DB Corp's Q3FY18 results (Outperformer) - Disappointing quarter; worst appears to be behind…

Q3FY18 Result Highlights

• Results were sharply below estimates with cons. rev. fall of 4.6% yoy to Rs5.99bn (3% miss), EBITDA fall of 30% yoy to Rs1.4bn (15% miss) whereas PAT declined by 34% yoy to Rs781m (17% miss).
• Print ad revenue fell by 5.8% yoy (IDFCe: 3% yoy decline) due to (1) weak govt. spending (relative to base quarter), (2) Gitanjali Gems ad-for-equity revenue (~Rs120mn) in the base (adj. for this, decline is 3% yoy), and (3) sharp fall in key categories like real estate, education, and electronics. We note that Hindustan’s ad revenue grew 5% yoy.
• Circulation rev. grew by 6% yoy (IDFCe: 8% yoy) led by increased number of copies in both existing and new markets. Radio revenue declined 7.5% yoy (IDFCe: 11% growth) due to high govt. and BFSI spending in the base quarter relative to Q3FY18. Internet rev (contributes ~2% to cons. rev.) fell by 2% yoy.
• RM expenses increased 6.2% yoy largely on account of increase in circulation (avg. up 6% yoy) even as ad rev. fell by ~6% yoy.
• Other exp. increased by 12% yoy due to focus on increasing circulation. Margin fell 830bp yoy to 23.3% (IDFCe: 26.4%); reported EBITDA fell by 29.6% yoy to Rs1.4bn. PAT at Rs781m (miss of 16.5%) fell by 34% yoy in-line with the weak operating performance.

Key positives: Growing circulation revenue.

Key negatives: Sharper than expected ad rev. decline, weak margin.

Impact on financials: Cut FY18E/19E EPS by 17%/19%. Introduce FY20E.

Valuations & view

Q3FY18 performance has been disappointing which has led to sharp downward revision in our estimates as we also build in higher newsprint prices going forward (as highlighted by DBCL and peers). However, ad rev. growth is finally on an uptrend (from Dec’17 onwards) and thus we expect ad revenue growth to revive over FY19E given weak base and the election heavy year (state elections Rajasthan, Chattisgarh, and Madhya Pradesh; national elections). Given weak FY18E performance (EPS to fall 10% yoy), we now build in a 19% EPS CAGR over FY18E-20E. Given improved earnings trajectory ahead we roll-forward our valuation to FY20E arriving at a revised PT of Rs Rs390 (15x FY20E EPS), maintain OP. Key risks include persistent ad rev. weakness, spike in newsprint prices and any slippage in competitive positioning in the forthcoming Indian Readership Survey (IRS).