DB Corp's Q3FY20 results (Neutral) - Weakness continues; Newsprint prices only silver-lining!

Q3FY20 Result Highlights

• DB Corp reported better results versus muted expectations. Cons. rev. fell 9.2% yoy to ~Rs6bn (2% beat), PBT fell 5.6% yoy to ~Rs1.1bn (19% beat), while PAT grew 3.5% yoy to ~Rs816m (20% beat).
• DBCL reports ad revenue for print and digital combined from Q1FY20 onwards. Ad revenue (Print+Digital) performance remains weak, falling ~10.8% yoy to ~Rs3.9bn (in-line). Govt. segment (~15% yoy fall) continues to remain weak (esp. National Govt.) while sectors like Auto/FMCG/Lifestyle too remain under pressure. Education/Real Estate sectors have performed well in Q3.
• Circulation revenue grew ~1.5% yoy to ~Rs1.3bn (2% beat) mainly on account of cover price hikes taken in select markets in Madhya Pradesh.
• Radio revenue fell ~20.1% yoy to ~Rs372m – a victim of the lack of spending from central govt. Radio EBITDA fell ~33.2% yoy to ~Rs135m due to negative operating leverage.
• Newsprint prices continued to soften (~15.9% yoy fall), which led to RM costs falling ~20.4%. In addition, cost controls across other line-items meant that EBITDA (post Ind-AS 116) grew 1.4% yoy to ~Rs1.4bn (13% beat). Margins came in at 23.7% (+250 bps yoy; IDFCe: 21.5%).
• PAT stood at ~Rs816m (+3.5% yoy; 20% beat). DBCL has declared a Rs3.5/share dividend (total Rs10/share dividend declared so far in FY20E). High payouts would continue given lack of M&A opportunities.

Key positives: Newsprint/RM costs trending lower.

Key negatives: Weak print/radio ad performance.

Impact on financials: Cut FY20E/21E EPS by 1%/4%. Introduce FY22E.

Valuations & view

Softening newsprint prices continue to protect operating profits despite the collapse in print/radio ad revenue in FY20E. The near-term outlook for ads continues to remain challenging (print/radio), and although cost rationalisation measures continue to yield impressive results, we believe that cost declines would eventually stop and the focus would once again come on revenue growth for which there are no near-term triggers. We are building in a 5% CAGR in print ad for FY21E/22E, but beyond this, the long-term structural headwind of digital versus print would weigh on the sector and the company. Maintain Neutral (8x FY21E EPS / TP Rs159).