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Media
India
DB executes in Ranchi but strategic direction risky. We interacted with print
advertisers and distributors during our Ranchi visit; key takeaways—(1) validation of
strong growth in Tier-II Hindi markets, (2) established leadership of Prabhat Khabar (PK)
driven by local connect, (3) robust penetration of Dainik Bhaskar (DB) led by the
subscription scheme, likely ahead of Hindi Hindustan (HH) but with (4) question marks
whether DB can sustain the momentum (end of subscription period given large number
of dual-newspaper households). Retain BUY on DBCL with TP of Rs320; we highlight
higher financial risk given simultaneous Bihar & Maharashtra launch.
Interaction with advertisers in Ranchi: Validates strong growth in Hindi/Tier-II print markets
We interacted with two reasonably large advertisers in Ranchi, notably the local branch of Punjab
National Bank (PNB) and local clothing retailer Kashmir Vastralaya (KV). PNB officials reported
robust 30-40% growth in business (credit and deposit) over the past few years and expected the
momentum to sustain for another 4-5 years given market potential. Public sector banks like PNB
have (1) low exposure to consumer/retail loans and thus, (2) low ad-spends-to-sales ratio but are
incrementally increasing their focus in this area. PNB’s tie-up with LIC for marketing/distribution of
insurance products is driving higher fee income and local advertising.
Kashmir Vastralaya noted changing consumer tastes in clothing (1) towards ready-made apparels
from pure fabrics a decade back along with (2) emergence of premium clothing. Advertising
growth is driven by same-store sales growth of 20-25% (ad-spends-to-sales ratio constant at 1.5-
2.0%) but also potential increase in number of stores (own expansion, new competition).
However, emerging mediums like FM radio and regional channels may benefit at the cost of
outdoor (significant clutter) and legacy print (to a lesser extent). Ad rates are under pressure but
compensated by rising volumes (advertisers’ share of voice).
Interaction with distribution network: DB likely runner-up led by survey/subscription scheme
We interacted with retail distributors (hawkers) in two distribution centers in Ranchi (there are 6-7
such centers across the district). Key takeaways: (1) PK has managed to retain its leadership
position in Ranchi, (2) DB has managed to make a significant impact in Ranchi led by innovative
survey and subscription scheme, (3) likely ahead of Hindi Hindustan in the market, (4) DJ had
limited traction in Ranchi historically but surprisingly, (5) I-Next seems to have made an impact
given an innovative format and differentiated content. Some distributors also talked about DB’s
ability to sustain the momentum given large number of dual-newspaper households (70-80%)
with PK leading in terms of local news quality; DB Corp is sanguine given 1-year subscription and
continuous improvement in local news content.
Retain BUY on DBCL with TP of Rs320; financial risk has increased, however
We retain our BUY rating on DBCL with TP of Rs320; DCF roll-forward and value-accretion from
Jharkhand are negated by higher WACC (13.0% from 12.5% previously) on account of higher
financial risk from simultaneous Bihar and Maharashtra launch. Though DB has clarified that the
Bihar launch has not been delayed beyond few months, we continue to be surprised by its decision
to launch Jharkhand before Bihar. Retain BUY on JAGP and HMVL as well given robust advertising
environment and compelling valuations. HMVL trades at ~70% discount to peers JAGP and DBCL
on an EV/reader basis; potential decline in Jharkhand readership would be more than made up by
(1) expansion in UP market and (2) revamp in larger Bihar market (from March 2010). JAGP may
prove to be the dark horse given (1) renewed investments to protect key markets and (2) strong
traction in niche but advertising-led tabloid I-Next.
Interaction with advertisers in Ranchi (contd.)
Business Head, PNB Jharkhand circle (banking)
The past was not pretty. From a banking perspective, the Jharkhand state was largely
an ignored area given its underdevelopment and fears of high NPAs (and thus, reluctance
of banks to lend). However, the creation of the new state has given a new direction to it
led by industrial development.
The future looks bright. The creation of the new state has certainly led to greater focus
on development and industrial growth, resulting in accelerated business growth (30-40%)
in the past few years. Given the low base and the transformation, the growth can sustain
at these levels for another few years before slowing down. Besides traditional banking
centers (Ranchi, Jamshedpur, Dhanbad and Bokaro), new centers such as Bhorandia are
emerging, driving corporate and SME loans.
