IGI Logo

Margin pressure from rise in newsprint prices

DB Corp’s (DBCL) Q1FY22 EBITDA was negligible due to: 1) ad revenue decline of 45% QoQ on second lockdown, and 2) 14% QoQ rise in newsprint prices. Company has since seen recovery in ad revenues with the Jul’21 number at 75% of July’19. It remains confident of significant recovery in the coming festive season. DBCL’s newsprint prices costs are likely to increase in Q2FY22 too by a further 2-3% with domestic newsprint prices are already up 35% YoY.

Prices of this vital raw material could put significant pressure on margins as the company does not see ability to pass the entire inflation through cover price hike. DBCL is yet to receive observations from CBDT survey at its premises. We cut EPS estimates by 5% / 7% for FY22E / FY23E, and reduce the target price to Rs93 (from Rs114) as we trim the P/E multiple to 7x (from 8x). Maintain HOLD.

* Ad revenues dipped 45% QoQ, but rose 60% YoY to Rs1.7bn on decline in print segment by 45% QoQ (up 58% YoY) to Rs1.6bn, and in radio by 44% QoQ (up 95% YoY) to Rs156mn. Company has seen recovery in ad revenues over the past few months. Apr’21 ad revenues were at only 25% of Apr’19, but it jumped to 40% in Jun’21 and 75% in Jul’21.

DBCL expects ad revenues to further improve in the coming festive season starting Sep’21. Company has also been impacted by discontinuation of advertising by a few state governments. DBCL witnessed ad revenue recovery for all four key categories – auto, education, real estate, and FMCG – in Q1FY22.

* Further rise in newsprint prices is a risk. Circulation revenues rose only 0.2% QoQ (19% YoY) to Rs1.1bn. This was due to drop in copies by 6% QoQ (up 6% YoY) to 4.3mn while realisation was up 2.1% QoQ (10.2% YoY) to Rs2.9/copy. Circulation was impacted by the second lockdown in Q1FY21, though the company remains hopeful of recovery in the coming quarters. DBCL has taken cover price hike of 2% QoQ (8.5% YoY) to offset rising newsprint prices, and may take further hike/s though passing the entire RM inflation is unlikely.

Circulation EBITDA matched circulation revenues due to lower pagination at 16 pages, but this would rise in the coming quarters on higher ad revenues thereby increasing circulation losses. Newsprint prices rose 14% YoY and QoQ to Rs41/kg and DBCL anticipates another 2- 3% rise in Q2FY22. Domestic newsprint prices already up 35% YoY, but the company continues to benefit from forward pricing in imports. Newsprint inflation is due to: 1) rise in logistics cost, 2) higher waste paper (up >2x), and 3) higher demand from China.

* DBCL starts disclosing digital metrics. Company has reclassified the emerging category with digital segment revenues and EBITDA. Digital revenues were Rs44mn in Q1FY22 as DBCL has made its app ad-free (e-newspaper too is free on the app). Though the app continues to attract customers with 7.5x growth in past few quarters, DBCL incurred loss of Rs321mn on it due to continued investment to improve user experience.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer