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Softening newsprint price benefits to reflect going forward
* Increase in RM cost starts subsiding:
4QFY19 was characterized by EBITDA margin expansion as against the steep 880bp/210bp YoY drop witnessed in 2QFY19/3QFY19. Consol. EBITDA at INR1b grew 6% YoY (5% beat), while margin expanded 20bp to 17.7%. This was due to a modest 5% YoY increase in cons. revenue to INR5.9b (in-line) coupled with a deceleration in YoY increase in RM cost, up 14% YoY (as against steep 30-35% YoY increase witnessed in 2QFY19/3QFY19). Also on QoQ basis, RM cost declined 12%, indicating a reversion of newsprint prices to normal levels (despite an increase in circulation copies). Yet, PAT declined 5% YoY to INR545m (3% miss) as growth in EBITDA was outweighed by drop in other income (-65% YoY) and higher taxes. For FY19, revenue/EBITDA/PAT grew 6%/-11%/-15%.
* Concall highlights:
(1) Expect newsprint prices to decline to INR40/kg in 1QFY20, and decline further in ensuing quarters (from INR44.5/kg in 4QFY19). (2) Expect full benefit of drop in newsprint prices to reflect from 2QFY20/3QFY20. (3) No significant increase in circulation copies is expected in FY20.
* Earnings growth should revive:
We expect ad revenue to grow at modest 6% CAGR over FY19-21 on the back of revival in local ad spends across categories and the recent increase in DAVP rates. This coupled with healthy 15% growth in radio revenue due to higher utilization at new stations and volume-led growth in circulation revenue should drive 6% consol. revenue CAGR over FY19-21; we maintain our estimates. Despite the subdued revenue growth, newsprint price reversal trend (benefits of which will start flowing in ensuing quarters) and ~10% additional correction in newsprint prices(as alluded by management) should act as a key catalyst in driving 19% EBITDA CAGR over FY19-21.
* Valuation view:
We value DBCL with a target price of INR215 – ascribing 9x (~40% discount to three-year average) P/E on FY21 EPS. We believe the revival in earnings driven by softening newsprint prices is not fully captured in the valuation. Maintain Buy
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