DB Corp Ltd (DBCL) - A Wonderful play on the growing Indian Consumption

Content Index
• DB Corp – Investment Snapshot :- Slide #3
• DB Corp Investment – Elevator Pitch :- Slide #4
• Our Research Desk’s views on the Stock :- Slide #5
• Warren Buffet’s write-up on Newspapers :- Slide #7
• Newspaper Industry Overview :- Slide #18
• DB Corp – Company Overview :- Slide #33
• DB Corp – Financials:- Slide #50
• Concerns & Reasoning :- Slide #52
• Conclusion :- Slide #54
“ Specialists in discovering Multibagger stocks “

DB Corp – Investment Snapshot
(as on May 25, 2014)
Recommendation :- BUY Maximum Portfolio Allocation :- 4 % Investment Phases & Buying Strategy 1st Phase (Now) of Accumulation :- 80% Current Accumulation Range :- 270-300 Rs Allocation increase in case of Correction :- 7% DB Corp can be accumulated at the current price with more addition in case of a correction. We are looking at the stock as a 5 year Investment opportunity. It is one of the few quality stocks that can deliver good risk-adjusted returns at the current levels. Core Investment Thesis : DB Corp with its strong brand and wider readership provides a strong Media platform to capitalize on the improving economic sentiment and the structural growth story of Indian consumers. With a good Management, attractive valuations and strong earnings growth – DB Corp is a good Investment Idea.
Current Market Price – Rs. 280
Current Dividend Yield – 1.85%
Bloomberg / Reuters Code –DBCL@ IN/ DBCI.BO
BSE / NSE Code – 533151/ DBCORP
Market Cap (INR BN / USD Mn) – 54.70 /927.77 [1 USD – Rs. 58.96]
Total Equity Shares [Mn]– 183.37
Face Value – Rs. 10
52 Week High / Low – Rs.211 / Rs.344.5
Promoter’s Holding – 74.94%
FII - 18.54%
DII - 2.67%
Other Holdings - 3.85%

DB Corp – Investment (Escalator Pitch)

Dear Members, It’s been a terrific run-up in Markets over the last few months. We have been a big beneficiary of the same with all our stocks gaining significantly. You can read about our Market perspective in the following link, Our Monthly Investment Newsletters - http://www.slideshare.net/hbjcapital/hbj-capital-ventures-llp-monthly- newsletter-may-2014 The Run-Up has ensured that most of the quality stocks are no longer available at attractive valuations. We would not like to BUY low quality businesses, just because they are relatively cheap. In a market starved with attractive Investment opportunities, we are happy to present a quality Stock Idea in the form of DB Corp which is still available at attractive valuations. In fact DB Corp is a high conviction bet for us. We are accumulating the stock in our Portfolios for some time now. As you might have noted – DB Corp is our second recommendation in the Hindi Print Media space after Hindustan Media Ventures (HMVL) recommendation in Jan, 2014. While we are bullish on the entire pack of Hindi Print Media stocks (including Jagran Prakashan), DB Corp is the best Long Term bet. HMVL is more of a valuation play and definitely doesn’t fall into the league of DB in terms of growth prospects, Management quality, Long Term business potential etc. DB Corp is also a High Dividend Yield stock for our Portfolios. With growing Free Cash Flows, the dividend payout would continue to increase for the next many years. Before we get into the company specific details about “DB Corp”, let’s understand the broader picture. We believe that there is irrational fear about the decline of Print Media. Critics point out that Print Media will be on a secular decline and hence despite these businesses earnings over 30% ROCE’s, they don’t deserve higher valuations. We believe that’s not the case, especially for Hindi Print Media stocks that have a long run way of growth ahead of them. Before we provide our views on the economics and future of newspapers, it’s great to understand the Investing legend – Warren Buffet’s views on the same and the rationale behind his aggressive buying spree of Newspapers. In fact another sharp business mind, Jeff Bezos has also bought into Washington Post. While the dynamics of Developed Print Media markets and our Hindi Print Media stocks differ, its good to foresee the developments in this Industry by looking at the global newspaper industry.
Our Research Desk’s views on the Stock Idea

Warren Buffet’s write-up on Newspapers (Full of Wisdom)
WB on his decision to go on a Newspapers buying spree in Berkshire’s 2012 Annual Report :
During the past fifteen months, we acquired 28 daily newspapers at a cost of $344 million. This may puzzle you for two reasons. First, I have long told you in these letters and at our annual meetings that the circulation, advertising and profits of the newspaper industry overall are certain to decline. That prediction still holds. Second, the properties we purchased fell far short of meeting our off-stated size requirements for acquisitions.
We can address the second point easily. Charlie and I love newspapers and, if their economics make sense, will buy them even when they fall far short of the size threshold we would require for the purchase of, say, a widget company. Addressing the first point requires me to provide a more elaborate explanation, including some history.
News, to put it simply, is what people don't know that they want to know. And people will seek their news - what's important to them - from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost. The relative importance of these factors varies with the nature of the news and the person wanting it.
Before television and the Internet, newspapers were the primary source for an incredible variety of news, a fact that made them indispensable to a very high percentage of the population. Whether your interests were international, national, local, sports or financial quotations, your newspaper usually was first to tell you the latest information. Indeed, your paper contained so much you wanted to learn that you received your money's worth, even if only a small number of its pages spoke to your specific interests. Better yet, advertisers typically paid almost all of the product's cost, and readers rode their coattails. Additionally, the ads themselves delivered information of vital interest to hordes of readers, in effect providing even more "news." Editors would cringe at the thought, but for many readers learning what jobs or apartments were available, what supermarkets were carrying which weekend specials, or what movies were showing where and when was far more important than the views expressed on the editorial page.

