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HT Media – 3QFY2011 Result Update
Angel Broking maintains Buy on HT Media with a Target Price of Rs175.
We have revised our FY2011 estimates downwards: 1) revised revenue estimates
by 1.5% to factor in sequentially lower advertisement revenue from Hindi print
and lower revenue traction from the Burda JV; 2) revised earnings estimates by
7.6% to factor in higher newsprint cost and high operational expenses on account
of expansion of the company’s print business. We highlight that yoy comparison
of Hindi print business is not completely valid as Hindi business (HMVL) was a
Strong top-line growth led by impressive ad-revenue growth yoy: HTML posted
robust set of numbers both on the revenue and profitability fronts. Top-line grew
29% yoy to `464cr, aided by significant advertisement revenue across all its
publications. Recurring earnings grew 36.1% yoy aided by decrease in interest
expense and tax rate, despite flattish margins (declined by 14bp yoy).
Outlook and Valuation: We have rolled over to FY2013. During 3QFY2011,
HTML posted impressive ad-revenue and with the up-tick in the economy we
estimate this growth to sustain, with English print (HT Times and Mint) and HMVL
posting a CAGR of 14% and 21% over FY2010–13, respectively. Aggressive cost
rationalisation in the radio business and benefits of the new royalty structure
(continues to be EBITDA positive and posted EBIT profit of ~`3cr), trickle-down
effect of higher revenue traction and benign newsprint price environment for the
company (factoring in ~6% rise during FY2010-13) will help HTML post higher
margins (~19%) during FY2011–13. At the CMP of `143, HTML is trading at
14.8x FY2013E revised consolidated EPS of `9.7. Owing to significant
improvement in profitability of its growing businesses and incremental revenue
traction on the back of improvement in advertising spend across sectors, we
maintain a Buy on the stock, with a Target Price of `175 based on 18x FY2013E
earnings.
Strong top-line growth led by impressive ad-revenue growth yoy
For 3QFY2011, HTML posted strong top-line growth of 29% yoy to `464cr
(`359cr) driven by the 29% and 28% yoy growth in the English and Hindi
businesses, respectively. The company reported a 27% yoy/12% qoq growth in adrevenue,
aided by the 35% yoy growth in Hindustan and 25% yoy growth in HT
Times. On sequential basis however, Hindustan reported a meagre 3.4% yoy
growth in advertising revenue (negative surprise), while advertising revenues of HT
Times grew 16%. Hindustan’s lower advertisement revenue may be attributed to
weaker political advertising contribution from the Bihar elections. However,
considering that 3QFY2011 consolidated the entire festive season, the sequential
ad-revenue growth is still a little disappointing.
Circulation revenues fell 2.1% yoy on lower realisation, but stood higher by 12.7%
qoq to `47.1cr during the quarter. While Hindustan’s circulation remained flat at
`30.6cr yoy, it grew 6.3% qoq aided by higher circulation volumes (launched the
Gorakhpur edition during the quarter), HT Times circulation suffered on account of
higher discounts/free trial subscription copies distributed in the markets of
Mumbai, Punjab, UP and some parts in Delhi.
Among the other segments, the new businesses registered significant revenue
traction. The radio business reported robust top-line growth of 80.2% yoy to
`18.2cr (`10.1cr) on the back of increased advertising, while the internet business
contributed `2.1cr to overall revenues. The Burda JV contributed `15cr to revenues
this quarter (`28cr in 2QFY2011). Currently, the Burda JV is functioning at 40-45%
of its printing capacity and is likely to operate at 80-100% of its printing capacity in
3-4 years, by which time revenues from this alliance will also stabilise. In FY2011,
we expect the Burda JV to contribute ~`60cr to overall revenues.
Bumper earnings growth at 36% yoy; Fever 104 reports profit of `3cr
HTML posted robust yoy growth of 36.1% in earnings to `50cr (`37cr) on a
recurring basis and 33.6% yoy growth to `47.8cr (`35.8cr) on a reported basis,
despite the decline in other income (down 7.1% yoy), increase in depreciation cost
(up 31.7% yoy) and flattish operating margins, aided by the fall in interest expense
(down 35.8% yoy) and tax rate (down 424bp yoy). The company’s radio business
reported profit of `3cr, which is a substantial jump from the meagre profit of
`0.5cr reported in 2QFY2011, benefited by the new royalty structure. The internet
business however, continued to be in the red and reported a loss of `10.7cr (loss
of `9.9cr).
OPM flat yoy despite higher raw material costs
At the operating level, HTML posted flattish operating margins (14bp yoy decline)
despite higher newsprint cost and cost of goods from Burda JV (recorded newsprint
cost of `12.5cr this quarter) being recorded this quarter, aided by various cross
rationalisation methods adopted by the company. Staff cost (down 88bp yoy),
advertising spends (down 199bp yoy) and other expenses (down 99bp yoy)
declined, while gross margins contracted by significant 400bp yoy. Sequentially,
gross margins expanded by 269bp resulting in operating margin expansion of
374bp, despite increase in circulation volumes, aided by high advertisement
revenue traction.
