Media - Sector Update - Declining newsprint prices to benefit industry :Centrum

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Declining newsprint prices to benefit industry



We remain positive on print companies and believe the full benefits of
falling newsprint prices will come in Q4FY15 with HT Media the biggest
beneficiary. Our interaction with a global newsprint trader suggests
that newsprint prices will fall to $550-570/mt in Q4FY15 from $570-590
range in Q3FY15 in consonance with the commentary by Indian
publishers. The weakness is driven by significant demand supply
mismatch, ban on Russian exports to EU coupled with Rouble devaluation
and fall in Indian consumption, even as closure of capacities arrest
this fall from H2CY15. While we lower our revenue estimates with lower
ad growth, we are increasing EBITDA estimates with declining newsprint
prices. Maintain Jagran as the top pick.

$ Newsprint prices on a declining trend: Our interaction with a global
newsprint trader suggests that newsprint prices could fall from
$570-590 range in Q3FY15 to $550-570 in Q4FY15, owing to i)
Significant demand supply mismatch globally; ii) Ban on Russian export
to EU and Europe; iii) Devaluation of Russian Rouble and iv) Fall in
Indian consumption for the first time in a decade with English print
declining. This declining trend could be arrested in H2CY15 as some of
the capacities globally are closing down, e.g. Resolute Forest
Products announcing permanent closure of 465K MT in Canada in the next
2 months and Finnish pulp and paper maker UPM-Kymmene planning to
shutter 800K MT of publication paper capacity in Europe.

$ Domestic prices to mirror international fall: We believe domestic
prices are also falling in line with international prices on the back
of lower demand in India. Along with this, some publishers have
started to increase imports from Russia as imported newsprint is
cheaper. Russia accounts for ~25% of imported newsprint in India. We
believe the fall in pulp prices should also reflect in newsprint
prices in the next few months. The current gap between domestic prices
and international landed cost is ~7-8% depending on quality. Lower GSM
paper is also being bought by manufactures to maintain margins with
lower advertising revenue growth.

$ HT Media to be biggest beneficiary: We believe the benefits of lower
newsprint cost will be fully visible for companies from Q4FY15 as they
are sitting on high cost inventory partially reflected in Q3FY15
numbers. We believe HT Media will be the biggest beneficiary as it has
the highest consumption of newsprint and ~80% of the newsprint comes
from imports. Our sensitivity analysis suggests that 1% gain in
newsprint prices will have ~2% impact on HT Media, 1.1% on Jagran and
1% on DB Corp at operating profit levels.

$ Valuations: We have lowered revenues for Jagran and DB Corp
factoring in lower ad revenue growth, while increasing operating
profit estimates factoring in lower newsprint prices. We believe lower
ad growth will be mitigated by lower newsprint prices in FY15 while
the full benefits will come in FY16E when ad growth bounces back. We
continue to maintain BUY on Jagran Prakashan, DB Corp and HT Media
with Jagran Prakashan the top pick in the print space.  Key risks are
sudden reversal in newsprint prices and lower than expected ad growth
for a prolonged period.



Thanks & Regards