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DB Corp (DBCL)
Media
3QFY11 festivities galore; festival season does not return till next year, however.
DBCL reported strong 3QFY11 EBITDA at Rs1.15 bn (+20% yoy, +21% qoq) led by strong
29% yoy advertising growth (complete festival season in 3Q) despite investments in new
markets; operating expenses increased 13% qoq led by first full quarter of operation of
Ranchi edition and launch of Jamshedpur edition in Jharkhand market. Retain BUY with 12-
month DCF-based TP of Rs325 (30%+ upside). However, 33% EBITDA margin may not
sustain given rising investments; we model 28-30% EBITDA margins in FY2012E-13E, still
strong given peak investment period. DBCL also declared Rs2/share interim dividend, already
implying an annualized dividend yield of 1.6%.
Strong 3QFY11 financials led by advertising growth despite rising investments in new markets
DBCL reported strong 3QFY11 EBITDA at Rs1.15 bn (+20% yoy, +21% qoq) as complete
festival season advertising (+29% yoy, +18% qoq) negated higher investments in new markets
(first full quarter of operation of Ranchi edition and launch of Jamshedpur edition in Jharkhand
market) resulting in persistently high 33% EBITDA margin.
Strong 3QFY11 financials despite rising investments in new markets (operating loss of ~Rs100
mn in BJH market) showcases the strength of DBCL’s core franchise. However, we would
caution against reading too much into the quarter as DBCL benefitted from strong advertising
growth from a favorable base in 3QFY10 (partial festival season). We model 28-30% EBITDA
margins in FY2012E-13E, still robust given peak investments.
DBCL reported 3QFY11 advertising revenues of Rs2.69 bn (+29% yoy, +18% qoq) on account
of (1) impressive performance across advertising categories during (2) complete festival season
in 3QFY11 (favorable base yoy, as discussed above).
DBCL reported 3QFY11 circulation revenues of Rs540 mn (+1% yoy, +2% qoq), marginally
below our expectations. DBCL is stoutly defending its dominant position in the MPCG market
(>2X of competition) by reducing cover prices and expanding circulation.
DBCL’s FM radio business, MyFM, also contributed Rs33 mn of EBITDA to 3QFY11 financials led
by 37% yoy growth in revenues to Rs129 mn.
DBCL reported 3QFY11 raw material costs of Rs1.07 bn (+26% yoy, +18% qoq) led by rising
investments in new as well as core markets; yoy comparison is anyway less meaningful given
bottom of the newsprint price cycle. The qoq increase was largely due to volume growth as well
as DBCL eating into its low-cost inventory. Newsprint cycle seems to have stabilized and thus,
we expect manageable 5-8% yoy inflation ahead
DBCL reported modest 4% yoy growth in other direct costs versus sharp 44% yoy growth
in employee expenses. Besides the impact of DBCL’s entry into the Jharkhand market on
employee expenses, DBCL has also been in the process of regularizing its previously
temporary/out-sourced work force (accounted in other direct expenses). The in-sourcing
allows DBCL greater control over the distribution operations.
DBCL’s 3QFY11 overhead expenses increased 34% yoy, largely reflecting the start-up
costs (Rs37 mn for the launch of Jamshedpur edition) associated with DBCL’s entry into
the Jharkhand market. We highlight the key expansion initiatives of DBCL in new as well
as core markets in 3QFY11 (including rollover from 2QFY11).
DBCL’s entry into the Jharkhand market with Ranchi edition launched on September
20, 2010; 3QFY11 was first full quarter of operations.
Launch of Jamshedpur edition on December 10, 2010.
Launch of 2 new printing centers in Hanumangarh and Banswara in Rajasthan
market (total of 16 centers in the state).
Launch of 2 new printing centers in Hoshangabad and Khandwa in Madhya Pradesh
market (total of 8 centers in the state). We note that the above-mentioned markets
in Rajasthan and MP were already serviced by existing editions but DBCL has now
launched ‘hyper-local’ editions to service readers better.
However, 3QFY11 D&A expenses at Rs110 mn remained low (+4% yoy, +3% qoq)
despite investments across new and core markets. Additionally, net interest expense
declined only to Rs4 mn in 3QFY11 from Rs6 mn in 2QFY11 despite significant cash
generation in the core business. We highlight that DBCL has invested Rs600 mn for an
office building in Mumbai, which is yet to become operational; we would seek further
clarifications on the same during the concall.
Legacy markets, core business: Doing just fine!
Exhibit 2 presents DBCL’s strong position across its legacy markets (leader in MPCG and CPH
markets and strong runner-up position in Rajasthan and Gujarat markets). DBCL continues
to proactively work in the direction of strengthening its leadership presence in the former
and closing the gap over relatively localized competition in the latter markets. As previously
discussed, DBCL has been investing in new printing centers to create more ‘hyper-local’
editions in order to service the readers better. We highlight the DBCL provides a balanced
mix of best-in-class local (politics, events) and national (entertainment, sports) to the readers
at an affordable price, thus creating entry barriers for competition.
