PL Sector Report - Education - Jul-Sep'23 Earnings Preview - A tough quarter

Education – Jinesh Joshi – Research Analyst, Prabhudas Lilladher Pvt Ltd

Jul-Sep’23 Earnings Preview – A tough quarter

Education companies under our coverage universe are expected to report a muted quarter with 2.4% YoY decline in top-line. Softness in test preparation segment is likely to impact S Chand & Co (S Chand) while Navneet Education’s (NELI) publishing business is expected to face a set-back amid fall in volumes, higher sales return and change in paper pattern of Gujarat board. Given muted sales performance, we expect both the companies to collectively report EBITDA loss of Rs222mn in 2QFY24E. Though current quarter is expected to be muted we believe book publishers are at a cusp of entering a secular growth cycle as much awaited final draft of National Curriculum Framework (NCF) was released recently. As phased NCF implementation begins, second hand books market will become redundant and result in significant price and volume delta for both NELI and S Chand.

Top pick: We prefer S Chand at current levels as the business has turned turnaround and is expected to report sales/EBITDA CAGR of 17%/26% over FY23-FY26E. The stock trades at attractive valuations of 11x FY25E EPS with an FCFF yield of 8.2% and remains our preferred pick in education space.

NELI’s publishing business to face headwinds: We expect NELI’s publishing topline to decline 15.0% YoY to Rs1,141mn in 2QFY24E due to 1) higher sales return 2) fall in volumes and 3) change in paper pattern in the state of Gujarat (exams have shifted from 2Q to 3Q which will result in volume spill-over to next quarter). Consequently, publishing EBIT margin is expected to decline 560bps YoY to 11.0% amid loss of operating leverage. Stationary division is expected to grow 10.0% YoY to Rs2,117mn with an EBIT margin of 7.0%. We expect EBIT loss of Rs100mn in the EdTech business. Overall, we expect top-line to decline 0.6% YoY to Rs3,279mn with an EBITDA margin of 5.6% for 2QFY24E. Retain ‘BUY’ on NELI with a SOTP based TP of Rs205 (earlier Rs192) as we roll-forward to Sep-25E.

S Chand’s top-line to decline 15.0% YoY: S Chand is likely to report 15.0% YoY decline in top-line to Rs402mn in 2QFY24E amid softness in the test preparation segment. We expect EBITDA/PAT loss to widen to Rs406mn/Rs385mn for the quarter due to muted top-line growth and rise in employee & other expenses. Retain ‘BUY’ on S Chand with a TP of Rs338 (12x Sep-25E EPS).

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