DB Corp: BUY. DB Corp: Worth the paper

The stock of DB Corp, the publisher of the leading Hindi daily Dainik Bhaskar, has lost around 20 per cent since early this year. Disappointing show in the June and September quarters preceded by a relatively subdued performance in 2014-15 seems to have played spoilsport.

The overall economic slowdown and the company’s pursuit of higher ad rates have hurt ad volumes. This has impacted its ad revenue, which accounts for three-fourths of its income.

But the company’s prospects look good and investors can consider buying the stock. Also, at ₹322, the stock trades at 20 times its trailing 12-month earnings, the same as the stock’s five-year historical average valuation.

DB Corp’s newspaper ad revenue, which declined during the last two quarters, is expected to improve from the next fiscal onwards. One, a likely recovery in economic growth should help ad volumes.

Two, the management also expects an improvement in yields as clients begin to accept the higher rates that the company has been pushing for.

DB Corp, which publishes several newspapers, including the flagship Dainik Bhaskar, which is circulated in 12 States, is well placed on the circulation revenue front too. Driven both by cover price increases and higher volumes, the company has consistently grown revenue at double-digit rates for many years.

With tier II and III cities to be the new centres of growth, DB Corp, a leading player in the Hindi and regional print markets, is all set to cash in on the trend.

Apart from the mainstay newspaper business, the company is also strengthening its radio business. DB Corp, which operates the MY FM Radio station with 17 stations in seven States, acquired 14 new frequencies in the phase III radio auctions held in September. While the radio business is a small contributor to financials (5-6 per cent share in revenue and operating profit), it has been doing well.

After the 7 per cent growth last fiscal, DB Corp’s ad revenue declined 6.6 per cent during the half-year ended September 2015.

A fall in ad volumes due to lower demand from sectors, such as real estate and education, has hurt revenue.

Volumes were also partly affected by the shift in the Navratri season, which is a good time for advertising, to the December quarter this year.

Last year, the festival period was part of the September quarter.

More importantly, ad volumes have been hit by DB Corp’s focus on higher yields (better ad rates), even at the cost of volumes.

The company has been pursuing this strategy for a year or so, as it feels the existing rates in some of its markets are not reflective of market reality. As a consequence, there has been a cut back in volumes by many clients.

According to the company management, with some of the clients slowly coming around to the new rates, there should be an improvement in volumes going forward.

Moreover, given the reach provided by DB Corp, with its dominant position in northern and western India, companies that were advertising with the paper may choose to come back to it. Alongside, a gradual macroeconomic recovery too should aid ad volumes and revenue.

For the half-year ended September 2015, DB Corp’s circulation revenue grew 15.5 per cent year-on-year, similar to the growth rates of the past years.

Unlike ad revenues which fluctuate with economic conditions, circulation revenue, which contributes a fifth to the company’s revenue, has provided steady support and should continue to do so.

The growth in revenue has been thanks to both growing circulation (volume) and cover price (yield) increases.

For the half-year ended September 2015, the growth was primarily driven by increasing yield.

For the half-year ended September 2015, DB Corp posted revenue of ₹952 crore, down 1.8 per cent from the year-ago period.

Operating profit and net profit too were down 9.5 per cent year-on-year to ₹234 crore and 14.7 per cent to ₹126 crore. This should however, change for the better, once advertisement revenue starts to pick up. Apart from that, the radio business too should support growth in the long run. Revenue from the newly-acquired stations should start flowing in once they become operational sometime next year.

The impact will reflect on earnings once they turn profitable at the operating profit level, which could take a few years.