Segment-wise, overall EBIT margins contracted by 143bp yoy to 15% (16.4%), on
account of the decline in EBIT margins of the print business (recorded EBIT of `78cr
while EBIT margin contracted by 265bp yoy to 17.4%) and higher loss in the
internet business. The radio business reported EBIT margin of 16.5% yoy.
Investment Rationale
Incremental growth in ad revenue, Burda JV to scale up top-line: HTML
recorded impressive ad-revenue this quarter, with a yoy growth of 24.7% and
35% in English and Hindi print, respectively, on account of consolidation of the
festive season. The company has recently taken a card rate hike 10-15% (will
reflect in 4QFY2011). With the up-tick in the economy, we estimate this
growth in ad-revenue to sustain, with the English (HT Times and Mint) and
Hindi print businesses (HMVL) posting a CAGR of 14% and 21% over FY2010–
13, respectively. While Hindustan’s ad-revenue will grow maximum in UP (we
peg a CAGR of ~24% over FY2010–13), HT Mumbai will be the maximum
growth driver for the English print’s ad-revenues (we peg a CAGR of ~14%
over FY2010–13). Moreover, FY2011 will be the first full operational year for
the Burda JV and we estimate it to contribute ~`60cr to top-line in FY2011.
Resilience in new business to continue, expect OPM of ~19% over FY2011–
13: In terms of operating performance, HTML continued to show resilience in
its new businesses during the quarter (radio and internet gained traction).
Moreover, aggressive cost rationalisation in the radio business and benefits of
the new royalty structure (continues to be EBITDA positive and posted EBIT
profit of ~`3cr, trickle–down effect of higher revenue traction and benign
newsprint price environment for the company - factoring in ~6% rise during
FY2010-13E) will help HTML post higher margins (~19%) during FY2011–13.
Balance sheet to remain healthy, we peg cash to swell to ~`190cr in FY2013:
HTML registered significant turnaround in net working capital in FY2010, with
an improvement in both inventory and debtor turnover. Going forward, we
expect the company to sustain its negative working capital cycle through
FY2011, FY2012 and FY2013, thus increasing its cash surplus to ~`190cr by
FY2013. Hence, we believe that HTML is extremely well placed to fund its
expansion plans and continue investing in its growing business, owing to low
debt:equity of ~0.2x and low working capital requirements.
Merger of Firefly e-Ventures with HT Media
The company job portal (Shine.com) being operated by its wholly-owned
subsidiary, Firefly e-Ventures (FEVL), is being merged with itself subject to approval
of the shareholders of HTML at a equity ratio of 1:15.5 (i.e. for every 15.5 shares
of FEVL of face value `10, 1 equity shares of HMVL of face value `2 will be
issued). The shareholders’ meeting is to be held on February 2, 2011.
The rationale for the merger as indicated by management is: 1) increased
investment required for Shine.com, and 2) HTML benefitted on the tax front as
FEVL is loss making entity.
Outlook and Valuation
We have revised downwards our estimates. Our revenue expectations for FY2011
are pruned down by 1.5% to factor in:1) sequentially lower advertisement revenue
from Hindi print and 2) lower revenue traction from Burda JV– we expect Burda JV
to contribute `60cr in top-line (earlier estimated `75cr). We have pruned our
earnings estimates by 7.6% to factor in:1) higher newsprint cost (we have factored
in ~6% rise in blended newsprint cost) and expect newsprint cost with regards to
Burda JV to be 75% of its revenues, and 2) high operational expenses on account
of expansion of the company’s print business to UP and Chandigarh-Punjab-
Haryana regions
At CMP of `143, HTML is trading at 14.8x FY2013E revised consolidated EPS of
`9.7. Owing to significant improvement in the profitability of its growing
businesses and incremental revenue traction on the back of improvement in adspend
across sectors, we maintain a Buy on the stock, with a Target Price of `175,
based on 18x FY2013E earnings.
We are lowering our assigned P/E multiple from 20x to 18x owing to the following
factors: 1) increased focus on new businesses, which may not be value accretive in
the near term (internet business, mobile solutions and magazines), 2) volatility in
the contribution from Burda JV (likely to work at 80-85% capacity utilisation in 3-4
years) to overall top-line, and 3) lower-than-expected ad revenues (Hindi print is
consistently recording lower advertisement revenues for the past two quarters)
Downside risks to our estimates include – 1) Sharp rise in newsprint prices,
2) Increased competition, and 3) Higher-than-expected losses or re-investment in
growing businesses (radio, Mint and internet).
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