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Event update: Media - Print; Govt. hikes ad rates by 25%, much required breather…

Event

The Ministry of Information & Broadcasting (MIB) has announced a 25% hike for advertisement rates over and above the existing rate structure for such ads in print media as prescribed by the Bureau of Outreach and Communication (erstwhile DAVP). The price hike goes into effect from today and would be valid for a period of three years.

Background

The 25% price hike announced has come after a period of nearly five years. The previous revision of rates had happened in 2013 (when a 19% hike was announced over and above rates set in 2010). The price hike translates into a 4.6% CAGR over five years which would be in line to marginally better than the ad yield improvement experienced for commercial advertising. We note that government rates are one-fourth to one-fifth that of commercial rates and this hike will help bridge the gap.

Our view

JAGP/DBCL key beneficiaries: As per our discussions with the respective managements, nearly ~25% of Jagran Prakashan’s (JAGP) print ad revenue is derived from government sources, while the corresponding figure for DB Corp (DBCL) stands at ~18%. Given that print ad revenue contributes to ~59% and ~63% of cons. revenue for JAGP and DBCL; respectively, the price hikes could correspond to 3.7% increase in cons. revenue for JAGP and 2.8% for DBCL in FY20E. These gains would flow straight to PBT as there won’t be any additional costs attached to it (assuming volume remains constant at current expected levels).

Slight alleviation in the current newsprint inflationary environment: Although newsprint prices have eased from their high watermark of ~$750/MT and current market rates are hovering around the ~$600/MT level, newsprint inflation would continue to hurt print media players until Q4FY19E given high inventory levels at higher prices. We expect average booked newsprint prices to fall sequentially from Q1FY20E onwards and on a yoy basis from Q2FY20E onwards, assuming no resurgence in newsprint prices and stable forex rates. In this environment, the government’s announcement of price hikes would be welcome news to print media players, especially those in regional/vernacular markets where government advertisements are on the higher side.

Why are we not upgrading our estimates yet?

Despite this positive event and improving newsprint price trajectory, we are not changing our estimates or rating because of low confidence on our estimates for H2FY19E and continued slowdown in large non-government advertising segments such as Automobiles, Education, Real Estate etc. We are currently building in 11.4%/9.3% yoy growth in DBCL’s/JAGP’s H2FY19E print ad growth and correspondingly 8.6%/6% yoy growth in H2FY19E EBITDA respectively. It is possible that these companies could miss our ad growth estimates for H2FY19E and that peak newsprint prices would be booked in H2FY19E, our EBITDA estimates could also be at risk. As a result our FY19E estimates could be downward revised (will take cues from Q3FY19E results) and as such our absolute FY20E estimates may not need tweaking due to improved visibility in government ad revenue growth and lower newsprint prices for FY20E. We maintain our earnings estimates for both DBCL and JAGP.

We maintain our Neutral rating on both DBCL and JAGP given structural concerns on ad revenue growth as internet penetration continues to increase rapidly in vernacular markets. Once we start seeing improvement in the outlook on non-Govt. advertising or in financials, we might look to upgrade from a tactical point of view. We note that these companies would continue to payout 50-70% of their profits in terms of dividend or buyback.​