DBCL faces some competition from Nai Dunia (including NavDunia in Bhopal) and Patrika
(from the Rajasthan Patrika group) in the MPCG market. However, we note (1) the dominant
leadership position of DBCL in the MPCG market, which it aims to strengthen by reduced
cover prices and increased sampling but also (2) low readership penetration in the market
(see Exhibit 3). Arguably, it is indeed difficult for one single news source to provide multiple
points of view and completely satisfy the needs of the entire population of the state. We
foresee (1) one of the competitors emerging as a robust runners-up player in the market
followed by (2) a period of consolidation. We expect DBCL to maintain its dominant position
(it has successfully retained its core readership).
New markets: DBCL’s expertise ensures value!
We begin by highlighting the considerable experience and expertise that DBCL has
developed as regards new market entry strategies: (1) starting with Rajasthan in CY1996-97,
(2) Haryana in CY2000-01, (3) Gujarat in CY2003-04 and (4) Punjab in CY2006-07
(completing the CPH trilogy). We believe BJH market will likely not be any exception given
the initial traction DBCL has gained in the market. Nonetheless, we await the industrystandard
Indian Readership Survey data for confirmation (we note that IRS provides last-12-
month average readership so we may have to wait for another two rounds). For the time
being, we assume (1) Rs2.5 bn of peak investment in BJH market (versus Rs2.0 bn guided by
the company) and (2) value-neutrality with respect to BJH expansion. Thus, our DCF-based
value of Rs325/share is core business valuation.
Exhibit 5 presents the relative valuation of DBCL versus peer group; we have adjusted JAGP’s
valuation for high dividend yield (~3%) and DBCL’s valuation for start-up losses in the BJH
market. DBCL stock is attractively valued at 16X and 9.5X FY2012E EPS and EBITDA, given
potential ~20% advertising and ~15% revenue growth (assuming no contribution from
circulation revenues) for leading Hindi/regional print players; DBCL is at the top of the heap.
DBCL’s entry into fast-growing (on account of an ensuing economic transformation) BJH
market provides future growth opportunity. However, we expect interim rewards as well
(higher dividend payout); we discuss the cash flow characteristics of DBCL in greater detail in
our note “Flowing in cash” dated July 19, 2010.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
DB Corp (DBCL)
Media
3QFY11 festivities galore; festival season does not return till next year, however.
DBCL reported strong 3QFY11 EBITDA at Rs1.15 bn (+20% yoy, +21% qoq) led by strong
29% yoy advertising growth (complete festival season in 3Q) despite investments in new
markets; operating expenses increased 13% qoq led by first full quarter of operation of
Ranchi edition and launch of Jamshedpur edition in Jharkhand market. Retain BUY with 12-
month DCF-based TP of Rs325 (30%+ upside). However, 33% EBITDA margin may not
sustain given rising investments; we model 28-30% EBITDA margins in FY2012E-13E, still
strong given peak investment period. DBCL also declared Rs2/share interim dividend, already
implying an annualized dividend yield of 1.6%.
Strong 3QFY11 financials led by advertising growth despite rising investments in new markets
DBCL reported strong 3QFY11 EBITDA at Rs1.15 bn (+20% yoy, +21% qoq) as complete
festival season advertising (+29% yoy, +18% qoq) negated higher investments in new markets
(first full quarter of operation of Ranchi edition and launch of Jamshedpur edition in Jharkhand
market) resulting in persistently high 33% EBITDA margin.
Strong 3QFY11 financials despite rising investments in new markets (operating loss of ~Rs100
mn in BJH market) showcases the strength of DBCL’s core franchise. However, we would
caution against reading too much into the quarter as DBCL benefitted from strong advertising
growth from a favorable base in 3QFY10 (partial festival season). We model 28-30% EBITDA
margins in FY2012E-13E, still robust given peak investments.
DBCL reported 3QFY11 advertising revenues of Rs2.69 bn (+29% yoy, +18% qoq) on account
of (1) impressive performance across advertising categories during (2) complete festival season
in 3QFY11 (favorable base yoy, as discussed above).
DBCL reported 3QFY11 circulation revenues of Rs540 mn (+1% yoy, +2% qoq), marginally
below our expectations. DBCL is stoutly defending its dominant position in the MPCG market
(>2X of competition) by reducing cover prices and expanding circulation.
DBCL’s FM radio business, MyFM, also contributed Rs33 mn of EBITDA to 3QFY11 financials led
by 37% yoy growth in revenues to Rs129 mn.
