3QFY2009 Result Update ACCUMULATE Price Rs57 Target Price Rs65 Investment Period 12 months Stock Info Sector Market Cap (Rs cr) 1,343 Beta 0.5 52 WK High / Low 230 /55 Avg Daily Volume 47,658 Face Value (Rs) 2 BSE Sensex 8,779 Nifty 2,725 BSE Code 532662 NSE Code HTMEDIA Reuters Code HTML.BO Bloomberg Code HTML@IN Shareholding Pattern (%) Promoters 68.7 MF/Banks/Indian FIs 13.7 FII/ NRIs/ OCBs 15.5 Indian Public 2.1 Abs. 3m 1yr 3yr Sensex (%) (17.8) (50.1) (7.8) (%) (30.3) (73.6) (40.6) Anand Shah Tel: 022 4040 3800 Ext: 334 e-mail: anand.shah@angeltrade.com Shweta Boob Tel: 022 4040 3800 Ext: 311 e-mail: shweta.boob@angeltrade.com Performance Highlights Muted Topline growth, up 5%: For 3QFY2009, (HTML) reported muted Top-line growth of 4.5% yoy to Rs334cr (Rs319cr). Top-line disappointed primarily due to the mere 5% increase in Advertisement Revenues to Rs287cr (Rs274cr) despite a festive month in the quarter owing to a weak macro-economic environment. According to management, the Delhi and Mumbai Ad markets (display ads) fell 31% and 24%, respectively. Under the Partnership for Growth model (ads for equity), the company registered Revenues of Rs26.5cr (Rs3cr) in 3QFY2009 and accounted for 9.2% of the company s total Advertisement Revenues. Cover price of Hindustan and Mint (in select areas) increased at an average Rs0.75 effective from end December 2008 and will start reflecting post 4QFY2009E. Earnings slump 79%: The company reported another disappointing quarter registering a sharp decline of 78.8% in Reported PAT to Rs7.8cr (Rs36.9cr) largely impacted by Margin pressure, high Interest costs, which moved up 120% (owing to huge debt of Rs485cr as on December 31) and exceptional losses of Rs12.8cr - namely consultancy charges of Rs7.5cr for drawing up strategic plans for new areas of business and provision of Rs5.3cr for diminution in value of long-term investments. On a recurring basis, Bottomline declined by 44% to Rs20.6cr largely on account of poor Revenue traction and Margin pressure. Margins contract 589bp: At the Operating front, the company continued to face pressure registering a sharp fall of 589bp yoy in EBITDA Margin to 12.7% (18.6%) resulting in a 28.7% fall in EBITDA to Rs42.3cr (Rs59.3cr). Raw Material costs (newsprint costs) increased by a modest 19% yoy (compared to the 30% yoy increase witnessed in 2Q though it remained flat on a qoq basis) in line with our expectation (we believe Newsprint prices have already peaked). However, as a percentage of Sales, Raw Material costs jumped by 542bp to 43.8% (38.4%) on account of muted Top-line growth. Going forward, we expect to benefit on account of lower newsprint prices (will start kicking in post 1QFY2010 once the built-up inventory gets absorbed) and better cost efficiency by reducing newsprint consumption through rationalisation of grammage and pagination. Key Financials (Standalone) Y/E March (Rs cr) FY2007 FY2008 FY2009E FY2010E Net Sales 1,039 1,186 1,324 1,486 % chg 26.2 14.1 11.6 12.3 Net Profit (Adj) 115.1 144.5 93.1 126.6 % chg 208.7 25.6 (35.6) 36.0 OPM (%) 18.4 18.8 14.1 16.2 EPS (Rs) 4.9 6.2 3.4 5.4 P/E (x) 11.6 9.2 16.6 10.5 P/BV (x) 1.7 1.5 1.4 1.2 RoE (%) 14.7 15.8 9.5 11.5 RoCE (%) 15.4 15.3 8.8 11.6 EV/Sales (x) 1.3 1.2 1.1 0.9 EV/EBITDA (x) 7.3 6.3 7.5 5.8 Source: Company, Angel Research January 21, 2009 1
Key Developments Hindustan Times continues its leadership position in Delhi NCR while gaining momentum in Mumbai: In 3QFY2009, Hindustan Times significantly increased its share of readership in Delhi NCR by 8% at 2.3mn vis-à-vis its closest competitor, TOI. The Mumbai edition readership has increased by 38% to 0.5mn, reducing the gap quite significantly with competition. While circulation numbers remained the same on qoq basis, HT Mumbai and Mint saw revenue traction of 10%. recently launched Hindustan Times in Dehradun, Kanpur and Jhansi in 2QFY2009. Significant increase in readership of Hindustan while further strengthening its leadership position in Bihar and Jharkhand: Hindustan has become the fastest growing Hindi daily across the country increasing its readership by 5% to 9.2mn. This is a reflection of the significant investments made by the company in building brand salience as well as expanding its reach across various geographies. The company continues to receive positive response from recently launched editions in UP, further strengthening the momentum gained in readership and revenues. It posted a phenomenal 20% growth in Circulation and 30% growth Revenue in the recently tapped regions. Mint clearly established as No.2 Business daily: As per the recent IRS Survey, Mint is clearly the second largest established business daily with an average issue readership of 1.4lakh, approximately twice the size of its next closest competition in the cities of Delhi, Mumbai and Bengaluru. The company plans to expand footprint of Mint in the medium term to get national leverage and further strengthen its position in the business news segment. Management has guided that Mint will achieve break even in FY2011. New press commissioned in Meerut: In continuation of its expansion strategy in UP, inaugurated its printing facilities at Meerut in October 2008 enabling a deeper reach in key towns of UP. The Company intends to continue making investment in UP aggressively and complete its presence in UP by launching new printing facilities in Allahabad and few other key towns in the near future. This will enable achieve operational efficiencies and build a strong leadership position across the states of Bihar, Jharkhand, UP and Delhi. Foray into mobile marketing services in collaboration with Velti plc: To tap the world s fastest growing mobile market (in terms of number of new subscribers added each month) the company has entered into a 65:35 joint venture (JV) with Velti plc to deliver mobile marketing and advertising services throughout India. Velti plc is one of the world s leading providers of mobile advertising solutions and is listed in London. The company expects to start providing these services by the end of FY2009. to write off part equity of loss-making Radio business announced that its Radio business has incurred substantial losses since inception and accordingly has sought shareholders' approval for writing off part of the share capital. As per the Delhi High Court directive, its shareholders would meet on January 28 to consider demerger of its Radio business from its subsidiary HT Music and Entertainment Company (HTME) and merge it with itself. The Radio business of the demerged company has incurred substantial losses since inception on account of low Advertisement Revenue, high Brand building cost and delay in availability of Common Infrastructure resulting in substantial investment in transmission facilities for Delhi and Mumbai FM Radio stations, all of which have resulted in erosion of its share capital. It is therefore proposed to write-off part of the share capital, which has eroded due to accumulated losses (Rs75cr). Further, the company added that the Radio business of the demerged company is in consolidation and expansion mode and hence is likely to continue incurring losses in the near term (management expects it to breakeven in six months). This may again result in erosion of share capital of the demerged company. In November 2008, the Board approved demerger of Radio business of HTME, a subsidiary and vesting thereof into HTML (Radio business numbers will start reflecting in the standalone entity 4QFY2009E onwards). January 21, 2009 2
Outlook and Valuation During FY2008-10E, we expect HTML to post a CAGR of 11.9% in Revenues aided by 12.4% CAGR in Advertising Revenues and 11.9% CAGR in Circulation Revenues. We have marginally revised our Top-line estimates downwards to factor in the higher-thanexpected slowdown in Advertising Revenue growth (particularly in FY2010E) on account for weaker macro-economic conditions. However, we believe HTML is well placed to outperform the Print industry growth on account of improved traction (marketshare gains) across its publications. Strong growth in the Mumbai region (Hindustan Times) along with rising contribution from UP (new edition launches under Hindustan), will be the key growth drivers for the company s Advertising Revenue. On the Operating front, we expect HTML to post muted CAGR of 4% in EBITDA during FY2008-10E largely on account of severe Margin pressure owing to poor revenue growth. We have modeled in a decline in OPM of 256bp for FY2009E due to higher newsprint costs and high SG&A expenses incurred on HT Mumbai, Mint and Hindustan (expansion in UP). While we expect newsprint prices to soften post 4QFY2009E, impact of the same is likely to be felt only in FY2010E. However, we have increased our newsprint cost estimates to account for the sharp Rupee depreciation. We have revised our Earnings estimates downwards by 28% and 12.2% for FY2009E and FY2010E respectively, factoring in lower-than-expected and disappointing Top-line growth in 3QFY2009 leading to lower Margins. Moreover, HTML has increased its Debt substantially (to meet working capital requirements) and now has net debt position of Rs196cr, which will lead to higher Interest costs further aggravating woes. Hence, we expect Earnings growth to remain muted at 3.2% CAGR over FY2008-10. We believe HTML is undergoing a major expansion phase penetrating deep into the Hindi market, entry into other media platform (mobile solutions services, internet portals, joint venture (JV) with Burda) and expansion of Mint. While, we respect the foresight of the company to become a one-stop-shop-media company in the long run, we have concerns over its performance in the short run owing to following: 1. Advertisement Revenues have slowed down more than expected. 2. Debt on the company s books has shot up by 124% ytd to Rs485cr as on Dec 31, 2008. 3. Amidst the economic slowdown, the company s non-cash Partnership for Growth (PoG) model appears to have backfired on its Revenue strategy (is exerting stress on its working capital requirements). The company is likely to provide more provisions as it has 50% exposure to the Real Estate sector, which has tanked 30% and is expected to further decline, in turn further impacting the company s Profits. 4. Other than its core business of Printing, none of its other businesses, viz. Internet, Radio or Event Management, is profitable. Moreover, Mint and HT Mumbai are yet to break even. Thus, a slowdown in its core business Revenues raises concerns over absorbing these losses. 5. We await details about the HT-Velti JV in terms of investment, target market and viability (profitability). Thus, although the company s foray into yet another media platform is enthusing, being at gestation period we believe it will be a drag on the company s Profitability in the short run. At the CMP of Rs57, the stock is trading at 10.5x FY2010E Standalone EPS of Rs5.4. In view of the above concerns, we have downgraded the stock from Buy to Accumulate and have revised our Target Price to Rs65 (Rs99) based on a P/E multiple of 12x FY2010E Earnings. January 21, 2009 3
Exhibit 1: 3QFY2009 Performance (Standalone) Y/E March (Rs cr) 3QFY2009 3QFY2008 % chg 9MFY2009 9MFY2008 % chg Net Sales 333.8 319.4 4.5 989.2 873.8 13.2 Consumption of RM 146.2 122.6 19.3 411.6 344.1 19.6 (% of Sales) 43.8 38.4 41.6 39.4 Staff Costs 49.5 43.3 14.4 144.2 125.8 14.6 (% of Sales) 14.8 13.6 14.6 14.4 Advertising 27.5 31.8 (13.5) 85.8 66.0 29.9 (% of Sales) 8.2 9.9 8.7 7.6 Other Expenses 68.2 62.4 9.3 202.6 174.2 16.3 (% of Sales) 20.4 19.5 20.5 19.9 Total Expenditure 291.4 260.0 12.1 844.1 710.2 18.9 Operating Profit 42.4 59.4 (28.6) 145.1 163.6 (11.3) OPM (%) 12.7 18.6 14.7 18.7 Interest 10.1 4.6 119.5 22.6 13.3 70.1 Depreciation 13.8 11.4 21.5 39.5 33.0 19.8 Other Income 7.9 8.7 (10.0) 24.7 27.5 (10.3) PBT (excl. Ext Items) 26.3 52.1 (49.5) 107.7 144.8 (25.6) Ext Income/(Expense) (12.8) - (12.8) - PBT (incl. Ext Items) 13.5 52.1 (74.1) 94.9 144.8 (34.5) (% of Sales) 4.1 16.3 9.6 16.6 Provision for Taxation 5.7 15.3 (62.6) 33.1 41.9 (21.0) (% of PBT) 42.2 29.3 34.9 28.9 Recurring PAT 20.6 36.9 (44.1) 74.6 103.0 (27.5) PATM (%) 6.2 11.5 7.5 11.8 Reported PAT 7.8 36.9 (78.8) 61.8 103.0 (40.0) Equity shares (cr) 23.4 23.4 23.4 23.4 EPS (Rs) 0.3 1.6 2.6 4.4 Source: Company, Angel Research January 21, 2009 4
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