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Wednesday, June 27, 2007

ISEC - Deccan Chronicle


ICICI Securities report on Deccan Chronicle Holdings:

We recently appraised Odyssey, the retail business of Deccan Chronicle Holdings (DCHL), via store visits. Based on DCHL’s expansion plans and ‘Agreed upon procedures’ with KPMG, we are optimistic on Odyssey going forward. We value Odyssey at Rs 1.9 billion (Rs 7.50 per DCHL share) based on peer valuation. DCHL is the cheapest stock in print space and our top pick in the print sector. The stock is currently trading at FY09E P/E of 19.2x and EV/EBITDA of 10.6x.

Odyssey

DCHL acquired a 100% stake in Odyssey in September ’05 for Rs 612 million. The company is planning on expansion through an initial public offering (IPO) for Odyssey for raising Rs 770 million, post which, DCHL plans to de-merge the entity (Odyssey) from the print business. Odyssey’s business encompasses retailing of books, music, cards, stationery, gifts, toys, multimedia and magazines. Odyssey started in 1995 and has 17 national stores as of date, spanning 10 cities – Chennai, Hyderabad, Bangalore, Nagpur, Coimbatore, Trichy, Salem, Varanasi, Noida and Mumbai. The entity posted FY06 revenues of Rs 256 million. Books contribute to 40% of revenues whereas share of non-book items (gifts, toys, stationery and greeting cards) is 50% on an average.

Aggressive expansion plan by Odyssey through increasing number of stores to 44 and built-up area under operation to 527,296sqft by FY09.

Pan India presence.

Odyssey is targeting pan India presence to leverage on the consumption boom. At present, a large chunk of revenues are contributed by Chennai (six stores). Odyssey plans to capture A-class cities, extending operations to Delhi, Bangalore, Mumbai, etc.

Financials on the upswing.

The management expects Odyssey to register FY09E revenues at Rs 3.2 billion, up 12.5x from FY06 revenues at Rs 255 million on the back of an increase in number of stores to 44 from 17 at present.

Valuation

We value Odyssey at Rs 1.9 billion or Rs 7.50 per DCHL share based on the current store outlay and projected financials for FY07.

Odyssey

DCHL recently laid down its expansion plans for Odyssey, with a KPMG study of the ‘Agreed upon procedures’ for the expansion. Odyssey has outlined an aggressive pan India expansion plan, to increase its presence to 44 stores from 17 stores in 10 cities at present. DCHL acquired 100% stake in Odyssey in September ’05 for Rs 612 million. The company is planning on expansion through an IPO for Odyssey for raising Rs 770 million, post which, DCHL plans to de-merge Odyssey from the print business. However, the company has been planning the IPO for the past 15 months.

Takeaways from the KPMG study of ‘Agreed upon procedures’

Odyssey - The present state

Odyssey is in the business of retailing books, music, cards, stationery, gifts, toys, multimedia and magazines. It is the first branded leisure store in India, growing from one store in 1995 to 17 stores as on date, spanning 10 cities – Chennai, Hyderabad, Bangalore, Nagpur, Coimbatore, Trichy, Salem, Varanasi, Noida and Mumbai. Odyssey registered FY06 revenues of Rs256mn. Books contribute to 40% of revenues whereas share of non-book items (gifts, toys, stationery and greeting cards) is 50% on an average; other items including music & multimedia contribute 10%. Employee strength is 379, including store staff of 226.

Aggressive expansion plans

Odyssey plans aggressive expansion through increasing number of stores to 44 and built-up area under operation to 527,296sqft by FY09. Odyssey’s store model is similar to Landmark’s, stocking books, music CDs, gift items as well as lifestyle products such as perfumes and leather products.

Financials – To witness an upswing

Odyssey has given FY09E guidance of revenue and profitability. However, we estimate that there is a risk to performance on account of slower-than-estimated expansion owing to delay caused by mall developers. Further, the schedule is short of three stores, owing to delay in transfer of properties.

Key assumptions for projections, by the management

  • Revenues from existing stores to increase 35%
  • Gross margins are based on current average margins
  • Employee costs are based on expected employee strength and a 10% yearly increment rate
  • Lease rentals include selling, general and administration expenses, based on signed letters of intent
  • Depreciation is calculated using the straight line method.

Valuing Odyssey

In our detailed report dated May 29, ’07 (India Media Sector: Triumph writ large), our FY09 valuations for Odyssey were Rs 612 million. We have revisited our valuations, post the built up of Odyssey’s new stores and peer multiples, attributing Rs 1.9 billion or Rs 7.5 per DCHL share. However, we believe that the DCHL management is planning to raise money at IPO valuations of Rs 4-5 billion for Odyssey.

Deccan Chronicle - Still the cheapest

DCHL is our top pick in the print sector and the cheapest stock in print space. The stock is currently trading at FY09E P/E of 19.2x and EV/EBITDA of 10.6x, even after moving up 20% in the past three weeks. We have not factored in any upside from the Odyssey’s stock dividend.