MOSL: D B CORP (Downgrade to Neutral)-Cost pressures dent performance

D B Corp: Cost pressures dent performance; Downgrade to Neutral

(DBCL IN, Mkt Cap USD0.7b, CMP INR265, TP INR300, 13% Upside, Downgrade to Neutral)

• Higher newsprint prices drag PAT lower: revenue increased 7% YoY to INR6.3b (in-line), mainly led by 7% YoY growth in print business. Recovery in FMCG and education category adspend drove modest 5% YoY growth in print ad revenue. Circulation revenue grew at a healthy 10% YoY to INR1.3b, driven by higher circulation copies, while radio revenue grew at a muted 2% YoY. However, rising newsprint prices, coupled with higher circulation copies, led to an increase in RM cost by 28%, pulling down consol. EBITDA to INR1.7b (-10% YoY, 10% miss). EBITDA margin shrank 490bp YoY to 26.6%. Consequently, consol. PAT declined 11% YoY to INR976m (15% miss).
• Concall highlights: (1) 2QFY19 ad revenue should increase led by a low base. (2) FY19 circulation revenue should grow in double-digit. (3) Expect newsprint prices to settle down to original levels in 3Q/4QFY19. (4) FY19 newsprint cost should be 20% higher. (5) Net cash balance stood at INR3.63b, of which INR3.13b should be used for 5% buyback.
• Cutting earnings estimate due to cost escalations: We expect 8% CAGR over FY18-20 on the back of (a) healthy 8% growth in print ad revenue, led by a recovery in local adspend across categories and higher government adspend in a pre-election year and (b) 8% growth in circulation revenue, led by an uptick in circulation copies and yield improvement. However, we have revised our RM cost estimate due to a steep rise in newsprint prices. This leads us to cut our EBITDA/PAT estimate by 12%/15% for FY19 and by 8%/12% for FY20. We expect 8%/12% EBITDA/PAT CAGR over FY18-20.