In turn, the local paper was indispensable to advertisers. If Sears or Safeway built stores in Omaha, they required a "megaphone" to tell the city's residents why their stores should be visited today. Indeed, big department stores and grocers vied to outshout their competition with multi-page spreads, knowing that the goods they advertised would fly off the shelves. With no other megaphone remotely comparable to that of the newspaper, ads sold themselves. As long as a newspaper was the only one in its community, its profits were certain to be extraordinary; whether it was managed well or poorly made little difference. (As one Southern publisher famously confessed, "I owe my exalted position in life to two great American institutions - nepotism and monopoly.") Over the years, almost all cities became one-newspaper towns (or harbored two competing papers that joined forces to operate as a single economic unit). This contraction was inevitable because most people wished to read and pay for only one paper. When competition existed, the paper that gained a significant lead in circulation almost automatically received the most ads. That left ads drawing readers and readers drawing ads. This symbiotic process spelled doom for the weaker paper and became known as "survival of the fattest.“
Now the world has changed. Stock market quotes and the details of national sports events are old news long before the presses begin to roll. The Internet offers extensive information about both available jobs and homes. Television bombards viewers with political, national and international news. In one area of interest after another, newspapers have therefore lost their "primacy." And, as their audiences have fallen, so has advertising. (Revenues from "help wanted" classified ads - long a huge source of income for newspapers - have plunged more than 90% in the past 12 years.) Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what's going on in your town - whether the news is about the mayor or taxes or high school football - there is no substitute for a local newspaper that is doing its job. A reader's eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read

to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.
Even a valuable product, however, can self-destruct from a faulty business strategy. And that process has been underway during the past decade at almost all papers of size. Publishers - including Berkshire in Buffalo - have offered their paper free on the Internet while charging meaningful sums for the physical specimen. How could this lead to anything other than a sharp and steady drop in sales of the printed product? Falling circulation, moreover, makes a paper less essential to advertisers. Under these conditions, the "virtuous circle" of the past reverses. The Wall Street Journal went to a pay model early. But the main exemplar for local newspapers is the Arkansas Democrat-Gazette , published by Walter Hussman, Jr. Walter also adopted a pay format early, and over the past decade his paper has retained its circulation far better than any other large paper in the country. Despite Walter's powerful example, it's only been in the last year or so that other papers, including Berkshire's, have explored pay arrangements. Whatever works best - and the answer is not yet clear - will be copied widely.
Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities - while it may improve profits in the short term - seems certain to diminish the papers' relevance over time.
Our newspapers are certainly not insulated from the forces that have been driving revenues downward. Still, the six small dailies we owned throughout 2012 had unchanged revenues for the year, a result far superior to that experienced by big-city dailies. Berkshire's cash earnings from its papers will almost certainly trend downward over time. Even a sensible Internet strategy will not be able to prevent modest erosion. At our cost, however, I believe these papers will meet or exceed our economic test for acquisitions. Results to date support that belief.

We believe that DB Corp can deliver healthy Risk-adjusted returns for an Investor. The Broad rationale for our bullishness on the stock stems from the following 5 – Reasons,
- Attractive Economics of a Quality Hindi Newspaper Franchise. (High Free cash flow business with decent Growth).
- Excellent Operational Track Record (Fastest growing Indian Newspaper company with aggressive expansions).
- Huge Operational Leverage to result in cyclical improvement in Earnings. (Multiple Margin Levers in next 3 years).
- Management Quality and Capital Allocation skills. (Poised to become a Multi-Language & Multi-Platform media).
- Attractive Valuations for a Quality stock (forward Cash EPS multiple of just around 10X & FCF Yield of > 8%). 1.) Attractive Economics of a Quality Newspaper Franchise : Globally we have seen that Newspapers which have dominant market shares in a region have been able to demonstrate tremendous pricing power over long periods of time. These newspapers consistently throw a lot of free cash flow to Investors considering their Asset light business models. Newspapers are generally a consolidated industry with oligopolistic characteristics - Top-3 players in most regions contribute to over 90% of the overall market. Considering the Brand Equity, Customer stickiness and Distribution network of incumbents, it is generally difficult to dislodge them by a new competitor. Moreover with most Advertisers preferring to market their brand with the Top-3 players, it becomes extremely difficult for a new player to operate a Viable edition without gaining significant market share from incumbents. Only Incumbents who tend to be laid back and non-responsive cede Market share, otherwise changes in Market leadership are rare. More importantly, Newspapers are asset light businesses with shorter working capital cycles and high fixed asset turnovers. Incremental growth in Newspaper business (Circulation growth + Advertisement growth) doesn’t require any significant capital and hence the Incremental ROCE’s tend to be very high. This leads to tremendous improvements in a company’s financials during its growth phase. A Quality newspaper franchise has strong pricing power to consistently improve its Yields. This apart from Volume growth in a country such as India leads to consistently robust cash flows. Maintenance CAPEX is miniscule and that leads to most Print Media companies having strong Dividend Payout ratios of 50+%.

However, the biggest problem with this Industry has been the emergence of digital media and Television which are helping people consume news in a faster, efficient and cheaper manner. This is making Newspaper redundant, especially among the younger generation. While this is a serious threat for Newspapers, we believe that the last set of Newspapers to be affected from this change would be Regional Newspapers catering to a population which is becoming literate for the first generation. We believe that the fear of declining readership in Indian context is several years away. The demographic profile of India would ensure strong volume growth for the next decade. This is even so correct in case of Hindi Print Media companies catering to geographies which have a lot of delta in literacy levels. Hence regional newspaper companies have a long run way of growth ahead of them. We also believe that the fear of Newspapers getting disrupted by Internet is an overhyped theme. Indian television penetration is extremely high. There are also numerous 24*7 news channels (English & Vernacular), but still Newspapers continue to grow, how ? If Newspapers can successfully take on the onslaught of Television, Internet penetration should not make much of a difference. The important reason for sustainability of Newspapers is the local nature of News. Another important point is that almost 70% of advertising revenue comes from Local advertisers and share of National advertisers has been consistently decreasing. Concepts of Geo-Targets TV Ads is still in infancy and Internet Media firms providing local news doesn’t look feasible. Even now, Print continues to offer one of the most cost effective medium for local advertisers. We believe that multiplicity of news sources would continue in the future and Newspapers would continue to find a place. Newspapers constitute a very small % of an household’s spending and hence there is very little incentive to cut it off with respect to the value they offer. More importantly, unlike their Western counterparts, Indian newspapers have enough time to reposition themselves to the challenges of the future. They can easily learn from successful western models such as Kindle Subscriptions, E-Newspapers etc. Indian newspapers are also aware of the threat and are responding by rationalizing cost structures and building up strong digital platforms. With strengths in content generation, Newspaper companies can deliver the content effectively across any platform and also monetize them well. Anyways Rate of Change would continue to be slow enough for these companies to have similar financial characteristics over the next 5-10 years.

