HT Media's Q1FY19 results (Neutral) - Disappointing print performance; to unlock part value in radio…

Q1FY19 result highlights

• HTML’s cons. rev. fell 7.1% yoy to ~Rs5.4bn (8% miss; cons. est. ~Rs6bn). Digicontent Limited (formerly HT Digital Ventures Ltd.) has been reported as discontinued operations (as required by Ind-AS 105); however, it is still to be carved out as NCLT approval is pending; previous year financials have also been re-stated.
• Hindi Print ad rev. fell 5.1% yoy (IDFCe: 1% fall) due to weakness in  pan-India large client spends and high base due to govt. spending prior to GST. English Print ad rev. fell 9% (IDFCe: 1% yoy growth), despite a soft base. Overall, print ad rev. fell 7.1% yoy (IDFCe: flat).
• English circulation rev. fell 4% yoy to ~Rs160m, while Hindi circulation rev. fell 3% yoy to ~Rs530m (both in line).
• Radio rev. grew 9.6% yoy to ~Rs472m (IDFCe: +8%), margins improved 400bp yoy to 30% led by operating leverage gains. Digital rev. fell 46% yoy as it scales down loss-making segments.
• Given the high operating leverage nature of the business, EBITDA plunged 48.7% yoy to ~Rs360m (55% miss; cons. est. ~Rs858m). Net income too was almost wiped out at ~Rs58m (86.1% yoy fall; 90% miss; cons. est. ~Rs526m).
• In a relatively complex transaction, HTML has opted to demerge its radio business (excl. Hyderabad & UP stations) and merge it with Next MediaWorks Ltd. (NMW; a listed entity). Post the demerger, HTML will own 37.5% in NMW and its shareholders will own 36.5% in NMW.

Key negatives: Weak performance in English/Hindi print.

Impact on financials: Cut FY19E/FY20E EBITDA by 32%/31% as we now assume 4% CAGR decline in Eng. Print ad rev (vs 1% earlier) and 8% CAGR in Hindi Print ad rev (vs 10% earlier).

Valuations & view

Print ad rev. outlook has further worsened for HT Media given challenges faced by English Print and Hindi suffering from a high base. Although we expect a recovery in print-ad spends in H2FY19E (improving economic activity/run-up to general elections), higher newsprint prices would erase all the handsome gains from the cost-cutting exercise in FY18 and cause EBITDA to fall by 34% in FY19E. We would have appreciated if the entire value was unlocked in radio rather than retaining half of it with HTML. Moreover, post this move HTML will become a pure-play print company (as digital/content business has already been demerged), which could lead to a de-rating. We retain our Neutral with revised PT of Rs60 (7x FY20E, downward revised from 8x).