The offer appears stiffly priced, even if we factor in the quantum rise in earnings this year. FIIs will be able to buy only up to 5 per cent of the company's equity as that would exhaust the permitted limit of 26 per cent. This could also cap the valuation of the stock. Given the political sensitivity of the FDI-in-print issue, we do not expect the limit to be raised in a hurry.
INVESTORS can avoid exposure in the initial public offering of Jagran Prakashan, as it appears stiffly priced and, more important, payoffs from the proposed investment plans may flow only over a three-to-four-year period. A large proportion of the funds mobilised is earmarked for business plans where earnings visibility is poor.
The limited leeway available for foreign institutional investors (FIIs) to invest in the stock is also likely to prove a damper, as far as valuation goes. Our recommendation does not factor in any liquidity-driven gains upon listing and is made from a long-term perspective.
Dainik Prakashan — publishers of Dainik Jagran, the most widely circulated and read daily in the country — has an impressive track record; for this reason, we will track the stock closely for an investment recommendation at lower price levels and/or at a later date when greater clarity emerges on the utilisation of funds and the likely pay-offs. This stock also has the potential to be the preferred play in the vernacular space over the longer term with the Sun Network, should the latter also become a listed entity at some point in the future.
We take a positive view of several aspects such as:
The aggressive investment mode even during years when the industry environment was not favourable for print media players.
The expansion of its footprint — there are now Dainik Jagran editions from 25 locations — to wire up much of Uttar Pradesh, Uttaranchal, Bihar, Punjab, Haryana and Himachal Pradesh.
The depth of its coverage with a sharp focus on local news, which is important for a paper that publishes 200 sub-editions, to cater to markets with differing Hindi dialects.
The bankrolling of its expansion plans through a judicious mix of debt and cash flows from operations.
The impressive growth in circulation numbers (daily sales of 2.4 million in January-June 2005) that has also been accompanied by a scaling up of revenues, albeit with a lag, over the past five years.
The strategic partnership with the Independent News and Media group of the UK, which has a 26 per cent stake in Jagran Prakashan.
The rising share of Hindi newspapers in the advertisement pie, that is likely to flow largely to Dainik Jagran and Dainik Bhaskar, which also boasts of a circulation of close to two million; they represent the most attractive reach for advertisers targeting the Hindi heartland.
The likelihood that it will continue to scale up circulation numbers (it has launched three editions over the past 18 months) which will have a beneficial impact on advertisement revenues.
The following aspects temper our view:
The investment plans outlined by the company in the offer document do not inspire confidence, as there is a high degree of uncertainty about payoffs and a substantial part of the funds are to be deployed in businesses incidental to Dainik Jagran.
The investments planned in expanding and upgrading its printing facilities at various locations are likely to pay off over the long term, as circulation rises and the need arises for supplements on superior quality paper. As this exercise will also enhance its ability to offer more colour pages, there could be accretion to revenues, as ad tariffs on colour paper command a higher price. Benefits from this investment are, however, likely to be partially reflected in revenues from FY-08 onwards and, in earnings, only in subsequent periods.
The company plans to launch a second brand in locations where Dainik Jagran is the numero uno product. The objective is to position the lower-priced new paper as a flank to protect Dainik Jagran. In several locations where Dainik Jagran leads the market, it has an overwhelming share of the advertisement revenues. In this backdrop, the proposed flanking strategy may prove an expensive exercise, as incremental ad flows may be limited.
Even in Mumbai — a much larger market than any served by Dainik Jagran — the strategy of the Times of India to launch a second paper to serve as a flank, has not proved a success. What is of concern is the absence of details about the second newspaper plan, except for cursory mention that plant and machinery will be procured in the first quarter of 2008. Even if this venture were to generate revenues, its impact is likely to be reflected in significant revenues only three to four years from now.
Substantial investments are planned in acquisitions, event management and the out-of-home media market; the latter will be pursued through investment in 250 vans, which will serve as mobile advertisement vehicles in the geographies where Dainik Jagran has a footprint. We take a cautious view of the likely payoffs from these investment plans and have concerns whether returns will be commensurate with the resources deployed.
A strong balance-sheet with Rs 400 crore in cash after the offer, is likely to enable it pursue growth plans aggressively. There could also be a sizeable one-time income in FY-07 due to income from investing this war chest. The massive expansion in shareholders' funds could act as a drag on performance parameters.
The offer appears to be stiffly priced, even if we factor in the quantum rise in operating profits and earnings in the first six months of FY-06. This must also be seen in the context of the profile of investors from the public domain.
FIIs will be able to buy only up to 5 per cent of the company's equity as the 20-per-cent-plus stake of Independent News and Media will exhaust the permitted limit of 26 per cent for FDI/FIIs/NRIs. This factor could also cap the stock's valuation levels. Given the political sensitivity of the FDI-in-print issue, we do not expect this limit to be raised in a hurry.
Offer details: Jagran Prakashan is offering 10-million shares in a price band of Rs 270-Rs-324. The company will mobilise between Rs 275 crore and Rs 325 crore based on the eventual pricing level of the offer. The equity base will be Rs 50 crore. The book running lead manages are DSP Merrill Lynch and ICICI Securities.
