Annual Report Update

SECTOR: MEDIA

Deccan Chronicle
STOCK INFO. BLOOMBERG

BSE Sensex: 14,048 S&P CNX: 4,214

DECH IN
REUTERS CODE

28 August 2008
Previous Recommendation: Buy
YEAR END NET SALES (RS M ) PAT (RS M) EPS (RS) EPS GROWTH (%) P/ E (X) P/ B V (X) ROE ( %) ROCE (%) EV/ SALES

Buy
Rs118
EV/ EBITDA

DCHL.BO

Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)

244.0 270/95 2/-14/-42 28.8 0.66

03/07A 03/08A 03/09E 03/10E

5,528 7,824 9,273 10,607

1,614 2,719 2,755 3,597

6.8 11.1 11.1 14.5

105.0 64.5 0.2 30.6

17.5 10.6 10.6 8.1

3.4 2.7 2.4 2.0

19.5 25.5 22.4 25.1

18.5 25.7 27.7 30.4

5.6 3.7 3.6 3.1

12.0 6.0 7.0 5.6

Bangalore launch to drive circulation growth: In line with its vision to emerge as the largest English daily in South India, DCHL launched Deccan Chronicle in Bangalore in May 2008. Circulation in Hyderabad and Chennai has plateaud at 700,838 copies/day and 302,333 copies/day, respectively. Currently, the circulation in Bangalore is 210,000 copies/day and would be ramped up after printing capacity expansion. Ad revenues to grow at 14% CAGR over FY08-10: DCHL has posted 44% ad revenue growth in FY08, led by increase in card rates. The company has increased card rates by a further 30% in 1QFY09, which would be the key driver for 14% CAGR in ad revenue growth over FY08-10. We estimate Bangalore edition ad revenue contribution at Rs260m in FY09 and Rs530m in FY10. Newsprint prices on a high; might soften after 3QFY09: DCHL reported 15% decline in newsprint cost due to lower international newsprint prices and stronger rupee in FY08. However, it has reported margin pressure in 1QFY09 due to rupee depreciation and sharp increase in newsprint prices to US$900/ton. Management expects newsprint prices to soften post 3QFY09; we estimate EBITDA margin decline of 11% in FY09 and 4% expansion in FY10. Securitization lowers debtor days: DCHL has posted a sharp decline in debtor days from 201 in FY07 to 114 in FY08. Debtors have declined to Rs2.4b in FY08 from Rs3b in FY07 due to securitization of receivables (Rs1.65b) and change in business strategy (allowing only 90-100 days of credit). Management has indicated that debtor days of 90-100 would be maintained, going forward, allaying concerns regarding high debtors. Flat PAT in FY09; rising payout ratio holds promise: We now expect FY09 PAT to be flat (earlier estimates 4.3% growth) due to impact of high newsprint prices and launches of Financial Chronicle and the Bangalore edition of Deccan Chronicle. We expect PAT growth of 30% in FY10 (earlier estimates 22.7%) due to expected decline in newsprint prices and scale up in Bangalore. The payout ratio has increased from 17% to 31.5%. Management has indicated further increase in payout ratio. We expect the stock to get re-rated on: (1) company maintaining low debtor days; (2) further increase in payout ratio; and (3) sharp decline in newsprint prices. The stock trades at 10.6x FY09E EPS and 8.1x FY10E EPS. Dividend yield is 4.5% based on FY10 estimates. We maintain Buy.
STOCK PERFORMANCE 1-YEAR

Deccan Chronicle (Rs) - LHS 290 240 190

Rel. to Sensex (%) - RHS 50 25 0 -25

140 90 Aug-07

-50 -75 Nov-07 Feb-08 May-08 Aug-08

Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com)Tel:+9122 39825404/Amit Purohit (AmitPurohit@MotilalOswal.com)Tel:+9122 39825418

