DB Corp; Set to cross another language barrier; Target: Rs 284: Emkay

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DB Corp

Set to cross another language barrier

HOLD

CMP: Rs 253                                        Target Price: Rs 284

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n     DB Corp announces entry into Marathi land to cross another language barrier after success in Gujarati

n     To launch Marathi daily during CY11 and deferred Bihar launch to end of FY12. Management est. Marathi ad market at ~Rs7.0bn, growing at 15-20% annually 

n     The management has guided with the initial capex of Rs600-700mn for Maharashtra launch

n     Given the healthy cash on balance sheet and further dilution of promoters’ stake to 75% (currently 86.3%) by FY13E (mandated by Sebi) would keep the funding intact for further  expansions

Expanding footprint

DB Corp has announced the launch of Marathi daily (ex Mumbai) during CY11. The

company is in aggressive mode for expansion in different territories. In August last year

it launched its brand in Jharkhand market and expanding there since then. Maharashtra

region is currently controlled by three major newspapers i.e Sakal, Lokmat and Pudhari.

As per Q3 2010 IRS survey, Lokmat, Sakal and Pudhari has average daily readership

(in 000’s) of 7809, 4639 and 2661, respectively.

Why Maharashtra first and not Bihar?

The company has delayed the scheduled launch of Bihar as earlier expected in FY12E

and has been preceded by Maharashtra launch. As per management, from last couple

of years it has been looking for M&A in Marathi market but nothing worked out. Marathi

ad market is worth Rs7.0bn v/s Rs2.0bn of Bihar and that motivated management to tap

higher lucrative market first.

Capex and margins going ahead

The company has guided capex of Rs 600-700mn capex for Maharashtra launch and

cons. capex at Rs1-1.1bn for FY12E. The company is on expansion mode and would be

launching its brand in two states in next fiscal year and it would lead to higher opex

resulting in lower margins for next fiscal. However, we believe the near term pressure

on margins and return ratios for sake of future growth would not be a concern for the

company in long run.

Outlook and Valuations

With the improving literacy rate in Tier II & Tier III cities and strong economic growth

(GDP) of the country, we expect the next phase of growth would be in the rural India.

With increasing ad spend across the sectors and expansion by corporates deeper into

rural pockets augurs well for future ad growth. At CMP of Rs253, DB Corp trades at

19.6x and 17.4x for FY11E and FY12E earnings, respectively. We maintain HOLD

rating on the stock with target price of Rs284. We have not incorporated estimates of

Maharashtra launch in our estimates.

Estimated losses from the new launch

We have estimated loss of Rs322mn and Rs584mn for the first two years of launch in

Maharashtra. However, the management has not disclosed the strategy and the start up

circulation number in the state. We have assumed the circulation considering the average

daily circulation of two other major news dailies Lokmat and Sakal. As per latest ABC

survey (jan-June, 2010) Lokmat and Sakal has average daily circulation of 13.3 lacs and

15.9 lacs copies/day. The estimated EBITDA loss of Marathi market would be in addition to

the losses from Jharkhand market; with this we believe the profitability and return ratio for

DB Corp would dent for next 1/2 years, however the expansion in newer territories would be

the next growth driver for the company.

Few stats of Maharashtra

Maharashtra is the third largest state of India in terms of area and second largest in terms

of population. It is richest state in India contributing to 15% of industrial output and 13.5% of

GDP. With literacy rate of 77% and per capita GDP of Rs79,515. Total ad market size of

Maharashtra amounts to ~Rs21.0bn and ex Mumbai it stands at Rs7.0bn.

Statistics

Base population 1069 lacs

Literacy 77%

Can read Marathi 635 Lacs

Any Marathi daily 184 Lacs

Penetration gap 71%

Avg GDP growth (since 03-04) 14.50%

Market potential value (% of India) 13.50%

Source: Company presentation