Navneet Education: Education Needs Better Valuation Some Results and Updates: Sundaram Finance, Narayana H, HCG, Ak Capital services, Quick Heal, Agro Tech Foods.

Navneet Education: off late I have picked good quantity of this one. I think market has yet to fully understand its business model which has strong brand power with relatively high entry barriers. Education publication is a great business worldwide so as in India. Education publishers are much bigger than other much talked about media companies. Like Pearson, McGraw Hill or Penguin are much bigger and profitable than AOL or The New York times although Pearson is battling with slowdown in USA. 

But Indian education market is very small and dominated by huge number of small regional publishers. The Indian education publishing market is estimated at anywhere between Rs 14,000 and Rs 22,000 crore. But Navneet and S Chand are the biggest with around 500-600 cr revenues from publication and currently both or on acquisition spree to be the number one in Indian Publishing arena. S Chand is coming with IPO shortly but it has, In 2014, acquired a majority stake in Delhi-based publisher New Saraswati House. Earlier, it acquired Vikas Publishing House and Madhuban Books. In March 2016, S. Chand invested in education-technology start-up Testbook.

Navneet has recently acquired (for 90 cr) Encyclopedia Britannica’s Indian content development and publishing business. EB has revenues of around 75 cr and is developing content for CBSE affiliated schools in India serving around 5 million students. Navneet is so far a dominant player in Supplementary education books in Gujarat and Maharashtra with around 60-70% share while EB is a textbook player. As per the directives of Govt, NCERT is the content developer and publisher for almost all of the schools in India. Out of 15 Lakh schools, only 1 lakh are private with 20000 affiliated with CBSE/ICSE. So around 14.80 lakh use NCERT content. Although CBSE/ICSE are also supposed to use NCERT but the issue is debatable and these schools are using private publishers’ books upto 8^th standard. Also CBSE segment is growing very fast and I think EB acquisition will give high growth prospectus in textbook business.

Another area is Digital education and its impact in publishing business. First of all, Players like Navneet are not printing presses, they are content developers. Navneet has around 200 authors on royalty while S chand has a staggering pool of 3500 authors. So printed books are just a media; media can be digital. But even western countries have penetration level of only 20% for digital books. Students still prefer hard textbooks as they are more engaging and connect better. Digital e-books are a good supplementary  option. Pricing is another issue with E-books as they need different cost elements than paper and ink. The success of Digital Right management is not much high. The purpose of DRM is to prevent unauthorized redistribution of digital media and restrict the ways consumers can copy content they've purchased. Any hacker can break the code of DRM and that can be detrimental for the publishers. So publishers are not caring much for E-books. But still they are growing and publishers are also changing their game accordingly with almost all the publishers having their digital business for the same content. Even Apple is paying to the likes of Pearson education for their proprietary content and these books are sold by Apple to its subscribers. So I don’t see any threat from Digital books in stead they will only bring additional revenues due to more reach. Navneet has e-learning business under E-sense which is growing around 50-60% yoy.

But still, top Indian publishers Navneet and S chand are just having top lines of 500-600 cr which is very low for a big country like India. This is due to presence of so many regional publications in the entire chain. But this will change as players like Navneet and S chand may follow acquisition route for growth. So Navneet will look for more acquisitions and we’ll see high growth in the future. IPO of S chand will provide the re-rating as at present it is available at a PE of 20 but this is on the backdrop of some severe drought years where Navneet didn’t witness any growth at all. But this year it has witnessed strong growth so far. For 9 months its turnover is at 888 cr from 746 cr with Op profit at 212 cr vs 162 cr. But last 2 quarter has seen top line growth of around 50% and bottom line has grown by almost 100%.

Navneet is not a properly analyzed stock as market is giving it a valuation of a stationary company. But brand loyalty is very stronger in Education business where same books are recommended over generations. We can try different stationary brands as stationary is just a commodity but books are not. Every book is distinct and creative that's why as i have said earlier some education books are read over generations. "The Intelligent Investor" by Benjamin Graham was first published in 1949 but this is still being regarded as the best book on Value Investing. That's why i feel Content publishers especially Education content publishers should command much higher PE ratio of 30-40. It is at 133 and it was advised around 100 but it is still a good buy.

Some Results updates:

Sundaram Finance: Inspite of the impact of Demonetization, Sundaram Finance has given impressive set of numbers. Turnover is stable at 598 cr vs 590 cr. However PBT  is at 201 cr vs 147 cr…while PAT is at 138 cr vs 102 cr. So a growth of around 35% in NP…mainly due to lower interest cost at 288 cr from 324 cr which indicates that it has earned more fee based revenues this quarter although detailed report for this quarter is yet to be released by the company. However General insurance business, as expected, has given strong growth. Gross written premium this quarter is at 559 cr vs 423 cr last year; a growth of 32%. Overall this year GWP for 9 months is at 1637 cr vs 1210 cr. PAT of general insurance business is at 28 cr vs 20 cr. So we can see that this is growing at 40% and I am seeing this growing even faster in the future. The most impressive number is the NPA numbers; even after taking 90 days norms GNPA is just at 2% while NNPA is just 1% which is what I always like about the management of Sundaram.