Nationalized public sector banks traditionally spend less on advertising given their focus
on corporate loans. However, local advertising spends are being driven by (1) retail loans,
(2) SME loans and (3) saving schemes. Education, housing and auto loans are the key
categories driving retail loans. Private sector banks have been very active in these
categories but public sector banks are making a mark now.
Real estate has great potential in the Ranchi city in particular; however, the sector being a
speculative and sensitive sector, all loans require clearance from the head office. Thus, the
bank’s portfolio is more geared towards residential loans on the retail side and
construction of hotels/colleges on the commercial side.
PNB has a marketing and distribution tie-up with LIC for insurance products and the initial
public response has been good. The public sector banks and the local bank branch are
making efforts towards increasing the share of fee-based income (~10% currently), which
is also driving higher advertising spends.
Proprietor, Kashmir Vastralaya (retail clothing)
The business is doing well with 20% same-store sales growth led by increasing readymade
apparel sales (65% now versus entirely fabric sales a decade back). The brand has
two stores in Ranchi currently but another expansion is being planned. There are 6-7
similar stores in Ranchi and competition is rising with 2-3 more coming up. However, the
proprietor was relatively sanguine saying that the market has the potential to grow in
multiples (and not merely percentages).
Typically, retail outlets like KV operate on low margins and thus the ad-spends-to-sales
ratio is around 1.5-2.0%. The flagship KV store had sales of Rs370 mn in FY2011,
implying an ad spend of ~Rs7 mn. KV’s advertising spends are driven by (1) remembrance
for the brand as well as (2) to promote immediate action by consumer during sale period
(also known as tactical advertising).
KV does an in-store survey every year during the sale period to determine the media
platforms its customers are consuming. In the last round of survey, PK led followed by HH
and DJ; the next round of the survey is due in July. The proprietor felt that DB has made
an impact among the consuming population in Ranchi; it was unlikely to have upstaged
PK but he expected it to be ahead of HH/DJ in the next round. At the very least, DB has
done a great job in terms of utilizing their new printing set-up (all-color) and providing
clean advertising environment to advertisers.
Print remained fairly critical to the advertising plans of KV but other choices were
available in the form of outdoor, FM radio and regional channels. The proprietor was
particularly impressed by the efficiency of FM radio (cost to reach the Ranchi population).
He noted that broadcasters (FM radio, regional channels) now provide advertising
production services. Conversely, he highlighted significant clutter in outdoor medium in
Ranchi due to lack of discipline in the city.
Post the entry of DB into the market, other players have reduced advertising rates to
remain competitive. Given that DB is providing a good product at a reasonable price and
has resonated with the readers/advertisers, it is difficult for existing players to price
themselves considerably higher versus DB.
Nonetheless, advertisers do not seem to have reduced there spends on existing
brands but are incrementally spending on DB. The negotiating power now available
with advertisers has been used to increase volume of advertising/share of voice as
well as experiment with new media platforms like FM radio. We highlight that with
expansion by existing players and new entrants, the number of large retail stores
could double even assuming stable same-store sales.
The proprietor was relatively sanguine about the push by English newspapers in Ranchi.
He felt that readers had very strong connect with the local language. Additionally, Hindi
newspapers are far ahead of English newspapers in terms of their local (city/state)
coverage. Thus, he did not see English newspapers displacing Hindi as the primary print
medium in Ranchi though growth may be faster.
Interaction with distribution network (contd.)
The general agreement was that Prabhat Khabar (PK) has been able to maintain its
leadership position in the market, largely on account of continued focus on local news.
This was confirmed by a visual inspection of the copies being carried by a much larger
cross-section of hawkers.
There was also general agreement that Dainik Bhaskar (DB) has effectively become the
challenger brand in the Ranchi market. A majority of the distributors noted circulation
numbers for DB ahead of Hindi Hindustan (HH); only a few distributors had HH circulation
ahead or equal to DB. A visual inspection of a large cross-section of hawkers tended to
confirm the above discussions.
The general consensus was that Dainik Jagran (DJ) has not pushed its product and
generally gets picked up due to pull from readers/consumers. However, the surprise was
strong traction witnessed in I-Next tabloid launched by JAGP across its markets in urban
areas. DJ+IN circulation seems to have surpassed HH and even DB with some distributors;
JAGP may prove to be the dark horse.
