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Media: India
Newsprint not critical. The newsprint cycle has likely stabilized with benchmark 30-lb
US East Coast newsprint prices stable at US$640/ton. The trends in two key drivers of
newsprint prices are (1) cost-push inflation has likely peaked declining prices of
pulp/fiber but (2) demand-supply gap has reduced with robust demand from emerging
markets, including India. We remain sanguine on newsprint prices (likely 5-8% annual
inflation) given (1) demand is not yet back to CY2008 levels and thus, (2) supply-side
slack exists in the market. (3) More important, the street seems to be neglecting the
robust recovery in advertising revenues, the key driver behind robust newsprint demand
from emerging markets. Reiterate our BUY rating on DBCL and JAGP.
Newsprint cycle has likely stabilized; we expect manageable 5-8% inflation annually
Exhibits 1-2 present the near-term (12 months) and long-term (10 years) trends in newsprint prices.
The newsprint cycle has likely stabilized with benchmark 30-lb US East Coast newsprint price
stable at US$640/ton for the past four months. However, we do not believe the existing price to
be the peak of the newsprint cycle but expect manageable 5-8% annual inflation ahead. Of the
two key drivers of newsprint prices (1) cost push inflation is likely to be subdued as prices of
pulp/fiber have declined in global markets (see Exhibits 3-5) but (2) global demand-supply gap has
reduced with robust demand from emerging markets including India.
The strength of the global newsprint demand will pressure prices but newsprint inflation is likely to
be contained within 5-8% levels (annually), in our view. Exhibits 6-7 present the trends in
newsprint demand in US and EU markets; newsprint demand continues to remain subdued in
developed markets in CY2010 post sharp decline in CY2009, with likely significant slack on the
supply side since demand is yet back to CY2008 levels. The key risk to our assumption would be
capacity closures (supply constraints); capacity closures have taken place but largely in Europe
where newsprint prices remain much below US levels (see Exhibits 8).
We model FY2012E-13E newsprint prices at US$650-675/ton. Exhibit 9 presents our sensitivity
analysis of earnings of JAGP and DBCL on account of higher newsprint prices (incremental
US$25/ton); we believe normalized newsprint prices (on a full cycle basis) are likely to be around
US$650-700/ton levels based on the cost curve (see Exhibit 10).
Robust advertising revenue growth a key driver, rising competitive action key risk
We believe advertising revenue growth and competitive intensity will likely be the key drivers of
earnings growth and stock performance with newsprint price likely having a moderate impact.
Two important observations: (1) We believe the street seems to be neglecting the robust recovery
in advertising in regional print media markets (themselves a driving factor of emerging market
newsprint demand) on account of a weak 2QFY10 (seasonal factors). All large regional print media
companies are positioned for renewed growth in circulation (pass-through to cost), readership and
advertising revenues (with a lag of 1-2 years) in their core markets. (2) Rising competitive intensity
remains a key risk but is likely over-stated with the three largest Hindi print companies (JAGP,
DBCL and HMVL) pitted against one another in the Bihar-Jharkhand (BJH) market. However,
competition may help expand the BJH market as it is under-penetrated (~19% versus ~25% All-
India average) and under-monetized. Further, (c) strong advertising growth (~20-25% in BJH
versus ~15-18% in Hindi market) is assured with continued political and economic development in
the state and (d) we have already factored in the potential impact into our financials. We reiterate
our BUY rating on DBCL and JAGP, which are trading at inexpensive valuations of17.5X and 16.5X
FY2012E EPS estimates.
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