Jagran Prakashan's Q2FY20 results (Outperformer) - Economic slowdown has a severe impact on the ad industry…

Q2FY20 result highlights

• Standalone (excl. Radio/Mid-Day): Rev. fell 4.1% yoy (2% miss) to ~Rs4.3bn. Print ad revenue fell 2.3% yoy (3% beat) given weak central govt. ad spends, cutbacks from commercial spenders, as well as sharp decline in ND ad revenue (as base quarter had election related spends). However, Jagran has done better than its peers as DBCL/HMVL ad declines stood at 11%/5% respectively.
• Std. Circulation fell 1.7% yoy (2% miss) due to copy withdrawals (4-5% decline) partially covered by price hikes.
• Std. EBITDA was flat yoy at ~Rs703m (5% beat) on account of lower RM costs (11% yoy fall) and control of other cost line items (flat yoy). EBITDA margin expanded ~70 bps yoy to 16.2% (IDFCe: 15.2%).
• Consolidated Revenue fell 7.0% yoy to ~Rs5.1bn (6% miss) mainly on account of weak radio performance (~22% yoy fall). Print ad revenue fell 3.6% yoy (in-line), while Circulation fell 2.9% yoy (3% miss). Digital ad performance was weak in Q2 (~17.5% yoy fall).
• Cons. EBITDA fell 9.5% yoy to ~Rs901m (11% miss), mainly on account of the miss in radio performance (Radio EBITDA fell ~30.3% yoy to ~Rs185m on negative op. leverage). Cons. PAT, however, jumped ~189.7% yoy to ~Rs1.2bn (128% beat) due to tax reversals taken on account of lower tax rate in non-radio business entities.

Key positives: Lower RM costs.

Key negatives: Sharp drop in Radio performance.

Impact on financials: FY20E/21E EBITDA cut by 8%/12% respectively.

Valuations & view

Weak spending environment, alongside non-existent central government ad spends, has thrown a spanner in the expectations of the print ad industry (incl. JAGP) of enjoying the twin benefits of improving ad revenue growth (due to 25% DAPM ad rate hike) in a lower newsprint cost scenario. This was our key rationale behind our short-term tactical constructive stance on the company (even though print faces long-term obsolescence risks in our opinion). The continued slump in ad environment remains a near-term concern, although softening newsprint prices and the recent downward revision of corporate tax rate would cushion the negative impact of revenue weakness on the bottom-line. We retain our tactical OP rating given the healthy upside from current levels despite factoring in earnings cuts (8x FY21E EPS). Any upticks in ad revenue, coupled with lower cost base, would disproportionately pull up earnings.​