DB Corp's Q1FY19 results (Neutral) - Ahead of muted exp.; tough year…

Q1FY19 Result Highlights

• Cons. rev. grew by 6.7% yoy to Rs6.3bn (2% beat), EBITDA fell by 9.8% yoy to Rs1.68bn (7% beat) whereas PAT declined by 11.4% yoy to Rs976m (6% beat); results better than muted expectations.
• Print ad revenue grew by 5.3% yoy (IDFCe: 3.5% yoy), entire growth was volume-driven. Key categories contributing to growth include Education, FMCG and Govt. Sectors like Real Estate and BFSI were very weak in this quarter.
• Circulation rev. grew by 10.2% yoy (IDFCe: 9.4% yoy) entirely led by increased number of copies in both existing and new markets. Radio revenue grew by meagre 1.7% yoy (IDFCe: flat) as legacy stations saw decline in Govt. rev. Digital rev (contributes ~2% to cons. rev.) grew by 2.4% yoy.
• Raw material expenses increased by 27.7% yoy led by sharp 11.6% yoy increase in newsprint prices and 14.5% yoy increase in consumption (led by increase in avg. no copies).
• Margin fell 490bp yoy to 26.63% (IDFCe: 25.4%) led by 570bp increase in RM costs (as a % of sales) and thus EBITDA fell by 9.8% yoy but came in higher than exp. on better ad growth.
• EBITDA losses from emerging editions increased to Rs181m vs Rs62m yoy as it increased copies by an avg. 10% yoy and had a one-off exp. of Rs58m; Digital losses came down to Rs5m from Rs55m yoy.

Key positives: Ad growth, better than exp. margins.

Key negatives: Rising newsprint prices.

Impact on financials: Cut FY19E/20E EPS by 9%/4%.

Valuations & view

Sharp increase in newsprint price is hurting all Print players including DBCL; however, it is better placed to manage the spike given improving ad growth outlook (especially in H2FY19E) due to elections in its key markets (state elections in Rajasthan, Chhattisgarh, and Madhya Pradesh and national elections). DBCL’s decision to defer further increase in copies in a rising newsprint price environment is welcome. This year would be challenging (1.8% decline in EBITDA) but we expect sharp rebound in FY20E (25.9% increase in EBITDA) led by our estimate that avg. newsprint prices could fall by 5% in FY20E. We maintain our Neutral rating, till grow revives, with a revised PT of Rs273 (12.5x FY20E EPS).