[Investors Please Listen] Navneet Publications (India) : Recommendation: Buy Price target: Rs107 Current market price: Rs91

Price target revised to Rs107

Result highlights

• Navneet Publications (Navneet)' Q1FY2010 results were below our expectations, as the top line grew by just 7.9% year on year (yoy) to Rs262.0 crore (as against our expectation of a 14.0% year-on-year [y-o-y] growth) during the quarter.
• The publication division registered a modest growth of 4.0% yoy to Rs159.1 crore during the quarter much in line with our expectations. The stationery division registered a revenue growth of just 14.1% yoy to Rs100.3 crore (as against 100.8% y-o-y growth in Q4FY2009 and above 50% y-o-y growth in the remaining three quarters of FY2009), below our expectation of 30.0% y-o-y growth for the quarter, resulting in below-expectation top line growth. 
• The operating profit margin (OPM) expanded by 127 basis points yoy to 28.5% in the quarter (in line with our expectation of 28.3% growth), mainly on account of a 131-basis-point y-o-y decline in the other expenditure as percentage to sales. Thus the operating profit grew by 12.9% yoy to Rs74.8 crore during the quarter.
• Lower interest cost coupled with lower incidence of tax led to a 17.2% y-o-y increase in the adjusted net profit to Rs48.3 crore in Q1FY2010. However this is below our expectation of Rs49.7 crore on account of lower-than-expected growth in the top line.
• The post-tax exceptional gain (forex gains) of Rs10 lakh in the quarter as against the post-tax exceptional loss of Rs1.1 crore in the previous quarter of the last year resulted in a 20.6% y-o-y increase in the reported net profit to Rs48.4 crore in the quarter. 
• The board of directors has approved bonus issue of 3:2 (a bonus of 3 shares for every 2 shares held).
• With proposed changes in the syllabus of few standards in schools of Gujarat and Maharashtra, we expect the revenues of the publication division to grow by 10% yoy in FY2011 (as against our earlier expectation of 5% yoy). Thus we are revising upwards our top line and bottom line estimates for FY2011 by 2.0% and 4.7% respectively. 
• We believe the publication division is likely to post higher growth numbers beginning FY2011, as syllabus changes in the two states have been initialised. Also, with the stationery division likely to post 25%+ growth rate in the coming years, we expect Navneet's top line to grow at a compounded annual growth rate (CAGR) of 16.3% over FY2009-11 and the bottom line to grow at a CAGR of 21.4% over FY2009-11. 
• At the current market price the stock trades at 12.0x its FY2010E of Rs7.6 and 9.9x its FY2011E of Rs9.1. As we see the revenues of the publication division to pick up significantly from FY2011 on the back of syllabus changes, we assign a valuation that is 10% higher than the historic average of 10.6x 1-year forward. Thus we value the stock at 11.7x its FY2011E earnings and revise our price target to Rs107 and maintain our Buy recommendation on the stock.

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