Buy Jagran Prakashan: 31% ad revenue growth, 32% PAT growth; Deutsche Bank

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


31% ad revenue growth, 32% PAT growth; maintaining Buy


In-line earnings; maintaining estimates and target price
31% growth in 3QFY11 YOY ad revenues driven by yields (15%) and inventory
(16%) enabled Jagran Prakashan to bear a 28% increase in newsprint costs and
report 32% PAT growth. The integration of Mid-day (a newspaper group based out
of Mumbai), which JPL has acquired, is being integrated with effect from January
2011. The acquisition will drive the launch of Jagran's Urdu newspaper in India's
biggest state. We are maintaining our earnings estimates of INR7.8 in FY11 and
INR9.2 in FY12 and our INR185 target price.

25% revenue growth, 31% advertising revenue growth  

Jagran Prakashan reported healthy 3QFY11 results on the back of strong 

advertising revenue. Revenue grew by 25% and PAT grew by 32%. Advertising 

revenue (77% of group revenue) grew by 31%, 15% by yield and the rest by 

volume, indicating a buoyant advertising environment. Circulation revenues grew 

by 7% on the back of a 10% increase in circulation volumes, primarily driven by 

higher numbers in Jharkhand, which  saw a competing newspaper launch during 

the quarter.  

28% increase in raw material costs included in these numbers  

Raw material costs for the quarter increased by 28%, reflecting the impact of high 

newsprint prices (~18%) and growth in circulation (~10.8% YoY increase). EBITDA 

margins increased by 292 bps, reflecting operating leverage. The company 

indicated that the high newspaper costs are now in the numbers and going 

forward newsprint costs would likely see a 7-8% increase from the current level. 

Maintaining Buy with a target price of INR185 

Our DCF-based target price of INR185 is based on a cost of equity of 12.7% and a 

4% terminal growth rate. This translates into 23.8x FY11E and 20.1x FY12E 

earnings respectively; JPL currently trades at 15.5x FY11E and 13.1x FY12E 

earnings. Downside risks include rises  in newsprint prices and increases in 

competition due to the entry of Dainik Bhaskar (DB) Corp in Uttar Pradesh

Investment thesis 

Outlook 

The key strength of the company is its dominance in readership in Uttar Pradesh (India’s 

most populous state), which drives a relatively disproportionate share of advertising from this 

market. We believe Jagran Prakashan (JPL) is well placed to deliver a 25% CAGR in earnings 

over FY10-12 as a strong economy drives local (real estate, education) and national 

(automotive, consumer durables and telecom) advertising to the regional leaders. Buy. 

Valuation 

Our DCF-derived target price of INR185 is based  on a cost of equity of 12.7% and a 4% 

terminal growth rate. We believe that DCF is the most appropriate way of valuing a print 

business as the cash flows remain steady and circulation revenues are not dependent on the 

advertising environment. For a dominant player  like JPL, a substantial part of advertising 

revenues also tends to remain steady. The key assumptions of our two-stage FCFE (free cash 

flow to equity) methodology are: risk-free rate of 6.4%, market risk premium of 7.2% (we 

apply a standard estimated risk-free rate and market risk premium to all the Indian companies 

we cover), and beta of .87 (Bloomberg Finance LP data), implying cost of equity of 12.66%. 

Our growth assumption in the stable phase is 4% (which is the long-term growth rate in the 

number of households in India). This implies a FY12E P/E of 20x. 

Risks 

Newsprint costs account for 70% of the cost of the newspapers. We have assumed an 

average of USD674/tonne newsprint cost for FY11E and FY12E, vs FY10's USD527, a 28% 

increase. An increase in newsprint prices is a  downside risk for Jagran Prakashan. Dainik 

Bhaskar (DB) Corp's entry into Uttar Pradesh, Jagran's key market, could dent Jagran's 

strong positioning in the state. Also, Dainik Bhaskar Corp/Hindustan's buy-out of Amar Ujala, 

the second biggest player in Uttar Pradesh, could lead to stronger competition for Jagran. 

31% ad revenue growth, 32% 

PAT growth.  

31% advertising growth driven by both volume and yield 

Jagran Prakashan reported healthy 3QFY11 results on the back of strong advertising revenue. 

Revenue grew by 25% and PAT grew by 32%. Raw material costs for the quarter increased 

by 28%, reflecting the impact of high newsprint prices (~18%) and growth in circulation 

(~10.8% YoY increase). EBITDA margins increased by 292 bps, reflecting operating leverage.  

7-8% increase in newsprint costs expected this year 

In 3QFY11, raw material costs (mainly newsprint) increased by 28% while circulation volume 

increased by 10%, demonstrating an 18% rise in the price of newsprint. The company 

indicated that the high newspaper costs are now in the numbers and going forward 

newsprint would likely see a 7-8% increase from the current level.  

Jharakhand marginally negative. 

At its post-results conference call, management admitted that the Jharkhand operations were 

marginally negative.  (Jharkhand is a state that Dainik Bhaskar has entered, making it a fourplayer market.) This was primarily due to a price cut in the newspaper and a relatively smaller 

advertising market.  

Mid-day integration on track  

The acquisition of Mid-day has brought three language dailies to Jagran. We believe this 

forms part of JPL’s initiative to identify growth avenues beyond the Hindi newsprint 

business. JPL acquired Mid-day, an English language  compact newspaper (All-India 

Readership: 458,000 as per IRS Q12010) published out of Mumbai, for INR1.73bn. Equally 

important, in our view, was the fact that the acquisition gave JPL two language publications 

via Mid-day Gujarati (AIR 91,000, IRS Q12010) and Inquilab, an Urdu daily (AIR 186,000, IRS 

Q12010). The strategic intent remains to expand into new languages via an established brand 

rather than build one like the group has built its Hindi newsprint business. We believe that the 

company will re-launch Mid-day Gujarati as a broadsheet,  first in Mumbai and then in the 

state of Gujarat (one of India’s most prosperous states). We also expect the Urdu daily 

Inquilab to drive readership in the states of Uttar Pradesh and Madhya Pradesh. Also, the 

respective state governments remain advertisers in language publications. Our numbers 

factor in Mid-day’s numbers within JPL’s FY11 and FY12 estimates.  

Valuation 

DCF-derived target price of INR185 (~54% upside potential)  

The key assumptions of our two-stage FCFE (free cash flow to equity) methodology are: 

„ Risk-free rate of 6.4%, market risk premium of 7.2% (we apply a standard estimated riskfree rate and market risk premium to all the Indian companies we cover), and beta of .87 

(Bloomberg Finance LP data), implying cost of equity of 12.66%. 

„ Growth in the stable phase of 4% (which is the long-term growth rate in the number of 

households in India). This implies a P/E of 20x FY12E. 

We believe that DCF is the most appropriate way of valuing a print business as the cash 

flows remain steady and the circulation revenues are not dependent on the advertising 

environment. For a dominant player like JPL, a substantial part of the advertising revenues 

also tends to remain steady.