Deccan Chronicle Holdings Company Update BUY Charged up for second innings Price Rs114 Significant correction in newsprint prices coupled with higher profitability in the IPL venture are expected to drive a 42.8% CAGR in Earnings for Deccan Chronicle Holdings (DCHL) over Target Price Rs142 FY2009-11E. Moreover, as Balance Sheet concerns fade (Debt and Receivable days both Investment Period 12 months stand reduced), focus shifts to core properties (Print and IPL) and ongoing buy-back instills confidence, we believe that the DCHL stock warrants a re-rating. Hence, we upgrade DCHL Stock Info to a Buy, valuing the stock at 12x FY2011E EPS (40% discount to its peers like Jagran Sector Media and HT Media due to scalability issues), with a 12-month Target Price of Rs142. Market Cap (Rs cr) 2,792 Print Business - Strengthening its foothold in South: Following launch of its Bangalore edition, DCHL registered total daily Circulation of 1.35mn during Jan - June (JJ) 2009 according Beta 0.9 to the Audit Bureau of Circulation (ABC, latest Circulation figures), an increase of 1.2% over 52 Week High / Low 124/26 Jan - Dec (JD) 2008 and 25.9% over JJ 2008. We believe that enhanced presence places Avg Daily Volume 520,265 DCHL in a significantly better position in terms of offering bundled advertising to any media planner looking for a pan-South India platform. Face Value (Rs) 2 IPL holds promise: Deccan Chargers Sporting Ventures (DCSVL) houses the Hyderabad BSE Sensex 16,886 IPL team, Deccan Chargers (100% stake), which won the second season of IPL. In terms of financials, we expect DCSVL to record a sharp jump in Revenue in FY2010E to Rs100.6cr Nifty 5,020 (Rs56.6cr) driven by revised media telecast rights boosting Net Profit to Rs22cr (Rs1.6cr). We BSE Code 532608 remain optimistic on IPL's moneymaking prospects and any news flow on the stake sale front will trigger a re-rating in the DCHL stock. NSE Code DCHL Newsprint prices collapse, significant Margin expansion ahead: Over the past six Reuters Code DCHL.BO months, newsprint prices have collapsed. The 30-lbs benchmark US East coast, newsprint Bloomberg Code DECH@IN prices fell by almost 38% to US $465 from its peak in February 2009. For FY2010E, we expect DCHL to save almost Rs70cr in newsprint costs, despite higher newsprint consumption due to Shareholding Pattern (%) the Bangalore edition, as we have modeled a 31% drop in imported newsprint prices (landed Promoters 63.0 cost) to US $607. Further, we expect savings in newsprint cost to contribute almost 894bp to Margin expansion over FY2009-11E. MF / Banks / Indian FIs 16.5 Key Financials (Consolidated) FII / NRIs / OCBs 14.7 Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E Indian Public / Others 5.8 Net Sales 895 968 1,086 1,194 Abs. 3m 1yr 3yr % chg 52.3 8.2 12.2 9.9 Net Profit 303.6 142.3 263.2 290.1 Sensex (%) 17.9 20.7 38.0 % chg 83.7 (53.1) 84.9 10.2 DCHL (%) 54.1 (2.2) 14.7 OPM (%) 61.4 31.0 42.4 41.0 Anand Shah EPS (Rs) 12.4 5.8 10.7 11.8 P/E (x) 9.2 19.6 10.6 9.6 Tel: 022 - 4040 3800 Ext: 334 P/BV (x) 2.3 2.2 2.0 1.8 E-mail: [email protected] RoE (%) 25.2 11.2 18.5 18.2 Chitrangda Kapur RoCE (%) 26.7 11.8 18.4 18.8 Tel: 022 - 4040 3800 Ext: 323 EV/Sales (x) 2.8 3.1 2.7 2.4 E-mail:[email protected] EV/EBITDA (x) 4.5 10.1 6.4 5.8 Source: Company, Angel Research JanuarySeptember 30, 22, 2008 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1 Deccan Chronicle Holdings Media Investment Arguments Print Business - Strengthening its foothold in South India Enhanced presence in South Consistent leadership in the Andhra Pradesh print market, steady position in Chennai (fighting places DCHL in a better competition from Times of India-TOI) and entry into Bangalore (third largest print advertising market) position to offer bundled in May 2008 have helped DCHL strengthen its foothold in the Southern markets. We believe that advertisements enhanced presence places DCHL in a significantly better position in terms of offering bundled advertising for any media planner looking for a pan-South India platform. According to ABC JJ 2009, DCHL registered a total daily circulation of 1.35mn, an increase of 1.2% over JD 2008 and 25.9% over JJ 2008 (due to launch of the Bangalore edition). While the publication continues to strengthen its position in its core market of AP while holding on in Chennai, Bangalore has ramped up to an impressive daily circulation of 245,000 copies. Exhibit 1: Circulation steady- Bangalore ramp up impressive 900 784 803 800 748 701 700 600 in '000) 500 400 302 