PL Sector Update - Education - Apr-Jun’23 Earnings Preview – High paper prices act as a dampener

Education companies under our coverage universe are expected to report 12.2% YoY growth in top-line amid expected fillip in volumes as students have started returning back from government schools to private schools post COVID. However, EBITDA margins will remain under pressure due to higher paper prices (WPI for printing & writing paper is up 8% YoY excluding the data for June 2023 which is not published as yet).

We believe book publishers are at the cusp of entering a golden era as pre-draft of National Curriculum Framework (NCF) for school education was released recently and final recommendations will be ready by end of June. NCF implementation will make second hand books market redundant and result in significant price and volume delta for both Navneet Education (NELI) and S Chand & Co (S Chand). We prefer S Chand at current levels as business has turned turnaround and there is no overhang of EdTech losses (NELI will be seeding losses of Rs650mn in FY24E) that can negate NEP delta. We expect S Chand to report sales/EBITDA CAGR of 13%/23% over FY23-FY25E and maintain ‘BUY’ on the stock with a TP of Rs257 (12x FY25E EPS).

NELI’s publishing business to stage a comeback: We expect NELI’s consolidated publishing business to grow 18% YoY to Rs4,343mn in 1QFY24E buoyed by rising volumes. However, publishing EBIT margin is expected to decline 230bps YoY to 34% amid higher paper prices. Stationary division is expected to grow by 10% YoY to Rs3,572mn with an EBIT margin of 15%. We expect EBIT loss of Rs180mn in the EdTech business. Overall, we expect top-line growth of 14.4% YoY with an EBITDA margin of 23.5% for 1QFY24E. Retain ‘BUY’ on Navneet with a SOTP based TP of Rs152.

S Chand’s top-line likely to be at par with 1QFY23: S Chand is likely to report 2.0% YoY decline in top-line to Rs1,052mn in 1QFY24E. However, GM is likely to be at 61.0% (67.4% in 1QFY23) amid higher paper prices. We expect EBITDA/PAT loss of Rs63mn/Rs133mn for the quarter. Retain ‘BUY’ on S Chand with a TP of Rs257.

Sector re-rating hinges on NCF roll-out; implementation time-line eyed: With pre-draft already released and final recommendations expected to be ready by end of this month, we believe NCF implementation for higher grades (3rd to 12th standard) is around the corner. This is likely to result in significant price and volume delta for 2-3 years and re-rate book publishers. S Chand remains our preferred pick in the education space.

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