DB Corp's Q1FY20 results (Downgrade to Neutral) - FY20E Ad rev outlook turns shaky again!

Q1FY20 Result Highlights

• Cons. rev. fell 4% yoy to ~Rs6.1bn (1% miss), PBT fell 3.2% yoy to ~Rs1.4bn (2% beat), while PAT fell 3.9% yoy to ~Rs938m (2% beat).
• DB Corp has clubbed Digital ad rev. with Print Ad rev. for reporting purposes from this quarter. Ad revenue growth (Print+Digital) continues to remain poor and fell 4.4% yoy to ~Rs4bn (in-line). Govt+Political category grew by ~3%, followed by Real Estate (15% on small base). Declines were seen in Education (Q1 is usually strong), Automobiles, and Lifestyle categories.
• Subscription revenue fell 2.3% yoy to ~Rs1.3bn (1% miss). No cover price hikes were taken in recent times while some temporary copy rationalisation took place in Rajasthan and Bihar.
• Radio grew by a robust 18.9% yoy to ~Rs377m (8% beat) due to focus on ground-level activities in existing station markets while Phase III station utilization improvement continued.
• RM cost softening was seen in Q1 (-5.9% yoy; -7.2% qoq) but was entirely led by lower consumption; benefit of fall in newsprint price will be visible from Q2 onwards. Reported EBITDA came in at ~Rs1.8bn. Adjusting for Ind-AS 116 impact, EBITDA would have come in at ~Rs1.7bn (-0.6% yoy; 3% beat; Margin at 27.5% vs IDFCe: 26.5%).
• PAT came in at ~Rs938m (-3.9% yoy; 2% beat). Ind-AS 116 impact on PAT stood at ~Rs9m.

Key positives: Robust cost controls in a slow quarter.

Key negatives: Ad growth remains weak, subs rev lacklustre.

Impact on financials: 8%/13% EPS cut in FY20E/21E. Incorporate Ind-AS 116 impact on DBCL’s financials.

Valuations & view

Although newsprint prices have softened from their peak levels, the recent announcement of 10% customs duty on imported newsprint (which in-turn would increase domestic newsprint prices too to some extent given their linkage to landed imported prices) would turn this tailwind upside down (unless rolled back, looks unlikely, in our view). In addition, the weak outlook expected in H1FY20E and the uphill climb needed to cover the strong base effect of print ad revenue in H2FY19, would keep a lid on the company’s prospects in FY20E despite the impressive cost rationalisation measures implemented. While the industry is lobbying to at least get the customs duty reversed, we have incorporated its impact on costs in our estimates. We downgrade the stock to Neutral. Our revised target price stands at Rs180 (cut target multiple to 9x FY21E EPS vs 10x earlier).