But Tube Investments has a much bigger general insurance business with GWP of around 3500 cr with PAT figure of around 180-200 cr. So as I am saying from time to time, Tube is a stunning stock which is way undervalued at CMP of 600.

Narayana Healthcare and HCG: Narayana healthcare has grown its topline around 20% but it is the bottom line where it is putting its heart. Topline for 9 month is at 1395 cr vs 1186 cr but PAT is at 60 cr vs 16 cr. Same is the case with Healthcare Global which apart from Cancer business has a very promising fertility clinic business. For me these two are blind buys for next 2 years. As shared earlier also, healthcare will be the next IT like opportunity for India which will put India as the global hub for low cost quality healthcare. Just for putting things into Perspective, NH does the heart surgery at 1/10^th of the cost of the same in USA but still its mortality rate is almost at par with best USA hospitals. This is a great feat. NH is at 335 ( Last advised at 290) and HCG at 245 ( last advised at 190)…but these are still buys.

AK Capital Services: This was recommended at 280 in Nov-2016 to our blog readers via email ID of this blog. It is now at 415 already. Due to some reasons I couldn’t post the study on this at the blog. Actually I was planning to put Ak Capital as a demonetization pick as I think that huge bank deposits will pave the growth of Bond market in India but even I could not put my study on demonetization. We have picked Care Ltd in Aug-2016 at 1000/- on the same theme and RBI has made some policy changes to make corporates borrow more through bonds than banks.

As I have shared earlier also, Banks are not suitable for granting long term infrastructure loans for 20-25 years due to their assets liability mismatch. Most of the liabilities (Deposits) of the banks have average tenure of around 7-8 years but loans (assets) provided by banks are for 20-25 years. So Banks have a situation where they are required to refund the deposit after 7 years but they can’t demand the loan. I have always felt that Banks’ primary role should be channelization of savings from public. Then they should focus on lending these to other financial institutions and they should themselves deal mainly in retail and small business loans of small duration.

In Aug-2016, in order to slow down the bank loans to big corporates RBI has issued some guidelines for banks. RBI intends to create a special class of large borrowers called “specified borrowers”. Banks have to keep extra reserves for incremental loans made to these corporates along with making more provisions for these loans. This will raise the cost of borrowing from Banks for these corporates. This will make corporates to go for Bond markets. SEBI is also focusing on deepening the bond trading in India.  

Ak capital is the largest private sector merchant banker in India. It is having the largest chunk of bond issue market. For 2015-16 its standalone topline was 68 cr with NP at 18 cr. Its consolidated numbers were 241 cr and 41 cr respectively. But for 9 months this year, its standalone numbers are at 72 cr vs 49 cr while NP is at 18 cr vs 12 cr. But it hasn’t provided its consolidated numbers for the year so far. For last 2 quarters it is growing at around 70-80%. It is still ruling at a PE of just 5-6 and a significant re-rating can take place as management looks reasonable as nothing negative has come out so far. Most importantly they have current investment book of around 800 cr comprising mainly of Bonds. Out of this around 650 cr is Govt bonds. These are housed under its subsidiary AK cap Fin Pvt ltd whose results are not published. But this year after demonetization, Bonds prices have seen big upward movement coupled with overall low interest expectations. Interest rates will fall more in India. I am sure than AK must have sold big part of these bonds and could have gained huge. Only the time will testify this.

So I feel AK is still a buy at 400 levels. It is not comparable to Care Ltd in quality yet so it is better to put only risky money and should be a part of risky portfolio.

Quick Heal: I am advising this regularly from 220 levels. This is one company which will see huge rerating going forward. Cyber security is the next big business opportunity and even a common man using mobile for payments cannot afford to ignore security part of the game, After IPO, Quick heal has upped the brand promotion activity on television which was the only thing missing from its strategy in the past. But IPO money has been used for this purpose and we’ll see huge benefits from this. It has shown around 30% growth in june-16 quarter but stock price hasn’t gone anywhere. It is a great buy at 278.

Agro Tech foods: We were expecting a revival in its food business post marketing and distribution initiatives taken by the management. So this quarter, in spite of the demonetization, Agro tech has managed to maintain its topline at 208 cr vs 202 cr. But the surprise has come from the margins as its PBT is at 12.5 cr vs 9.5 cr…benefitted from low interest costs and margin improvements. I am seeing even better numbers coming quarters. Agro tech was advised around 525 but I made some good buying around 450 levels and the same was advised via emails also. It is now at 512 and looks ripe for a big jump.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)