MOSL: D B CORP (Buy)-Ad revival bodes well-increasing costs pose a challenge, though

D B Corp: Ad revival bodes well; increasing costs pose a challenge, though

(dbcl IN, Mkt Cap USD0.7b, CMP INR265, TP INR324, 22% Upside, Buy)

• High opex pulls down PAT: Consol. revenue grew 10% YoY to INR5.7b (1% miss), led by healthy growth in the Print business. Print ad revenue was up 9% YoY to INR3.4b, driven by a revival in adspend. Moreover, a 14% YoY jump in circulation copies to 5.96m drove 9% YoY growth in circulation revenue to INR1.3b. Radio revenue, too, increased 9% YoY to INR360m. Yet, consol. EBITDA fell 13% YoY to INR979m (18% miss), mainly due to a 16% rise in opex. EBITDA margin contracted 445bp to 17.3%. PAT declined 11% YoY to INR571m (17% miss) due to lower EBITDA, partly offset by lower tax. For FY18, consol. revenue rose 3% to INR23.3b (in-line), while EBITDA/PAT fell 12%/14% to INR5.9b/3.4b (4% miss).
• Concall highlights: 1) Volumes to account for ~70-80% of total ad revenue growth in FY19. 2) Expect a 12-15% YoY increase in newsprint prices in 1Q/2QFY19. 3) Circulation copies to increase by 6-10% in FY19. 4) FY19 (maintenance) capex to be ~INR500-600m. 5) Management has no plans of any M&A/investment activities.
• Higher newsprint prices to limit earnings growth: We expect print ad revenue CAGR of 8% over FY18-20, led by a recovery in ad spend and increased spending by government in the run up to a few upcoming state elections (key markets) as well as the general election next year. Furthermore, 6-10% growth in circulation copies and yield improvement are likely to drive 7% CAGR in circulation revenue. Subsequently, we have largely maintained our revenue estimate – revenue CAGR of 8% over FY18-20E. However, the impending rise in newsprint prices (12-15% YoY) and higher circulation copies are expected to pressurize EBITDA. Thus, we have cut our EBITDA/PAT estimate by ~10%/10% for FY19/20. We expect 13%/19% EBITDA/PAT CAGR over FY18-20.