DB Corp: Buy

As a strong play on the domestic consumption story, more so in the rapidly growing Tier- 2 cities and towns, DB Corp offers an attractive investment option over the medium-term.

Investors with a two-year horizon can buy the shares of the company, given the continuing sound pace of advertising revenues growth and improvement in circulation.

At Rs 216, the share trades at 15 times its likely per share earnings for FY13, which is lower than the valuation that the company has historically commanded and slightly below that of its peers such as Jagran Prakashan.

An expanding share of resilient regional advertising, leadership in circulation in key markets, and increase in ad rates to prop realisations are key positives for the company.

In FY11, DB Corp's revenues increased 19.1 percent to Rs 1250.8 crore, while net profits expanded 41.4 percent to Rs 258.5 crore.

The momentum on the revenue front has continued into the first half of the current fiscal with a 16.7 per cent rise. However, profits have fallen by over 25 per cent as a result of higher newsprint costs and increase in selling expenses due to edition launches.

Growth in smaller cities

DB Corp operates several newspapers, the main one being Dainik Bhaskar which is circulated in 11 Sates with 36 editions.

It also publishes a Gujarati newspaper in Gujarat and Maharashtra as well as a Hindi business daily in six States. The total readership for its newspapers is 18.1 million.

Dainik Bhaskar , the second most read Hindi Newspaper in India, is among the top papers read in Madhya Pradesh, Rajasthan, Chandigarh, Punjab and Haryana.

In Gujarat too, its regional language newspaper is among the most read. All these States contribute to the operating profits of the company. Given that growth in Tier-2 and Tier-3 cities and towns is increasingly driving growth for several sectors, the company's strong penetration in these markets would enable it to cash in on the trend.

Retail advertising strong

DB Corp derives around 80 per cent of its revenues through advertising. Despite concerns of a slowing economy, the company has seen an 18 per cent growth in advertising revenues in the first half of this fiscal over the previous year, a reflection of its strong presence in growing markets.

The other key aspect is that DB Corp derives around 62 per cent of its advertising from regional or retail advertisers. This segment is generally quite resilient to any slowing macro indicators. Evidence to this fact is the growth that retail advertising had even in the troubled 2008-09 years.

Retail (or regional or local) advertising has grown 20 per cent for the company even in the recent September quarter, while national advertising grew in single digits.

Sectors such as education, automobiles and lifestyle continue to be strong for the company. Apart from advertising, circulation too has picked up for the company.

In the first half of FY12, circulation revenues have grown by 9.3 per cent, with double-digit growth in the recent quarter. The company may increase cover price in key markets such as Madhya Pradesh, which could prop revenues further. The other key trend at a macro level is that DB Corp could benefit regional newspapers such as Dainik Bhaskar .

The premium that English language newspapers used to command in advertising vis-à-vis regional ones is shrinking.

From 12 times higher rates that English Newspapers commanded in 2003, the number has come down to 4.8 times in 2010, according to a recent FICCI KPMG report.

Cost pressures

With newsprint costs spiralling, DB Corp's raw material costs, as a percentage of revenues, rose from 30 to 35 per cent over the past three-four quarters. In the recent September quarter, DB Corp also had to contend with a steep depreciation of the rupee against the dollar to nearly Rs 50 a dollar levels.

Since the company imports 20-22 per cent of its newsprint, it had to contend with increased outflow on this count. Also, with foreign currency loans on in its books, the rupee volatility has also meant marked-to-market forex losses for the company, though it has been only around Rs 6 crore in the recent quarter.

Launch of five new editions in Maharashtra recently also led to increase in newsprint consumption.

DB Corp, however, anticipates newsprint prices to remain steady or even decline, going forward. Also, with no new launches planned over the next few quarters, costs too should be under control.