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THE SECTORIAL REPORT ON

PRINT MEDIA

Submitted To: Prof. SAPNA MALHOTRA

Submitted by: Aatif Ansari Abdullah Tayyebi Abrez Bhiwandiwala Abu Talib Khan (01) (03) (05) (07)

Rizvi Institute of Management Studies and Research Carter Road, Bandra West, Mumbai-400050

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Executive Summary
Indian Newspaper Publishing - Standing Tall We believe the Indian Print Media sector offers an excellent opportunity for investors to cash in on the strong economic growth and emerging consumerism theme in India. Contrary to popular belief and in defiance of global trends, Newspaper Publishing in India still stands tall beating Television in terms of advertising growth. Going ahead, the Rs130bn Indian Newspaper Publishing industry is expected to register a 13.9% CAGR in revenues during CY2007-11 largely driven by advertising revenue. While advertising revenue is basically related to strong economic growth in the country, we believe Newspaper Publishing in India is set to grow owing to structural growth drivers like rising penetration, higher literacy levels and improving affordability of the medium. Newsprint concerns discounted Rising newsprint prices has emerged as the key concern for Print Media companies in India. Capacity rationalisation in North American markets, lower supplies from China and rising crude oil prices has led to this sharp hike. However, we believe the impact of rising newsprint prices on Print Media companies' profitability has already been discounted in the market as reflected in the sharp fall in the stock prices of Print Media companies by 30-45% during the last three months. We believe the newsprint prices are likely to stabilise in 2HCY2008 as the supply situation from China improves post the Olympics in Beijing. For our Print Media universe, we have modeled in an 18% rise in newsprint prices in FY2009E from $600/ton as a base case followed by a 6% jump in FY2010E. Premium valuations to sustain Globally, Print Media companies usually command premium valuations owing to the unique nature of their business model, which entails high operating leverage and generates strong free cash flows. This allows Print Media companies to venture into new businesses/ alternative media platforms and emerge as a complete media house, which further improves their bargaining power with advertisers and expands their total advertising pie. Beefed up with proper funding (post opening up of FDI), a buoyant economy and better demographics, we believe the Print Media companies in India have also embarked on a similar trend. This new era has witnessed Print Media breaking its shackles from its traditional strongholds to expand into new geographies, launching new editions and even venturing
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beyond Print. We believe such new initiatives will not only help the companies maximise use of their infrastructure and brands, it will also act as a stepping stone to unlock shareholder value once the ventures attain significant size. Angel Print Media Top Picks - Set to outpace industry growth We Initiate Coverage on the Print Media sector in India with a positive outlook for our universe of stocks, which includes three companies Jagran Prakashan (JPL), HT Media (HTML) and Deccan Chronicle Holdings (DCHL). We expect our Print Media universe to register a robust 21% and 30.3% CAGR in Net Sales and Profits during FY2007-10 respectively, outpacing industry growth. Revenue growth is likely to be driven by a robust 22.3% CAGR in advertising revenues and modest 9.4% CAGR in circulation revenues during the period. Jagran Prakashan is our Top Pick in the sector followed by HT Media. We believe both the companies are a unique play on the Print Media in terms of their market presence and product portfolio. We maintain our Neutral view on Deccan Chronicle as despite its cheap valuations, strong concerns render the risk-reward ratio in the stock unfavourable.

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Indian Media & Entertainment Industry

Over the last several years, Indian Media & Entertainment (M&E) Industry has consistently outperformed most other sectors in terms of growth. Standing tall at an estimated size of Rs513bn in CY2007, it is expected to continue to grow at a steady pace of 18.3% CAGR during CY2007-11. While traditional segments like Television and Print continue to account for the largest shares of the overall pie, it is emerging segments like Internet advertising, Radio and Animation and Gaming, which are expected to register higher growth. In terms of size, we believe that the Indian M&E industry has just touched the tip of the iceberg. In CY2007, the Indian M&E Industry accounted for a mere 0.9% of the Global M&E Industry, which stood at US $1,432bn and is expected to grow at a CAGR of 6.6% over CY2007-11.

