Deccan Chronicle Holdings

Deccan Chronicle Holdings' low debt and good dividend paying record makes it an attractive buy

 

MEDIA companies were one among the biggest victims of the global financial crisis as their ad revenues fall sharply after the burst of Lehamn Brothers in September 2008. Things have now looking up and media companies have made a smart recovery in the past two quarters. Much can be attributed to the softening of newsprint prices, overall improvement in advertisement situation and a perk-up in circulation aided by cover .

   What is attractive for investors is media stocks didn't move much even though their financial outlook looks robust. The stocks of Deccan Chronicle Holdings, the company that publishes The Deccan Chronicle and Asian Age, has corrected by over 25% in the past three months and is trading just 11 times its trailing earning and just twice its book value. This is an attractive valuation for a company with low debt, strong operating cash flows and a good dividend paying history.

BUSINESS

DCHL owned The Deccan Chronicle is one of the largest English language publications in the South with a total circulation of around one million copies, 70% of which comes from AP and rest is from Tamil Nadu. It recently entered the Bangalore. In addition, the company now also owns Asian Age, an international newspaper based in Delhi, Financial Chronicle, a financial daily, and AndhraBhoomi, a telegu language newspaper. In the past few years, the company has been expanding its portfolio to become a multi-region player from being a South India focussed publisher. It also owns Deccan Chargers, one of the most prolific team in IPL. Bulk of the company's revenues and profits are generated from Deccan Chronicle franchisee. However, most of its recent forays holds good long-term potential.

INVESTMENT RATIONALE

Three factors make Deccan Chronicle Holdings a compelling buy. First, on a consolidated basis, operationally with the exception of March 2010 quarter—when the company had an exceptionally high tax — has been well ahead of its peers on the operating profit margin and net profit margin. At around 42%, its EBITDA margin is better than HT Media's 28.8% and Jagran Prakashan's 27.5%. A rise in cover prices and ad tariffs, cut in pagination and y-o-y fall in newsprint prices drove profitability.

   The company has increased its ad tariff by 50%. Secondly, it merged its subsidiaries Sieger Solutions, Asianage Holdings and Deccan Chronicle Bangalore with itself. Sieger Solutions is an advertising arm of Deccan Chronicle. Asianage Holdings, on the other hand, owns the Asian Age newspaper, which was acquired by the company. Of these three wholly-owned arms— in terms of profitability and sales as of FY09 — Sieger Solutions is the only one that is generating significant revenues and profits.

   As of FY09, the Sieger had a sales turnover of Rs 44 crore and a profit of Rs 10.3 crore. While Asianage is Holding yet to make profits.

As of FY09, the company's net profit was just Rs 1.6 crore while its sales turnover was Rs 9 crore. It would take a few quarters for the company to secure a steady flow of revenues from these subsidiaries but one cannot rule out the long-term benefits involved in the merger. And thirdly, the company has corrected around 25% and going ahead from here there is room for good appreciation given its sturdy balance sheet, good operational numbers and low debt.

VALUATION

The company is trading at a P/E of 11x. This is far lower than the current valuation of its peers — HT Media and Jagran Prakshan. HT Media and Jagran Prakashan are trading at a P/E ratio of 23(x) and 19(x), respectively. The company's low debt as its peers and good dividend paying record makes it an attractive buy.