Deccan Chronicle

Bangalore edition to drive circulation growth In line with its vision to emerge as the largest English daily in South India, DCHL launched Deccan Chronicle in Bangalore on 26 May 2006. DCHL maintains its leadership position in the Andhra Pradesh market and is a strong number-2 player in the Chennai market after Hindu. Entry into Bangalore has positioned the daily in all the key cities of South India, namely Bangalore, Chennai and Hyderabad. Circulation in Hyderabad and Chennai has plateaud at 700,838 copies/day and 302,333 copies/day, respectively. We expect Bangalore to be the key driver for the growth in circulation revenue. Currently, the circulation in Bangalore is 210,000 copies/day. Times of India leads the market with over 400,000 copies/day while Deccan Herald has circulation of 100,000 copies/day but is gradually on its way out. The company is planning to double its printing capacity in Bangalore from 75,000 copies/hour to 150,000 copies/ hour, which would entail an investment of Rs400m. DCHL has also launched a financial daily, Financial Chronicle in Mumbai, Hyderabad, Bangalore and Chennai. The paper has an association with International Herald Tribune and carries a 4-page global news section from International Herald Tribune. Currently, Financial Chronicle has a circulation of 21,000 copies/day. The management plans to maintain this publication as a niche product and is offering a combo with its lead product, Deccan Chronicle. No major ramp-up in the circulation is expected in the near future.
TREND IN CIRCULATION - COPIES PER DAY (LAKH)

STRONG TRACTION IN HYDERABAD CONTINUES ('000 COPIES/DAY)

800

Andhra Pradesh

Chennai

600

400

200

0 1H03 2H03 1H04 2H04 1H05 2H05 1H06 2H06 1H07 2H07

Source: Company/Motilal Oswal Securities

Advertising revenues grow 44% in FY08; 14% CAGR likely over FY08-10 In FY08, DCHL posted 44% growth in ad revenue on account of increase in ad rate and higher inventory utilization. Further, the trend to move to color advertisement has also yielded better returns. Management believes that rising circulation fueled by increase in literacy and economic prosperity would continue to drive strong growth in advertising. Andhra Pradesh continues to be a major contributor to advertising revenue. The company has taken a card rate hike of 30% in 1QFY09 across all its editions. This would translate to 15-18% increase in net realization. We expect the benefit of this rate hike to start flowing from 2QFY09. The recent launch in Bangalore has strengthened the company presence in the South, enabling it to offer combo s advertising option to advertisers. Ramp up in Bangalore edition holds the key to future ad revenue growth. We have factored in circulation of 200,000 and 300,000 copies in Bangalore for FY09 and FY10. Most of the ad sales in Bangalore are currently in combo format. We estimate ad revenues from Bangalore at Rs260m in FY09 and Rs530m in FY10. We believe that ad revenues in Bangalore would pick up only gradually, as the company is not offering longer credit period to the advertisers to push up advertising growth, as it had done in Chennai. We estimate 14% CAGR in ad revenue for DCHL over FY08-10.
2

12 8.8 9 6 3.8 3 0 1HCY04 2HCY04 1HCY05 2HCY05 1HCY06 2HCY06 1HCY07 4.0 5.1 8.5 4.3 9.5

10.0

10.7

2HCY07

Source: Company/Motilal Oswal Securities 28 August 2008

1HCY08

Deccan Chronicle

TREND IN ADVERTISING REVENUE (RS M)

Advertising revenue 10,500 8,000 5,500 3,000 500 FY05 FY06 FY07

Share of Ad revenue (%) 98 94 90 86 82 FY08 FY09E FY10E

DCHL is sensitive to this rising newsprint prices, as it completely imports its raw material requirements. The management expects newsprint rates to moderate in the coming months, as the demand for newsprint cools off post Olympics and US election. We have factored in 30% increase in newsprint cost for the company to Rs35,355/ ton in FY09 and a 10% decline in FY10.
NEWSPRINT CONTINUES TO REMAIN STRONG (USD/METRIC TONNE)

