Deccan Chronicle Holding – 2QFY2011 Result Update Angel Broking

Visit http://indiaer.blogspot.com/ for complete details �� ��

 Deccan Chronicle Holding – 2QFY2011 Result Update

Angel Broking maintains a Buy on Deccan Chronicle Holding with a Target Price of Rs190.

Post Deccan Chronicle Holdings’ (DCHL) 2QFY2011 results, we have revised our

estimates downwards primarily to factor in lower revival in advertisement volume.

The company posted dismal results for the quarter, with top-line de-growth of

5.7% yoy and earnings decline of 17.3% yoy impacted by margin contraction by

281bp yoy. Owing to attractive valuations, we maintain a Buy on the stock.

Top-line, bottom-line in line with estimates: DCHL reported top-line decline of

5.7% yoy/growth of 2.1% qoq to `237cr (`251cr/`232cr). On the operating front,

DCHL registered margin contraction of 545bp yoy/189bp qoq, despite gross

margin expansion of 64bp yoy, as the company continues to benefit from benign

newsprint prices. Earnings for the quarter, on a standalone basis, declined 17.3%

yoy to `83cr (`100cr), impacted by increase in interest expense, depreciation

charge and margin contraction, though cushioned by higher other income.

Outlook and Valuation: Over FY2010–12, we expect DCHL to post a CAGR of

10% in standalone revenues largely driven by 10.2% CAGR in advertising

revenues and 7.9% CAGR in circulation revenue owing to higher contribution

from the Bangalore edition. In terms of earnings, we have penciled in 10.9%

CAGR during the period largely driven by top-line growth, as we expect margins

to dip marginally lower as newsprint prices harden. At `137, the stock is trading

at attractive valuations of 10.4x FY2012E standalone EPS of `13.2. We maintain

a Buy on the stock with a SOTP Target Price of `190 based on: 1) 12x FY2012E

standalone earnings for its core print business fetching `158/share, and 2)

`32/share value for the IPL Team (25% discount to the per share value calculated,

based on US $225mn floor price for new teams’ auction).

Concall - Key Takeaways

􀂄 Ad growth muted, volume recovery yet to take place: DCHL reported low

recovery in advertisement volume, as recovery from recruitment and real estate

sectors slows down. Management is however bullish in terms of ad volume pick

up in 2HFY2011 as 3Q is the festive season.

􀂄 Newsprint prices expected to remain benign: DCHL continues to benefit from

benign newsprint cost, reporting gross margin expansion. DCHL has an

inventory cover for three months. However, management has not indicate a

significant increase in the newsprint cost going forward expecting the newsprint

price to remain stable as few plants in Chile re-start production after the

earthquake.

􀂄 Deccan Chargers lock-in period ends in December, looking to sell stake:

Management has re-iterated that it seeks to dilute its stake in Deccan Chargers

and has received a nod from BCCI for the same as the company finishes its 3-yr

lock-in period clause on December 2010. Management seems disinterested to

continue with the franchise (even though it has received the auction and the

matches schedule from BCCI for IPL-4, confirming that IPL-4 is slated to be

played on schedule) and is enthused with the response it is receiving from

potential buyers.

Investment Rationale

􀂄 Buyback to be EPS neutral but sentimental positive: The DCHL board has

announced a buyback of shares at a price not exceeding `180/share and up to

an aggregate of `270cr, which is within the 25% limit of total paid up capital

and free reserves as on March 31, 2010. The stipulated price is based on a

premium of ~34% over its last three month’s average price. At the higher end of

the capped buyback price and outlay, the company would be able to purchase

up to ~15mn equity shares of the outstanding 243.4mn shares or roughly ~6%

of the equity. We believe the buyback would be EPS neutral owing to reduction in

other income (on account of usage of cash). Hence, we believe that the move

would be a sentimental booster to the stock price.

􀂄 IPL – huge value un-locking potential: Deccan Chargers Sporting Ventures

(DCSVL) houses the Hyderabad IPL team, Deccan Chargers (100% stake), which

won the second season of IPL. Based on the floor price of US $225mn for the

recent new teams auction (Kochi and Pune teams), we had calculated `43/share

value for DCHL’s IPL team. However, on account of the negative publicity with

regards to IPL and cancellation of two IPL teams from IPL–4, makes us tread

caution, and thus we give 25% discount to the per share value for the IPL team

and arrive at a value of `32/share for DCHL’s IPL team. Potential stake sale of

the team (as indicated by management) will trigger re-rating of the DCHL stock.

􀂄 Attractive valuations: DCHL is currently trading at 10.4x FY2012E standalone

EPS (print), which is at a steep discount to its peers due to scalability issues as it

is characterised as a single publication company with limited reach (only South).

However, fading balance sheet concerns (debt and receivable days both stand

reduced) and rising profitability in IPL (possibility of un-locking) instills

confidence.

Outlook and Valuation

Post 2QFY2011 results, we have revised our estimates downwards to factor in low

advertisement volume revival. Over FY2010–12, we expect DCHL to post a CAGR of

10% in standalone revenues largely driven by 10.2% CAGR in advertising revenues

and 7.9% CAGR in circulation revenue on account of higher contribution from the

Bangalore edition. In terms of earnings, we have penciled in 10.9% CAGR during

the period largely driven by top-line growth, as we expect margins to dip marginally

lower as newsprint prices harden.

At `137, the stock is trading at attractive valuations of 10.4x FY2012E standalone

EPS of `13.2. We maintain a Buy on the stock with a SOTP Target Price of `190

based on: 1) 12x FY2012E standalone earnings for its core print business fetching

`158/share, and 2) `32/share value for the IPL Team (25% discount to the per share

value calculated, based on US $225mn floor price for new teams’ auction).