Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the short-term bank facility and commercial paper programme of Navneet Education Ltd (Navneet).

 

The rating continues to reflect the company’s established market position in the educational books segment in Gujarat and Maharashtra, healthy presence in the stationery segment in the domestic and global markets, and comfortable financial risk profile. These strengths are partially offset by limited geographical diversity in the publishing business, seasonality of business operations and susceptibility to intense competition.

 

Consolidated revenue grew ~50% in fiscal 2023 to Rs 1,695 crore, led by strong demand in both the publishing and stationery segments, as sales revived from Covid-19 related disruptions and as demand from schools grew. The high-margin publishing segment grew ~80% in fiscal 2023, supported by schools operating for the entire year. In the nine months through December 2023, however, the segment degrew ~1% as syllabus remained unchanged in Gujarat and Maharashtra along with rise in paper prices, which resulted in the company losing out to second-hand books. The stationery segment grew ~38% in fiscal 2023 and 5% in the first nine months of fiscal 2024, led by growth in both, the domestic and export markets. The operating margin at the consolidated level improved to 18% for fiscal 2023 from 15.8% in the previous fiscal. Given the established market position of Navneet in educational books, its performance is expected to be supported by yearly change in syllabus following the guidelines under the National Education Policy (NEP).

 

In a move to rationalise the group structure and improve synergies between the publication and education technology (Edtech) business, in August 2023, Navneet announced the scheme of arrangement for amalgamation of its step-down subsidiary, Genext Students Pvt Ltd (Genext), with itself. Additionally, with a view to offer ‘phygital’ (physical plus digital) education solutions and expand product offerings for both its publication and digital segment, the Edtech business of Navneet FutureTech Ltd will be demerged into Navneet Education Ltd. The performance post this arrangement will remain a key monitorable. However, healthy cash accrual from the traditional businesses will likely fund the losses with no major reliance on external debt.

 

The Edtech business, which was earlier expected to incur loss of Rs 80-100 crore annually due to initial high customer acquisition cost, is expected to see smaller loss as it has shut down its ‘Leapbridge’ project (a subscription-based business model for toys focused on STEM segment) and scaled down the Genext business. The segment is expected to break even in 2-3 years.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Navneet and its subsidiaries: Navneet Futuretech Ltd (formerly eSense Learning Pvt Ltd), Indiannica Learning Pvt Ltd, Navneet (HK) Ltd, Navneet Learning LLP and Navneet Tech Venture Pvt Ltd. The subsidiaries are strategically important to, and have high operational integration with, Navneet.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and healthy growth prospects for the publishing business: Navneet has a leading market position in the supplementary books segment in western India, primarily Maharashtra and Gujarat. Strong brand equity, an extensive distribution network, and superior content creation capability backed by a team of experienced authors and established tie-ups with schools, support the market position. Changes in the school curriculum and initiatives to expand into new geographies will support scale of operations in the educational books segment over the medium term.

 

• Healthy presence in the global stationary market: Barring the impact of the pandemic in fiscal 2021, Navneet clocked strong revenue growth of 14% and 29% in fiscals 2020 and 2019, respectively, in the stationery segment, largely driven by exports. A preferred partner status from retailing giant Walmart supported the stationery segment, which grew 4.6% in the nine months through December 2023 over the corresponding period of the previous fiscal. The company is a dominant Indian player in the US market with clients such as Walmart, Target and Staples, and continues to diversify its presence in Europe and Africa to minimise dependence on any one key customer.

 

• Healthy financial risk profile: The balance sheet is healthy, driven by CRISIL adjusted networth of Rs 1,090 crore as on March 31, 2023, and working capital debt (Rs 276 crore) resulting in strong debt protection metrics with gearing at 0.25 time in fiscal 2023. Healthy cash-generating ability and prudent working capital management have led to no dependence on external borrowings. The ratio of total outside liabilities to tangible networth (TOLTNW) was comfortable at 0.46 time as on March 31, 2023, while the interest coverage ratio remained healthy at 22.81 times in fiscal 2023. The overall financial risk profile is likely to remain comfortable, supported by healthy accrual, nil long-term debt, and strong liquidity (including unutilised bank limit).

 

Weaknesses:

• Limited geographical diversity in the publishing business: The mainstay publishing business (contributed 43.5% to the revenue in fiscal 2023) provides study materials for the state boards of Gujarat and Maharashtra, leading to revenue concentration and limitation of geographical diversity, which constrains the business risk profile. That said, the stationery segment for Navneet has shown steady growth in the domestic and international markets following Covid-19 related disruptions.

