DB Corp Cost pressure to remain, maintain hold : Emkay

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DB Corp

Cost pressure to remain, maintain hold

HOLD

CMP: Rs260                                        Target Price: Rs284

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n     Q2FY11 PAT grew by 30.4% yoy to Rs659mn, slightly below our estimate of Rs684mn impacted by sharp rise in opex towards newsprint cost and new launches

n     Robust advertisement revenue of Rs2.8bn grew by 29% yoy led by volume and price growth

n     Significant yoy increase of 26% and 34% in raw material and other operating cost dents EBITDA and profitability

n     Robust revenue ad growth to continue but margin pressure to remain in short term. Maintain HOLD rating with target price Rs284

Robust ad revenue growth

DB Corp reported net sales growth of 25% yoy led by strong ad revenue growth of

29.1% yoy to Rs2.8bn (Our est. of Rs 2.6bn, 21% growth yoy), driven by robust volume

growth and marginal from pricing growth. Circulation revenue remained flat at Rs 540mn

yoy. Radio revenue stood at Rs128mn with EBITDA margin of 25%. Con. EBIDTA grew

by 22.5% yoy to Rs 1148mn while EBIDTA margins declined by 60bps yoy. Despite of

strong revenue growth, margin decline was primarily due to 34% and 26% yoy rise in

SG&A and raw material expenses, respectively. PAT for the quarter stood at Rs 659mn

up 30.4% yoy but below our estimates of Rs684mn.

New launches and newsprint prices put cost pressure

Post the launch of Ranchi edition in Jharkhand, Bhatinda edition in Punjab and Nagaur

in Rajasthan in Q2FY11, DB Corp added Jamshedpur and Jammu edition in Q3FY11 in

its bouquet. It is expected to launch Dhanbad edition in Q4FY11. Newsprint print prices

have increased from $643/MT in Q2FY11 to $664/MT in Q3FY11; however since then it

has stabilized. Average newsprint cost for DB Corp increased by ~4% from

Rs26835/MT in Q2FY11 to Rs27868/MT. With high newsprint prices we expect the

operating cost pressure from new launches would further increase going forward.

Outlook

The company has reported better than expected ad revenue growth for Q3FY11. The

growth has been primarily led by the volume, which signals the improvement in the

macro environment. The management has also indicated, going forward the growth

would come from volumes rather than increase in ad rate. Given the increase in the ad

spends across the sectors and improving ad volumes, we have maintained our ad

revenue growth estimate of 14.1% yoy to Rs11.2bn for FY12E.

Newsprint price from the current levels is not expected to increase significantly;

however, the raw material prices for DB Corp would increase due to increase in

circulation of copies. This increase would get mitigated by ad revenue in long-term.

Rating maintained at HOLD, target price of Rs284

We maintain our rating on the stock to HOLD considering the cost pressures due to rise

in newsprint prices and aggressive launch of new additions would limit upside to our

target price of Rs284 on the stock. At CMP of Rs260, the stock trades at 19.6x and

17.4x our estimated EPS for FY11E and FY12E respectively.