DBCL reported 3QFY11 raw material costs of Rs1.07 bn (+26% yoy, +18% qoq) led by rising
investments in new as well as core markets; yoy comparison is anyway less meaningful given
bottom of the newsprint price cycle. The qoq increase was largely due to volume growth as well
as DBCL eating into its low-cost inventory. Newsprint cycle seems to have stabilized and thus,
we expect manageable 5-8% yoy inflation ahead
DBCL reported modest 4% yoy growth in other direct costs versus sharp 44% yoy growth
in employee expenses. Besides the impact of DBCL’s entry into the Jharkhand market on
employee expenses, DBCL has also been in the process of regularizing its previously
temporary/out-sourced work force (accounted in other direct expenses). The in-sourcing
allows DBCL greater control over the distribution operations.
DBCL’s 3QFY11 overhead expenses increased 34% yoy, largely reflecting the start-up
costs (Rs37 mn for the launch of Jamshedpur edition) associated with DBCL’s entry into
the Jharkhand market. We highlight the key expansion initiatives of DBCL in new as well
as core markets in 3QFY11 (including rollover from 2QFY11).
DBCL’s entry into the Jharkhand market with Ranchi edition launched on September
20, 2010; 3QFY11 was first full quarter of operations.
Launch of Jamshedpur edition on December 10, 2010.
Launch of 2 new printing centers in Hanumangarh and Banswara in Rajasthan
market (total of 16 centers in the state).
Launch of 2 new printing centers in Hoshangabad and Khandwa in Madhya Pradesh
market (total of 8 centers in the state). We note that the above-mentioned markets
in Rajasthan and MP were already serviced by existing editions but DBCL has now
launched ‘hyper-local’ editions to service readers better.
However, 3QFY11 D&A expenses at Rs110 mn remained low (+4% yoy, +3% qoq)
despite investments across new and core markets. Additionally, net interest expense
declined only to Rs4 mn in 3QFY11 from Rs6 mn in 2QFY11 despite significant cash
generation in the core business. We highlight that DBCL has invested Rs600 mn for an
office building in Mumbai, which is yet to become operational; we would seek further
clarifications on the same during the concall.
Legacy markets, core business: Doing just fine!
Exhibit 2 presents DBCL’s strong position across its legacy markets (leader in MPCG and CPH
markets and strong runner-up position in Rajasthan and Gujarat markets). DBCL continues
to proactively work in the direction of strengthening its leadership presence in the former
and closing the gap over relatively localized competition in the latter markets. As previously
discussed, DBCL has been investing in new printing centers to create more ‘hyper-local’
editions in order to service the readers better. We highlight the DBCL provides a balanced
mix of best-in-class local (politics, events) and national (entertainment, sports) to the readers
at an affordable price, thus creating entry barriers for competition.
DBCL faces some competition from Nai Dunia (including NavDunia in Bhopal) and Patrika
(from the Rajasthan Patrika group) in the MPCG market. However, we note (1) the dominant
leadership position of DBCL in the MPCG market, which it aims to strengthen by reduced
cover prices and increased sampling but also (2) low readership penetration in the market
(see Exhibit 3). Arguably, it is indeed difficult for one single news source to provide multiple
points of view and completely satisfy the needs of the entire population of the state. We
foresee (1) one of the competitors emerging as a robust runners-up player in the market
followed by (2) a period of consolidation. We expect DBCL to maintain its dominant position
(it has successfully retained its core readership).
New markets: DBCL’s expertise ensures value!
We begin by highlighting the considerable experience and expertise that DBCL has
developed as regards new market entry strategies: (1) starting with Rajasthan in CY1996-97,
(2) Haryana in CY2000-01, (3) Gujarat in CY2003-04 and (4) Punjab in CY2006-07
(completing the CPH trilogy). We believe BJH market will likely not be any exception given
the initial traction DBCL has gained in the market. Nonetheless, we await the industrystandard
Indian Readership Survey data for confirmation (we note that IRS provides last-12-
month average readership so we may have to wait for another two rounds). For the time
being, we assume (1) Rs2.5 bn of peak investment in BJH market (versus Rs2.0 bn guided by
the company) and (2) value-neutrality with respect to BJH expansion. Thus, our DCF-based
value of Rs325/share is core business valuation.
Exhibit 5 presents the relative valuation of DBCL versus peer group; we have adjusted JAGP’s
valuation for high dividend yield (~3%) and DBCL’s valuation for start-up losses in the BJH
market. DBCL stock is attractively valued at 16X and 9.5X FY2012E EPS and EBITDA, given
potential ~20% advertising and ~15% revenue growth (assuming no contribution from
circulation revenues) for leading Hindi/regional print players; DBCL is at the top of the heap.
DBCL’s entry into fast-growing (on account of an ensuing economic transformation) BJH
market provides future growth opportunity. However, we expect interim rewards as well
(higher dividend payout); we discuss the cash flow characteristics of DBCL in greater detail in
our note “Flowing in cash” dated July 19, 2010.
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