HT Media's Q4FY18 results (Downgrade to Neutral) - Newsprint price inflation to play spoilsport…

Q4FY18 result highlights

• HT Media cons. rev. fell by 4.1% yoy to Rs5.6bn (3% miss), EBITDA grew 10.2% yoy to Rs805m (9% miss). However, adj. PAT grew to ~3x yoy to Rs750m due to higher other income (~Rs843m; +72.7% yoy).
• Hindi Print ad rev. fell 14.6% yoy (IDFCe: 3% fall) due to high base effect (UP elections in base; LTL revenue was flat yoy). English Print ad rev. grew 15.1% yoy (IDFCe: +3% yoy) as in the base Eng. Print ad rev. had fallen by 21% yoy. Overall print ad rev. grew 2.4% yoy (IDFCe: flat yoy), mostly through volume growth (yields were flat yoy).
• Radio rev. growth slowed to 1.5% yoy (in line). Growth was largely yield driven and through legacy stations. Digital ad rev. fell by 26% yoy (vs exp. of 15% fall) due to weakness in Shine.com and restructuring in other digital businesses (mobile/education).
• EBITDA grew 10.2% yoy to Rs805m, as its cost cutting initiatives (implemented in July 2017) continue to bear fruit (overall expenses fell by 6.2% yoy. Raw mat. expenses were up just 1% yoy as higher newsprint prices will start to reflect from Q1FY19E onwards. EBITDA was also supported by superlative performance in the Radio business (~61% margin; +28% points improvement yoy) due to improvement in yields in legacy stations and one-time year end provision reversals.
• Other income at ~Rs843m was up 72.7% yoy, sharply higher than estimated on profit on MTM gains and sale of ad-for-equity stakes.

Key positives: English ad rev. growth; Radio EBITDA margin.

Key negatives: Hindi ad rev. decline sharper than estimated.

Impact on financials: We now build in 18% increase in newsprint prices in FY19E (vs 8% earlier) and this has led to a cut of 19%/11% in our FY19E/20E EBITDA. EPS cut is lower as other income is revised upwards.

Valuations & view

We expect recovery in Print ad spends in FY19E led by improving economic activity and run-up to the general elections. However, imported newsprint prices have increased sharply (up almost ~50% in the past 4 months) and this would put tremendous pressure on margins as raw mat. expenses constitute ~28% of revenue. We now expect flat profits over FY18-20E (vs. 10% CAGR exp. earlier) and given tremendous pressure on gross margins in the near-term, we downward revise our target multiple to 8x FY20E EPS (vs 9x earlier) and downgrade the stock to Neutral. We had upgraded HT Media 3 quarters back because of its major cost cutting initiatives; however, newsprint price increase is playing spoilsport and is reminiscent of CY08 when prices went up by ~40% before falling by an equal amount in CY09.