library for the education boards of these

two states and the CBSE curriculum. Its strong brand name, especially in West India,

creates a strong platform to launch products and penetrate new markets.

Exhibit 31: Navneet’s reach via e-learning content

Number of Institutions

3,000

2,050

2,400

1,700

FY13

FY14

FY15

FY16

Source: Company, MOSL

29 March 2017

Navneet Education

Exhibit 32: Prominent online vendors

Name

TopperLearning

Meritnation

Extramarks

Learn Next

Byju's

Edurite

Toppr

Esense

Khan Academy

100 percentile

Promoted by

Educomp and Network 18

Pavan Chauhan

Atul Kulshrestha

IIT Alumni

Byju Raveendran funded by Sequoia Capital

Pearson Group

Zishaan Hayath and Hemanth Goteti

Navneet

Salman Khan, MIT and Harvard Graduate

Based out of

Mumbai

Delhi

Noida

Hyderabad

Banglore

Mumbai

Gurgaon

Target segment

K-12,ICSE/CBSE, State Boards

K-12,ICSE/CBSE

K-12,ICSE/CBSE, State Boards

K-12,Test preparation

CBSE/ICSE/General worksheets

IIT JEE, Pre medical and Foundation

K-12,ICSE/CBSE, State boards

Free content/Non-Profit organization

Engineering, Medical, MBA entrance

Year

2009

2007

2013

2008

2013

2009

2005

2012

Source: Company, MOSL

Top Scorer platform to pick up with increasing digitization

NELI has created Top Scorer, an online knowledge platform that provides smart

learning packs for Grade 1-10 students across CBSE, Gujarat and Maharashtra state

boards. It is looking to target the retail segment through pen-drives and CDs across

its distribution network in Maharashtra and Gujarat in the next one year. The

product is sold at INR3,000-4,000 at retail level (offline) while online subscription is

priced lower. Currently, there is not much traction in this segment, but we believe

that with increasing thrust on digitization, and given the current under-penetration

in the market, this segment has huge growth potential. The company is investing in

advertisements and content creation in FY17 to grow its B2C revenue. We

understand NELI is looking to increase its investments in marketing and distribution

for its digital segment to INR80m-100m in FY17 from an average of INR60m-80m per

year for the past five years.

Exhibit 33: Top Scorer products…

Exhibit 34: ...in a variety of forms

Source: Company, MOSL

29 March 2017

Navneet Education

Small investment in direct education business can pay off

Navneet has entered into

direct education in

collaboration with K12

Techno Services

NELI has entered direct education in collaboration with K12 Techno Services. It had

invested INR480m for its 25% stake in the venture. At the end of 1QFY17, Sequoia

Capital held 58%, Navneet learning LLP held 32%, while the management (ESOP)

held 10% in Techno Services Private Limited. The company now manages 12 Orchid

International Schools (CBSE Board). Of these 12 schools, five are in Bangalore, four

in Mumbai, and one each in Navi Mumbai, Pune and Hyderabad. All these

businesses are asset light and operate under a 30-year lease agreement.

As the Indian education sector evolves and there is greater need for schools with

better facilities, this investment should pay off handsomely for NELI. In FY16, Orchid

International School had 6,500 students across 12 schools; this year, the number has

increased to more than 9,500 students (despite that, occupancy is 50-55%). CBSE

generally gets higher fees, as its offerings are more. In this business, margins depend

on occupancy rate – operating leverage kicks in as occupancy rises. NELI is open to

holding its investment or exiting, depending on economics. Until FY16, it also had 52

SSC schools in Andhra Pradesh, under the brand Gowtham Model School, which it

sold back to the promoter.

