22/3/2013
Buy Navneet Publications (India) Ltd. For Target Rs.79


We initiate coverage on Navneet Publications (India) Limited (NPIL) with a BUY and a Price Objective of `79 representing a potential upside of ~34.4% over a period of 24 months. At the CMP of `59, the stock is trading at 12.2x and 10.0x its estimated earnings for FY14 & FY15 respectively. On the back of multiple growth drivers viz. proposed common curriculum, geographic expansion and improved visibility of e-learning business, we expect revenues to grow at a CAGR of 17.5% to `1,022.2 crore by FY15E from `630 crore in FY12. Further, EBITDA margins are expected to improve from 20.8% to 23.2% by FY15E as the incremental revenues from eSense business will flow directly to EBITDA. We expect PAT to grow at a CAGR of 21.5% to `139.9 crore in FY15E from `78.0 crore in FY12. Further, we have cautiously not factored `750 crore digital learning order received by NPIL from Directorate of Primary Education, Maharashtra and remains a substantial upside risk to our estimates. On the most conservative basis, we expect ~64% upside to our FY15 EPS estimate of `5.9 per share.
* Publication business to witness robust growth on the back of multiple drivers
On an average, NPIL has witnessed ~19-20% revenue growth during the syllabus change phase. With proposed change in school syllabus by state boards of Maharashtra and Gujarat, we expect the revenues from curriculum-based segment to continue to report robust growth during FY12-14E. Further, proposed common curriculum, which is to be implemented pan India, should provide further impetus to the publication business revenues even beyond FY14. NPIL also plans to extend its reach Pan India. Over the next 3-4 years, we expect a complete rollout of its offerings in AP. We expect this stream to grow at a CAGR of 19.6% over FY12-15E to `606.2 crore on the back of multiple drivers.
* Valuation
We initiate coverage on Navneet Publications (India) Ltd (NPIL) as a BUY with a Price Objective of `79 representing a potential upside of ~34.4% over a period of 24 months. At a CMP of `59, the stock is trading at 12.2x and 10.0x its one year forward earnings for FY14 and FY15 respectively. Historically, the company has traded at an average of 13.5x its one year forward earnings and we have assigned a similar multiple for the valuation purpose. However, we believe that these estimates are conservative given the upside risks that the stock holds which are enumerated below:
1) Probable re-rating due to:
a. Strong visibility of common curriculum implementation
b. Increased emphasis on supplementary books by state government
c. Increased demand for NPIL‟s stationery in the export market
d. Consistent Dividend P/O ratio of above 40% (~2.3% dividend yield) coupled with consistent ROE of 21% and higher.
2) Specific allocation of digital learning orders to boost EPS substantially


Update On Information Technology


Infrastructure Services Outsourcing (IS, IMS, RIM, TIS) has been the key revenue growth driver for Indian IT. All the managements have highlighted thatinfrastructure-led deals are expected to drive the growth opportunity. We see increased competition in IS outsourcing to exert pressure to outdo their rivals in terms of costs and deliverables. We see risk for the companies increasing due to possible aggressive bidding for Infrastructure Management Services (IMS) contracts. Among peers, HCL Tech has the highest contribution from IMS in their portfolio as well as the highest percentage of incremental revenue contribution from the service line. We cite caution on the increasing risk of the services portfolio for the company.
* Competitiveness of Global peers at an all-time low: Traditional global majors like HP, CSC, Dell and Xerox have been the traditional leaders in IMS contracts. Low operating margins (high single digit to low teens) and weak cash-flows restrict their ability to offer realization cut on the renegotiated contracts. According to TPI, ~US$100bn deals are up for grabs, largely led by IS Outsourcing. Moreover, increased credibility of Indian IT majors would help them win business critical IS Outsourcing deals.
* IMS – key service for growth: IMS currently contributes ~16% revenue to Tier-1, with HCL Tech deriving ~27% of revenue from the services. IMS has grown at CQGR of 5.5% & 4.9% over the last four and eight quarters, respectively, for Tier- 1 Indian IT companies (8.2% & 6.6% for HCL Tech) compared to overall revenue growth of 2.3% and 3.1%, respectively, for the same period.
* Is the risk increasing with heightened activity in IS Outsourcing? The new vendors, who bid for the replacement/renewal market, are under pressure to outdo their rivals in terms of costs and deliverables. The aggressive bidding could possibly increase the risk of the overall service portfolio.
* Risks may not materialize immediately! Most of the Indian IT Services firm are ITIL certified to offer high quality infrastructure services to clients. We do not expect the heightened risk to materialize immediately, but higher contribution of IMS-led work could increase the portfolio risk.
* Valuation & Recommendation – Continue to prefer balance portfolio: “Faster, better, and cheaper” PICK TWO. Some contracts’ commitment may be trying to bundle all the three, which may put pressure on the profitability of the projects in the long run or may increase risk of the portfolio. Risk to profitability and revenue definitely warrants attention. We stay cautious on HCL Tech, due to higher contribution from Infrastructure-led work. However, HCL Tech has perfected the art of delivering one of the best IMS services among peers.