Thursday, 5 December 2013

Hindustan Media Ventures Limited: A mispriced bet in newspaper business

Warren and Charlie's fascination towards owning newspaper business is well known to most of us! In 1973, Berkshire bought stake in Washington post and kept on increasing its stake year after year. Washington post has been one of the top holdings and one of the largest wealth creators for Berkshire, over the years. However, Warren's love with newspaper business continues unabated, till date! Berkshire, in last two years, bought 28 daily news papers for USD 344 million. Warren Buffett devoted a large section of annual shareholder letter explaining the rationale for buying newspaper business, especially when, most people in US believe that newspaper industry is on deathbed! Here is the what Warren Buffet has to say about newspaper business

"Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what's going on in your town - whether the news is about the mayor or taxes or high school football - there is no substitute for a local newspaper that is doing its job. A reader's eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.

...Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time."

So, how about an opportunity to own one of the largest Indian Hindi daily business with respectable management pedigree and excellent performance matrix on very favourable terms? Let's explore it further:

About Hindustan Media Venture Limited (HMVL):

HMVL is the company promoted by HT Media limited, part of erstwhile KK Birla group. The company was part of KK Birla group till 2008, however post Mr.Birla's demise in 2008, the HT Media business was passed onto one of his three daughters, Mrs. Shobhana Bhartia. Mrs. Bhartia is married to Mr. Shyam Sundar Bhartia, the chairman of the Jubiliant group (Jubliant Pharma, Jubilian foodworks etc). As a part of restructuring exercise, the "hindi" print media business was spun off and sold to HMVL on slump sale basis along with all the assets and liabilites in 2009. The idea of spinning of "hindi" print media business was to charter a well defined growth path for the business and provide sufficient management bandwidth. In 2010, HMVL came out with IPO to raise 270 crore to fund the expansion and pre payment of loan. The shares were issued to investors in IPO @ Rs.166. 

Business of HMVL:

HMVL publishes hindi daily "Hindustan", a children magazine "Nandan" and a woman centric magazine "Kadambini". "Hindustan" is the second largest Hindi daily in the country by total readership and the third largest by average issue readership "AIR" according to latest data published by IRS in Q4, 2012.  "Hindustan" is the mainstay of HMVL's operations. Hindustan has 12 editions and more than 110 sub editions spread across the state of Bihar, Jharkhand, Delhi/NCR, Uttar Pradesh and Uttarakhand. According to latest IRS data, Hindustan has total readership of 3.2 crores. 

Hindustan has been an undisputed leader in Bihar and Jharkhand market for many years with 68% and 46% market share respectively, well ahead of the second largest player in both the states by a wide margin. Hindustan is the second largest hindi daily in Delhi/NCR region. HMVL entered UP and Uttarakhand market before 3 years, and have reaped rich dividends from such geographical expansion. HMVL has been growing at brisk rate in both the markets. HMVL has not only emerged as the third largest player but has also inched very close to the second largest player Amara Ujala! According to the latest conference call, HMVL has broke even in UP last quarter and is likely to break even in Uttarakhand in next quarter.

HMVL's business derives its revenue largely from two sources i.e. advertisement and subscription. Currently, HMVL derives 72% of its revenue from advertising, 25% from subscription and rest 3% is from interest/dividend income. However, looking at the past trend, that contribution of advertisement revenue has increased significantly from 60% to 72%. Based on my understanding, currently, in the print media, the typical split between ad and subscription revenue is 70/30. Raw material cost constitutes 40% of total revenue. It is likely that RM cost is likely to stabilize at current level or even decrease in case of newsprint prices decline due to appreciation of rupee. 

Competition:

Daily newspaper market has largely been dominated by two or three players in most of the regions. In all the markets in which HMVL operates, the competitive landscape is no different! However, new players are entering in some of the markets dominated by HMVL especially Jharkhand and Bihar. It is possible that entry of a new player with deep pockets can change the competitive landscape in these markets. 

There are predominantly following players in the market that HMVL operates in 

Dainik Jagarn: Present in UP, Uttarakhand, Deli, Bihar, Jharkhand

Amar Ujala: Present in UP and Uttarakhand

Prabhat Khabari: Jharkhand 

Navbharat Times: Delhi/NCR

Panjab Kesari: Delhi 

Dainik Bhaskar: Jharkhand (2011) and entering in Bihar (2013) 

Follwing is the state wise competitive situation based on company's presentation and IRS data (Presentation to investors)

Bihar: Currently, only two major players in the market Hindustan and Dainik Jagarn. Hindustan has lead of more than 60% in terms of AIR over Dainik Jagaran. DB has recently launched Patna edition and if they expand aggresively(as they have done in other states), it may be the third significant player in the state.

Jharkhand: Highly competitive market with 4 players in the fray. Hindustan is the leader followed by Prabhat Khabar, Dainik Jagaran and Dainik Bhaskar respectively. However interesting thing is that gap between first three players have remained almost constant even after the entry of a new player. 

Delhi/NCR: This market is again fiercely contested market with 4 players. However, market is dominated by Navbharat Times which has been able to hold forte very well in spite of stiff competition. There is hardly any difference between second and third player i.e. Hindustan and Dainik Jagaran in terms of AIR and both have maintained their AIR over last couple of years. However, Punjab Kesari has lost readership consistently and is the only weak wicket!

UP and Uttarakhand: This market, few years back was dominated by Dainik Jagaran and Amar Ujala. However, entry of Hindustan has changed this dynamics. Hindustan has been gaining the readership at the expense of Amar Ujala while Dainik Jagaran has maintained its readership numbers in absolute terms. However both Dainik Jagaran and Amar Ujala has lost market share to Hindustan. Dainik Jagaran is still leading the market by a wide margin while the gap between Amar Ujala and Hindustan is narrowing down fast.

