DB Corp's Q4FY18 results (Downgrade to Neutral) - Near-term earnings visibility clouded by sharp increase in newsprint price…

Q4FY18 Result Highlights

• Cons. rev. grew by 9.7% yoy to Rs5.7bn (3% beat), EBITDA fell by 13% yoy to Rs979mn (13% miss) whereas PAT declined by 11% yoy to Rs571m (5% miss).
• Print ad revenue grew 8.8% yoy (IDFCe: 8.0% yoy), albeit on a soft base. 80% of the growth was volume-driven. Key categories contributing to growth include Education, BFSI, FMCG. Sectors like Real Estate and Auto are showing revival signs but are still weak.
• Circulation rev. grew by 8.5% yoy (IDFCe: 8.0% yoy) led by increased number of copies in both existing and new markets. Radio revenue grew 9.3% yoy (IDFCe: flat). Internet rev (contributes ~2% to cons. rev.) fell by 7% yoy.
• RM expenses increased 20.5% yoy, of which half was attributable to rising newsprint prices, the balance to increased circulation.
• Other exp. increased by 19.6% yoy due to focus on increasing circulation. Margin fell 440bp yoy to 17.3% (IDFCe: 20.3%); reported EBITDA fell by 12.8% yoy to Rs979m. PAT at Rs571m (5% miss) fell by 11% yoy, partially supported by higher other income and lower tax rate.

Key positives: Ad/Circulation/Radio growth.

Key negatives: Weak margin; rising newsprint prices

Impact on financials: Cut FY19E/20E EPS by 8.4%/10.7%.

Valuations & view

DBCL has been posting disappointing results since the past couple of quarters and outlook on FY19E ad revenue growth is non-committal despite this being an election heavy year in its markets of operation  (state elections in Rajasthan, Chattisgarh, and Madhya Pradesh; national elections). This coupled with sharp increase in newsprint prices has clouded earnings visibility in the near-term and as a result we downgrade DBCL to a Neutral with a revised price target of Rs285 (12.5x FY20E EPS versus earlier ascribed multiple of 15x). We are now building a 7.5% CAGR in Print ad rev. over FY18-20E and a 13.3% CAGR in EBITDA over the same period with bulk of this growth being driven by the assumption of fall in newsprint prices in FY20E (over FY19E). DBCL’s delay in distributing excess cash (since end FY17) is also worrisome although the management has said that the Board would decide in next two quarters.