DB Corp IPO Analysis

Aggressive pricing

Has one of the largest newspaper production and distribution platforms in India

Promoted by Ramesh Agarwal and Sudhir Agarwal, DB Corp is one of the leading print media companies in India, publishing 7 newspapers, 48 newspaper editions and 128 sub-editions in three languages - Hindi, Gujarati and English in 11 states in India. The company's flagship newspapers, Dainik Bhaskar, Divya Bhaskar and Saurashtra Samachar, have a combined average daily readership of 15.5 million readers, making it one of the most widely read newspaper groups in India. With a total average daily readership of 11.7 million readers, Dainik Bhaskar is a widely read newspaper in Madhya Pradesh, Chattisgarh, Rajasthan, Haryana, Punjab, and Chandigarh. Divya Bhaskar is the number one Gujarati daily newspaper by circulation in Gujarat. Its other newspapers are Business Bhaskar, DB Gold and DB Star, and, franchisee DNA in Gujarat and Rajasthan.

In addition to newspapers, DB Corp publishes 5 periodicals: Aha Zindagi, a monthly magazine in Hindi and Gujarati; Bal Bhaskar, a Hindi magazine for children; Young Bhaskar, a children's magazine in English; and Lakshya, a career magazine in Hindi. The company has one of the largest newspaper production and distribution platforms in India. Its print products are produced at 31 facilities spread across 31 cities with an installed capacity of approximately 1.94 million copies per hour.

Through its subsidiary, Synergy Media Entertainment (SMEL), DB Corp has a significant presence in radio under the brand, My FM. Through SMEL, it operate 17 FM radio stations. Through its subsidiary, I Media Corp (IMCL), it also runs internet portals and short messaging service (SMS) portals.

DB Corp sells space in its publications through advertising agencies as well as directly to customers. It has one of the largest pools of advertisers in India. DB Corp had relationships with 1,552 accredited agencies and 2,745 non-accredited agencies and served approximately 308134 advertisers end September 2009.

DB Corp intends to enter the capital market to raise Rs 336.24 crore to Rs 385.31 crore by issuing around 1.81 crore equity shares of face value of Rs 10 each through a 100% book-building process at a price band of Rs 185 – Rs 212, which consists of fresh issue of 1.27 crore of equity share and an offer for sales of around 0.54 crore by Cliffrose Investment (an affiliate of private equity firm Warburg Pincus). The company will use the proceeds setting up two new publishing units, each with a capacity to print 50,000 newspaper copies per hour at an approximate cost of Rs 60 crore; upgrade its existing plant and machinery in Madhya Pradesh, Chhattisgarh, Rajasthan and Gujarat at an approximate cost of Rs 30.5 crore; enhance brand image through sales and marketing; reduce its existing working capital loans at Rs 38.1 crore to Rs 18.1 crore; and prepay Rs 110 crore of the existing term loans of Rs 403.67 crore.

Strengths

Has substantial presence in north, central and western India. The key flagship newspaper, Dainik Bhaskar, is market leader by readership in the daily newspaper segment in Madhya Pradesh, Chattisgarh, Chandigarh and Haryana.

Divya Bhaskar is the largest Gujarati language newspaper by circulation.

The flagship newspapers, Dainik Bhaskar, Divya Bhaskar and Saurashtra Samachar, have a combined average daily readership of 15.5 million readers, making it one of the most widely read broadsheet newspaper group in India.

Weaknesses

Due to the memorandum of understanding with legal heirs of late Bishambhar Dayal Agarwal (BDA), the company cannot publish Dainik Bhaskar in the districts of Sidhi, Narsinghpur, Seoni, Satna, Mandla, Chhindwara, Rewa, Shahdol, Jabalpur, Gwalior, Balaghat, Damoh, Chhatarpur, Panna, Tikamgarh, Anuppur, Umaria, Katni, Dindori and Jhansi and in Maharashtra and western Uttar Pradesh., where Dainik Bhaskar is owned by BDA. It is also possible for BDA to start Dainik Bhaskar in states without the presence of the newspaper.

The promoters and promoter group have equity interests or investments in other entities that offer related services such as DMCL, Bhaskar Multimedia Pvt Ltd, Bhaskar Publications, and Allied Industries Pvt Ltd, DB Publications Pvt Ltd, Dimension Media Pvt Ltd, Divya Prabhat Publications Pvt Ltd, Manjul Publishing House Pvt Ltd, New Era Publications Pvt Ltd and Saurashtra Samachar Pvt Ltd. These entities have been incorporated to print and publish newspapers. This can have adverse effects on operation and there is scope for conflict of interest.

Valuation

DB Corp has set a price band of Rs 185 to Rs 212 per equity share of Rs 10 face value. At the lower band of Rs 185 per share, the P/E is 17.6 times the annualised consolidated EPS of Rs 10.5 for the half-year ended September 2010 and 70.4 times the consolidated EPS of Rs 2.6 for the fiscal ended March 2009 (FY 2009). At the upper price band of Rs 212 per share, the P/E will be 20.1 times the annualised EPS for the half-year ended September 2010 and 80.7 time the EPS for FY 2009. Considering the past track record, the first half performance looks to be exceptional. The first half operating profit margin (OPM) of 32.9% is way above the OPM of 12.7% to 20.1% achieved in the last four years. The high OPM is mainly due to the sharp fall in newsprint costs due to exceptional fall in newsprint prices. As newsprint prices have already gone up and this kind of margin is not sustainable. Hence, it is not proper to annualise the first half EPS and arrive at P/E. Comparable player Jagran Prakashan is currently trading at P/E of 39 times FY 2009 EPS as against which DB Corp is offering its shares at P/E of 70.4-80.7 times.