Hence, we believe that Hindi Newspaper companies do have a strong future with healthy volume growth and increasing realizations. The increasing Ad market size in line with consumption growth should help Newspaper companies to drive their bottom-line. In fact, Hindi Print Media stocks are one of the best proxy plays for the structural rise in rural consumption demand. With this view, we believe that the Hindi newspaper stocks should be quoting at a premium and not at a discount to the overall market.
Actually, we believe it is TV Broadcasting which is getting disrupted much faster and very few Investors are realizing that companies such as Netflix and mediums such as YouTube would eventually make Broadcasters redundant and shift the balance of power towards content producers. Rate of change in this Industry can actually be faster than Regional Print media considering the demographics of their users and the current realizations among market participants. We also believe that the shift of Broadcasters to Online platforms would make significant difference to their cost economics compared to shift of Newspapers to Digital media. On the whole, we believe that quality regional newspapers will continue to have attractive economics for many more years to come.
2.) Excellent Operational Track Record : (Aggressive Expansions into different Markets)
DB Corp is India’s largest Print media company with a daily readership base of 19.8 Million readers across its different brands. It houses the second largest Hindi newspaper (Dainik Bhaskar) and second largest Gujarati newspaper (Divya Bhaskar). DB Corp has the distinction of reaping success and building scale in every market in which its present. DB Corp’s operational track record and growth strategy gives us enormous confidence in the future of this company.
DB Corp’s management has grown the company from a 1-state company in 1997 to over 14-states currently. During this growth - DB Corp has grown from 1 Language paper to 4 Languages, 5 Editions to 55 Editions and readership from 3.2 Million to 19.8 Million. Organic readership growth of 11.5% CAGR for the past 15 years is a phenomenal track record. Newspaper penetration is only around 30% in the company’s target markets and almost 50% of India’s consumption happens in these Markets. Hence, DB Corp has a strong run way for growth for many more years to come. Company’s leadership position across several core markets serves well to attract strong advertisers on to its platform.

The company’s launch strategy deserves a extremely special mention. In an Industry which has decent moats to protect incumbents from competition, DB Corp has been able to achieve No:1 (or) No:2 position on Day-1 of its launch in all markets. DB Corp’s unique launch strategy of reaching out to customers, conducting pre-launch surveys, aggressive on-ground marketing etc is a separate Case study in itself. The company targets high growth markets with lower penetration and complacent incumbents.
Even in the recent Patna Launch, the company started of as No:1 player on the first day of launch by expanding the market and chipping away some market share from the incumbents, despite the Top incumbents preparing themselves strongly for DB’s entry for 4 months in advance by cutting subscription costs and by aggressively marketing themselves. This kind of successful launch allows the company to break even on a New Launch within a 4 year time frame. In fact, in Patna – DB Corp expects to break even in just around 3 years.
Management has not just grown in new markets, but also has defended its leadership in its old markets well despite intense competition. Even with the “Times Group’s” aggressive launch in Gujarat and Rajasthan, DB Corp has not only held on to its subscribers but also grown it well. The company has gained 20K-30K additional subscribers in each of these markets over the last few quarters despite the subscription rate hike of 11%. This does indicate the pricing power and loyal readership base of the company.
DB Corp’s another reason for success is its strategy to not chase Market share per se. The company has stayed away from chasing readership that can’t be monetized in the medium term. DB Corp is in fact extremely well positioned in the Tier-2,3,4 cities/ towns across several key markets. The company is the leader by a wide margin in the urban centers of Gujarat, Rajasthan, Bihar etc, even though it’s not the overall market leader in these states. DB Corp is the No:1 player in urban readership pan-India, even higher than the English newspapers. This allows it to leverage its position among advertisers to gain incremental share going forward.
Company need not enter new markets for growth, it just needs to launch more editions. The company has a number of new markets in which it has entered recently and can grow by increasing penetration. The organic subscriber volume growth in mature markets is close to 5+% and new markets/ editions would continue to add more subscribers to the company. Management is focused on emerging as a Pan-India leader in Print Media.

3.) Huge Operational Leverage to result in cyclical improvement in Earnings : Newspapers generally have a high operating leverage as they have a large Fixed cost component (Employee cost & Sales cost) and hence any improvement in revenues generally leads to strong growth in profits. More importantly, new editions also go through a long Investment phase where they continue to post EBIDTA losses arising out of high Fixed costs, Large overheads and Low circulation revenues. It is only after a certain threshold of circulation does the edition start attracting advertisers at healthy realizations. Improvements in Volume and realizations of advertisements generally leads to significant improvement in Margins after the Edition’s break even. In fact in the initial few years of launch, almost 90% of revenues come only form local advertisers. Only after a certain threshold does the high yield national advertisements come to make up almost 30% of revenues. We believe that DB Corp has several Margin Levers over the next few years that would help the company to post strong earnings growth going forward. Subdued Newsprint Costs :
- Company’s input cost has been increasing consistently over the last many quarters as Newsprint prices are marked to landed prices. In fact last year’s Newsprint Costs increased 16% YoY. With the rupee depreciation over the last few years, Newsprint costs had shot up substantially eroding Margins. With the rupee appreciating over this quarter, combined with subdued Global Newsprint prices - DB Corp can certainly expect a Margin lever from lower Newsprint costs as % of Revenues. Improving Ad Realizations :
- As company’s emerging markets continue to mature and as DB Corp penetrates different markets strongly, Ad realizations would step up. The company’s realizations alone can grow at 11% CAGR for the next few years, buoyed by a rebounding economy. With the Ad markets improving, the improvements in realizations would be sustainable and much of this delta would flow to the bottom-line directly.