Exhibit 35: Orchid International School

Source: Company, MOSL

29 March 2017

Navneet Education

SWOT Analysis



Strong market share

of ~65% in

Maharashtra and

~70% in Gujarat in

publication segment

Over 50+ year strong

legacy brand in India

in SSC board syllabus

for K12 segment

Strong sales team of

450+ with 1,200

distributors,16C&F &

3 Mother depots



Relatively less

aggressive in

marketing its e-

learning products

compared to few

others

Late entrant in highly

scalable CBSE market

in India



Huge untapped

opportunity with only

3,500 of 39,000 private

schools tapped in

ELearning segment in

Maharashtra & Gujarat

Britannica India

curriculum acquisition

will aid in penetration

in CBSE schools across

different states

Increasing exports of

value add products in

stationery segment



Competitive intensity in

publication

segment

with market leader

Classmate(ITC) having

aggressive pricing

Increase in paper prices

can impact operating

margins

Any defamation suits

related to IPR may have

an adverse impact on

company financials



29 March 2017

Navneet Education

Financial Overview



We expect 21.7% revenue CAGR over FY17-19E driven by syllabus change, CBSE school

penetration (aided by Britannica India curriculum acquisition), digital content business

and growth in exports of stationery.

We expect EBITDA to post 24.8% CAGR and PAT to post 25.9% CAGR over FY17-19E

with a margin expansion of 120bp over FY17-19E to 24.5%.

We expect return ratios to improve over the period; RoCE is expected to improve from

21.1% in FY17 to 25.8% in FY19E primarily due to operational efficiencies & expect Net

D/E to decline from 0.3x to 0.2x despite acquisition cost of ~INR880m for EBI &

buyback of ~INR580m in FY17E.

We expect steady improvement in operating cash flow.

Expect 21.7% revenue CAGR over FY17-19E

Syllabus change across SSC schools in a phased manner every six years (significant

changes in Std X curriculum in two core states in FY18 & 19), would drive growth in

publication revenue by 18.1% CAGR over FY17-19E while Encyclopedia Britannica

acquisition is expected to grow at 30% CAGR over FY17-19E aided scale-up in five

new states (apart from its two core states). Led by growth in stationery exports, we

expect stationery segment to grow at 13.3% CAGR over FY17-19E; with increasing

thrust on digitization also expect a spurt in eSense with revenue CAGR of 20% over

FY17-19E. Overall revenue is likely to grow at a CAGR of 21.7% over FY17-19.

Exhibit 36: Revenue expected to grow at 21.7% CAGR over FY17-19E

30%

Revenue (INR m)

Growth(%)

25%

11%

9,498

-3%

6,189

FY12

8,057

FY13

8,821

FY14

9,795

FY15

FY16

10,894

FY17E

13,651

FY18E

16,131

FY19E

15%

18%

Source: Company, MOSL

EBITDA margin to expand 120bp; expect 25.9% PAT CAGR over FY17-19E

Encyclopedia Britannica India made margins of 5.4%/6.1% in FY14/FY15 respectively,

lower in comparison to Navneet’s current consolidated which stood at 21.6% in

FY16. Post consolidation, we expect NELI’s EBITDA margin to expand by 120bp from

23.3% in FY17 to 24.5% in FY19, driven by operational efficiencies and improvement

in EBI margins with synergies driving both business. PAT is likely to grow at a CAGR

of 25.9% over FY17-19E.

29 March 2017

Navneet Education

Exhibit 37: EBITDA margin to expand 120bp over FY17-19E

EBITDA (INR m)

23.9% 23.6% 24.2%

21.6%

2,538

1,922 2,080 2,367 2,055

FY13

FY14

FY15

3,276

3,952

780

FY12

1,067

FY13

1,303

1,152

FY14

FY15

EBITDA margins

23.3%

24.0%

24.5%

37%

13%

-21%

1,033 1,552

FY16 FY17E FY18E FY19E

Source: Company, MOSL

2,008

Exhibit 38: PAT to grow at 25.9% CAGR over FY17-19E

PAT (INR m)

Growth(%)

50%

29%

23%

2,461

21.2%

1,313

FY12

FY16 FY17E FY18E FY19E

Source: Company, MOSL

Cash flows to improve significantly

We expect Navneet’s free cash flows (FCF) to improve significantly over the years.