Some distributors did wonder aloud that the market situation remained very fluid since
DB is still being picked up as the second paper in a household (70-80% dual-newspaper
households versus 30-40% previously). The re-booking process starts again in July-August
and sustaining reader connect would be critical for DB.
However, distributors also noted likely 20-30% expansion in the Ranchi print market in
terms of (1) rising newspaper pick-up from new households and (2) rising newspaper
pick-up by various members of a household (DB Star/I-Next).
Indian Readership survey does not seem to corroborate the trends in the market, likely
due to lag effect; though DB is not yet counted in IRS, there seems to be a much wider
gap between PK and HH than indicated by our interaction. However, the gap between DB
and HH also seems to be much closer than indicated by DBCL-IMRB survey, potentially
highlighting the limitations of the surveys/methodologies. Nonetheless, the IRS survey has
captured the traction in I-Next very well.
Interaction with DBCL management
The DBCL management focused its attention on the methodology behind the success of
its Ranchi launch as well as challenges for the future. We have discussed the former in
great detail previously (see our DB Corp initiation report “Good News” dated April 16,
2010) so we focus our attention on some finer details as well as potential challenges for
DB Corp in securing its initial gains in the market.
The entire efforts of DBCL management can be encapsulated in three steps (1) enter the
household, (2) get members to sample the paper and (3) become the primary newspaper
of the household. DBCL’s multi-stage market survey and subscription schemes/drives drive
the first step, as discussed in our initiation report.
The second step is driven by connect and content. DB does large activations in the city
with significant reader participation such as comedy shows, auto fest, celebrity cricket to
drive connect with readers. Additionally, DB creates differentiation by becoming the
leading voice on certain social issues along with activation-led connect: Rainwater
harvesting drive (independently verified as one of major issues in Ranchi), clean city drive
and special research reports are some examples.
DB went at length to recreate its DB Star product in the Ranchi market with special focus
on corruption, which is a key area of concern for the local population in Ranchi. This
along with other innovations like a 3D paper creates the buzz around the brand and
provides DB with the visibility/mindshare.
Finally, once the households have started picking up the newspaper, DB’s approach to
content leads the conversion to becoming the primary newspaper. DB has initiated
innovations such as on-the-spot-reporting (mandatory laptops for all reporters) to
establish an edge over competition in news. Finally, DB has more entertainment space
within the newspaper for the entire family.
The two key challenges going forward are (1) converting strong operational performance
into advertising revenues including expanding the retail market (see Exhibit 2) as well as
(2) ensuring DB does not lose the initial momentum when the subscriptions come up for
renewal. DB Corp was confident given its track record, initial success and 6 months time
(subscription period) to iron out any kinks in the offering.
Positive view on regional print media noting key concerns
We discuss the key underlying drivers of regional print media companies, which support our
positive view, as well as key concerns.
Exhibit 3 presents the large penetration gap available to DBCL, JAGP and HMVL in their
key markets (UP, MP and Bihar), which are among the least-penetrated regional print
markets in India, implying considerable scope for readership growth; this does not even
take into account low literacy levels and rising focus of the government on increasing
education efforts in these markets, particularly Bihar.
The advertising growth in regional markets notably Hindi (limited competition from C&S
TV unlike other markets) has far outpaced the dominant English press in India. Our
discussion with local/regional advertisers in Ranchi further strengthens our belief in
continued robust growth in advertising in these markets.
Benchmark US newsprint prices remained unchanged at US$640/ton in March 2011 and
have been flat for the past 7 months consecutively. We expect newsprint price inflation
effective 2HFY12E but within reasonable bounds (5-10% yoy).
Valuations remain supportive with our coverage regional print media companies trading
at 15X FY2012E earnings estimates. We highlight that DB Corp and Jagran operate at
~30% steady state operating margins; HMVL currently operates at ~18% operating
margin given operating losses/investments in UP market.
Rising competitive intensity remains the key concern for print media companies; the
concern remains on both sides: (1) The ability of existing players to protect market share
and (2) ability of new entrants to profitably expand in new markets. Market
fragmentation is a reality already built into our expectations; the only saving grace is that
competition will also result in market expansion driven by (1) increasing print penetration
and (2) strong advertising growth, as discussed above.