Higher Subscription Realization :
- DB Corp has a cover price cost of 4 Rs, but the net realization per copy is only around 1.91 Rs. The company had improved its realization by about 10% last year by moving it from 1.75 Rs. We believe this trend of improving subscription realizations would continue as the company’s gives substantial discounts to readers during its launch phase. Also company's move to increase cover prices in Mature markets has been taken well in the market place with no negative effects. Hence, subscriptions realizations would also continue to inch up. Strong Ad & Subscription Volume Growth :
- In addition to the improvement in realizations, DB Corp can continue to drive volume growth leading to better economies of scale and higher margins as a result. The organic subscription growth can be 5%. The company’s current Ads : Editorial content is 28 : 72 and Pagination is around 22.8. There is enough room for DB Corp to improve its Ad volumes too. Improved Margins would result in better Shareholder Returns : The biggest Margins kicker however would come from lower % of new market revenues as the existing emerging markets would mature over the next 3 years. Company’s EBIDTA margins for its mature markets is around 33% and its emerging markets are currently posting losses, leading to blended Margins of around 27%. We expect the company’s overall margins to improve up to 30% as the Emerging editions turn around. We believe that the Market has still not factored in the huge Operational leverage in the business. For example, a 5% improvement in the revenues - changes the EPS estimates by as much as 15%. Also a 3% variation in Newsprint prices - changes the EPS estimates by 4%. With the turnaround in business sentiment, we believe that DB Corp would be one of the biggest beneficiaries. The analysts consensus doesn’t reflect the sensitivity in earnings and the last few years of bad Macro performance has anchored their expectations at conservative levels. More importantly, we believe that the company’s business model and management quality would ensure that such improvements would trickle down to strong shareholder returns in a sustainable manner and also in a magnified manner.

4.) Management Quality and Capital Allocation skills : DB Corp’s biggest USP over its peers is its Management quality and Corporate culture. Shareholders can feel safe about investing in a competent and credible management. Company’s past capital allocation skills also gives Investors a lot of comfort. The company’s Revenues have grown at 15% CAGR over last 6 years, EBIDTA at 30% CAGR and PAT at 45%. The quality of growth is extremely comforting with improving Margins, Capital efficiency and Robust free cash flows. The company’s overall ROCE’s are upwards of 50%. It’s Core Hindi Print ROCE’s are >50%. This clearly denotes the quality of capital allocation. The company has a meager Maintenance CAPEX of just around 25 Cr Rs/ Year. The company’s balance sheet is robust with 350+ Cr of net cash. With lower launches and robust operating cash flows, the company would continue to deliver strong dividends. The company’s current Dividend payout itself is healthy enough at 50+%. Without any big acquisition, the company can certainly improve on it going forward. The returns on the capital retained is strong both in terms of ROIC and in terms of shareholder returns. Management continues to focus on improving its Financial performance even further by effective cost control and improving yields. DB Corp’s management has strong clarity on future expansion plans. Unlike other Media companies that are entering into spaces such as Online Job and Real Estate classifieds, DB Corp would continue to focus on delivering news across different platforms without diversifying itself from the Core business. The company’s only other diversification is its Radio business. Even there, it is extremely successful with leadership position in 16 of the 17 Markets it operates in and also has a 40% EBIDTA margin. DB Corp has the financial strength to grow its Radio business piggybacking on the Phase-3 Licenses that are expected to be rolled out soon. We believe that DB Corp is one of the few companies that has succeeded across Languages and platforms pointing out to superior Management execution. The company’s digital business is also emerging strongly with it being the largest visited Hindi News website. We would like to think that the company has all the capabilities of emerging as the strongest Media brand in the country going forward.

5.) Attractive Valuations for a Quality stock :
The Valuations vocabulary seems to be going back to the 2003-07 era after the historic election mandate. While the last few years were focused on Balance sheet strength, Cash Flow from Operations, Return Ratios etc – the new theme seems to be revenue growth, order book visibility, improvement in Financial leverage etc. While we understand that some amount of mean reversion would happen considering the huge underperformance of a few sectors over the last many years, we don’t believe that these businesses can give secular returns over the next 5 years. The best way to play the overall economic improvement would be to stick with stocks that have the business model and pricing power to capitalize on the improvement and deliver shareholder returns. Most of the bad quality businesses may initially benefit, but eventually fall into the “Red Queen Effect” leading to sub-standard shareholder returns despite the overall improvement.
In such a scenario, we believe that a stock such as “DB Corp” is an extremely efficient tool of playing the improvement in consumption spending and the overall improvement in the business sentiment. The Ad market growth is always a multiplier of the GDP growth. Combine this with a high operating leverage business and a low Incremental CAPEX business, it’s easy to understand the magnification of GDP improvement on shareholder returns. While Operating Leverage can be a double edged sword, we would like to believe that in an environment of improving economic fundamentals, it’s better to get into good quality businesses with such high earnings leverage.
The stock may not be extremely cheap, but is definitely attractive enough for a high quality business with a secular growth story. On relative basis, DB Corp is cheap compared to other quality investment opportunities. For a company with a growing cash flow yield, its currently available at 15X trailing earnings and 13X trailing operating cash flows. In fact on FY-16 conservative estimates – Free Cash Flow yield of 8% does looks extremely attractive. We believe that on the current price, the Stock can start delivering almost 5-6% Dividend Yield (15 Rs/ Share) over the next three years along with consistent incremental growth from thereon. We are building in a conservative earnings CAGR of around 15% over the next 3-5 years. There is a strong probability of we getting surprised on the upside incase the economic sentiments improve much better than what we have built into our numbers.

