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Rise in newsprint price adds to risk

DB Corp’s (DBCL) Q4FY21 EBITDA rose 53% YoY to Rs1bn; missed estimates by 11% on lower revenue in ad and circulation; but, it was offset by lower newsprint prices. Though the second covid wave impacted in the past two months, the company has seen sharper recovery in June’21 with the unlocking, which is comforting. In FY22, the company eyes recovering ad volumes, post which it will push yield improvement. We are impressed by cost-saving efforts which are helping it protect FCF despite pressure on revenues. Newsprint price rise poses risk to DBCL’s EBITDA recovery; sticky inflation may not be good news. We have cut EPS estimates by 13% / 0.2% for FY22E /FY23E, but increased our target price to Rs114 (from Rs100) on increase in PE multiple to 8x (from 7x); downgrade rating to HOLD (from Buy).

Ad revenue dipped 6.9% YoY to Rs3.1bn on decline in print segment by 5.9% YoY to Rs2.8bn, and in radio by 14.7% YoY to Rs278mn. The company will focus on driving growth in ad volumes in FY22 where it plans to reach pre-covid levels; yield rise likely FY23 onwards. It is also positive on monetising the rise in circulation market share in many markets. DBCL sees second wave to have some impact on ad revenues, but it has seen much sharper recovery in June’21 unlike the first covid wave where recovery was more gradual. Some segments have certain issues which on normalisation will drive further rise in demand such as education, lifestyle and media & entertainment etc. DBCL continues to remain optimistic on radio which will benefit from localisation

Newsprint price rise is posing risk. Circulation revenue dipped 8% YoY to Rs1.1bn (2% QoQ). This was due to drop in copies by 15% YoY (up 2.5% QoQ) to 4.5mn while realisation was up 5.9% YoY to Rs2.85/copy. Circulation has reached 90% of pre-covid level in Q4FY21, but was again impacted by 6-8% during the second wave. Circulation EBITDA benefited from lower newsprint prices, down 4.3% YoY, but DBCL expects newsprint prices to rise in the next quarter by 12-15%, but sees price easing on rise in supply from paper wastes. It also plans to hike cover prices by Rs8-10/month on rise in newsprint prices. Its imported newsprint contribution has increased to 54% from 39%.

55-60% of cost savings are structural. DBCL has achieved cost-saving of Rs1.95bn, higher than guided Rs1.25bn led by sharper focus on cost optimisation including employees, other expenses, and printing & production. It expects 55-60% of the savings to continue even after normalisation. In Q4FY21, cost rose due to 1) recognisation of ESOP cost and annual incentives; 2) cost related to higher operating income and 3) investment in digital. EBITDA grew 53% YoY to Rs1bn on low base. EBITDA margin was strong at 22%. Net profit rose 103% YoY to Rs487bn.

Digital opportunities emerging. DBCL is in discussion with Google and others for selling news on digital platforms, which may open new revenue stream, but we have little clarity on this right now; we would wait to see how the opportunity unveils. It is also seeing strong DAU traction on its ad-free app.

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