DB Corp's Q2FY18 results (Outperformer) - Performance to improve from H2 onwards...

Q2FY18 Result Highlights

• Cons. rev grew by 5.4% yoy to Rs5.68bn (2% beat), reported EBITDA fell by 7.1% yoy to Rs1.4bn (3% miss) whereas PAT declined by 11.1% yoy to Rs787m (5% miss). However, adjusted for one-off savings in ‘other expenses’ in Q2FY17, EBITDA grew by 4.2% yoy.
• Print ad revenue grew by 6.1% yoy (IDFCe: 5% yoy) and is a decent performance given overall weak macro and impact of GST launch on advertising (Hindustan reported ~8% yoy decline in Print ad rev.).
• Circulation rev. grew by strong 8% yoy (IDFCe: 5% yoy) better than that for peers. Radio revenue grew by strong 16.7% yoy (IDFCe: 10% growth) because of new stations aiding to growth (single-digit LTL growth). Internet rev (contributes ~2% to cons. rev.) fell by 12% yoy.
• Raw mat. expenses increased by 9.3% yoy (+3% newsprint price yoy and +6% yoy consumption increase on increase in copies.
• Reported other exp. increased by sharp 19% yoy but adj. for one-offs in the base quarter (Rs163m on reversal of radio royalty and MTM gains in Gitanjali Gems private treaties), other exp. increased by manageable 4.7% yoy despite focus on increasing circulation. Reported margin fell 330bp yoy but adj. (for one-offs in base) margin fell by just 30bp yoy to 24.6% (IDFCe: 25.8%); reported EBITDA fell by 7% yoy to Rs1.4bn whereas adj. EBITDA grew by 4.2% yoy.
• EBITDA miss of 3% was led by Rs~70m of pre-operative expenses incurred in this quarter to increase in editions/copies; adjusted for this EBITDA is in line. PAT at Rs787m (miss of 5%) fell by 11% yoy; however, adj. PBT (for one-off savings in the base) grew by 4% yoy.

Key positives: Ad/Circulation/Radio rev. growth.

Key negatives: Fall in Internet ad rev. yoy.

Impact on financials: Cut FY18E/19E EPS by 10%/7%.

Valuations & view

We expect DB Corp to post a CAGR of 10.3% over FY17-19E in ad growth against 2.2% CAGR over FY14-17 as it has shed its stubborn approach on increasing ad rates. This coupled with tight cost control and manageable increase in newsprint cost would lead to a robust CAGR of 16% in PAT over FY17-19E. Given decent earnings growth, high return ratios, high FCF generation and limited medium term threat from online medium (for regional print), we retain our Outperformer rating with revised TP of Rs411 (15x FY19E EPS).