With the stock quoting at a discount to its historical P/E multiple, probability of a valuation re-rating does emerge. Even without such a re-rating, pure earnings growth in itself would propel shareholder returns. On a broad basis, we believe that one of India’s largest Media platform that touches almost 50 Million people (total readership) on a daily basis and run by a competent Management is a Value BUY at an enterprise value of less than 5000 Cr.
We would like Investors to add this stock at the current low prices and accumulate strongly in case of corrections. For investors who would like to add a steady dividend stream to their portfolio, DB Corp is a good fit. We believe that the stock can deliver an additional return of 10-15% price appreciation in addition to the strong Dividend Yield, thereby enabling healthy returns for share holders.
Regards,
Gokul Raj . P,
Director & Chief Investment Officer – HBJ Capital.

Newspaper Industry – An Overview

Indian Media Industry
• Total spending on advertizing on all media stood at USD 5.5Bn in 2011 which accounted for 41% of the total industry revenues.
• According to KPMG estimates advertisement revenues are expected to reach about USD 10.8 Bn by 2016 which signifies the enormous potential for growth going forward.
• Print media is the largest contributor accounting for about 46% of the advertising share. Considering the cost effective nature and huge reach of Print Media advertising, it continues to be a favorite among advertisers especially to reach customers in the hinterland.

Overall Industry Size (INR Bn)*
2008
2009
2010
2011
2012
CAGR (2007-10)
2013P
2014P
2015P
2016P
2017P
CAGR (2012,17)
Television
82.0
88.0
103.0
116.0
124.8
8.0%
138.6
156.6
180.1
207.2
240.3
14.0%
Print
108.0
110.4
126.0
139.4
150.0
7.6%
162.0
179.0
200.0
222.0
248.3
10.6%
Radio
8.4
8.3
10.0
11.5
12.7
10.4%
14.0
15.4
18.7
22.7
27.4
16.6%
Out of Home(OOH)
16.1
13.7
16.5
17.8
18.2
2.4%
19.3
21.1
23.0
25.0
27.3
8.4%
Digital Advertising
6.0
8.0
10.0
15.4
21.7
40.9
28.3
37.1
48.9
65.1
87.2
32.1%
Total
221
228
266
300
327
9.1%
362
409
471
542
630
14.0%
Advertising Spends across Mediums
Source: KPMG analysis and industry interviews

Print Media Market Overview
• The print media industry size is pegged at about Rs.224 Bn in 2012 and is projected to grow to about 340 Bn in 2017. projects.
• Within the print media market Newspaper revenues account for 95% while the rest 5% is accounted by the magazine segment.
• While the advertising revenues are expected to grow by a CAGR of about 10% the circulation revenues are expected to grow by a CAGR of about 4.5%.
• The total industry is expected to grow by a CAGR of about 8% given that the GDP growth likely to be about 6% for the next few years.

Print Industry and GDP Growth
• The print media is expected to register a growth of 9-10% YoY on the back of the relationship between print industry growth and GDP growth.
• The growth in the print media is expected to be driven increased spending power, favorable demographics and increased penetration.
• The print media to GDP growth was the highest in FY06 at 1.98x and had an average growth of about 1.25x. As GDP growth picks up the ad volumes are expected to pick up which will result in uptick in ad rates.

Print Industry : Top Categories advertised on print
• Print Media is a good proxy for increased Consumption growth in this country. Advertising as a % of GDP would continue to raise going forward as India moves beyond a 1000$ per capital economy. The top 5 sectors i.e Education, Auto, FMCG, Real estate and BFSI constitute 45% share and is expected to continue due to increasing spend for Education as it is the highest component of a family’s budget and strong growth in consumption.
• With inflation likely to cool down in the coming years there is likely hood of a decline in interest rates which is positive for sectors such as Auto, FMCG, Consumption. Also increased revenue share of Organized businesses over un-organized businesses is a structural trigger for higher advertising growth.

Print Media market across geographies
• The Indian print media is divided into three markets i.e English, Hindi and Vernacular.
• The hindi geography dominates the landscape in terms of population with about 600 mn while the vernacular segment has a population of about 500 mn and English geography has the lowest population of just about 60mn.
• Though the English geography has the least share of population it commands the highest pricing power due to higher purchasing power of the population.

English Print Media
Estimated AD revenues from English Market
• The English print media is concentrated across the six metros and is more concentrated compared to regional players with average of 90% readership with the top 2 players. High concentration is led by a well fortified business model with advertisements constituting 95% of the revenues.
• Delhi and Mumbai are the two of the top markets for the English newspapers with share of 32% and 39% respectively to the overall Ad revenues.
• However, the English print media faces the risk of potential competition from the digital media due to increase in broadband penetration. Demographics of English Print are more susceptible to technological advances and this can be seen from the relatively slow circulation growth of English Print media.
Top 10 English Newspapers

AD rate Premium-English vs Hindi
• English dailies command higher ad revenue per reader due to its dominant presence in metros.
• The estimated average revenue per reader for English dailies is about Rs.2700-4000 while for hindi dailies it ranges between Rs.400-600.
• English dailies command a premium of 1.5x premium on cost per thousand basis compared to regional print due to maturity of metro markets.
• Further English dailies also sell a higher ad volume due to higher pagination.