Navneet is acquiring Encyclopedia Britannica India business for ~INR880m

(transaction completed in Dec 2016) & has also gone for a buyback of ~INR580m

(2% share capital). The company does not expect to incur significant capex; over

FY16-19, its INR200m capex (except for acquisition cost of INR 880m to acquire EBI

in FY17E) would be largely in the nature of maintenance capex. Operating cash flows

would remain robust over FY17-19E.

Exhibit 39: FCF to remain robust

FCF (INR m)

1,685

1,446

979

377

162

1,777

1,216

Exhibit 40: Steady improvement in operating cash flow

Operating Cash Flow (INR m)

1,942

1,622

1,721

1,366

1,927

740

591

-423

FY12

FY13

FY14

FY15

FY16

FY17E FY18E FY19E

Source: Company, MOSL

FY12

FY13

FY14

FY15

FY16

FY17E FY18E FY19E

Source: Company, MOSL

Net debt-equity to decline & Return ratios to improve

During the year end Navneet has high working capital requirement as ~50% of its

annual sales happen in 1Q. However, by the end of the 2nd quarter, company

recovers its working capital and becomes cash positive. We believe that with

growing business year end debt requirement will continue to remain high which will

be liquidated by the end of 2nd quarter. Despite acquisition cost of ~INR880m for

Encyclopedia Britannica India curriculum acquisition and buyback of share to tune of

~INR580m (~46.57lakh share of face value INR2 each at INR125) in FY17, we believe

net debt free in FY19 after increase in FY17 .Working capital days are expected to

improve from 179 days to 147days post acquisition of EBI over FY16-19E.

29 March 2017

Navneet Education

Exhibit 41: Turning debt free in FY19

Net Debt (INR m)

0.4

0.3

0.4

Net DER (x)

0.2

1,395

1,342

1,793

888

0.1

650

0.2

976

680

0.1

0.0

-14

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

Exhibit 42: ROCE ratio to improve

ROCE(%)

Exhibit 43: Improvement in working capital cycle

Working Capital Turnover(days)

196

168

191

169

179

157

151

147

18.2

20.8

18.7

19.5

18.4

21.1

23.7

25.8

Source: Company, MOSL

29 March 2017

Navneet Education

Valuation and view

Initiate with a Buy

Compelling story of India’s education sector demand



NELI is a dominant player in publishing business in Maharashtra (~65% market

share) and Gujarat (~70% market share). It has over five decades of experience

in developing content with an asset base of over ~225 authors who create

content and update the same timely. With long standing relationship with state

boards & schools and a strong distribution channel, we believe it is well posed to

capture the growth opportunity.

The current gradual transition of SSC syllabus schools towards CBSE pattern has

opened up CBSE text books market for Navneet (potential market of INR30b).

With the addition of Britannica, Navneet would provide higher offerings in the

Indian curriculum segment and would be able to tap newer markets in India,

especially CBSE and international board schools. We believe the acquisition

would be synergic to its core operations & lead to improvement in margins for

EBI going ahead (6.1% in FY15 as per ROC filings).

We view Navneet as a value stock with steady growth & dividend payout (61% in

FY16) over the years. We believe Navneet is well posed to achieve 21.7% CAGR

in revenues & PAT CAGR of 25.9% with a 120bp expansion in margins led by

major changes in SSC curriculum in its two core states over FY17-19E, increasing

penetration in CBSE schools & other international boards due to Britannica India

(EBI) acquisition, spurt in exports (mainly led by Walmart) and improvement in

e-sense revenues with increasing adoption of digitization.

Despite EBI acquisition to tune of INR880m (completed in Dec 2016) and

buyback of shares of INR580m in FY17, we expect RoCE to improve from 21.1%

to 25.8%, working capital cycle to improve from 157 days to 157days and

company to turn net debt free from net debt equity levels of 0.2x in 19E.

Strong management bandwidth with proven track record, high visibility on

operating cash-flows, superior return ratios and strong balance sheet, makes

Navneet a preferred ‘BUY’ in the Education space. Initiate with a

‘Buy’

and TP of

INR210 (20x FY19E), upside of 40%.