Earnings estimates and revisions
We have revised our FY2012E and FY2013E EPS estimates for DBCL to Rs14.5 (Rs14.0
previously) and Rs17.4 (Rs17.0 previously) on account of robust performance in Jharkhand
and across its core markets, which gives improved visibility on advertising revenues and
lower-than-expected initial operating losses in Jharkhand. However, our TP remains
unchanged at Rs320 given Jharkhand value-accretion and DCF roll-forward are negated by
our higher assumed WACC (13.0% versus 12.5%) on account of simultaneous Bihar &
Maharashtra launch, resulting in higher financial risk.
We have revised our FY2012E and FY2013E EPS estimates for JAGP to Rs7.7 (Rs7.9
previously) and Rs9.0 (Rs9.3 previously) on account of increased circulation investments in
key markets and modest reduction in advertising growth; our TP stands revised to Rs150
(Rs155 previously). JAGP seems to have lost out in Ranchi between PK, DB and HH but the
same was already built into our estimates given that JAGP was not active in the Jharkhand
market. However, we were positively surprised by strong traction for I-Next in the market;
further, JAGP’s renewed circulation investment in core markets (UP and Bihar) provides
comfort on assumed moderate advertising growth.
We have revised our FY2012E and FY2013E EPS estimates for HMVL to Rs9.0 (Rs10.0
previously) and Rs12.4 (Rs13.0) on account of reduction in advertising revenue growth due
to sharper-than-expected fragmentation in the Ranchi market; our TP remains unchanged at
Rs200. However, we also highlight that Hindustan had re-launched their Patna edition along
with new printing facilities in the Bihar market in anticipation of DBCL launch; thus, the
focus was on ring-fencing the market where Hindustan is a stronger player and derives a
majority of its advertising revenues.
Finally, we note HMVL’s expansion and robust readership growth in UPU market, notably
HH’s success versus runner-up Amar Ujala in the key cities. We believe HMVL’s large ~70%
EV/reader discount versus peers reflects lack of monetization focus in the past; incrementally.
HMVL’s circulation investment in UP will be completed by end-FY2012E and monetization
would begin in right earnest thereafter. We expect the valuation gap to close over time as
monetization improves and thus, margin gap closes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Media
India
DB executes in Ranchi but strategic direction risky. We interacted with print
advertisers and distributors during our Ranchi visit; key takeaways—(1) validation of
strong growth in Tier-II Hindi markets, (2) established leadership of Prabhat Khabar (PK)
driven by local connect, (3) robust penetration of Dainik Bhaskar (DB) led by the
subscription scheme, likely ahead of Hindi Hindustan (HH) but with (4) question marks
whether DB can sustain the momentum (end of subscription period given large number
of dual-newspaper households). Retain BUY on DBCL with TP of Rs320; we highlight
higher financial risk given simultaneous Bihar & Maharashtra launch.
Interaction with advertisers in Ranchi: Validates strong growth in Hindi/Tier-II print markets
We interacted with two reasonably large advertisers in Ranchi, notably the local branch of Punjab
National Bank (PNB) and local clothing retailer Kashmir Vastralaya (KV). PNB officials reported
robust 30-40% growth in business (credit and deposit) over the past few years and expected the
momentum to sustain for another 4-5 years given market potential. Public sector banks like PNB
have (1) low exposure to consumer/retail loans and thus, (2) low ad-spends-to-sales ratio but are
incrementally increasing their focus in this area. PNB’s tie-up with LIC for marketing/distribution of
insurance products is driving higher fee income and local advertising.
Kashmir Vastralaya noted changing consumer tastes in clothing (1) towards ready-made apparels
from pure fabrics a decade back along with (2) emergence of premium clothing. Advertising
growth is driven by same-store sales growth of 20-25% (ad-spends-to-sales ratio constant at 1.5-
2.0%) but also potential increase in number of stores (own expansion, new competition).
However, emerging mediums like FM radio and regional channels may benefit at the cost of
outdoor (significant clutter) and legacy print (to a lesser extent). Ad rates are under pressure but
compensated by rising volumes (advertisers’ share of voice).
Interaction with distribution network: DB likely runner-up led by survey/subscription scheme
We interacted with retail distributors (hawkers) in two distribution centers in Ranchi (there are 6-7
such centers across the district). Key takeaways: (1) PK has managed to retain its leadership
position in Ranchi, (2) DB has managed to make a significant impact in Ranchi led by innovative
survey and subscription scheme, (3) likely ahead of Hindi Hindustan in the market, (4) DJ had
limited traction in Ranchi historically but surprisingly, (5) I-Next seems to have made an impact
given an innovative format and differentiated content. Some distributors also talked about DB’s
ability to sustain the momentum given large number of dual-newspaper households (70-80%)
with PK leading in terms of local news quality; DB Corp is sanguine given 1-year subscription and
continuous improvement in local news content.
Retain BUY on DBCL with TP of Rs320; financial risk has increased, however
We retain our BUY rating on DBCL with TP of Rs320; DCF roll-forward and value-accretion from
Jharkhand are negated by higher WACC (13.0% from 12.5% previously) on account of higher
financial risk from simultaneous Bihar and Maharashtra launch. Though DB has clarified that the
Bihar launch has not been delayed beyond few months, we continue to be surprised by its decision
to launch Jharkhand before Bihar. Retain BUY on JAGP and HMVL as well given robust advertising
environment and compelling valuations. HMVL trades at ~70% discount to peers JAGP and DBCL
on an EV/reader basis; potential decline in Jharkhand readership would be more than made up by
(1) expansion in UP market and (2) revamp in larger Bihar market (from March 2010). JAGP may
prove to be the dark horse given (1) renewed investments to protect key markets and (2) strong
traction in niche but advertising-led tabloid I-Next.
Interaction with advertisers in Ranchi (contd.)
Business Head, PNB Jharkhand circle (banking)
The past was not pretty. From a banking perspective, the Jharkhand state was largely
an ignored area given its underdevelopment and fears of high NPAs (and thus, reluctance
of banks to lend). However, the creation of the new state has given a new direction to it
led by industrial development.
The future looks bright. The creation of the new state has certainly led to greater focus
on development and industrial growth, resulting in accelerated business growth (30-40%)
in the past few years. Given the low base and the transformation, the growth can sustain
at these levels for another few years before slowing down. Besides traditional banking
centers (Ranchi, Jamshedpur, Dhanbad and Bokaro), new centers such as Bhorandia are
emerging, driving corporate and SME loans.
Nationalized public sector banks traditionally spend less on advertising given their focus
on corporate loans. However, local advertising spends are being driven by (1) retail loans,
(2) SME loans and (3) saving schemes. Education, housing and auto loans are the key
categories driving retail loans. Private sector banks have been very active in these
categories but public sector banks are making a mark now.
Real estate has great potential in the Ranchi city in particular; however, the sector being a
speculative and sensitive sector, all loans require clearance from the head office. Thus, the
bank’s portfolio is more geared towards residential loans on the retail side and
construction of hotels/colleges on the commercial side.
PNB has a marketing and distribution tie-up with LIC for insurance products and the initial
public response has been good. The public sector banks and the local bank branch are
making efforts towards increasing the share of fee-based income (~10% currently), which
is also driving higher advertising spends.
Proprietor, Kashmir Vastralaya (retail clothing)
The business is doing well with 20% same-store sales growth led by increasing readymade
apparel sales (65% now versus entirely fabric sales a decade back). The brand has
two stores in Ranchi currently but another expansion is being planned. There are 6-7
similar stores in Ranchi and competition is rising with 2-3 more coming up. However, the
proprietor was relatively sanguine saying that the market has the potential to grow in
multiples (and not merely percentages).
Typically, retail outlets like KV operate on low margins and thus the ad-spends-to-sales
ratio is around 1.5-2.0%. The flagship KV store had sales of Rs370 mn in FY2011,
implying an ad spend of ~Rs7 mn. KV’s advertising spends are driven by (1) remembrance
for the brand as well as (2) to promote immediate action by consumer during sale period
(also known as tactical advertising).
KV does an in-store survey every year during the sale period to determine the media
platforms its customers are consuming. In the last round of survey, PK led followed by HH
and DJ; the next round of the survey is due in July. The proprietor felt that DB has made
an impact among the consuming population in Ranchi; it was unlikely to have upstaged
PK but he expected it to be ahead of HH/DJ in the next round. At the very least, DB has
done a great job in terms of utilizing their new printing set-up (all-color) and providing
clean advertising environment to advertisers.
