Navneet Publications (India)
Cluster: Emerging Star
Recommendation: Hold
Price target: Under review
Current market price: Rs108
e-learning: Key to growth
Results highlights
- Navneet publications Ltd's (NPL) sales for Q2FY2008 grew by a robust 35.5% year on year (yoy) to Rs82 crore. The sales were primarily driven by the hefty sales growth of the publication segment.
- Sales of the publication segment grew by 47.7% yoy to Rs61.7 crore as the sales in Q1FY2008 got deferred to Q2FY2008. The sales were deferred to Q2 as the publishing of supplementary books by NPL got delayed due to late arrival of government books. The profit before interest and tax (PBIT) margin for the segment improved by 540 basis points to 26.4% due to higher volumes.
- The stationery division had a subdued growth of 8.8% for the quarter primarily on account of decline in exports and strong sales growth witnessed in Q1FY2008. The segment witnessed a PBIT loss of Rs91 lakh in the quarter on account of a one-time write-off of bad debts worth Rs2.57 crore and increase in the advertising expenses. The advertising expense rose on account of aggressive brand building exercise undertaken by the company for the paper stationery and the new non-paper stationery businesses.
- The operating profit margin (OPM) improved by 211 basis points to 16.5% despite a 45.2% year-on-year (y-o-y) increase in other expenditure, which was on account of aggressive advertising by the company. The operating profit thereby increased by 55.3% to Rs13.5 crore. Further, aided by higher other income and a lower tax rate at 24.9% in Q2FY2008 as against 32.9% in Q2FY2007, the adjusted net profit grew by a hefty 98.3% yoy to Rs9.4 crore.
- The company launched e-learning modules in Gujarat in August 2007 and aims at launching the same in Maharashtra by January 2008. To ensure that the product gains acceptability, the company targets installing the product in 500 private schools in each of the states. Post this, it would release the product for retail sales (to students) from March-April 2008.
- We believe, with curriculum changes in Maharashtra and Gujarat being over, NPL's growth prospects depend to a great extent on the success of its new initiatives specifically that of e-learning. However, this venture being in a nascent stage, we would like to monitor the company's progress towards making it an acceptable product for the students. We believe that the current market price of Rs107.6 captures the fair value of the existing business and that of the company's new initiatives (considering the existing visibility). We thereby maintain our Hold recommendation on the stock.
Ceat
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs250
Current market price: Rs198
Price target revised to Rs250
- The production has been lower in Q3FY2008 due to festive season holidays and capacity expansion undertaken by the company. To offset the production loss, the company is trying to push its replacement sales and exports and is realigning its strategies. The demand from the Original Equipment Manufacturers (OEM) of commercial vehicles is picking up and is expected to improve further from Q4FY2008. For FY2008, the company expects a volume growth of ~10%.
- Rubber prices have started rising from October 2007 onwards after continuously falling for the last ten months. In view of this rise in the cost of rubber (the main raw material) and rising crude oil prices, the company is expected to announce a price increase of 1-1.5% in the first week of December 2007. Prices have been increased in the export markets also.
- Profit margins in Q3FY2008 may get affected to some extent on a quarter-on-quarter basis due to lower production and higher input costs. However the profit margins are expected to improve in Q4FY2008 on the back of increase in prices, higher production and commencement of additional capacities for off-the-road (OTR) tyres at Bhandup and passenger car tyres at Nasik.
- Relocation of the Bhandup facility to Patalganga is expected to start from FY2009 onwards and will lead to cost savings of ~Rs 30 crore per year.
- The management is planning to outsource low value-added products such as two-wheeler, jeep and tractor tyres, but will continue in-house manufacture of all value-added tyres such as OTR and those for trucks and cars. This should further improve the profit margins in FY2009.
- The high court has recently approved the de-merger of its investments to a separate company named CHI Investments Ltd, with the core tyre business remaining with Ceat. The financial restructuring entails conversion of every 100 shares of Ceat to 75 shares of the existing company and 25 shares of CHI Investments. Thus, the equity capital of Ceat (core tyre business) will reduce by 25% enhancing its earnings per share (EPS).
- The currently listed entity Ceat is expected to get delisted in December 2007 and the relisting of both the new entities is expected in January 2008.
- We maintain our positive outlook on the company, given its smart turnaround and brilliant performance improvement. At current levels, the stock trades at 7.5x its FY2009E and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.3. We maintain our Buy recommendation with a revised price target of Rs250.
SECTOR UPDATE
Real estate
ULCRA repeal to unlesh acres of land
The Maharashtra assembly today passed the motion to repeal the three-decade-old Urban Land Ceiling and Regulation Act (ULCRA) that imposed ceiling on the amount of vacant land that an individual could poses in a particular urban area. The ceiling was fixed based on the classification of cities. And with Mumbai being 'A' class city the limit was set at 500 square meters.