Financials & Ratios:

Here is the link for company's financials (Financials are only comparable from FY11)

Profit & Loss: In H1 FY14 HMVL has reported revenue of around 350 crore with net profit of 55 crore. If we annualize this number, FY 14 revenue is likely to be 700 crores with net profit of 110 crores. This translates into revenue growth of 10% CAGR in last three years while 28% CAGR profit growth. 

Company's EBIDTA margins have consistently increased from 18% in 2011 to 21% in 2013.In Q2, 2014, HMVL reported EBIDTA margin of 23%.

Balance sheet: Company has a very strong balance sheet with 36 crores of debt on total equity of 563 crores (As on H1 FY14).This translates into debt to equity ratio of 0.07. Company has cash and MF investment of around 400 crores (including non current investment of 95 crores). 

Cash flow: Company has consistently generated free cash flow from operations in all the years resulting into healthy cash position for the company.Cash flow from operations have been in line with the net profit or have exceeded the net profit in each of the last three years. Cash flow from operating activity is 57, 72 and 81 crores against net profit of 54, 65 and 84 crores. This not only indicates efficient use of fixed assets but also means that working capital management also has been excellent.

Return on capital employed: Even though company has generated respectable ROCE of 22-24% in last 3 years on the entire capital employed, the number do not reflect the actual attractiveness of the business. If we deduct the cash/investment from the capital employed and count only actual capital deployed in the business, HMVL is likely to generate 110 crore of profit on 220 crore of capital employed (fixed asset + net working capital) which is phenomenal 50%! And according to management, the operational leverage is yet to kick in...!!

Valuation:

Company has current market cap of 800 odd crores which is 7.3 times estimated FY 14 earnings. However, company is sitting on cash kitty of 400 crores which management is planning to deploy for acquisition, use it for expansion, return it to shareholders or a combination of these options. If management rationally deploys this capital and generate even 20% return it will translate into additional earnings of 80 crores, taking yearly earning to around 200 crores. Thus, after cash is deployed, effective P/E will be even less than 7, depending upon the kind of return generated on the capital. 

Moreover, according to management (both in AR and in concall), company in past 3 years have made substantial capital expenditure for upgrading their printing facilities and expanding into new geographies. In next few years, management will focus on maximizing the revenue from the investment made, increasing operational efficiencies and further consolidating its position in existing markets. Management has also indicated that this will result into operating leverage coming in to play resulting in significant increase in bottom line. 

In terms of peer comparison, DB corp, which also operates in vernacular/hindi print media and has similar margin and return ratios is trading at 19 times trailing P/E. As DB Corp covers wider geography and is bigger in scale than HMVL, it will command some premium over HMVL. Even if we assume that HMVL will trade at 25% discount to DB Corp, HMVL shall trade around 13-14 P/E. Currently, the stock is trading at 7 times FY 14 earning without considering cash deployment providing enough margin of safety and substantial upside potential. 

Currently market is punishing the company because it is sitting on large cash pile without utilizing it. This is perceived as key risk for the company as market has burnt their fingers in numerous companies where promoters have siphoned the cash through some very innovative and/or blatant means! I personally feel that given respectable management pedigree and management reiterating its intention to deploy cash in due course provide comfort to shareholders. Management in the last couple of concall, has confirmed that they are keeping cash reserves and evaluating various opportunities for inorganic growth. Management has also indicated that HMVL has a threshold limit of "war chest" in mind which it wants to preserve for inorganic growth. However, once that threshold is reached, company shall redistribute additional cash to shareholders. In latest concall, management also gave hints that company is very near to the threshold cash limit. So, it is possible that we witness some action from management on that front which will act as catalyst towards bridging the valuation gap.

Key investment rationale:

- Newspaper is a sticky business and switching cost/inertia is high 
- Typically, in newspaper business, growth in ad revenue is non linear after a newspaper approaches critical mass and scale as volume of advertisement and pricing power both grow. In UP and Uttarakhand, HMVL is approaching that inflection point. 
- Currently there is large gap between advertising rates of Amara Ujala (second largest player) and Hindustan in UP ( at least 30-40%). If HMVL continue to grow and reaches the scale of Amara Ujala, it can signifcantly increase advertisement rate ( I have compiled a comparison between ad rates from all major hindi dailies for HMVL market and if anyone wants it, I can send it over)
- Increasing literacy rates in Hindi belt is structurally good as new potential consumers will get added hence the potential customer base will expand
- Rural India and tier-II and tier-III towns are considered next growth engines for many businesses. Hence advertisement spend focused on this market is likely to go up. All vernacular and Hindi print media companies are going to be beneficiary of this trend
- There is large gap between advertisement rates charged by english dailies and Hindi/vernacular dailies. However, increasing focus on rural/tier-II/tier-III town by companies will narrow down this gap providing higher yield to hindi/vernacular dailies.

Key risks:

- Competitive intensity in key markets of Jharkhand and Bihar is increasing. any irrational behaviour by the new entrant/competitor can have negative financial impact.

- If management neither deploy cash in business/for acquisition or returns it to shareholder, market will continue to assign lower valuation 

- Management pay too high a price for the acquisition resulting into value erosion for the shareholders

One more interesting aspect! Azim Premji and his investment companies own 2.18% stake in the company.

I believe it is a good opportunity to own a solid and growing business on very favourable terms where odds of winning are in favour of an investor!