Most likely winner

PENNY WISE

(In Rs crore)

FY2004-05

FY2003-04

FY2002-03*

FY2001-02

Sales

274.54

252.85

323.45

217.35

(%) growth

8.58

-21.83

48.82

24.33

Net Profit

30.80

35.23

36.89

32.22

(%) growth

-12.57

-4.50

14.49

14.45

*18 Months

 Despite its incredible franchise, Navneet has been struggling to grow over the past few years as students prefer to go with cheaper second hand books than buy brand new ones (it's another matter they prefer to spend on cell phones, instead).  The growing number of tutorial centers which usually provide their own study material is also eating into sales of self study guides and supplementary books like the ones Navneet publishes. But most likely, the coming two years will be good for Navneet as a series of school syllabus changes will force students to buy new books resulting in better sales and profits.  Change of course
The syllabus revision in Maharashtra and Gujarat is likely to wipe out the entire second-hand market aiding Navneet's sales in the coming years.  Yes, Navneet does face competition from Chetna Publication, Jeevandeep Prakashan and Bal-Vidya Prakashan in Maharashtra and Bhavin publication in Gujarat but as Sunil Gala, president (finance) puts it, "The second-hand market is the biggest rival and that is going to be dead for a while."  Gujarat has already initiated the revision in syllabus. In Maharashtra, the new syllabus is to take off from the forthcoming academic session. The revision is to be brought about gradually for various classes.  For instance, in Gujarat syllabus for Standard VIII and XI was revised in 2004-05. In academic session 2006-07, Standard X will see a syllabus change.  Similarly, in Maharashtra syllabus for Standard I, V, IX, XI will take place in the coming session. Next year (2007-08), Standard II, VI, X and XII will change. The printing of text books for these revised syllabi is already underway.  Navneet does not print textbook but provides supplementary books which prepare students to face exams better. Obviously, that's more important for most students than learning for the sake of learning! Navneet sells workbooks which constitute 45 per cent of publications, guides (40 per cent) and most likely series (15 per cent).  For the record, Maharashtra and Gujarat are Navneet's main markets. While the former contributes 65 per cent to revenues the latter contributes the rest.  According to the latest Economic Survey, Maharashtra has the highest per-capita income of Rs 26,291. Gujarat has a per-capita income of Rs 22,047. The literacy rate in these states was 77 per cent and 70 per cent respectively according to the latest census reports.  According to an analyst with a broking firm, with the change in the syllabus the company's publication revenues will grow at 24 per cent per annum over the next three years from FY2005 to FY2008.  Note books etc
Currently, Navneet earns around 60 per cent of revenues from its publications and the rest from stationary sales. Apart from books for school curriculum, Navneet also sells children books etc which is set to show a steady 20 per cent growth.  Recently, the company acquired the publishing business of a Spanish publishing company Grafalco for Euro 459000. Grafalco has titles in Spanish language and clocked revenues of Euro 2,00,000 in the first two months of its operation post-acquisition. It is expected to break-even in calendar 2006.  In the stationary segment, Navneet's focus is mainly on note books, long books and the likes across the country and abroad. In FY2005, the revenues from the stationary segment declined marginally to Rs 105.07 crore but profits dipped 35 per cent to Rs 9.93 crore.  The reason is that cheaper Chinese exports are hitting the company hard. Gala expects the export contribution to come down further to around 20-25 per cent in the next two years. But he is pinning his hopes on the domestic market to make up for this loss. The plan is to increase the domestic focus by introducing additional variants and branding.  Having said that, the lower contribution from stationeries is actually a blessing in disguise since the publication business is at least three times more profitable than stationeries.  In FY05, the operating margins from the publication division were 27 per cent while it was only 9 per cent for the stationery business. Analysts say that since the publication business will be the main driver of growth going forward, overall margins are set to improve.  Pass or fail?
Though the outlook for Navneet is encouraging there are a few concerns. Firstly, increasingly schools are following the Central Board of Secondary Examination (CBSE).  Since CBSE has a uniform pattern across the country, there are many more publishing companies catering to this segment and Navneet could face stiff competition from some of the national players.  Gala counters it by putting, "It is difficult to cater to the educational publication market due to its regional flavor. Also, if at all we lose in these markets, we will make up in other markets." Navneet has taken some initiatives to enter new markets like Madhyapradesh and Andhra Pradesh.  Secondly, the increasing dominance of coaching classes which provide students with their own study material threatens the very survival of this industry. Also, even as revenues from the exports have declined the company is not immune to forex fluctuations.  In the September quarter, the company's profits were lower by Rs 1.4 crore due to forex losses. Though the acquisition of Grafalco will help Navneet in its overseas business, one needs to wait and see how it pans out.  Another worry is rising paper prices. Last fiscal, Navneet's operating margins were down 300 basis points primarily due to rising input costs, apart from higher selling and distribution cost. But analysts say that with nearly Rs 8000 crore expansion plan charted out by the domestic paper industry, prices should be under control.  Further, the company can also pass on the rise in the input cost to customers. The biggest risk, however, is any postponement of the proposed syllabus changes.  Since there are no listed players in the book publishing business, there is no benchmark to evaluate whether the stock is going cheap or expensive.  At current price of Rs 295, the stock trades at a price to earnings ratio of 16x based on trailing 12 month earnings and offers a dividend yield of 3-4 per cent. Since growth for the next two years is assured, the stock may still have some shelf life.