Buy DB Corp. – 3QFY2011 Result Update- Angel Broking

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DB Corp. – 3QFY2011 Result Update

Angel Broking maintains a Buy on DB Corp. with a Target Price of Rs. 358.

For 3QFY2011, DBCL reported strong set of numbers on both the revenue and

earnings fronts. While top-line was driven by advertisement revenues, earnings

were aided by the decrease in interest expense, flat depreciation and higher other

income. We maintain a Buy on the stock.

Robust top-line led by ad-revenue growth: As per expectations, DBCL reported

strong top-line growth of 24% yoy, driven by the 29% yoy growth in print

advertising revenues (consolidation of the festival season in the quarter) and 37%

yoy growth in radio ad-revenues. Circulation revenue was however, flat yoy in

absolute terms and increasing 1.5% qoq.

Earnings robust at 33% yoy despite margin contraction: DBCL posted a strong

33% yoy growth in earnings on a recurring basis and 30% yoy growth on a

reported basis despite the 111bp yoy contraction in margins on account of higher

raw material price and operational expenditure due to start-up cost, aided by the

decline in interest expense, flat depreciation and significant increase in other

income.

Outlook and Valuation: We have maintained our earnings estimates, but

marginally tweaked our top-line estimates to factor in lower circulation revenues

(management has indicated that they would not be increasing the cover prices,

and circulation volume would remain at ~5–8%) by 1–2%. At the CMP of `260,

DBCL is trading at 15.3x FY2013E consolidated EPS of `17. We maintain a Buy

on the stock with a Target Price of `358 based on 21x FY2013E earnings.

Downside risks to our estimates include – 1) sharp rise in newsprint prices, 2)

increased competition, and 3) higher-than-expected losses/ increase in breakeven

period of its new launches

Strong top-line growth led by impressive ad-revenue growth yoy

As was the expectation, DBCL reported a strong top-line growth of 24% yoy/ 16%

qoq to `348cr (`281cr/`301cr), driven by 29% yoy/19.5% qoq growth in print

advertising revenue and 1% yoy/1.5% qoq growth in circulation revenue. The

strong advertising revenue resulted from consolidation of the festival season in

3QFY2011. Circulation revenues on a yoy basis came in flat in absolute terms, but

increased 1.5% qoq to `54cr, though marginally below our expectation of `54.5cr.

DBCL maintained its strong foothold in Madhya Pradesh and Chandigarh, Punjab,

Haryana (CPH) markets by reducing the cover prices and expanding circulation.

Among the other segments, in the radio business the company reported a strong

growth of 37% yoy/ 17% qoq in advertising revenue to `12.9cr, while the event

management business remained lacklustre recording 11% yoy decline in revenue

and remained flat sequentially in absolute terms at `8.7cr.

Earnings robust at 33% yoy, despite investments in new geographies

DBCL posted a strong 33% yoy growth in earnings on a recurring basis and 30%

yoy growth on a reported basis despite the 111bp yoy contraction in margins on

account of higher raw material price and operational expenditure due to start-up

cost, aided by the decline in interest expense, flat depreciation and significant

increase in other income.

On a sequential basis, the company reported recurring and reported earnings

growth of 23% and 20% respectively, aided by margin expansion, lower interest

expense (down by 9.4%) and flat depreciation.

OPM under pressure yoy on high startup costs and newsprint prices

At the operating level, DBCL faced margin pressure (OPM contracted by 111bp

yoy) on account of higher raw material prices and increased operational

expenditure on account of start-up costs for the Jharkhand launch (this quarter

being the first full quarter of operations of DBCL’s Ranchi edition) and opening of

new printing presses (two printing presses in MP and four printing presses in

Rajasthan). Gross margins contracted by 55bp yoy/65bp qoq (following increase

in circulation volumes and higher newsprint prices), increase in staff cost by 194bp

yoy/fell by 132bp qoq (on account of higher number of in-sourced staff in the

direct payroll of the company), SG&A expenses increased by 91bp yoy/28bp qoq.

Investment Rationale

􀂄 Controlled aggression in business edges DBCL over peers: DBCL, though a

dominant No.2 player in the overall regional print space (trailing behind

Jagran Prakashan), enjoys premium valuation to its peers Jagran Prakashan

(flagship daily Dainik Jagran) and Hindustan Media Ventures (flagship daily

Hindustan). We attribute the reason for this trend to DBCL’s business model

(which is primarily advertising revenue driven) and well thought-out launches

in new markets. We believe the company’s continuous endeavour to diversify

its print business coupled with aggressive expansion into new markets (urban

towns beyond metros) backed by exhaustive market research and focus on

achieving leadership are the key differentiating factors compared to its peers.

􀂄 Peg 17% CAGR in ad revenue, Bihar/Jharkhand to contribute ~3%: We

expect ~20% yoy growth in advertising revenue in FY2011E for DBCL (in line

with management’s guidance of 18–20% yoy growth) on the back of an uptick

in economy and low base. Going ahead, we expect advertising revenue to

post ~16% yoy growth. During FY2010–13, we peg DBCL’s standalone ad

revenue (excluding radio) to post 17% CAGR driven by - 1) higher ad spend in

the regional markets, 2) uptick in the economy, resulting in increasing

advertisement volumes, 3) penetration into new markets (the company is

making inroads in the Rajasthan and Bihar/Jharkhand markets),

4) sustainable ad rate hikes (~12% ad rate hike taken in 1QFY2011), and

5) multi-state leadership in key urban areas.

􀂄 Retirement of debt and increasing cash give further impetus: DBCL has a

strong balance sheet, with a cash balance of over `195cr as of FY2010. Also,

the company has been repaying its high-cost term loans as reflected in the yoy

decline in interest expense. We have modeled in repayment of ~`40-50cr

each year over FY2011–13, Moreover, with substantial capex done in FY2009

and significant improvement in the company’s working capital, we expect its

cash balance to swell to ~`410cr or ~`22/share in FY2013. We attribute the

strong cash flow to a jump in free cash flow (expect a whopping ~`200cr by

FY2013) on strong earnings growth. Hence, we expect DBCL’s RoE to sustain

at ~25–26% and RoIC to rise to 28.2% (21.7% in FY2010) in FY2013.

Outlook and Valuation

We have maintained our earnings estimates, though we have marginally tweaked

our top-line estimates to factor in lower circulation revenues (management has

indicated that it would not be increasing the cover prices, and circulation volume

would remain ~5–8%) by 1–2%.

At the CMP of `260, DBCL is trading at 15.3x FY2013E consolidated EPS of `17.

We maintain a Buy on the stock, with a Target Price of `358, based on 21x

FY2013E earnings.

Downside risks to our estimates include – 1) sharp rise in newsprint prices,

2) increased competition and 3) higher-than-expected losses/increase in

breakeven period of its new launches