Print remained fairly critical to the advertising plans of KV but other choices were
available in the form of outdoor, FM radio and regional channels. The proprietor was
particularly impressed by the efficiency of FM radio (cost to reach the Ranchi population).
He noted that broadcasters (FM radio, regional channels) now provide advertising
production services. Conversely, he highlighted significant clutter in outdoor medium in
Ranchi due to lack of discipline in the city.
Post the entry of DB into the market, other players have reduced advertising rates to
remain competitive. Given that DB is providing a good product at a reasonable price and
has resonated with the readers/advertisers, it is difficult for existing players to price
themselves considerably higher versus DB.
Nonetheless, advertisers do not seem to have reduced there spends on existing
brands but are incrementally spending on DB. The negotiating power now available
with advertisers has been used to increase volume of advertising/share of voice as
well as experiment with new media platforms like FM radio. We highlight that with
expansion by existing players and new entrants, the number of large retail stores
could double even assuming stable same-store sales.
The proprietor was relatively sanguine about the push by English newspapers in Ranchi.
He felt that readers had very strong connect with the local language. Additionally, Hindi
newspapers are far ahead of English newspapers in terms of their local (city/state)
coverage. Thus, he did not see English newspapers displacing Hindi as the primary print
medium in Ranchi though growth may be faster.
Interaction with distribution network (contd.)
The general agreement was that Prabhat Khabar (PK) has been able to maintain its
leadership position in the market, largely on account of continued focus on local news.
This was confirmed by a visual inspection of the copies being carried by a much larger
cross-section of hawkers.
There was also general agreement that Dainik Bhaskar (DB) has effectively become the
challenger brand in the Ranchi market. A majority of the distributors noted circulation
numbers for DB ahead of Hindi Hindustan (HH); only a few distributors had HH circulation
ahead or equal to DB. A visual inspection of a large cross-section of hawkers tended to
confirm the above discussions.
The general consensus was that Dainik Jagran (DJ) has not pushed its product and
generally gets picked up due to pull from readers/consumers. However, the surprise was
strong traction witnessed in I-Next tabloid launched by JAGP across its markets in urban
areas. DJ+IN circulation seems to have surpassed HH and even DB with some distributors;
JAGP may prove to be the dark horse.
Some distributors did wonder aloud that the market situation remained very fluid since
DB is still being picked up as the second paper in a household (70-80% dual-newspaper
households versus 30-40% previously). The re-booking process starts again in July-August
and sustaining reader connect would be critical for DB.
However, distributors also noted likely 20-30% expansion in the Ranchi print market in
terms of (1) rising newspaper pick-up from new households and (2) rising newspaper
pick-up by various members of a household (DB Star/I-Next).
Indian Readership survey does not seem to corroborate the trends in the market, likely
due to lag effect; though DB is not yet counted in IRS, there seems to be a much wider
gap between PK and HH than indicated by our interaction. However, the gap between DB
and HH also seems to be much closer than indicated by DBCL-IMRB survey, potentially
highlighting the limitations of the surveys/methodologies. Nonetheless, the IRS survey has
captured the traction in I-Next very well.
Interaction with DBCL management
The DBCL management focused its attention on the methodology behind the success of
its Ranchi launch as well as challenges for the future. We have discussed the former in
great detail previously (see our DB Corp initiation report “Good News” dated April 16,
2010) so we focus our attention on some finer details as well as potential challenges for
DB Corp in securing its initial gains in the market.
The entire efforts of DBCL management can be encapsulated in three steps (1) enter the
household, (2) get members to sample the paper and (3) become the primary newspaper
of the household. DBCL’s multi-stage market survey and subscription schemes/drives drive
the first step, as discussed in our initiation report.
The second step is driven by connect and content. DB does large activations in the city
with significant reader participation such as comedy shows, auto fest, celebrity cricket to
drive connect with readers. Additionally, DB creates differentiation by becoming the
leading voice on certain social issues along with activation-led connect: Rainwater
harvesting drive (independently verified as one of major issues in Ranchi), clean city drive
and special research reports are some examples.
DB went at length to recreate its DB Star product in the Ranchi market with special focus
on corruption, which is a key area of concern for the local population in Ranchi. This
along with other innovations like a 3D paper creates the buzz around the brand and
provides DB with the visibility/mindshare.
