DB Corp: Ads to add value - Buy

The stock of DB Corp, publisher of the leading Hindi daily Dainik Bhaskar, has fallen over 40 per cent since our last call.

Newsprint cost and rupee volatility seemed to have weighed on the stock.

The steep increase in newsprint cost has impacted the company’s profitability in the last few quarters, while a weak rupee made paper imports more expensive.

Newspaper costs were up a steep 5 percentage points as a proportion of total cost at 47 per cent in the first half of FY19, compared with the previous fiscal. However, the company’s overall revenue increased by about 5 per cent during the first half of FY19, with rise in advertisements and circulation.

Expansion to newer markets, increased ad spends from the government in the light of the general elections this year and recovery in real-estate promotional spends are expected to provide increased revenue visibility.

Also, with additional capacity in newsprint coming into the market from producers, prices are expected to stabilise.

At ₹174, the DB Corp Stock trades at a reasonable 10 times its likely per share earnings for FY20. Thus, investors with a two-year investment horizon can buy this stock.

The company’s financials are strong with negligible debt.

Ad revenue to rise

Advertisements account for about 70 per cent of the company’s revenue, while 20 per cent comes from circulation. The rest is mainly from radio and internet (digital). During the first half of FY19, the company reported single-digit advertisement revenue growth of 4.6 per cent Y-o-Y.

This weak growth was attributed to the festive season being spread across two quarters this year, along with other factors such as high newsprint cost and weak localised advertisement from sectors such as auto and retail.

However, when adjusted for the last year’s festive season, ad revenues grew by about 17 per cent. Key contributions for advertisement revenue during the first half of FY19 came from government ads and real estate.

Ad spends from real estate are likely to witness better traction, given that there are signs of recovery in the sector.

Also, the upcoming general elections are likely to see the government as well as most political parties up their advertising spends.

Since DB Corp is among the top players in terms of circulation in States such as Madhya Pradesh, Chhattisgarh, Rajasthan and Haryana, it would be able to receive more advertisements from the national and State Governments.

The ad revenue contribution from various governments ranges between 11 per cent and 15 per cent; for the recent September quarter, it was around 12-13 per cent.

This is likely to go up, as the Ministry of Information & Broadcasting recently announced a revision in (Government) advertisement rates for print media by 25 per cent over and above the existing rate structure.

On the circulation front, during the first half of FY19, the circulation revenue registered a growth of 8 per cent compared with the same period last year. This is thanks to the aggressive circulation strategy by the company to increase its penetration in markets such as Bihar, Jharkhand and Punjab.

Newsprint cost to stabilise

DB Corp imports nearly 70 per cent of its raw material requirements (newsprint). The record increase in newsprint cost ( 25-30 per cent) and rupee volatility have impacted the company’s operating margins. From 27 per cent in the June quarter of FY19, it fell to 16 per cent in the September period.

However, newsprint costs have stabilised in recent quarters to ₹44-46 per kg. Though it remains elevated from its previous range of ₹35-37 per kg, it is not expected to increase due to additional capacity coming into the market.

This could offer some respite for the company. In addition, according to the management, newsprint contracts are being offered at a lower value of $50-70 per tonne next year, which is also an indication that the newsprint cost-increase is tapering. This impact, however, is expected to be felt only by FY20.

Radio business steady

DB Corp has branched itself into other segments such as radio and digital business.

My FM 94.3 operates in seven States from 30 stations and is considered to be among the top players in States such as Rajasthan, Punjab and Haryana. The segment contributes about 7 per cent to the company’s total revenue. In the September quarter, the radio segment registered a growth of 8.4 per cent Y-o-Y.

Though the company’s digital revenue increased 5 per cent Y-o-Y, it only contributed about 2 per cent to the company’s overall revenue.

Given the significant role the digital platform would play in the future, the monetisation of digital brand is important for the company.

In this regard, the company has launched a new app (Dainik Bhaskar Plus) to increase its viewership.