Exhibit 45: P/B trend

15 Yrs Avg(x)

10 Yrs Avg(x)

16.0

5.4

P/B (x)

5 Yrs Avg(x)

3.4

3.0

1.8

2.3

15 Yrs Avg(x)

10 Yrs Avg(x)

4.4

Exhibit 44: P/E trend

P/E (x)

5 Yrs Avg(x)

14.6

13.6

14.7

3.6

0.0

Source: Company, MOSL

29 March 2017

Navneet Education

Exhibit 46: Assumption sheet

Navneet Education Ltd

Revenues(INR m)

Educational Books

Children’s and General Books

Children’s and General Books Export

Exports (including incentives)

Paper Stationery (Domestic)

Non Paper Stationery (Domestic)

E-Sense

Britannica

Others

Growth (%)

Educational Books

Children’s and General Books

Children’s and General Books Export

Exports (including incentives)

Paper Stationery (Domestic)

Non Paper Stationery (Domestic)

E-Sense

Britannica

Revenue Mix (%)

Publishing Division

Stationery Division

E-sense and Others

Britannica Cirriculum

FY10

5,239

2,517

157

697

1,449

255

FY11

5,530

2,734

164

554

1,609

278

-20%

11%

164%

54%

44%

FY12

6,189

3,266

191

542

1,650

301

12%

19%

17%

-13%

-2%

104%

57%

40%

FY13

8,057

4,190

246

136

1,146

1,813

301

149

30%

28%

64%

111%

10%

61%

57%

40%

FY14

8,821

4,425

205

121

1,303

2,207

303

208

458

-17%

-11%

14%

22%

40%

54%

43%

FY15

9,795

4,932

267

120

1,697

2,213

315

201

600

11%

31%

-1%

30%

-3%

54%

43%

FY16

9,509

4,830

226

103

1,738

2,099

239

198

749

-3%

-2%

-15%

-14%

-5%

-24%

-2%

54%

43%

FY17E

10,894

5,555

235

108

2,086

2,351

268

202

861

15%

20%

12%

54%

43%

FY18E

13,651

6,555

240

110

2,503

2,539

279

242

1,077

108

25%

18%

20%

25%

51%

39%

FY19E

16,131

7,865

244

112

3,004

2,742

290

1,454

130

18%

20%

35%

51%

37%

53%

46%

Source: Company, MOSL

Exhibit 47: Peer valuation

Company Name

Navneet Education*

MPS

Sales CAGR

FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17-19E

EV/EBITDA

RoE %

EV/Sales

PAT CAGR

FY17-19E

*MOSL Estimates Source: Company, MOSL

29 March 2017

Navneet Education

Bull & Bear case

Bull case



In our bull case we assume higher than expected revenue growth in publishing

segment (over base case) due to Std X syllabus change over FY17-19E, higher

exports with traction from Walmart, larger revenue growth in e-Sense with

increasing level of digitization & higher growth in EBI due to synergies with

Navneet. Additionally, we assume prices of critical raw material like paper & ink

decrease for FY18E and FY19E.

Instead of assuming a 120bp EBITDA margin increase over FY17-19E in the base

case due to operational efficiencies, we are assuming 170bps YoY improvement

over FY17-19E with improvement in Britannica margins due to synergies with

Navneet & also in Navneet’s core business.

In the bull case we are assuming that company will not pass on benefit on lower

raw material prices and thus enjoy higher margins.

There is an increase 7% in FY18E EPS and 10% in FY19E EPS over the base case

EPS to INR9.2 and INR11.6 respectively.

Assuming higher PE of 24x (vs 20x in base case) target multiple, we get a bull

case target price of INR278 (upside of 84% to CMP) based on FY19 EPS instead

of the base case target price of INR210, upside of 40%.

Exhibit 48: Bull case scenario

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

FY16

9,498

-3.0

2,055

21.6

-13.2

1,033

10.9

-20.7

4.3

FY17E

11,148

17.4

2,597

23.3

26.4

1,594

14.3

54.3

6.8

FY19E

17,239

19.9

4,310

25.0

23.3

2,701

15.7

25.2

11.6

278

Source: Company, MOSL

FY18E

14,382

29.0

3,495

24.3

34.5

2,157

15.0

35.3

9.2

29 March 2017

Navneet Education

Bear case



Our bear case assumptions mainly have a negative impact on both sales growth

and operating margins for FY17E, FY18E and FY19E compared to our base case.

