Multiple levers of earnings improvement in FY20, including the upcoming elections, make DB Corp a worthy investment idea
As a tactical pick, we are recommending DB Corp (CMP: Rs 192, M Cap: Rs 3,369 crore), one of the largest print media companies known for its flagship daily Dainik Bhaskar. Its print business has a presence in 12 states in north, central and western India. It also operates a radio business under the brand name 94.3 My FM.
On a consolidated level, the company derives majority of its revenue from advertisements issued in the publications (around 60 percent of total revenue in FY18) and sale of publications (22 percent of total revenue in FY18).
Print sector had been reeling under multiple issuesGrowth of the print industry was disrupted by demonetisation and implementation of Real Estate Regulatory Authority (RERA) and Goods & Services Tax (GST), which adversely impacted advertising revenue. Consequently, revenue growth of the newspaper industry in FY18 was the lowest in a decade at 3.9 percent, as per KPMG report. Just when the sector started stabilising with ad spends reverting back to normal levels, rise in newsprint prices jolted sentiment again.
First, upcoming national elections are expected to boost ad revenue. During 2014 national elections, ad revenue had risen by around seven percent for the sector.
In fact, DB Corp reported print ad revenue growth of 11.5 percent year-on-year in Q3 FY19, a double-digit growth after nine quarters. As Rajasthan, Madhya Pradesh and Chhattisgarh contribute around 60 percent to DB Corp’s ad revenue, it benefited from elections in these states.
Second, the biggest respite for DB Corp comes from peaking of newsprint prices. The management said international newsprint prices has come off sharply to $550-560 per tonne from a peak of $750-780 per tonne. It expects prices to fall further due to capacity addition in Russia and China. However, the benefit of the lower prices would accrue with a lag of couple of quarters owing to high cost inventory and locked-in contracts for imported newsprint. Imported newsprint account for around 30 percent of DB Corp’s newsprint consumption and hence a stable dollar-rupee would further comfort the company.
Third, the Bureau of Outreach and Communication (earlier known as the Directorate of Advertising and Visual Publicity; DAVP) announced a 25 percent increase in the card rates for government ads. Subsequent to the ad rate hike, we expect revenue increase and improvement in EBITDA margin.
Read: Hike in print media ad rates to give much-needed impetus to sector
Last but not the least, attractive valuations motivates us to look at DB Corp. Valuation of the company is at historic lows. With return on equity (RoE) in high teens and FY20 estimated price-to-earnings multiple of 9.6 times, the risk – reward is extremely favourable.
For DB Corp, FY18 was an aberration and FY19 too has been a difficult year so far. While competition from digital the world is real, it is much less pronounced for Hindi and regional newspapers. Multiple levers of earnings improvement in FY20, including the upcoming elections, make DB Corp a worthy investment idea.
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