775 725

Source: Company/Motilal Oswal Securities

675

Newsprint prices on a high; likely to soften post 3QFY09 DCHL benefited from 15% decline in newsprint prices from Rs32,145/ton in FY07 to Rs27,196/ton in FY08. This played a key role in pushing up EBITDA margins by 15% to 62.1% in FY08. The benefits arose due to decline in newsprint prices and appreciation of rupee. The prices of newsprint continue to head north on account of consolidation in global capacity (closure of few mills in North America), strong demand related to US elections, Olympics and strong prices of crude oil. Landed newsprint prices have increased from US$550/ton to US$900/ton. In addition, the rupee has depreciated to over Rs44/US$ as against an average of Rs40.2/US$ in FY08. The company operating profitability s has been impacted due to rising newsprint price in 1QFY09.
NEWSPRINT PRICE BOOST RAW MATERIAL COST IN FY09

625 575 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Jul-08 Aug-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Mar-07 Apr-07 Oct-07 Nov-07 Dec-07 Jan-08

Source: Company/Motilal Oswal Securities

Securitization and change in strategy lowered debtor days DCHL has posted a sharp decline in debtor days from 201 in FY07 to 114 in FY08. In absolute terms, debtors have declined to Rs2.4b in FY08 from Rs3b in FY07. Decline in debtor days has been due to securitization of receivables and change in business strategy. The company had securitized receivables of Rs1.6b with ICICI Bank for a total cost of Rs146m shown as a part of bank charges. Further, the management has changed its strategy of allowing long credit days to advertisers and has now started restricting the credit period to 90-100 days. DCHL is not offering higher credit period to advertisers in Bangalore as it had done at the time of Chennai launch. We believe that this is a major change in strategy, which also reflects its strong positioning in the top three cities in South India. Continuation of this strategy would enable it to manage its working capital cycle efficiently. Management has indicated that debtor days of 90-100 would be maintained, going forward.

4,200

Raw Material cost

% of revenue

54

3,200

42

2,200

30

1,200

18

200 FY05 FY06 FY07 FY08 FY09E FY10E

Source: Company/Motilal Oswal Securities 28 August 2008

Deccan Chronicle

WORKING CAPITAL CYCLE (RS M) FY05 FY06 FY07 FY08

continue for Sieger Solution till its internet venture starts contributing meaningfully. Odyssey: ramp up to increase in FY09/10 In FY08, Odyssey Retail clocked a turnover of Rs610m (up 30% YoY). Odyssey, a premier leisure store chain offering books, music, movies, cards, toys, stationery and gifts, has a space of 150,000 sq ft spread over 30 stores. Management has aggressive plans to ramp up the space addition in light of softening lease rentals. Odyssey is expected to increase its retail space from 150,000 sq ft to 1.1m sq ft by FY11.
SPACE ADDITION PLAN IN ODYSSEY (SQ FT)

Debtors Days Inventory Days Loans & Advances Days

409 90 192 42 44 10

1,358 150 392 43 1,014 112 68.6

3,037 201 300 20 1,138 75 73.6

2,447 114 301 14 1,900 89 37.9

Working capital / Sales (%) 16.5

Source: Company/Motilal Oswal Securities

Loans and advances have increased sharply during FY08 due to the money advanced for IPL operations (as the subsidiary, Deccan Chargers Sports Ventures was yet to be formally floated) and advance to supplier of newsprint. Sieger Solutions: promoters infuse Rs1b; vehicle for web based initiatives In FY08, Sieger Solutions posted revenue of Rs719m. A 100% subsidiary of the DCHL, Sieger Solutions use to sell media space for DCHL. It is now on its way to become the online media venture of the group. DCHL shares some portion of its advertising revenue (estimated at 9%) with Sieger Solutions in lieu of managing the e-initiatives of its newspapers i.e. Deccanchronicle.com and mydigitalfc.com. Revenue contribution from its internet venture is not significant as of now. Management believes that the internet is going to be the most potent medium of communication in the coming years and the internet strategy holds key to long term growth. The company has taken several online initiatives by launching The Papyrus Club (website for schools), Career Chronicle (job portal), e-paper and matrimonial website in the process of launch (marriagewow.com). Promoters (personal capacity) have infused Rs1.01b in Sieger Solutions as preference capital. New York Times has indicated interest in acquiring 5% equity stake in Sieger Solution. However, this is still under discussion and there has not been any indicative valuation. The deal with New York Times includes outsourcing of management/ development of internet properties for New York Times. We believe the sharing of ad revenue from DCHL will