Higher Growth Rates of Hindi Print

Print Advertising volume
• The print media share of advertisement stood at about 32% for English,34% for Hindi and 34% for vernacular segments. The growth in the advertisement is expected to be driven by economic growth with higher spends having in a buoyant economy.
• The strong correlation between economic growth and advertisement spends was reflected in the weak advertiser sentiments. Some of the big spending sectors such as Education, Banking, Financial Services and Insurance, Telecom and Retail tightened budgets and the advertising spends remained flat or declined.
• The share of English print advertisement volumes declined from 32 percent in 2011 to 27 percent in 2012 while Hindi and Vernacular markets continued to maintain their share even in a tough environment.

Advertising vs Circulation
• Historically, print companies have expanded by increasing penetration by keeping cover prices affordable, thus resulting in relatively lower circulation revenue growth.
• The share of advertisement to circulation is in the range of 65:35 and this trend is expected to continue in the medium term.
• English is the largest segment in terms of ad revenues and accounts for ~40% of print ad revenues while hindi accounts for higher circulation share but accounts for only 30% ad share.
•The vernacular market accounts for about 30% of the print ad revenues.

High potential Hindi Market
• Hindi speaking states offer immense potential due to lower readership among literates which shows the under penetration in these markets. In terms of AD revenue UP is the largest market constituting 30% of Hindi market followed by Rajasthan at about 18% while Chandigarh, Punjab, Haryana, Himachal Pradesh account for about 16%.Madya Pradesh accounts for about 30%. Intense competition has resulted in top 2 player dominating the market. In states like Rajasthan and Bihar the top 2 players control 80-90% of readership while it is about 60% for Haryana and Chhattisgarh.

Rising Hindi Readership
• The number of people reading English dailies is estimated to be about 18 Mn daily readers while the daily readers for Hindi dailies is about 15.5 Mn currently.
• Hindi speaking states offer potential to increase readership given low readership of about 18% among the literates.
• Despite strong competition, the average readership is concentrated with the top 2 players in the Hindi market having a combined Market share of 75% across key markets.
• Hindi market has been growing faster than the metro focused English market driven by increased penetration of consumer products in tier 2/3 cities.
• Rural growth and untapped consumption demand among Tier-2 & 3 markets have certainly helped Regional Print media companies.

Strong Growth & Healthy ROE’s of Hindi Print media
• Regional print companies have rationalized circulation strategies and raised realizations on sale of newspapers in many key markets.
• Circulation revenues are now set to contribute higher for print media companies on account of increase in prices. The regional print media is in a sweet spot as there is scope for further increase in prices due to customer stickiness and raising regional prosperity.
• However the print media is unlikely to increase prices on a judicial basis considering their long term business interest and actions of competitors.
• Hindi Media stocks have consistently posted ROE’s in excess of 20% even during a downturn. This displays the resilience and quality of their business operations.

Company Section

DBCL- A Snapshot
• Divya Bhaskar became No.1 from Day 1 of it’s launch in June 2003, out placing more than 50 year old local Gujarati newspaper in Ahmedabad city. This newspaper has its presence in Gujarat and Mumbai with 7 editions and 28 district editions. D B Corp Ltd has begun its journey in Maharashtra with the launch of Marathi language newspaper Dainik Divya Marathi newspaper in Amravati, Maharashtra.
• D B Corp Ltd. is engaged in printing and publication of Newspaper in four languages across 13 states, in Radio Business with "My FM" Radio station in 7 states and 17 cities along with strong web presence in India.
• Dainik Bhaskar continues to be the largest read newspaper of urban India, retaining its market position in legacy markets while also strengthening presence in emerging regions.

DBCL- Strong & Scalable Editorial Process

Expanding Foot Print

Launch Strategy – Case Study at leading B-Schools

Leader in high growth markets
• DB Corp is one of the few players to reap success and build scale in every market where it has a presence.
• DB Corp’s flagship daily, Dainik Bhaskar is the leader in the states of Madhya Pradesh, Chhattisgarh, Haryana and Chandigarh and a close number 2 in Rajasthan and Punjab. In older states, the company has more than 30% market share.
• DB Corp is the largest print media company in India in terms of average daily readership (19.8mn readers) through its flagship daily in Hindi, Dainik Bhaskar (14.4mn readers), Divya Bhaskar & Saurashtra Samachar in Gujarat (3.8mn readers) and Divya Bhaskar in Maharashtra (1mn readers).
• DB Corp has the second largest Hindi readership base in India after Dainik Jagran and also owns the second largest Gujarat daily. With rising advertiser interest in tier II and tier III cities/towns, we believe DB Corp is strategically placed in high growth markets.

Rajasthan Market
• The Rajasthan market is dominated by two leading players i.e. Rajasthan Patrika which is the leader in the state with 49% share followed by DB Corp which is a close second with 46% share while the others constitute 5%. The share of Dainik Bhaskar excluding the fringe players is about 48%. In terms of AD Revenues Rajasthan is the second biggest market with 18% share second only to UP which has the largest share. Rajasthan market has got good potential to increase readership given low readership of 14% among the literates. The Rajasthan market has high potential considering state NDP which stands at about Rs.54,000 at market prices which is above other Hindi speaking states.
Punjab Market
• The Punjab market is dominated by two leading players i.e. Punjab Kesari which is the leader in the state with 43% share followed by DB Corp which with 32% share while Dainik Jagran constitute 25% share. In terms of AD Revenues Chandigarh, Punjab, Haryana, Himachal(CPHH) is the third biggest market with 16% share. DB Corp which was earlier in the third position has moved up to the second spot with a 400 bps improvement in market share. The market share of DB Corp has improved from 28% in FY10 to about 32% while Dainik Jagran’s market share has slipped to 25% as against 32% earlier.

Gujarat Market
• The Gujarat market is dominated by three leading players i.e. Gujarat Samachar which is the leader in the state with 39% share followed by DB Corp which is a close second with 33% share while Sandesh constitute 28%. The share of Dainik Bhaskar includes Saurashtra samachar which is part of DB Corp.
• DB Corp though the No.2 player in the state is the leader in the urban market of Ahmadabad which offers enormous pricing power in the state.
• Gujarat market has got good potential due to increasing readership with about 40 Lakh readers which has the potential for monetization in the medium term.
• The Gujarat market has high potential considering the GDP growth is well above the national average which is preferred by local and national advertisers.