We are assuming a 310bp EBITDA margin decline over FY17-19E in the bear case

compared to 120bp expansion in base case and sales growth of

10.8%/16.1%/8% in FY17E/FY18E/FY19E over our base case.

In our bear case, we assume that exports will see higher competition, lower

growth in publishing segment due to slower economic growth, flattish e-Sense

revenue & single digit EBI growth with synergic benefit not occurring.

Additionally, we assume the company is unable to pass on the increase in raw

material prices and the benefits of operating leverage will also get delayed.

This will lead to decrease of 26% in FY18E EPS and 37% decrease in FY19E EPS

over the base case to INR6.3 and INR6.6 respectively.

Assuming the target multiple as 16x vs 20x that we have taken for the base case,

we get a bear case target price of INR106 (downside of 30% to CMP) based on

FY19 EPS instead of the base case target price of INR210, upside of 40%.

Exhibit 49: Bear case scenario

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

FY16

9,498

-3.0

2,055

21.6

-13.2

1,033

10.9

-20.7

4.3

FY17E

10,528

10.8

2,348

22.3

14.2

1,432

13.6

38.6

6.1

FY19E

13,188

7.9

2,532

19.2

3.0

1,542

11.7

4.1

6.6

106

-30

Source: Company, MOSL

FY18E

12,225

16.1

2,457

20.1

4.7

1,481

12.1

3.4

6.3

29 March 2017

Navneet Education

Industry overview

Industry structure in India

The Indian education system in the private sector can be divided into the formal and

informal segments. The formal education segment broadly comprises of schools and

higher education institutions. Schools, often classified as K-12 (Kindergarten to 12

grade) cater to the 3-17 years age group. Higher education, which includes

graduate, diploma, professional and post-graduation courses, caters to the 18 years

and above age group. The informal education segment includes pre-schools,

multimedia, vocational training, books and coaching classes. This segment is free

from price regulation as opposed to the highly regulated formal education segment.

Exhibit 50: Education landscape in India

Indian

Education

system

Public sector

Central

govt

funded

instituti

ons

State

govt

funded

instituti

ons

Higher

educati

instituti

ons

Private sector

Schools

Formal setup

Higher

Educati

instituti

ons

Non-formal setup

Multim

edia

schools

Vocatio

nal

training

centre

Educati

onal

material

supplier

Schools

Pre-

schools

Coachin

classes

Source: DISE, MOSL

India is one of the largest education systems in the world

India has one of the largest higher education systems in the world, with 25.9m

students enrolled in more than 45,000 degree and diploma institutions. In the last

decade, the growth rate has been particularly high. Private institutions are playing a

major role in the growth and account for 64% of the total number of institutions and

59% of the enrollment as against 43% and 33%, respectively, a decade ago. The

government has passed various bills during the last decade – the Higher Education

and Research Bill, the Educational Tribunal Bill, and the Foreign Educational

Institutions Bill to improve transparency in the system.

29 March 2017

Navneet Education

Exhibit 51: The number of universities has grown …

Number of universities

659

700

21,170

387

133

190

256

4,722

12,806

7,346

Exhibit 52: …and so has the number of colleges

Number of colleges

33,023

1980-81 1990-91 2000-01 2006-07 2011-12 2012-13

Source:

1980-81

1990-91

2000-01

2007-08

2011-12

Source:

Number of private schools is increasing

The total number of schools in India has increased from 1,196,663 in 2006-07 to

1,445,807 in 2014-15 – a CAGR of 3%. The government has been promoting

education though Sarva Sikhsha Abhiyan since 2000-2001. This initiative provides for

a variety of interventions like opening of new schools and alternate schooling

facilities (special training), construction of schools and additional classrooms, toilets

and drinking water, provisioning for teachers, regular teacher in service training and

academic resource support, free textbooks and uniforms, and support for improving

learning achievement levels/outcome. The number of private schools is increasing

as a percentage of total number of schools in India due to increasing awareness of

better quality education. Private schools, which constituted 19% of total schools in

India in 2008-09, accounted for 23% in 2014-15.