AS ON

ADDITIONS

CUMULATIVE

Mar-08 Mar-09 Mar-10 Mar-11 370,000 477,000 155,000

150,000 520,000 997,000 1,152,000

Source: Company/Motilal Oswal Securities

DCHL is also entering the eyewear business. It has already opened a 2,000 sq ft store in Bangalore The Eyewear Store and intends to add more stores. However, it plans to go slow on the ramp-up in this space until the model gets stabilized. IPL: new arrangement to impact financials in medium term During FY08, DCHL acquired franchise rights of the Hyderabad team in the Indian Premier League, a BCCI Venture. It has formed a special purpose vehicle (SPV), Deccan Chargers Sporting Ventures Limited. The management has guided a loss of US$1-2m in FY09 and indicated that there would be some change in the revenue share between the franchisee and BCCI. The new arrangement could have a step-up model in revenue share, impacting the financials of the franchisees in the medium term. The company plans to fully capitalize on the advertising and merchandising options in the coming season.

28 August 2008

Deccan Chronicle

Strong balance sheet and change in distribution policy could re-rate the stock DCHL balance sheet has emerged stronger due to s securitization of receivables. The company has re-paid the overdraft of Rs1.4b and has intentions to retire the shortterm debentures of Rs3.4b. Also, the company is charging for the entire Bangalore edition launch expenses in this year itself as against the earlier policy of writing off in five years. The total dividend payout (including dividend tax) of DCHL has increased from Rs267m to Rs858m, an increase of 220%. The management has hinted at further improvement in dividend distribution policy in the coming years. We expect dividend payout to increase from 31% in FY08 to 41% in FY09.
BREAKUP OF BORROWINGS (RS M) PARTICULARS FY05 FY06 FY07 FY08

TREND DIVIDEND PAYOUT AND DIVIDEND YIELD

Dividend Payout (%) 60 45 31.6 30 14.6 15 0.2 0 FY05 FY06 6.9 0.2 FY07 16.9 0.9

Dividend Yield (%) 5.6 40.9 3.5 2.6 2.8 1.4 0.0 FY08 FY09E FY10E 4.8 43.1 4.2

Source: Company/Motilal Oswal Securities

Short term non-convertible debentures Long term non-convertible debentures Bank overdraft Term loan Unsecured Debentures FCCB Total 1,075 397 190 500 2,423 2,412 770 5,888 135 6,051 8,062 1,825 357 133 1,653 138 1,340 2,030 1,333 1,164 750 650 2,150 3,400

Source: Company/Motilal Oswal Securities

Flat PAT in FY09; valuations attractive We now expect FY09 PAT to be flat (earlier 4.3% growth) due to impact of high newsprint prices and launches of Financial Chronicle and the Bangalore edition of Deccan Chronicle. We expect PAT growth of 30% in FY10 (earlier 22.7%) due to expected decline in newsprint prices and scale up in Bangalore. We believe that change in debtor policy and increase in payout ratio is positive. Though there is uncertainty regarding potential slowdown in advertising industry, we believe that the impact would be limited on the newspaper companies. We believe that sustained decline in newsprint prices would act as a trigger for the re-rating of DCHL. The stock trades at 10.6x FY09E and 8.1x FY10E earnings. We maintain Buy.