Madhya Pradesh & Chattisgarh Market
• The Madhya Pradesh market is dominated by three players i.e. Nai Duniya ,Rajasthan Patrika and DB Corp which is the leader in the state with 60% share followed by Rajasthan Patrika and Nai Duniya with 26% share and 15% share respectively. Despite rising competition in the Madhya Pradesh market DB Corp was able to raise the cover price which has still resulted in increasing circulation which underlines the dominance of DB Corp in this market. Madhya Pradesh market has got good potential to increase readership given low readership of 8.5% among the literates. The Madhya Pradesh market has high AD potential (13% of Hindi Belt) and has been growing consistently.
• The Chhattisgarh market has four players i.e. DB Corp which is the leader in the state with 34% share followed by Hari Bhoomi, Nava Bharat and Nai Duniya with 33%, 22% and 11% share respectively. Despite rising competition from Hari Bhoomi in the Chhattisgarh market DB Corp was able to maintain its leadership position with the two 2 players dominating the market with 67% share. Chhattisgarh market has got good potential to increase readership given low readership of 16% among the literates. The Chhattisgarh market has high AD potential as its is growing above the national average which attracts local and national advertisements.

Superior Operating Performance Vs Peers
• DB Corp stands close second in the Hindi print media segment behind Jagran Prakashan which is currently the market leader. DB Corp has got presence in about 14 states(including Bihar) which is just one short of market leader Jagran Prakashan which has presence in 15 states .
• In terms of readership DB Corp has the highest readership with 19.8 mn readers which is higher than market leader Jagran Prakashan and HT Media with 18.8 mn and 16.3 mn readers respectively. DB Corp has presence in 4 languages with 66 editions while Jagran Prakashan has presence in 5 languages with 123 editions. DB Corp’s top 3 markets are MP, Rajasthan and Gujarat as compared to UP, Delhi and Bihar for Jagran Prakashan.

Urban Market Leader
• DB Corp has strategically planned its expansion and readership base to urban and semi-urban markets as advertisers focus on these markets. Dainik Bhaskar is the leader in urban readership pan India, even ahead of English dailies.
• DB Corp has always stayed away from chasing overall readership which cannot be monetized in the medium term. DB Corp is overall No2 player in Rajasthan behind Rajasthan Patrika, but is the leader in key urban markets by a vast majority. DB Corp is the biggest player in the Ahmadabad the largest urban market of Gujarat though its was a late entrant in the state.
• DB Corp recently entered into Patna and not the whole state of Bihar as 50% of the AD market originates from Patna and the risk reward favours focus in the urban market.

Improving Emerging Editions
• The past experience indicates that any new edition launched takes about 3-4 years for stabilization and for earnings. Though the near term pain continues the long term results of the emerging editions would show growth trajectory when stabilization takes place.
• DB Corp operational losses which was around Rs.17.3 Cr in Q1FY12 had narrowed down to 9.6 Cr in 2QFY14 a sharp reduction of about more than 40%. DB Corp’s emerging editions losses are likely to reduce going into FY15 with traction in Maharashtra and Jharkhand editions.

Robust Margins in DB Corp’s Mature Markets
• DB Corp’s topline in FY14 was at Rs.16,220 mn as against Rs.13,591 mn in FY13 registering a growth of 19.34% YoY.
• DB Corp EBITDA in FY14 was at Rs.5317 mn as against Rs.4212 mn in FY13 registering a growth of 26.23% YoY.
• DB Corp EBITDA margins in FY14 was at 32.8% as against 31% in FY13 registering an increase of about 180 bps.
• DB Corp’s revenues from mature markets like Madhya Pradesh, Rajasthan and Gujarat were above expectations which has enabled the mature markets to record robust performance.

Newsprint Cost to remain Stable
• The newsprint cost has a major impact on the performance of print media stocks on account of it being the major raw material which accounts for 30-35% of cost as a percentage of sales.
• The newsprint is imported as domestic prices are far higher and steep decline in the value of the rupee impacts the margins of the company. A 3% variation in the prices of newsprint impacts the EPS by about 4%.
• In FY13 newsprint cost was around Rs.5426 mn as against Rs.5080 mn in FY12 registering an increase of about 15% due to weakness in the Indian rupee. However going forward we expect the newsprint cost to remain stable with an annual increase of about 7% YoY.

Digital Business
• DB Corp’s Digital Business has shown a impressive growth of 1950% in last 3 years with Collective page views stands at 369 million per month.
• DB Corp’s Unique Visitors have grown to 10 million per month, thus registering growth of 1650% in last 3 years.
• www.dainikbhaskar.com has become largest Hindi language website with 163 million page views, registering growth of 2700% in last 3 years.
• www.divyabhaskar.com has become largest Guajarati language website with 67 million page views, thus registering growth of 1100% in last 3 years.

Growing Radio Business
• DB Corp has a FM station by name “MY FM” with presence in 7 states and 17 cities in India and has s strong online presence in digital media.
• The radio business has retained the leadership position in the 17 radio stations running across India. As per the latest RAM/IRS/ORMAX research “MY FM “ was No.1 in 13 stations and a strong number 2 in rest of the stations.
• “MY FM” commands a leadership in retail with market share of 20% resulting in a strong advertisement growth of 20% and operating profit growth of 74% YoY.
•“MY FM” is bidding for Phase III licenses in their existing print markets with avenues of almost 380 radio stations.

DB Corp - Advertising Revenues
• DB Corp has been expanding its presence and market share in key states that has helped the company to increase its ad revenues substantially. The ad revenues of DB Corp which is around 76% is higher than Jagran Prakashan and Industry which has a 69% and 72% share respectively.
• The ad revenues share of DB Corp at 76% is higher as the company grows its business predominantly through the AD route unlike peers who look to grow through the circulation route. Further DB Corp strong market position has enabled the company to hike AD rates thereby increasing profitability. With increasing market share in key states and new launches in key states expected to gain traction, DB corp is expected to grow its Ad revenues.

