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 Rs204 levels (before split) at the time of our initiation to Rs220 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 260kms. 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 Rs330 based on 20x expected EPS of Rs16.5 for FY09E.
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 Rs2500mn and PBT of Rs252mn for Odyssey, The subsidiary Sieger Solutions could generate revenues of Rs765mn (@ 10% 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 2mn 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 Rs400-500mn 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 Rs12.3 and Rs16.5 for FY08E and FY09E respectively. We reiterate our BUY recommendation on the stock with a price target of Rs330.
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 Rs330 based on 20x expected EPS of Rs16.5 for FY09E.
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 Rs2500mn and PBT of Rs252mn for Odyssey, The subsidiary Sieger Solutions could generate revenues of Rs765mn (@ 10% 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 2mn 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 Rs400-500mn 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 Rs12.3 and Rs16.5 for FY08E and FY09E respectively. We reiterate our BUY recommendation on the stock with a price target of Rs330.
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