Steady improvement in regional advertising and readership in key markets are positives for the company.

DB Corp, the publisher of Dainik Bhaskar (its mainstay) and a few other newspapers, is a play on the demographic benefits of the rapidly growing Tier-2 cities and towns in many North Indian states.

Investors with a two-year horizon can buy the shares of the company, given the well-paced growth in its circulation and, importantly, a revival in advertising revenues. At Rs 234, the share trades at 16 times its likely per share earnings for FY14. This is lower than the valuation that the company has historically traded at (around 20 times).

Steady improvement in the share of regional advertising, leadership in circulation and readership in key markets are positives for the company. Over the next 12-14 months, a series of state elections as well as the general polls could act as a trigger for advertisements from political parties.

In first nine months of the current fiscal, DB Corp's revenues increased by 8.7 per cent over the same period in FY12 to Rs 1,194 crore, while its net profits expanded 3.9 per cent to around Rs 163 crore.

The profit growth was hit as rupee depreciation accentuated the problem of rising newsprint costs in late 2011 and the first half of 2012. This led to higher import costs for the company. Revenues were sluggish as the economy went into a slowdown and advertisers held back spends. But over the last couple of quarters, the momentum seems to be back, with advertising revenues growing at double-digits in the recent December quarter.

Smaller Cities Lead Growth

DB Corp operates several newspapers, the main one being Dainik Bhaskar which is circulated in 11 States with 36 editions and has the second-highest readership among Hindi language newspapers.

Besides, it publishes a Hindi business daily in six States, a Gujarati newspaper in Gujarat and Maharashtra, and a Marathi daily. The total readership for its newspapers is 19.1 million.

Dainik Bhaskar is among the most read newspapers in key States such as Madhya Pradesh, Rajasthan, Punjab and Haryana. In Gujarat too, its regional language newspaper is among the most read.

Given that Tier-2 and Tier-3 cities and towns are increasingly driving growth for several sectors such as telecom, automobiles and consumer durables, DB Corp may benefit from increased advertising spends by companies in this space.

The company has also been able to take price increases and yet protect circulation in some key States such as Madhya Pradesh.

Retail advertising strength

DB Corp derives around 77 per cent of its revenues through advertising and 17 per cent through circulation. Smaller divisions such as radio and out-of-home advertising contribute the rest.

It is, however, important to note that the company derives around 36 per cent of its advertising revenues from regional and retail advertisers.

This segment is generally quite resilient to slowing macro indicators and has been steadily increasing contribution.

Evidence is the growth that retail advertising had even in the troubled 2008-09 period.

There has been a double-digit growth in circulation revenues. The company is also set to benefit from potentially higher advertising spends by the government on financial inclusion and for creating greater awareness on programmes such as direct cash transfer.

Also, with large States such as Madhya Pradesh and Rajasthan going to the polls later this year, increased spending by political parties on campaigns may help leading newspapers such as Dainik Bhaskar.

The general elections in early 2014 may be another avenue to generate greater advertising revenues.

Cost Containment

With newsprint costs spiralling upwards in 2011-12, DB Corp's raw material costs as a percentage of revenues, rose steadily to around 34 per cent.

But since then, costs have stabilised at this level over the past few quarters and even declined marginally in the recent period.

With no new editions planned for the foreseeable future, the company’s costs are likely to stabilise.

Risks

Any sharp depreciation of the rupee can affect the cost structure of the company. Besides, pricing pressure from competition on ad rates or cover price can affect margins.

DB Corp’s operating (EBITDA) margins in the recent December quarter were at 27.8 per cent.

(This article was published on February 9, 2013)
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