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Jagran Prakashan reported mixed set of numbers (however broadly in line with
our estimates). Key highlights of the quarter include –
1) gross margin contraction
of 125bp yoy/ 91bp qoq on account of hardening of newsprint price, and
2) Mid-Day numbers do not reflect this quarter; however management has
indicated the Mid-Day numbers will be consolidated in 2HFY2011. We maintain
Jagran as our top pick in the print media space and re-iterate a Buy on the stock.
Weak operational performance, earnings grow solely on other income: Jagran
reported top-line growth of 12% yoy/3% qoq to `277cr (`247cr/`270cr), aided
by 13% yoy growth in advertising revenue to `193cr (`172cr), while the
circulation revenue came in flat (less than 1% increase yoy) at `54.8cr. At the
operating level, Jagran delivered contraction of 91bp yoy in OPM, largely on
account of gross margin contraction, increase in staff cost by 64bp yoy to `35cr.
However, Jagran’s earnings for the quarter registered a growth of 10.4% yoy to
`56cr (`50cr) aided by spike in other income (up 27% yoy).
Outlook and Valuation: We have marginally revised our FY2011 estimates
upwards (FY2012 estimates remain largely unchanged) to factor in – 1) increased
advertisement revenue in 3QFY2011 on account of the festive season and higher
colour advertisement inventory utilisation, and 2) increased revenue traction from
the new businesses. We have not factored in the Mid-Day deal in JPL’s numbers.
We believe with Blackstone’s recent investment of `225cr and a wider portfolio
(including Mid-Day publications), Jagran is well poised to benefit from steady
growth in the print media. The underperformance of the stock provides a good
entry point and we maintain a Buy on the stock, with a Target Price of `154
based on a P/E multiple of 20x FY2012E earnings.
Advertisement aids top-line, grows 13% yoy, while circulation remains flat
Jagran Prakashan reported top-line growth of 12% yoy/3% qoq to `277cr
(`247cr/`270cr), aided by 13% yoy/1.8% qoq growth in advertising revenue to
`193cr (`172cr/`190cr). The advertising revenue came in much below
management’s guidance of 18% yoy growth albeit on account of improvement in
yield. We recall management had indicated the company recorded ad growth of
18% and ~25% in July and Aug (mentioned in our company update of August 30,
2010), respectively. The lower-than-expected ad revenue maybe attributed to the
massive floods in Jagran’s regions of operation and cancellation of advertisement in
the last week of September on account of uncertainty caused by the verdict on
Ayodhya. Circulation revenues came in flat (less than 1% increase yoy) at `54.8cr
(`54.3cr). The company’s other businesses (event, outdoor and digital) continue to
show strong traction with revenues growing 28% yoy to ~`22cr (event and outdoor
businesses contributed to `20.8cr).
Management expects ad revenue growth of ~17–18% in FY2011 aided by–
1) increase in national advertisement, 2) higher contribution from advertisements
from the education/FMCG sectors, and 3) ad rate hike absorption of 8–9% going
forward (the company had taken a blended ad-rate hike of 10–15% in March-April
2010).
Weak operational performance, earnings grow solely on other income:
At the operating level, Jagran delivered contraction of 91bp yoy/61bp qoq in OPM,
largely on account of gross margin contraction of 125bp yoy/ 91bp qoq and
increase in staff cost by 64bp yoy/flat qoq to ~`35cr, despite decrease in other
expenditure by 97bp yoy/20bp qoq to `70.5 cr. However, Jagran’s earnings for the
quarter registered a growth of 10.4% yoy/flat qoq to `56cr (`50cr/`56cr) aided by
spike in other income (up 27% yoy).
Going ahead, we expect gross margins to contract by ~30-40bp from current levels
as we model in: 1) cover price cuts in Jharkhand from `4 to `2 due to entry of DB
Corp (leading to higher circulation), and 2) ~10% rise in newsprint costs for JPL in
FY2011 (newsprint prices are currently trading at ~US $700/tonne) as JPL has
already booked substantial inventory for imported newsprint
Investment Rationale
Strong ad-revenue growth on higher colour inventory, peg 18% CAGR: We
expect JPL to record strong ad-revenue growth of ~17–18% yoy in FY2011 on
account of increase in colour inventory to ~50% (in line with management’s
guidance) and higher volumes (absorption of ad-rate hike of
8–9%). For FY2010–12, we expect JPL’s ad-revenue to post a CAGR of 18% (on
higher proportion of colour ads, rate hikes and pickup in ad spend) aiding
top–line CAGR of ~15% over the period.
Margins to remain stable on significant cost efficiencies: For FY2011, we expect
operating margins to sustain at ~30% despite the 8–10% rise in newsprint costs
(JPL already has substantial inventory booked for imported newsprint), aided by
higher top–line growth on the back of increase in advertising spend across
sectors, various cost curtailment measures and improving profitability in the
nascent businesses of i-Next/City Plus and OOH/event management.
Underperformance a good entry point, JPL attractive at 16.7x FY2012E EPS: JPL
acquired the print business from Mid-Day Multimedia whose presence in
markets like Mumbai, Delhi, Bangalore and Pune (recently launched) is likely to
fill the gap in JPL’s portfolio v/s its peers HT Media (HT and Hindustan) and DB
Corp (Dainik Bhaskar and DNA), which offer both English and Hindi publications
to its advertisers. Hence, we believe that JPL’s combined offerings are likely to
boost its advertising revenues due to the bundling effect. While we have not
factored the deal in JPL’s numbers, we expect the deal to be earnings accretive
by ~2–3% in FY2011. Moreover, with Blackstone’s recent investment of `225cr
and a wider portfolio (including Mid-Day publications), we believe that JPL is
well poised to benefit from the steady growth in print media. We believe that
underperformance of the stock and attractive valuations (at the CMP, the stock
trades at 16.7x FY2012E EPS) provide a good entry point for investors.
Outlook and Valuation
Post the 2QFY2011 results, we have marginally revised our FY2011 estimates
upwards (FY2012 estimates are largely unchanged) to factor in – 1) increased
advertisement revenue due to higher 3Q on account of the festive season and higher
colour advertisement inventory utilisation, and 2) increased revenue traction from the
new businesses. We expect JPL to post 15% CAGR in top–line over FY2010–12
driven by 18% CAGR in advertising revenues and 2% CAGR in circulation revenues.
The other businesses (OOH, event management and SMS services) are estimated to
record CAGR of 26% during the mentioned period on better traction. In terms of
earnings, we expect JPL to report modest CAGR of 15% over FY2010–12 driven
largely by top-line growth and sustained margins. However, adjusting for the `8cr
foreign exchange gains in FY2010, we expect JPL to report a CAGR of 18% in
earnings over FY2010–12.
We believe underperformance of the stock provides a good entry point and maintain
a Buy, with a Target Price of `154, based on a P/E multiple of 20x FY2012E
earnings (in line with historical valuations).
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