28 August 2008

Deccan Chronicle

INCOME STATEMENT Y/E MARCH Advertising revenue Subscription revenue Net Sales Change (%) Printing and other exp % of sales Staff Cost % of sales Administrative exp % of sales M iscellaneous exp EBITDA % of Net Sales Depreciation Interest Other Income P B T before EOI Extra=ordinary exp PBT after EOI Tax Rate (%) Reported PAT Extra-ordinary Expenses Adjusted PAT Change (%) BALANCE SHEET Y/E MARCH Share Capital Reserves Net Worth Loans Deffered Tax Liability Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Current Liab. & Prov. Creditors Other liabilities Provisions Net Current Assets M iscellanous exp Application of Funds E: M OSt Estimates 2006 412 2,766 3,178 5,888 243 9,309 3,509 228 3,280 406 1 52 ,1 4,799 392 1 ,358 2,035 1 ,014 493 313 53 1 27 4,306 1 64 9,308 2007 478 7,791 8,269 6,051 441 14,761 6,092 394 5,698 125 1 ,403 7,808 300 3,037 3,333 1 ,138 407 275 126 7 7,400 135 14,761 2008 490 10,1 81 10,671 8,062 568 19,301 6,464 670 5,794 579 1,909 12,596 301 2,447 7,947 1,900 1,683 31 4 250 11 ,1 9 10,913 106 19,301 1 ,903 57.5 1 52 4.6 1 88 5.7 24 1,041 31 .5 1 00 1 94 213 962 0 962 283 29.4 679 0 679 2006 2,969 340 3,309 2007 5,1 4 1 41 4 5,528 67.1 2,406 43.5 21 5 3.9 296 5.3 29 2,582 46.7 1 71 332 324 2,403 0 2,403 790 32.9 1,6 14 0 1,6 14 1 37.8 2008 7,380 444 7,824 41 .5 2,343 29.9 261 3.3 331 4.2 29 4,860 62.1 280 768 379 4,191 0 4,191 1 ,471 35.1 2,719 0 2,719 68.5

(Rs Million) 2009E 8,705 568 9,273 1 8.5 3,61 8 39.0 389 4.2 502 5.4 29 4,735 51 .1 320 623 446 4,238 0 4,238 1,483 35.0 2,755 0 2,755 1 .3 2010E 9,957 650 10,607 1 4.4 3,71 0 35.0 445 4.2 538 5.1 29 5,885 55.5 336 451 437 5,534 0 5,534 1,937 35.0 3,597 0 3,597 30.6

RATIOS Y/E MARCH Basic (Rs) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation P/E (standalone) Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) P rofitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Creditors. (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 1 .9 0.7 0.8 0.4 0.3 1 50 50 0.4 201 34 0.4 14 1 39 0.4 103 35 0.5 1 03 35 0.5 21 .4 12.4 19.5 18.5 25.5 25.7 22.4 27.7 25.1 30.4 17.5 15.8 12.0 5.6 3.4 0.8 1 0.6 9.6 6.0 3.7 2.7 2.5 1 0.6 9.5 7.0 3.6 2.4 3.4 8.1 7.4 5.6 3.1 2.0 4.7 3.8 15.4 0.2 6.9 3.3 6.8 1 05.0 7.5 34.6 1 .0 16.9 11.1 64.5 1 2.2 43.6 3.0 31 .6 11.1 0.2 1 2.4 49.7 4.0 40.9 14.5 30.6 1 5.9 58.0 5.5 43.1 2006 2007 2008 2009E 2 0 0 10E

CASH FLOW STATEMENT

Y/E MARCH

2006

2007 2,403 1 71 332 790 -1 ,796 320 -2,308 -251 -2,559 3,976 163 332 272 3,536 1,297 2,035 3,333

2008 4,191 280 768 1 ,471 1 01 ,1 4,869 -830 -506 - 1,336 699 2,011 768 860 1,081 4,614 3,333 7,947

2009E 4,238 320 623 1,483 -499 3,198 -544 -4,954 -5,498 161 -3,535 623 1 ,127 - 5 , 123 -7,423 7,947 524

2010E 5,534 336 451 1,937 -457 3,927 -272 -1,738 -2,010 1 95 -27 451 1,549 - 1,832 85 525 610

PBT before Extraordinary Items 962 Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations (Inc)/Dec in FA (Pur)/Sale of Investments CF from Investments (Inc)/Dec in Networth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 1 00 1 94 283 -1 ,998 - 1,026 -1 ,428 -833 -2,261 -1 5 1 3,475 1 94 47 3,120 - 167 2,202 2,036

28 August 2008

Deccan Chronicle

N O T E S

28 August 2008

Deccan Chronicle

For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: inquire@motilaloswal.com

Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
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28 August 2008