DB Corp's Q2FY20 results (Neutral) - All-round weak performance

Q2FY20 Result Highlights

• Cons. rev. fell 8.7% yoy to ~Rs5.3bn (1% beat), PBT fell 8.2% yoy to ~Rs639mn (5% beat), while PAT grew 64% yoy to ~Rs756m (27% beat).
• DBCL has clubbed Digital ad rev. with Print Ad rev. for reporting purposes from Q1FY19 onwards. Ad revenue (Print+Digital) continues to remain poor and fell 10.8% yoy to ~Rs3.35bn (in-line). Govt ad (18% yoy fall) remains a key weak-point (esp. national govt.) Autos/FMCG too fell, albeit in single digits. Lifestyle/Education registered growth.
• Subscription revenue fell 2.4% yoy to ~Rs1.3bn (1% miss), partly on account of loss of copies in certain markets affected by floods. No cover price hikes taken in Q2, barring some markets in MP.
• Radio ad revenue fell 16.2% yoy to ~Rs316m (8% beat), once again affected by low govt. performance (50% yoy fall), although Auto/FMCG grew in double-digits. Real Estate was flat yoy.
• RM expenses continued to soften into Q2 (-17.6% yoy; -6.4% qoq) – led by both newsprint price fall (11.3% yoy fall) and lower consumption (7.2% yoy fall). Other costs were under control. Thus EBITDA came in at ~Rs984m (+6.6% yoy; 6% beat) & margins at 18.5% (+260 bps yoy).
• PAT came in at ~Rs756m (+63.6% yoy; 27% beat) due to tax write-backs taken in Q2 on account of lower corporate tax rate.

Key positives: Newsprint/RM costs trending lower.

Key negatives: Weak print/radio ad performance.

Impact on financials: Lower FY20E/21E EBITDA by 8.6%/6.8% as we lower Ad rev growth est. but EPS for FY20E/21E is upward revised by 0.8%/3.5% as we factor in lower tax rate.

Valuations & view

While softening newsprint prices (despite 10% BCD imposition) is a strong tailwind, weak ad growth performance in H1 has led to us revising our EBITDA estimates lower. Ad outlook remains weak although there are hopes that festive season may bring some cheer, but we remain guarded on this front as the base performance was very strong. Cost rationalisation measures continue to yield impressive results, however, costs cannot be lowered beyond a point and eventually revenue growth will be required. We expect recovery in ad rev. in FY21E but medium-term outlook is clouded as Print continues to bear the maximum brunt of the digital medium. As a result, we maintain Neutral on DBCL with a target price of Rs166 (lower target multiple to 8x FY21E EPS from 9x as business fundamentals are worsening).