DB Corp – IPO

Investors can consider subscribing to the initial public offer of DB Corp, a print media company that publishes the widely read Hindi daily, Dainik Bhaskar. Its strong regional footprint in the Hindi speaking states has enabled it to drive advertising revenues, the lifeline of the industry. Strong position in readership, the ability to tap regional and national advertisers even during a slowdown and lower newsprint costs and an appreciating rupee are key positives for the company.

At the upper end of the price band (Rs 185-212), the offer discounts the company's trailing 12- month earnings by about 28 times and its likely 2009-10 per share earnings by about 24 times, both on a post-offer equity base. This makes the offer a bit pricey as DB Corp asks for about the same multiples as Jagran Prakashan. In our view, the offer would be fairly priced at the lower end of the price band.

While DB Corp enjoys 20 per cent higher revenues than Jagran, it has a lower margin profile as it incurs higher employee and selling expenses. However, this may be a function of the ramp-up in its editions. DB Corp has seen its employee costs go up by 40 per cent annually over the last three years, due to staff recruitments for launch of new editions.

According to the ABC figures for January-June 2009, Dainik Bhaskar has a daily circulation of 2.547 million, higher than Dainik Jagran's 2.168 million. But the asking price is at a discount on a forward basis to players such as Deccan Chronicle Holdings and HT Media (which also publishes a Hindi Newspaper). DB Corp has seen its revenues grow annually by 21.7 percent annually over a three-year period to Rs 961 crore in FY-09, while net profits grew at 11.1 per cent to Rs 47.7 crore.

The company suffered a sharp decline (of 37 per cent) in profits for 2008-09, when the company was saddled with a 21 per cent rise in newsprint cost and, simultaneously, a 21 per cent increase in operating expenses.

However, a recovery is evident in the current fiscal with the company almost doubling its last year's profits in the first half itself.

Regional strength

DB Corp owns seven newspapers that have 48 editions. Dainik Bhaskar, one of its flagship newspapers, has 27 editions published across nine largely Hindi-speaking States (Madhya Pradesh, Rajasthan, Chhattisgarh, Haryana, Delhi, Punjab, Himachal Pradesh, Uttrakhand and Chandigarh).

According to the IRS 2009 R2 statistics, it has a readership of nearly 3.3 crore, making it the second most read newspaper in India. In Gujarat, it brings out Divya Bhaskar, where it claims top circulation.

There are also relatively smaller readership commanding newspapers such as Saurashtra Samachar, Business Bhaskar and DNA(in partnership with Zee Group).

These facts augur well for attracting advertisements, which contribute to over 75 per cent of the company's overall revenues.

DB Corp derives over 60 percent of its revenues from regional advertisers, which compares favourably to peer Jagran. The broad trend among broadcasters and print media companies seems to be suggesting an increasingly regional focus both in terms of audience and garnering advertisements.

HT Media, for example, has looked to expand in the Hindi language genre under the Hindustan brand and is now the fourth largest read in this category, according to recent IRS surveys (IRS 2009 R2). Zee Entertainment has acquired all of Zee News' entertainment channels to have sharper regional focus.

Recovery in advertisements of education, automobiles, insurance, telecom, especially with the several new entrants coming in and operators seeking to expand rurally, and FMCG companies means that both regional and national advertising are likely to be healthy for the company.

Even in 2008-09, when advertising revenues were hard to come by, DB Corp saw advertising revenues grow by close to 12 per cent, helped by regional advertising. The company's subscription revenues also rose over 10 percent.

DB Corp also has 17 FM radio stations in operations. But this business is nascent .

Easing costs

Newsprint prices, which were hovering around $900 per tonne levels in mid- 2008, have now declined to $500 levels, and this should help substantially rein in raw material cost, which accounted for over 40 per cent of FY-09 revenues. The benefits of this have begun to trickle in during the recent couple of quarters.

The rupee has also appreciated nearly 10 per cent from its peak to Rs 46.5 levels against the dollar, a saving for DB Corp because most of the paper sourced is denominated in dollars.

Risks

The key risks to this recommendation would be competition from papers such as Hindustan and Amar Ujala, especially if it reduces pricing power.

Interest expense has increased by over 30 percent in the last fiscal. But the interest coverage for the company is still a healthy 4.4 times. A part of the issue proceeds will go towards repayment of nearly a fourth of its long-term loans of Rs 457 crore.

Issue proceeds

DB Corp hopes to raise Rs 385 crore from the IPO, of which nearly Rs 116 crore would go to Cliffrose Investment, an existing shareholder in an offer for sale. About 1.8 crore shares would be on offer.

The company seeks to use the offer proceeds towards setting up publishing units, upgrading machinery and for sales and marketing purposes. Enam Securities, Citigroup Global Markets and Kotak Investment Banking are the lead managers. The offer is open from December 11-15.