The FY2009 performance of Navneet Publications (Navneet) is expected to be mediocre. We expect the company to register a topline growth of 20.6% year on year (y-o-y) to Rs495.8 crore, primarily driven by a robust growth in the stationery business (of 57% yoy).
In its performance review meet (on 22 April, 2009) the management of the company estimated a turnover of above Rs500 crore for FY2009.
However, we expect the operating profit margin to decline by 81 basis points mainly on account of higher raw material expenses. Consequently, the operating profit is expected to grow by 15.9% in FY2009.
The higher incidence of tax and an expected lower other income would lead to a meagre 2.8% growth yoy in the bottom line to Rs58.2 crore in FY2009.
With no change expected in school syllabi in FY2010, we believe the publication business of Navneet will report a subdued growth for the fiscal.
However, the management has identified the stationery business as the growth driver, as the same has achieved a robust growth in the domestic as well as international market.
The company is making strong attempts to expand its stationery product portfolio as well as its footprints in the domestic stationery market.
Considering the small size of the existing non-paper stationery business and the new launch (office stationery products), Navneet should be able to record a robust growth of ~60% in the revenues of its stationery business in FY2010.
Thus, we expect Navneet’s top line to grow by 16.0% yoy in FY2010. Further, the increase in the scale of the stationery business will help in improving the overall margins of the company.
Hence, we expect the operating profit to grow by 16.6% yoy and the adjusted net profit to grow by 17.5% yoy in FY2010.
A growth driver for the future that the company is building up is the e-learning venture, which continues to be in a market development stage (student modules not launched).
At the current market price the stock trades at 9.6x its FY2009E earnings of Rs6.1 and 8.2x its FY2010E earnings of Rs7.2. In view of the performance expected in FY2010 and the dividend yield of 4.1%, the stock is fairly valued at the current valuations.
Since our last update on the company (ie March 19, 2009) the stock has appreciated by 34% and achieved our price target of Rs59. Consequently, we are downgrading the stock to a HOLD and advise partial booking of profits.