ICICI Direct recommended hold rating on DB Corp with a target price of Rs 235 in its research report dated September 18, 2018.
ICICI Direct's research report on DB Corp
Our interaction with the DB Corp management indicates that newsprint prices are expected to remain elevated for the rest of FY19. The pain has been accentuated by a sharp rupee depreciation vs. US$ (11% in FY19 so far). However, on account of additional newsprint supply coming in from a couple of new mills in the global market, newsprint prices are expected to at least stabilise at the current level, if not decline further. We now build in ~30% newsprint cost increase (vs. ~22% earlier) for FY19. Subsequently, this results in a further cut in estimates of ~100 bps for EBITDA margin and 6.8% for PAT for FY19. The management indicated that amid higher newsprint prices, they continue to strive for incremental volume market share in some of its key markets while they foresee a double digit growth in print ad (largely led by festive season and state elections in its key markets of Madhya Pradesh, Rajasthan and Chhattisgarh) and circulation (expansion led) in FY19.
Outlook
The print sector continues to lag in terms of ad growth largely due to the prolonged after-effects of demonetisation and legislations like GST RERA, which impacted local advertisements (~two-third of ad pie). Furthermore, with the steep impact of higher newsprint costs and rupee depreciation, print business profitability recovery looks distant. We cut our EBITDA, earnings estimate by 3.4%, 6.8% in FY19E and 2.5%, 6% in FY20E, respectively, to factor in higher newsprint and other costs. We value the company at 12x FY20E EPS of Rs 19.6 with a target price of Rs 235. We maintain our HOLD rating on the stock. We note that H2FY19 is likely to witness healthy ad/circulation traction. We would await newsprint cost stability coupled with a sustained ad recovery before turning optimistic.
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