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Hindustan Media Ventures (HMVL)
Media
Near-term pains overshadow potential gains. HMVL reported weak 3QFY11 EBITDA
at Rs185 mn (+11% yoy; +2% yoy), below our Rs250 mn expectations; the negative
variance resulted from lower-than-expected advertising revenues (Rs945 mn versus our
expected Rs1 bn) potentially due to (1) negative advertising contribution from Bihar
elections and (2) pullback of commercial advertisers given prior election experience.
However, two factors compel a reduction in target price to Rs200 (Rs225 previously)
and downgrade to ADD (BUY previously) (1) continued investment in new markets as
well as (2) slower-than-expected ramp-up in monetization (not dissimilar from HT
Media).
Near-term pains: Continued investment and relatively weak advertising hit 3QFY11
` We highlight that a yoy results comparison is neither valid nor completely possible given that
Hindi Hindustan was a part of HT Media till November 2009 (3QFY10).
` At the operating level, HMVL reported 3QFY11 EBITDA of Rs185mn, a modest 11% yoy and
2% qoq growth despite 3Q being the seasonally strong quarter (complete festival season
advertising) and favorable base (partial festival season in 3QFY10).
` The negative variance was on account of weaker-than-expected 3QFY11 advertising revenues
at Rs945 mn (+35% yoy, +3% qoq). The 3% qoq advertising growth surprised negatively in
light of a seasonally weak 2Q and the festival season falling entirely in 3QFY11.
` Bihar elections played spoilsport on two counts (1) weaker-than-expected political advertising
did not completely compensate for loss of DAVP/government advertising and (2) caution of
commercial advertisers given prior election experience.
` Nonetheless, we highlight that 9MFY11 EBITDA growth of 7% yoy continues to remain weak,
reflecting (1) continued investments (strong 28% yoy growth in operating expenses) but also (2)
slower-than-expected ramp-up in monetization of these investments (see our note ‘Too much
broth, too few cooks’ on HT Media dated 07 January, 2010).
` Hindustan launched its Gorakhpur edition in the UP market in 3QFY11 and higher circulation
across key markets (UPU, BJH) compensated for pressure on realizations due to competition;
3QFY11 circulation revenues were in line with expectations.
` HMVL reported only Rs16 mn of other income on net cash balances of Rs1.65 bn, reflecting an
effective annualized interest rate of ~4%.
We remain positive on regional print media in general and Hindustan Media in particular
given (1) the penetration opportunity and (2) the monetization opportunity in key markets,
as described in the next few sections. However, valuation at 17.5X FY2012E earnings is at a
modest premium to peers JAGP and DBCL (adjusted for high dividend yield in case of JAGP
and BJH startup losses in case of DBCL). The premium may have been justified given the
high growth potential (+5-10% versus peers) but the risks are also commensurate. We
downgrade HMVL to ADD (BUY previously) with a 12-month DCF-based target price of
Rs200 (we model 13% WACC versus 12.5% for peers on account of potentially higher risk;
the margin volatility in HMVL gives credence to the risk assessment). However, we also
highlight the ‘operational valuation (EV/reader)’ discount in the last section.
Potential long-term gains: penetration
Exhibit 3 presents the key readership statistics in various Hindi/regional markets; we note
that Madhya Pradesh (MPCG with Chhattisgarh), Uttar Pradesh (UPU with Uttaranchal),
Orissa and Bihar (BJH with Jharkhand) are the key Hindi/regional markets with the highest
potential for readership growth. Kerala, Gujarat and Rajasthan represent the long-term
potential for print media in regional markets but may not be achievable in all markets given
varied demographics and culture; nonetheless, 25%+ print penetration and 50%+ loyal
readership can be considered good medium-term (5-year) targets for incumbents as well as
new players in under-penetrated markets.
HMVL is present in two out of four of these markets, notably BJH and UPU. (1) Hindustan is
the legacy leader in the BJH market but (a) a weak advertising market and thus, (b) high
cover prices have resulted in lower penetration in the market. Robust economic growth
resulting in a strengthening advertising market and competition is driving investment in the
market.
(2) Hindustan is expanding in the UPU market building upon its strong legacy presence in
Lucknow and Varanasi cities. It has done reasonably well in the cities of UPU but now needs
to penetrate the upcountry markets and complete the expansion in FY2012E. (3) Though
Delhi is well-penetrated being a metro market, NCR regions like Gurgaon, Noida, Faridabad
and Ghaziabad are witnessing (a) strong population growth and (b) rising penetration led by
hyper-local editions of Hindustan targeting these markets
Potential long-term gains: monetization
The print penetration opportunity now lies in the semi-urban (small towns) and rural areas of
Hindi/regional markets. Print players need to balance increasing penetration with improving
monetization since the per-capita income in these areas is lower than that of urban centers.
Exhibits 4-5 present evidence of rising prosperity in semi-urban/rural areas of India; LUP (lowunit-price) categories such as FMCG and Telecom are witnessing strong growth versus
mature metro/urban markets. Thus, key product and service companies are looking at still
under-penetrated semi-urban and rural markets for growth and shifting their incremental
advertising spends towards these markets, which can be most effectively covered by
regional/vernacular media platforms. The lack of intra-segment competition from radio and
internet puts print in a sweet spot in capturing this advertising.
However, HMVL needs to improve its capabilities as regards monetization across its key
markets, specifically in the UPU market. It benefits from being a part of the larger print
bouquet of HT Media in being able to garner national advertising from large, pan-India
advertisers but needs to improve upon its share of local advertising given rising prominence
of local brands (FMCG, mobile phones) in these markets. We highlight (1) peers JAGP and
DBCL garner ~55% and ~60% of their advertising from local advertising and (2) have
reported rising profitability of their hyper-local editions. We have previously seen this issue
with HT Mumbai as well with advertising highly skewed in favor of national brands (likely in
conjunction with HT Delhi) with limited traction in local advertising.
Potential long-term gains: valuations
Regional print media stocks are trading at reasonable valuations given the potential growth
opportunity (literacy, penetration, monetization) available in these markets. However, rising
competition and resulting market fragmentation as well as rising cost of doing business is
also a key driver behind the stubbornness of weak valuations for regional print media
companies throughout CY2010. However, we highlight (a) competition also exists in those
markets where there is potential penetration opportunity (BJH, UPU and MPCG markets for
listed players) and (b) the impact of rising competitive intensity is already built into our
expectations (and partially in case of street expectations). However, we concede that
building in a near-perfect competitive scenario into our models is impossible (providing some
justification for the uncertainty around these stocks).
HMVL trades at a marginal premium to JAGP and DBCL — the premium may be justified
given (1) faster growth profile versus peers (5-10% higher) and (2) potential for margin
expansion (18-20% currently versus 30%+ for peers). However, two factors underpin a
higher risk perception (we also model 13% WACC rate for HMVL versus 12.5% for peers: (1)
Continued large investments into expansion opportunities and (2) slower-than-expectation
monetization. However, even as financial valuation may be at a premium to peers, we
highlight that ‘operational valuation (EV/reader)’ is at a considerable discount and the
discount is widening over time given strong growth in readership of HMVL. Thus, as
highlighted previously, the ability of HMVL to bridge the large gap between readership and
monetization will be the key valuation driver.
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