Exhibit 53: Growth in number of schools in India

4.5%

Total number of schools (in m)

4.5%

3.7%

2.8%

1.4%

1.20

1.25

1.29

1.30

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

1.36

1.41

1.43

2012-13

1.45

-0.2%

2014-15

1.4%

1.2%

1.45

YoY growth

2013-14

Source: DISE, MOSL

29 March 2017

Navneet Education

Exhibit 54: Total enrollments in India

Total enrollments (in m)

200

199

198

19%

20%

21%

22%

23%

Exhibit 55: Private schools increasing

% of Government Schools

% of Private schools

81%

80%

78%

79%

78%

77%

2011-12

2012-13

2013-14

2014-15

Source: DISE, MOSL

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Source: DISE, MOSL

Exhibit 56: Total number of schools in Maharashtra and Gujarat (category-wise; 2014-15)

Primary with

Upper

Primary with

U. Primary &

Upper

Primary With

Primary only

Upper

U. Primary &

Sec. &Higher Primary Only Sec. & Higher

Primary

Sec.

Total schools in India

Total schools in

Maharashtra and

Gujarat

847,118

64,932

277,706

57,343

37,460

2,148

147,388

876

38,734

4,947

45,143

2,461

U. Primary

with Sec.

52,231

8,016

All Schools

1,445,807

140,722

Source: DISE, MOSL

Improvement in gross enrollment ratio (GER) a big positive

The government has taken various measures in the Eleventh Five Year Plan (2007-

2012) to improve the gross enrollment ratio (GER). India reached a GER of 17.9% in

2007, up from 12.3% in 2012. The government has set a target of enrollment of

35.9m students by the end of the Plan period. Enrollments and GER are expected to

the Twelfth Five Year Plan, central higher education institutions are expected to

show the highest annual growth of 14.9% in student enrollments as compared to

private institutions (7.6%), state institutions (5.6%), and open and distance learning

institutions (4.4%).

Exhibit 57: GER has improved over the years

GER in higher education (%)

17.9%

12.3%

8.4

18.8%

16.6

22.5%

Exhibit 58: Total enrollments trend

Enrollments (in m)

25.9

30.5

10.0%

5.0%

6.0%

4.9

1979-80 1989-90 1999-00 2006-07 2011-12 2012-13 2013-14E

Source: E&Y Report, MOSL

1990-91

2000-01

2006-07

2011-12

2013-14E

Source: E&Y Report, MOSL

29 March 2017

Navneet Education

Exhibit 59: Enrollments to grow at 6.7% CAGR

Enrollments (in m)

25.9

16.6

4.9

1990-91

8.4

0.6

2000-01

2006-07

2011-12

2013-14E

Private

State

1.2

ODL

30.5

12.8

8.4

4.2

5.2

Exhibit 60: Enrollments to improve across categories

18.5

2011-12

2016-17

Central

Source: E&Y Report, MOSL

India lags in terms of quality of education and research

Only four Indian higher education brands featured in the Times Higher Education

World University Rankings 2013-14 of the top 400 global universities. This depicts

that the quality of education is low in India. Out of the 48 countries studied, India

ranks second-last in the U21 rankings of national higher education systems. India

featured lowest amongst BRIC nations. Academicians in China authored almost five

times more research papers than India’s academicians in 2011. Even the relative

impact of citations for India is half that of the world average. These statistics call for

education sector reforms in India.

Exhibit 61: Times Higher Education world ranking

Number of Education brands in top 400

109

100

77.2

China

74.9

49.5

45.6

44.5

36.3

Exhibit 62: India features last amongst BRIC nations

U21 Ranking of National Higher Education Systems

India

Australia

Russia

Brazil

China

India

Australia

Source: E&Y Report, MOSL

Exhibit 63: Number of research papers released

Number of research papers by country, 2011

India

Japan

China

187

536

903

1,326

4,367

Source: E&Y Report, MOSL

Exhibit 64: Relative impact of Indian citations lowest

Relative impact of citations by country, 2007—11

1.25

1.24

0.81

0.61

0.51

World

Average

Japan

China

India

Source: E&Y Report, MOSL

29 March 2017

Navneet Education

Rise in student-faculty ratio in higher education is concerning

Student-faculty ratio in higher education has almost doubled in the past two

decades. However, there has been improvement in student-teacher ratio in schools.