303 306 303 300 243 245 (circulations 200 100 21 0 AP Bangalore Chennai JD 2007 JJ 2008 JD 2008 JJ 2009 Source: ABC, Company, Angel Research Readership declines in However, readership figures indicate a slightly different picture (Source: IRS). Among the Top-5 Chennai due to stiff English dailies, DCHL registered maximum erosion in readership, which currently stands at 1.09mn competition from TOI as per IRS 2009 R1. We attribute this fall in readership to a decline in Chennai, which was impacted (Bangalore edition not post TOI’s entry last year. However, the figures do not capture DCHL's Bangalore edition. captured yet) Exhibit 2: Readership under pressure due to competition Top-5 English Dailies Average Issue Readership (AIR) (‘000) 2009 R1 2008 R2 ror % 2008 R1 yoy % The Times of India 6,864 6,710 2.3 6,790 1.1 Hindustan Times 3,492 3,522 (0.9) 3,276 6.6 Hindu 2,237 2,121 5.5 2,244 (0.3) Deccan Chronicle 1,093 1,152 (5.1) 1,225 (10.8) Telegraph 1,083 1,018 6.4 1,009 7.3 Source: Indian Readership Survey (IRS), Angel Research; Note: R1= January to December period, R2 = July to June period; ror = readership over readership SeptemberJanuary 30, 22, 2008 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 2 Deccan Chronicle Holdings Media Andhra Pradesh - Deccan's cash cow Market leader in AP with 60% Andhra Pradesh (AP) is DCHL's home market and remains the backbone of its operations readership generating strong Revenues and Cash flows. Deccan Chronicle is a market leader in AP accounting for almost 60% of the readership. Rich history dating back almost 70 years, larger set of offerings (with highly localised content) and higher pagination have helped DCHL maintain its stronghold in the region. Exhibit 3: Deccan’s leadership in AP maintained (‘000) 2009 R1 2008 R2 ror % 2008 R1 yoy % Andhra Pradesh Deccan Chronicle 808 822 (1.7) 892 (9.4) The Hindu 384 374 2.7 409 (6.1) Time of India 192 192 - 185 3.8 Source: IRS, Angel Research Going ahead, we estimate total Revenues from AP to post a CAGR of 9.7% over FY2009-11E to Rs660cr largely driven by a 10% CAGR in Advertising Revenues during the period as Circulation is expected to grow at a muted 4% CAGR. Modest Ad rate hikes, higher colour Ad space (colour commands a premium over B&W rates) and recovery in Ad Volumes (post 2HFY2010E) will aid Ad Revenue growth. Exhibit 4: Strong position in AP to aid steady growth post economic recovery 700 850 660 650 800 596 600 572 549 750 550 (Rs cr) 700 ('000) 500 650 450 400 600 FY2008 FY2009 FY2010E FY2011E Revenues (LHS) Circulation (RHS) Source: Company, Angel Research Chennai - Holding on Currently enjoys No.2 position DCHL expanded its operations in Tamil Nadu with the launch of its flagship daily in Chennai in in Chennai market with daily March 2005. Deccan Chronicle currently enjoys No.2 position in the Chennai market with a daily circulation of 302,522 copies circulation of 302,522 copies (ABC JJ 2009) and a readership base of 282,000 readers (IRS 2009 R1). However, following entry of TOI last year, competition has intensified denting Deccan Chronicle's readership in Chennai, which is exhibiting signs of weakness. JanuarySeptember 30, 22, 2008 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 3 Deccan Chronicle Holdings Media Exhibit 5: TOI’s entry has impacted Deccan’s readership in Chennai (‘000) 2009 R1 2008 R2 ror % 2008 R1 yoy % Tamil Nadu The Hindu 1,165 1,145 1.7 1,164 0.1 Deccan Chronicle 282 328 (14.0) 327 (13.8) The New Indian Express 146 158 (7.6) 156 (6.4) Source: IRS, Angel Research Future growth in Revenue is Hence, going ahead, we expect Chennai to post a muted 3.6% CAGR in Revenue over likely from increased Ad FY2009-11E as future growth of Advertising in Chennai is likely to come from an uptick in volumes volumes rather than Ad rate (likely post 2HFY2010E due to economic recovery) rather than Ad rate hikes (absorption will be an hikes issue due to competition). However, our interaction with management exhibited strong confidence of its position in Chennai market and sees no significant threat from The Hindu or TOI. Exhibit 6: Muted growth expected in Chennai due to competition 300 350 250 250 233 232 340 208 330 200 320 150 ('000) (Rs cr) 310 100 300 50 290 0 280 FY2008 FY2009 FY2010E FY2011E Revenues (LHS) Circulation (RHS) Source: Company, Angel Research Bangalore - So far, so good Deccan Chronicle has ramped Post expansion into Chennai, Deccan Chronicle was launched in Bangalore in May 2008 with an up its daily circulation to initial run of 100,000 copies.