Stock Market Update on DB Corp. for 1QFY2012

Stock Market Update on DB Corp. for 1QFY2012 with a Buy recommendation and a Target Price of `302 (12 months)

    DB Corp. (DBCL) reported a mixed performance on the revenue and earnings front. The company’s top-line growth was driven by impressive ad and circulation revenue. Earnings for the quarter declined due to losses because of the new launches. We maintain our Buy recommendation on the stock.

    Top-line growth steady led by ad revenue growth and impressive circulation revenue growth: DBCL reported steady top-line growth of 18.4% yoy, driven by 20% yoy growth in print ad revenue and 18% yoy growth in radio ad revenue. Circulation revenue was higher by 5.8% yoy and 6.4% qoq on account of new launches in Jharkhand with Dhanbad edition and the company’s foray into Maharashtra with the launch of Aurangabad and Nasik editions.

    Earnings down by 14.7% yoy because of losses due to aggressive expansion: In terms of earnings, DBCL posted a decline of 14.8% yoy on a recurring basis and 14.8% yoy growth on a reported basis, primarily due to losses in new edition launches. Gross margin contracted by 561bp yoy due to heavy consumption of newsprint towards the launch of the new editions. On a sequential basis, earnings grew strongly by 35.8% with a mere 64bp qoq gross margin contraction.

   Outlook and valuation: We maintain our earnings estimate and have factored in the increase in newsprint price and higher number of loss-making editions.
    At the CMP of `224, DBCL is trading at 13.4x FY2013E consolidated EPS of `16.8. We maintain our Buy view on the stock with a target price of `302, based on 18x FY2013E earnings, which is in-line with its historical trading average since the company’s listing. Downside risks to our estimates include – 1) any further rise in newsprint prices, 2) competition becoming fierce and 3) higher-than-expected losses/increase in the breakeven period of its new launches.