Around 35% of faculty positions in state universities and 40% in central universities

are lying vacant. There is no mandatory formal teacher training program to develop

effective teaching skills, which hampers the quality of the education imparted.

While enrollment in higher education has grown six times in the last 30 years,

faculty strength has only grown four times, as reflected in the increasing student-

faculty ratio. Lower the student-teacher ratio, higher the quality of education, as

teachers can focus more on students.

Exhibit 65: Student-faculty ratio in higher education

Student-faculty ratio (2011-12)

20.4

20.8

27.8

Exhibit 66: Student-faculty ratio in schools

Student-Teacher ratio

18.7

14.2

1980-81

1990-91

2000-01

2010-11

2011-12

Source:

Highly fragmented industry with dominant regional players

The educational book market in India has been growing rapidly over the past 6-8

years. According to media reports, the K–12 market (school books) has grown from

INR63b in FY08 to INR186b in FY14, implying a CAGR of 19.7%. Higher education

book sales have grown in this period from INR16b to INR56b.

Exhibit 67: School education system in India

School Education system

National

Board

International

Board

SSC

CBSE

ICSE

CIE(IGCSE)

15,05,000

17,315

2,231

316

143

Source: Company Presentation, MOSL

29 March 2017

Navneet Education

Exhibit 68: Navneet’s focus regions for syllabus-based print content

Particulars

Number of Government schools

Number of private schools

Total Schools

Number of students*

a) Standard 1-5

b) Standard 6-8

c) Standard 9-10

d) Standard 11-12

Total Students

Maharashtra

67,382

29,126

97,084

10,125,716

6,046,718

3,665,059

2,515,481

22,293,964

Gujarat

33,755

9,880

43,635

5,764,682

3,377,769

1,746,385

985,972

11,874,808

Source: DISE, MOSL

While the market is highly fragmented, it is also experiencing consolidation, in part

as a result of involvement of foreign multinationals. The government allows 100%

foreign direct investment. Consolidation is happening not only in trade publishing –

merger of Penguin and Random House, and HarperCollins' acquisition of Harlequin

(all companies with substantial presence in India) – but also in educational books – S

Chand's acquisition of Madhuban, Vikas Publishing House and Saraswati Book

House, and Laxmi Publications' acquisition of Macmillan Higher Education.

29 March 2017

Navneet Education

Key risks

IPR infringement:

Infringement of IPRs is a big concern, as it can lead to massive

liability on the company. It is difficult for a company to prevent this, as authors may

copy material from a source unknown to the company. However, NELI has strong

panels of authors with high integrity. It has had long-standing relationships with

these authors and the author churn rate is extremely low.

Concentration of revenues in two states:

NELI’s operations are currently mainly

concentrated in its two core states Gujarat & Maharashtra. However, with common

syllabus, NELI has expanded into new states like Karnataka, NCR, Tamil Nadu, Kerala

and AP for penetrating into CBSE syllabus, diversifying its revenue base.

Stationery segment could face intense competition from ITC:

Over the past

five years, ITC has become aggressive in the value-added paper space, where NELI is

also present. Any predatory pricing by ITC to expand its market share can dent the

profitability of NELI’s stationery business. However, over the last four years, NELI

has increased its exports three-fold to diversify risk in the domestic stationery

segment.

Rise in paper costs

Paper, the key raw material, accounts for almost ~45-50% of

total cost. Sharp rise in paper prices can hit profitability of the publishing as well as

domestic stationery businesses.

29 March 2017

Navneet Education

Management overview

Exhibit 69:

Sr no Name

Mr. Gnanesh (Sunil) Gala

Designation

Managing Director

Role