 

• Exposure to intense competition: Intense competition from large companies such as ITC Ltd ('CRISIL AAA/Stable/CRISIL A1+') as well as from unorganised players limits pricing flexibility in the domestic market for stationery. In the publishing business, second-hand books have a prominent market share, which constrain sales when there is no change in syllabus or when there is a rise in paper prices.

 

• Susceptibility of operating margin to fluctuations in raw material prices: In the publication and stationery industry, cost of production and profit margin depend heavily on raw material prices, which account for a major portion of the production cost. Prices of key materials (primarily paper) have been volatile in the past few years. Moreover, the company may not be able to fully pass on increase in raw material prices to customers owing to intense competition.

Liquidity: Strong

Navneet’s liquidity is healthy with expected accrual of Rs 170-250 crore, which is sufficient to meet expected capex of Rs 50 crores over the medium term amid nil term debt obligation. The company had liquid surplus of Rs 75.7 crore as on September 30, 2023. The liquidity is supported by access to working capital limits of Rs 515 crore which were utilised 19%, on average, in the 12 months through December 2023, providing a liquidity cushion to meet any exigencies. With gearing of 0.25 time as on March 31, 2023, there is sufficient headroom to raise debt for capex or liquidity, if required.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes the ESG profile of Navneet supports its adequate credit risk profile.

 

Key ESG highlights

• In its efforts to reduce reliance on fossil fuels, the company has installed 724 kilowatt peak (kWp) of solar panels at two of its manufacturing facilities, resulting in ~30% reduction in combined power consumption at the two factories combined. The company also installed wind power capacity of 4.8 megawatt (MW), generating 7,738,000 units of power annually.
• Initiatives to reduce the carbon footprint have led to a significant reduction in carbon dioxide emissions, with savings of 19,244.2 metric tonnes till March 31, 2023. Total Scope 1 and Scope 2 emissions (Metric tonnes of carbon dioxide) per rupee of turnover has been reduced by 7%.
• In fiscal 2023, of the total paper procured as raw material, 14% was recycled while 37% was agro-based, making up a total of 51% of total material used in products. Additionally, ~93% of the total waste generated has been recovered through recovery operations.
• To minimise plastic waste, Navneet has developed a system where water-based ink carboys are lined with polybags, which allows return of the carboys to the manufacturer for reuse, significantly reducing plastic consumption and its associated environmental impact. The company has moved away from lower-micron plastics such as BOPP (biaxially-oriented polypropylene), PP (polypropylene) bags and shrink film, opting instead for higher-micron alternatives.
• Hazardous materials generated are disposed through government-authorised vendors, ensuring strict compliance with regulatory requirements and guaranteeing the safe and responsible handling of hazardous waste.
• The books which are recalled once they become obsolete (primarily due to changes in educational curriculum) are sold to scrap dealers specialising in sale of wastepaper to paper mills for the purpose of recycling.
• Navneet has implemented the Occupational Health and Safety (OHS) system across all its plants and offices, with its head office and two major sites holding ISO 45001 certification for their adherence to industry-leading safety standards.
• Navneet has an adequate governance structure, with 33% of its board comprising independent directors, the presence of an investor grievance redressal mechanism, and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Navneet Education Limited’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence.

Rating Sensitivity factors

Downward factors:

• Sustained decline in revenue along with moderation in the operating margin.
• Substantial increase in working capital requirement or any large, debt funded investments, leading to gearing remaining above 1.50 times.
• Higher than expected investment to group or associate entities impacting Navneet’s financial risk profile.

About the Company

Navneet was incorporated as Bookwing Publication (India) Ltd in 1959 by the Gala family, and was renamed Navneet Publications (India) Ltd in 1992 and got its present name in August 2013. Publications are sold under the Navneet, Vikas and Gala brands. The product portfolio additionally includes paper-based and non-paper-based stationery. The company also provides e-learning services in Gujarat and Maharashtra through its wholly owned subsidiary, Navneet Futuretech Ltd.

 

Navneet has collaborated with around 1,900 schools to provide digital teaching solutions in classrooms. Products such as e-learning tablets, cloud-based interactive exams and application-based audio visuals have been identified as key growth areas. The company is focusing on business-to-business products such as top class, which primarily targets educational institutions. Navneet has 20.25% stake in K12 Techno Services Pvt Ltd, which manages around 90 schools under the Orchid Schools brand across 14 cities in India.

 

On a standalone basis, for the nine months ended December 31, 2023, profit after tax (PAT) was Rs 158 crore and revenue Rs 1,316 crore, against Rs 180.8 crore and Rs 1,287.8 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable