COMPANY UPDATE Ritwik Rai ritwik.rai@kotak.com +91 22 6621 6310 Summary table (Rs mn) FY12 FY13E FY14E Sales 20,030 21,173 22,922 Growth (%) 12.1 5.7 8.3 EBITDA 2,869 2,763 3,215 EBITDA margin (%) 14.3 13.0 14.0 PBT 2,341 2,377 2,884 Net profit 1,655 1,619 1,874 EPS (Rs) 7.1 6.9 8.0 Growth (%) (8.5) (2.1) 15.7 CEPS (Rs) 11.0 11.3 12.5 BV (Rs/share) 67.6 74.3 82.1 Dividend / share (Rs) 0.4 0.4 0.4 ROE (%) 11.0 9.7 10.2 ROCE (%) 10.6 9.7 10.1 Net cash (debt) 3,664 4,197 6,679 NW Capital (Days) 4 43 38 P/E (x) 14.0 14.3 12.4 P/BV (x) 1.5 1.3 1.2 EV/Sales (x) 1.0 0.9 0.7 EV/EBITDA (x) 7.2 6.9 5.1 Source: Company, Kotak Securities - Private Client Research HT MEDIA PRICE: RS.99 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.115 FY13E P/E: 14.6X HT Media has underperformed print peers by 13%, and broader markets by 21% since our last update (May 22). Negatives remain, including lack of visibility in non-newspaper businesses, and challenging environment in the newspaper business. However, the company is taking steps to manage expenses (lower pagination) and curtail forex risks in newspaper operations. Recent interactions with the company also suggest that while remaining positive on potential for turnaround in the digital segment, the company would re-evaluate its presence in the job portal space if a turnaround is not imminent by the end of the year. Valuations, at 14.6x PER FY13E, are attractive. We upgrade the stock to ACCUMULATE (REDUCE earlier), with price target of Rs 115 (unchanged). Challenging environment being met with action on costs: While key issues facing newspaper publishers (weak advertising growth, higher raw material expenses, forex risks) remain, HT Media is taking steps to contain decline in earnings/ improve visibility of profits. The company aims to cut pagination by 10-15% to contain newsprint consumption. Although rupee depreciation shall remain a negative factor, the company has been hedging its news print exposure aggressively (covered till Oct/ Nov), reducing short-term risks on account of higher newsprint expenses/ rupee depreciation. The company is also considering further raising subscription rates in Mumbai (largest edition after Delhi, 0.5mn copies - largely on subscription), if it believes the competitors shall follow (likely, in our view). Company continues to believe non-publishing operations of the company will show improved performance this year; else business case for shine.com shall be re-evaluated: HT Media believes that shine.com, the job portal operated by HT Media, is likely to show improved performance in 2HFY13, on account of a stronger active resume database that it is expected to achieve by then. Further, the company has stated that losses from shine.com need not be viewed as perpetual and the business case for the same shall be reevaluated at the end of the year if a turnaround is not in sight. HT - Burda, the publishing JV operated by the company is also likely to show improved performance in FY13 on the back of higher capacity utilization. The company's education businesses (JVs with Mahesh Tutorials and Apollo Global) are unlikely to generate significant losses in FY13. These factors provide some comfort on near/ medium-term risks from non-newspaper businesses. Newspaper assets continue to improve in quality, long-term story intact: IRS 2012 shows continued strength in key editions. HT Delhi continues to be #1 in Delhi. HT-Mumbai has overtaken Mumbai Mirror, and is now the #2 English daily in the city. Hindustan (UP) continues to gain in readership, and Mint continues to be the #2 business newspaper by readership. There are substantial gains to be made in readership as well as in advertising revenues in the biggest English advertising market in India (Mumbai), as well as the biggest Hindi advertising market in India (Uttar Pradesh). HT Mumbai brings in revenues which are ~10%-12% of TOI Mumbai, while readership is 50% of The Times of India; Hindustan in UP brings in advertising revenues that are ~30% of market leader, while readership is 45%. Therefore, large opportunity size and favorable readership trends continue to assert the case for strong long-term gains in HT Media's newspaper segment. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
Strategic issues remain, placing limits on upsides in the medium-term: We believe HT Media has made strategic errors in choosing to invest aggressively and persistently in building of internet assets (particularly shine.com). Also, while education may be a promising business opportunity, we do not see a strategic fit between the education business and the core operations of the company. HT Media, in pursuing the strategy it is, may be sacrificing significant and perhaps better-fitting growth areas in media (in newspapers/ other areas). Webelieve this is the key negative for HT Media, which is behind poor valuations that the stock receives relative to its readership assets. Discount to stocks with greater visibility deserved; but valuations are attractive, raise to ACCUMULATE: We believe HT Media should trade at a discount to stocks with greater visibility (DB Corp, for example). Even so, we note that HT Media has declined 13% since our last update, underperforming other newspaper publishers significantly. Newspaper publishers have themselves underperformed the broader markets by 8% since, indicating that the impact of weakness in these businesses has been factored in. At 14.6x PER FY13E, we think the stock carries the burden of negatives that the company faces. We raise the rating of HT Media to ACCUMULATE (REDUCE previously), with a price target of Rs 115 (unchanged). Newspapers: Long-Term Investment Case remains strong HT Media's investment case is largely built on two factors: 1/HT Media's Hindustan Times is the market leader (by a slim lead) in Delhi. The company's Hindi newspaper is clear leader in Bihar and Jharkhand. These editions (supported by other minor cash cows) provide the company strong, stable cash flows (EBITDA ~ Rs4.5 bn, FY12), which can be utilized to further growth in other markets. 2/ The company has ambitiously launched (over the past few years) three important set of initiatives to further newspaper publishing business, which include HT- Mumbai, Mint (business newspaper), and a set of editions of Hindi daily Hindustan in UP/ Uttarakhand, which aim to further the company's reach in newspaper readership and therefore the advertising potential. Potential of the new initiatives from HT Media is fairly large: 1/ advertising revenues of HT-Mumbai are ~10% of those of The Times of India (Mumbai), even as the readership of HT-Mumbai is ~50% that of TOI, 2/ advertising revenues of Hindustan in Uttar Pradesh are only 30% of the leader (Dainik Jagran), while readership is ~45% that of Dainik Jagran. Therefore, the opportunity size is large, and is the prime factor guiding investment in the company. We also note that a significant amount of investment in these editions is complete - HT -Mumbai's circulation is ~65% that of The Times of India; Hindustan in Uttar Pradesh circulates ~75% copies of Jagran Prakashan. Readership trends of the key editions have been fairly strong. HT Delhi - Continues to be leader by a whisker (AIR, '000) 2400 1800 TOI Delhi HT Delhi 1200 600 0 2012 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
HT Mumbai - #2 English Daily in the City (AIR, '000) TOI DNA HT 1719 1666 1524 1553 1571 1553 1520 1461 1451 1478 1559 1551 1605 1577 1535 1596 1600 409 501 270 320 603 622 354 381 673 705 683 610 606 526 548 563 503 538 592 613 688 575 572 716 751 780 791 644 653 680 716 729 06 06 07 07 08 08 09 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 21 31 41 12 Hindustan (UP) - Improving over the years (AIR, '000) 12000 Dainik Jagran Amar Ujala Hindustan 9000 6000 3000 0 2012 Non-Newspaper Activities Leading to Significant Losses; Constraints on Newspaper Business In our opinion, the key negative in HT Media's investment case is the lack of focus on newspaper operations. HT Media has launched several non-newspaper initiatives in the recent past, including: 1/ portal shine.com, which generates ~Rs400mn in EBITDA losses annually, 2/ publishing operations (JV), which further brings in EBITDA losses of ~Rs 0-30 mn per quarter, 3/ JV with Mahesh Tutorials, which aims at catering to the coaching market in India, and 4/ JV with Apollo (entered into in FY12), which aims to cater to market for executive education (as of now). These initiatives, we believe: 1/ place a constraint on the company's aggression in new (newspaper) markets and editions in as much as the company attempts to protect near-term profitability and avoids raising fresh capital, 2/ are, in our opinion, incomplete strategic fits on HT Media's businesses, 3/ offer little or no visibility in earnings over the medium/ long-term, 4/ in the event when industry is facing several pressures (low advertising revenue growth, high newsprint prices, and weak domestic currency), these initiatives can result in either weak profitability or compromise on expansion plans of newspapers (we think, in the current circumstance, it would be the latter) - both of which are undesirable. We believe these are factors, along with general weakness in the industry that have led to the recent earnings misses, are key behind the poor performance of HT Media stock in the recent past. Further, these provide reason to doubt the ability of newspaper editions to scale up to leader's readership levels; on account of insufficient investments. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Company believes digital Assets may be headed for turnaround, mood turning introspective While we think long-term issues created by the strategies chosen by HT Media remain, and will continue to be a stumbling block in achievement of full potential of newspaper assets of the company (as also the potential valuation for the stock), the following factors need to be noted: 1/ the company believes that it is adding new resumes at a strong rate, and has the potential to reach #2/#3 position among jobs portals by the middle of the year. The management has also assured that it would consider options to contain losses over the long -term, should losses at shine.com continue into the end of the year. We note that traffic at shine.com broadly supports HT Media's belief. While traffic remains well below that of market leader and timesjobs.com, there seems some trend towards convergence with monsterindia.com. Traffic Rankings (shine.com vs monsterindia.com) Source: alexa.com 2/ this year, at least, losses from education businesses are likely to be modest. While operations with Mahesh Tutorials are small in size (6 centers operational), the executive - MBA program, in JV with Apollo, is unlikely to have its first session today - although very much in the works. The JV has begun the process for recruitment of faculty. The JV shall require investments of Rs 1.2Bn over two-three years (~Rs 600mn investments from HT Media). 3/ On HT Burda (printing JV), the company has begun to receive stronger orders from India, on account of which capacity utilization is likely to rise in FY13, erasing losses that the company has in the last year. Near - Term Concerns on Newspaper Contained on ongoing Action by Company In the near-term, we think: 1/ newspaper advertising revenues, even if weak, are likely to modestly outperform industry on the back of double digit growth in new operations, and relative insulation of Hindi markets, which will offset declines in revenues from Delhi edition of HT, 2/ losses on account of rupee depreciation are likely to be contained on account of aggressive hedging by the company, 3/ the company has stated that it would be cutting pagination aggressively, likely by 10-15% in additions to general waste reduction, 4/ in its Mumbai edition, HT Media is likely to raise subscription rates further, if competition permits the same (we think is quite likely, given behavior in the previous downturn). HT Mumbai's subscription rates have already been raised to Rs 299/ yr (from Rs 199/ year earlier), which should impact circulation revenues positively going into 2HFY13. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
Valuations Reasonable, Upgrade to ACCUMULATE We also find that HT Media is reasonably valued as compared with media peers. Note that: 1/ newspaper stocks, on average are trading at 30% discount to average of non-newspaper businesses in our coverage universe, 2/ HT Media trades at a 12% discount to DB Corp, due to poor earnings visibility, 3/ On EV/ Sales basis, HT Media is the cheapest stock in our coverage universe (0.9x EV/ Sales, versus 2.3x EV/ Sales for DB Corp), implying that the market is discounting the possibility of lossmaking editions continuing to remain in loss for a fairly long period. We also note that at CMP, HT Media trades at a 15% discount to our fair value of Rs 115/ share. Relative Valuation: HT Media CMP Mkt. Sales Grw. EPS Grw. PER PER EV/ Sales EV/ EBITDA (Rs) Cap. (12-14E) (12-14E) (13E) (14E) (13E) (13E) DB Corp 205 37,210 9.4% 17.9% 16.5 13.4 2.3 9.1 HT Media 99 23,189 7.0% 6.2% 14.3 12.4 0.9 7.8 Jagran Prakashan 88 26,503 7.8% 13.5% 14.0 12.1 1.9 7.8 Print Media Average 14.2 12.2 1.4 7.8 Zee Entertainment 148 128,336 12.6% 8.3% 22.3 19.8 3.6 14.5 Sun TV Network 317 124,923 9.5% 1.9% 20.3 17.4 6.3 8.5 ENIL 210 10,011 11.4% 11.2% 17.9 16.2 2.2 7.5 Dish TV 69 73,414 22.7% NM NM 34.8 2.7 9.0 Non-Newspaper Media Average 20.2 17.8 4.0 10.2 Coverage Universe Average 17.8 18.8 2.9 9.2 Source: Kotak Securities - Private Client Research We recommend ACCUMULATE on HT Media with a price target of Rs.115 Taking into account that a large part of negatives appear factored into current market price, lower expectation of negative surprises (from non-newspaper ventures), and cheap valuations, we upgrade HT Media to ACCUMULATE (previous rating: REDUCE). We maintain our price target of Rs 115. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6