Deccan Chronicle has been among our top midcap picks since the time we commenced the coverage on the company in July 2005. The stock has appreciated from Rs 204 levels (before split) at the time of our initiation to Rs 220 currently (post 1:5 split) delivering a 5x return over July05-07. To further strengthen our belief in the management initiatives and the growth prospects of, we visited the Chennai facility of the company. Deccan Chronicle has its only printing facility in Tamilnadu situated in Chennai from where it circulates the newspaper upto a distance of 260 kms. The entire Chennai edition operates with just 150 employees including the editorial staff, marketing team and labor. The company has over the years, built-in significant amount of automation in its processes, which is clearly reflected in its robust profitability. In just 2 years from the launch of Chennai edition, Deccan chronicle has beaten its competitor THE HINDU in terms of circulation (over 300,000). While the company plans to unlock value from its wholly owned retail subsidiary ODYSSEY, it further plans to unlock value from its another wholly owned subsidiary Sieger Solutions Ltd engaged in the business of selling advertisement space in Deccan Chronicle and internet advertising. In our estimates we have not factored the value of any of the subsidiaries, which leave headroom for further upside from our mentioned target price. We maintain our estimates and reiterate BUY recommendation on the stock with a price target of Rs 330 based on 20x expected EPS of Rs 16.5 for FY09E.
The key highlights of our visit and management meet were
The value unlocking potential from its subsidiaries, Odyssey and Sieger Solutions and the Internet initiatives of Sieger Solutions
The printing facilities of Deccan Chonicle are highly automated and operate with very less manpower, which has resulted in significant operating efficiencies
More value unlocking from subsidiaries
Deccan Chronicle books majority of the advertising revenues through its wholly owned subsidiary Sieger Solutions Ltd. Sieger is engaged into the business of marketing and selling ad space in Deccan Chronicle for a commission of 10%. Apart from the ad space selling, Sieger plans to enter the Internet advertising, specialty magazine and event management businesses. The significant growth in the revenues of Deccan Chronicle also ensures clear visibility of revenues for the subsidiary Sieger.
Sieger has already launched a website called www.papyrusclubs.com which provides a medium for schools, colleges and educational institutes to publish news and articles on the happenings in the student community. The company has already tied up with several institutes to publish and share the campus news and happenings over the Internet. This initiative not only helps the student community get an access to their information online but also would provide the same till eternity. The company plans to enroll more than 1000 institutes over the next year. With a large chunk of student base accessing the website, the portal would provide a huge database of students and the youth community which would help the company monetize from the advertisements and e-commerce. The company also plans to extend the services on its website www.deccanchronicle.com to offer various domain specific services such as user communities, e-mails, travel, matrimony, cookery, online news, etc. The company intends to position the portal as a gateway to south, which would provide host of content ranging from news to cookery. It also plans to provide online shopping, ring tone & music downloads, and a host of e-commerce facilities to monetize from the vast user base. The retailing subsidiary, Odyssey, is also on aggressive expansion and an IPO of the same (likely in FY09) would provide another trigger and value unlocking for the shareholders.
Valuation
Our estimates and valuation of Deccan Chronicle is based on the core newspaper business and does not include anything from the subsidiaries Odyssey and Sieger Solutions. While management has guided for a net sales of Rs 2500 million and PBT of Rs 252 million for Odyssey, The subsidiary Sieger Solutions could generate revenues of Rs 765 million (at10% of ad revenues of Deccan Chronicle) from advertisement space selling in FY08E. Sieger's new Internet initiative, www.papyrusclubs.com, is aimed at creating a niche community of school and college students, which could build a user base of over 2 million students and an additional access from the students family members. Such a high user base could lead to a huge potential for monetization the opportunity by way of advertisements on the portal and e-commerce. Currently not much information is available on the Internet initiative, however the management intends to spend around Rs 400-500 million on the same over the next 12-18 months. We believe that the Internet initiative and the value of subsidiary is a little too early to predict, but we strongly believe that Deccan is now looking at convergence by leveraging its leadership and the strong brand in the print media. Overall we believe that the Deccan Cronicle has highly automated, state of the art operating processes, which has resulted in significant amount of savings in operating expenses. The majority of the operating expenses are fixed, which provide significant operating leverage and the so-called "Delta effect" which is reflective in the financial performance of the company. We maintain our EPS estimates of Rs 12.3 and Rs 16.5 for FY08E and FY09E respectively. We reiterate our BUY recommendation on the stock with a price target of Rs 330.
The key highlights of our visit and management meet were
The value unlocking potential from its subsidiaries, Odyssey and Sieger Solutions and the Internet initiatives of Sieger Solutions
The printing facilities of Deccan Chonicle are highly automated and operate with very less manpower, which has resulted in significant operating efficiencies
More value unlocking from subsidiaries
Deccan Chronicle books majority of the advertising revenues through its wholly owned subsidiary Sieger Solutions Ltd. Sieger is engaged into the business of marketing and selling ad space in Deccan Chronicle for a commission of 10%. Apart from the ad space selling, Sieger plans to enter the Internet advertising, specialty magazine and event management businesses. The significant growth in the revenues of Deccan Chronicle also ensures clear visibility of revenues for the subsidiary Sieger.
Sieger has already launched a website called www.papyrusclubs.com which provides a medium for schools, colleges and educational institutes to publish news and articles on the happenings in the student community. The company has already tied up with several institutes to publish and share the campus news and happenings over the Internet. This initiative not only helps the student community get an access to their information online but also would provide the same till eternity. The company plans to enroll more than 1000 institutes over the next year. With a large chunk of student base accessing the website, the portal would provide a huge database of students and the youth community which would help the company monetize from the advertisements and e-commerce. The company also plans to extend the services on its website www.deccanchronicle.com to offer various domain specific services such as user communities, e-mails, travel, matrimony, cookery, online news, etc. The company intends to position the portal as a gateway to south, which would provide host of content ranging from news to cookery. It also plans to provide online shopping, ring tone & music downloads, and a host of e-commerce facilities to monetize from the vast user base. The retailing subsidiary, Odyssey, is also on aggressive expansion and an IPO of the same (likely in FY09) would provide another trigger and value unlocking for the shareholders.
Valuation
Our estimates and valuation of Deccan Chronicle is based on the core newspaper business and does not include anything from the subsidiaries Odyssey and Sieger Solutions. While management has guided for a net sales of Rs 2500 million and PBT of Rs 252 million for Odyssey, The subsidiary Sieger Solutions could generate revenues of Rs 765 million (at10% of ad revenues of Deccan Chronicle) from advertisement space selling in FY08E. Sieger's new Internet initiative, www.papyrusclubs.com, is aimed at creating a niche community of school and college students, which could build a user base of over 2 million students and an additional access from the students family members. Such a high user base could lead to a huge potential for monetization the opportunity by way of advertisements on the portal and e-commerce. Currently not much information is available on the Internet initiative, however the management intends to spend around Rs 400-500 million on the same over the next 12-18 months. We believe that the Internet initiative and the value of subsidiary is a little too early to predict, but we strongly believe that Deccan is now looking at convergence by leveraging its leadership and the strong brand in the print media. Overall we believe that the Deccan Cronicle has highly automated, state of the art operating processes, which has resulted in significant amount of savings in operating expenses. The majority of the operating expenses are fixed, which provide significant operating leverage and the so-called "Delta effect" which is reflective in the financial performance of the company. We maintain our EPS estimates of Rs 12.3 and Rs 16.5 for FY08E and FY09E respectively. We reiterate our BUY recommendation on the stock with a price target of Rs 330.
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