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DB Corp Management Note
We met DB Corps management to get an update on its print business.
Ad revenue to gain traction: The Companys advertising revenue growth is expected to pick up from the third quarter of the current financial year, aided by the festival season as well as lower base effect. The national advertising revenues which had witnessed a decline in 1QFY2013 are also expected to bounce back going forward.
OPM pressure to ease: The cyclical nature of ad revenue growth (sluggish due to slower GDP growth), a Rs.77cr loss at EBITDA level on emerging editions, increase in newsprint cost and a sharp depreciation in the rupee had contributed to margin erosion in FY2012. However, an expected uptick in ad revenue, a likely reduction in EBITDA level loss to Rs.44cr for emerging editions, decrease in newsprint cost in USD terms and appreciation in the rupee will result in at least a 100-150bp OPM expansion for FY2013.
Penetration Strategy: The Company has an advertising focused revenue model with average cover prices being the lowest among peers at Rs.2.6. The company believes there is still scope to increase circulation even in its mature markets and hence is still following the penetration strategy. However, cover prices have been marginally increased in selective markets such as Haryana, Chhattisgarh and a few regions of Madhya Pradesh where the scope for further penetration is limited.
New launches on backburner: The slowdown in ad revenues during the last few quarters is expected to delay DB Corps entry in Bihar, at least by a year. However, the company may still go ahead with smaller launches in Maharashtra at Akola, Amravati and Latur depending upon improvement in the ad market.
No acquisitions planned: The Company has no plans to acquire any news channel or any more radio licenses. However, the company is open to acquire a print media company if a suitable opportunity arises.
Online advertising not a threat: The internet penetration in India is still very low for the online medium to become a viable alternative to print medium. Moreover, DB Corp is present in tier 2 and tier 3 cities where internet penetration is as low as 4%. However, the company is investing in scaling up digital operations. The companys web portals have 245mn page views and 10mn unique visitors per month.
Outlook and valuation
At the CMP, DB Corp is trading at 15.3x FY2014E consolidated EPS of Rs.13.6. We recommend Accumulate on the stock with a target price of Rs.236, based on 17x FY2014E EPS, benchmarking it to our print media sector valuations (which are at ~15% premium to our Sensex target valuation multiple). Downside risks to our estimates include 1) sharp rise in newsprint prices in INR terms, 2) higher-than-expected losses/increase in the breakeven period of the new launches.
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