DB Corp - Circulation Revenues
• DB Corp has been deriving about 17% of its revenues from circulation which is much lower than its peers and industry. The circulation revenues of DB Corp is expected to grow from Rs.3235 mn in FY14 to about 3948 mn in FY16 backed by volume growth of about 4% and 5% in FY15 and FY16 respectively.
• The cover price of DB corp has increased by about 11% in FY 13 from Rs.1.70 per copy in FY12 to Rs.1.91 per copy in FY13. The circulation revenues of DB Corp are likely to improve further given lower prices compared to its peers such as Jagran Prakashan and HMVL which is around Rs.3 per copy leaving scope for further increases.

Robust Financial Performance

Financials

Earnings Projection – P&L Account
• DB Corp’s revenues are expected to grow by 17% in FY15 & FY16 driven by improved circulation and ad revenues.
• DB Corp has EBITDA margins in the range 26-27%.We estimate EBITDA margins of about 27% and 29% in FY15 and FY16.
• DB Corp is likely to report PAT of Rs.362.01 Cr in FY15 and Rs.439.43Cr in FY16 with an EPS of Rs.19.22 and Rs.23.33 in FY15 and FY16 respectively.
• DB Corp’s interest cost in FY 14 was at Rs.7.53 Cr and is expected to be about Rs.10.93 Cr and Rs.12.79 Cr in FY15 and FY16 respectively.
• DB Corp’s depreciation in FY14 was at Rs.64.25Cr and is likely to be at Rs.76.54 Cr and Rs.89.55 Cr in FY15 and FY16 respectively.
Specialists in discovering Multibagger stocks “
Particulars
FY12
FY13
FY14
FY15E
FY16E
Net Sales
1451.51
1592.32
1859.76
2186.79
2558.54
% Chg
15.20
9.70
16.80
17.58
17.00
Total Expenditure
1112.65
1215.03
1359.47
1580.35
1821.68
% Chg
29.29
9.20
11.89
16.25
15.27
EBITDA
338.86
377.29
500.29
606.44
736.86
EBITDA Margins(%)
23.35
23.69
26.90
27.73
28.80
Interesta
11.76
9.24
7.53
10.93
12.79
Depreciation
50.57
58.06
64.25
76.54
89.55
PBT
300.59
331.3
452.36
540.31
655.86
PAT
202.27
218.12
306.6
362.01
439.43
EPS
10.21
10.98
16.28
19.22
23.33

Concerns & Reasoning
1.) Steep rise in newsprint cost :
Newsprint forms the major raw material for the print media sector and forms a significant portion of their expenses. DB Corp do not have long term supply contracts with suppliers for the supply of newsprint. The price of newsprint both worldwide and in India has historically been cyclical and volatile. Any significant increase in the price of newsprint could adversely affect the margins of the companies in the print media.
2.) Dependence on AD Revenues :
Ad-spend by advertisers and ability to attract new advertisers is influenced largely by the circulation and readership, the geographical reach, readership demographics of newspapers and the preference of advertisers for one media over another. Further intense competition from new entrants may depress AD revenues which may affect the financial results of the company.
3.) Decrease in circulation :
Circulation of newspapers and magazines among the readers is an important source of revenue for the Company since it derive significant revenues from subscriptions. In addition, circulation and readership significantly influence ad-spend by advertisers and the advertising rates in the newspapers. Circulation and readership is dependant on the quality and reach of the publications and the loyalty of existing readers. A decline in circulation will impact the financial results of the company.

Price Chart
• DB Corp had corrected sharply during the past year to around 215 Rs in line with overall Market correction.
• The stock has high levels of Institutional Investor interest with FII’s consistently inching up their stake.
• If we subtract for the long term Investors in the stock, there is literally very little free float available.
Share Holding %
Mar
Dec
Sep
Jun
2014
2013
2013
2013
Promoters
75.00
75.00
75.00
75.00
FII
18.54
17.73
16.46
14.66
DII
2.67
2.94
4.00
5.34
Others
3.79
4.33
4.54
5.00

Conclusion
“The Hindu” which has been known as a premium English newspaper had recently launched a Tamil paper. For a company that has focused on English Print media for almost 100 years to launch a regional papers says a lot. There is a broad understanding among Industry experts that vernacular newspapers have far better growth prospects compared to English Print media. The growth potential is still higher in un- developed markets such as Madhya Pradesh, Uttar Pradesh, Jharkhand etc. With improving literacy rates and lower penetration rates, Hindi Print media would continue to offer healthy organic subscription growth. DB Corp is definitely the best of the lot among the Hindi Print Media stocks because of its Organic growth profile, Revenues spread out across Markets, leadership in most Markets, best Monetizable readership base and competent Management. DB Corp with its large readership base of around 5 Cr people provides Advertisers with a very cost effective way of reaching out to their customers. DB Corp is a well managed Print Media company with ROCE’s consistently above 30%. The company quality and quantity of growth over the past few years with PAT CAGR of 45% is impressive despite subdued economic sentiments. With such superior performance, we believe that DB Corp should deserve a far higher premium compared to its peers and overall market. DB Corp is currently quoting at around forward EV/ EBIDTA multiple of around 8X and forward Price/ Earnings multiple of 14X With a strong dividend yield, we believe that there is a good base for the stock leading to lower downside risks. We believe that the company’s earnings CAGR would surprise everyone on the upside over the next 3 years, leading to a Valuation re-rating. A combination of 20+% earnings growth and re-rating would help Investors with superior Risk-adjusted returns going forward.

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DB Corp Ltd (DBCL) - A Wonderful play on the growing Indian Consumption

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