Finally, once the households have started picking up the newspaper, DB’s approach to
content leads the conversion to becoming the primary newspaper. DB has initiated
innovations such as on-the-spot-reporting (mandatory laptops for all reporters) to
establish an edge over competition in news. Finally, DB has more entertainment space
within the newspaper for the entire family.
The two key challenges going forward are (1) converting strong operational performance
into advertising revenues including expanding the retail market (see Exhibit 2) as well as
(2) ensuring DB does not lose the initial momentum when the subscriptions come up for
renewal. DB Corp was confident given its track record, initial success and 6 months time
(subscription period) to iron out any kinks in the offering.
Positive view on regional print media noting key concerns
We discuss the key underlying drivers of regional print media companies, which support our
positive view, as well as key concerns.
Exhibit 3 presents the large penetration gap available to DBCL, JAGP and HMVL in their
key markets (UP, MP and Bihar), which are among the least-penetrated regional print
markets in India, implying considerable scope for readership growth; this does not even
take into account low literacy levels and rising focus of the government on increasing
education efforts in these markets, particularly Bihar.
The advertising growth in regional markets notably Hindi (limited competition from C&S
TV unlike other markets) has far outpaced the dominant English press in India. Our
discussion with local/regional advertisers in Ranchi further strengthens our belief in
continued robust growth in advertising in these markets.
Benchmark US newsprint prices remained unchanged at US$640/ton in March 2011 and
have been flat for the past 7 months consecutively. We expect newsprint price inflation
effective 2HFY12E but within reasonable bounds (5-10% yoy).
Valuations remain supportive with our coverage regional print media companies trading
at 15X FY2012E earnings estimates. We highlight that DB Corp and Jagran operate at
~30% steady state operating margins; HMVL currently operates at ~18% operating
margin given operating losses/investments in UP market.
Rising competitive intensity remains the key concern for print media companies; the
concern remains on both sides: (1) The ability of existing players to protect market share
and (2) ability of new entrants to profitably expand in new markets. Market
fragmentation is a reality already built into our expectations; the only saving grace is that
competition will also result in market expansion driven by (1) increasing print penetration
and (2) strong advertising growth, as discussed above.
Earnings estimates and revisions
We have revised our FY2012E and FY2013E EPS estimates for DBCL to Rs14.5 (Rs14.0
previously) and Rs17.4 (Rs17.0 previously) on account of robust performance in Jharkhand
and across its core markets, which gives improved visibility on advertising revenues and
lower-than-expected initial operating losses in Jharkhand. However, our TP remains
unchanged at Rs320 given Jharkhand value-accretion and DCF roll-forward are negated by
our higher assumed WACC (13.0% versus 12.5%) on account of simultaneous Bihar &
Maharashtra launch, resulting in higher financial risk.
We have revised our FY2012E and FY2013E EPS estimates for JAGP to Rs7.7 (Rs7.9
previously) and Rs9.0 (Rs9.3 previously) on account of increased circulation investments in
key markets and modest reduction in advertising growth; our TP stands revised to Rs150
(Rs155 previously). JAGP seems to have lost out in Ranchi between PK, DB and HH but the
same was already built into our estimates given that JAGP was not active in the Jharkhand
market. However, we were positively surprised by strong traction for I-Next in the market;
further, JAGP’s renewed circulation investment in core markets (UP and Bihar) provides
comfort on assumed moderate advertising growth.
We have revised our FY2012E and FY2013E EPS estimates for HMVL to Rs9.0 (Rs10.0
previously) and Rs12.4 (Rs13.0) on account of reduction in advertising revenue growth due
to sharper-than-expected fragmentation in the Ranchi market; our TP remains unchanged at
Rs200. However, we also highlight that Hindustan had re-launched their Patna edition along
with new printing facilities in the Bihar market in anticipation of DBCL launch; thus, the
focus was on ring-fencing the market where Hindustan is a stronger player and derives a
majority of its advertising revenues.
Finally, we note HMVL’s expansion and robust readership growth in UPU market, notably
HH’s success versus runner-up Amar Ujala in the key cities. We believe HMVL’s large ~70%
EV/reader discount versus peers reflects lack of monetization focus in the past; incrementally.
HMVL’s circulation investment in UP will be completed by end-FY2012E and monetization
would begin in right earnest thereafter. We expect the valuation gap to close over time as
monetization improves and thus, margin gap closes.
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