HT Media's Q2FY19 results (Dropping Coverage) - Print stays weak, P&L threatened by mark-downs in real estate portfolio…

Q2FY19 result highlights

• HTML’s cons. rev. fell 6.0% yoy to ~Rs5.1bn (7% miss). Digicontent Limited (formerly HT Digital Ventures Ltd.) has been reported as discontinued operations (as required by Ind-AS 105).
• Hindi Print ad rev. fell 6.4% yoy (IDFCe: 0%), despite a weak base as national advertising spends remained tight during the quarter (although local ad players have started spending). English Print ad rev. fell 9.6% yoy (IDFCe: 0%), despite a soft base for similar reasons. Overall, print ad rev. fell 8.3% yoy.
• English subs. rev. fell 5.3% yoy to ~Rs180m (in-line), while Hindi subs rev. grew 8.0% yoy to ~Rs540m, driven by cover price hikes.
• Radio rev. grew 10.6% yoy to ~Rs466m (IDFCe: 8.5%), margins improved 200bp yoy to 31% led by operating leverage gains. Digital rev. fell 35.4% yoy as it scales down loss-making segments.
• Despite weak revenue, cost pressure was visible across line items with raw material expenses increasing 18% yoy led by higher newsprint prices and other expenses increasing by sharp 21% yoy led by MTM loss on investments and forex loss. Given the high operating leverage nature of the business, EBITDA was wiped out in Q2, posting a loss of ~Rs195m. Adjusting for MTM/forex losses of ~Rs200m, EBITDA would have been break-even, but much lower than our exp. (of Rs451m).
• Net loss stood at Rs422m (vs profit exp of Rs216m) driven by EBITDA loss and exceptional provision of Rs239m towards past labour dispute; adj. for MTM & forex loss and one-off provision, net profit would have stood at ~Rs17m (90% miss).

Key negatives: Weak performance in English/Hindi print.

Impact on financials: N/A.

Valuations & view

FY18 performance was HTML’s peak driven by cost cutting initiatives; as ad revenue continues to be under pressure coupled with higher newsprint prices (accentuated by Re depreciation), HTML’s profitability will remain under severe pressure until both these issues are resolved. On top of this, mark-down in its real estate book (~10% of total assets) and Ad-for-equity holdings would put further pressure on profitability. Weak P&L outlook, demerger of business with decent future outlook such as digital/content and radio along with continuous inefficient capital allocation makes us drop coverage on the stock. Our last published rating on the stock was ‘NEUTRAL’ with a 12-month target price of Rs60 (7x FY20E EPS). Our estimates have not been updated for Q2FY19 realities and should not be used for making any investment decision.