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A buoyant economy and extremely favourable demographics are the two key macro-economic constituents on which the Indian Media industry stands today. Media Industry generally tends to exhibit cyclical nature wherein it grows faster when the economy is buoyant and we believe the time is right for the Media industry to bask in the glory of India Shining story. In perspective, according to a McKinsey report (MGI India Consumer Report), if India continues on its steady growth path over the next two decades, a major transformation will take place in the Indian consumer market. Income levels will triple and result in India taking over as the fifth largest consumer market (currently twelfth). Such strong growth and higher incomes will move over 291mn people out of desperate poverty and India's middle class will swell by almost ten times from its current size of 50mn to 583mn people (41% of population/ 128mn households) by 2025. Income growth will be the fastest in the urban areas where average real household incomes will increase by 5.8% whereas rural incomes will accelerate by 3.6% over the next two decades. Moreover, as higher disposable incomes propel consumer spending, more money will flow into leisure activities giving a steady impetus to M&E Industry. Besides the macro-economic factors, we believe steady advertising growth, liberal government regulations and convergence of diverse platforms will be the key growth drivers for the Media industry.

Advertising to grow at a steady pace As consumer wallets swell and companies slug it out to capture a larger share of these wallets, the advertising industry continues to make its importance felt registering a robust growth of 21.5% yoy in CY2007 to Rs195bn. Print Media continues to account for the largest share of the advertising pie at 48.1% registering a strong 20.5% yoy growth during the year. In terms of contribution to the total pie, both the traditional
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platforms viz., Print and Television are expected to converge in CY2011. Low ad spends relative to GDP, buoyant economic growth and high growth in new media platforms are expected to drive a steady 19.3% CAGR in revenues for the advertising industry during CY2007-11.

Buoyant Economy - the platform for steady advertising growth The advertising industry tends to exhibit a strong correlation with GDP growth (in the range of 1.3-1.5x Nominal GDP growth). During periods of strong growth in the economy, higher consumer spending pushes up the need for advertising and the reverse is true during economic downturns. Going ahead, the Indian economy is expected to grow at a steady pace of 7-8% (Real GDP growth) and with inflation estimated at 4-5%, we expect the advertising industry to sustain 16-18% growth.

Low Ad Spend to GDP indicates huge untapped potential Advertising spend in India stands at an abysmal 0.47% of GDP compared to the global average of 0.92%. Lower media penetration, poor
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discretionary spending and lack of regulatory support for media activities are to blame. However, we believe the scenario is changing and such low advertising activity indicates huge untapped potential for the media players. This potential can be estimated from the fact that if India were to achieve the global average of 0.92% in CY2011, then the advertising revenue during CY2007-11 would more than triple instead of just doubling. As corporates indulge in higher advertising budget outlays to differentiate themselves, more product categories and segments evolve and new advertising mediums and delivery formats emerge, we believe advertising spend is bound to improve.

Liberal government regulations - The thrust M&E Industry needed The Indian M&E Industry is witnessing heightened activity owing to rising participation of all its Stake-holders viz., regulators, consumers, corporates and investors. However, this wasn't always the case. Mired by a host of problems like poor regulatory framework, high amount of unorganised participation and leakages in the revenue models (eg., piracy), the Indian M&E Industry needed a push to achieve its true potential. Some of the liberal government policies that followed did provide the much needed thrust. Thus, while Radio has benefitted immensely owing to a shift to a revenue-sharing regime (from a license regime) and distribution of new licenses under Phase II, digitisation of Television distribution through DTH and CAS rollout have completely changed the ballgame for the Television industry. Close on heels was the Film Industry, which also got its share of favourable policies in terms of being accorded an Industry status. This liberal regime also relaxed foreign direct investment (FDI) norms for the M&E Industry in India opening the floodgates for foreign corporates and investments. Print Media was the first to benefit. In 2003, FDI upto 100% and 26% was allowed in non-news and news publishing, respectively. This as followed by 20% FDI in Radio and DTH, 49% in Cable TV and 100% FDI in Advertising, Films and TV Software production. More recently, to abide by the rising convergence
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trends in Media and Telecom, the government is considering allowing FDI upto 74% in segments like DTH, Cable TV and IPTV. Foreign investment limit in FM Radio is also likely to be increased to 24%.

The year 2007 witnessed the highest FDI inflow lending credence to the fact that the Indian M&E industry has been gaining favour with the foreign investors. Thus, while total FDI Earnings of the Information & Broadcasting (I&B) Ministry stood at $461.8mn levels for the period April 2000 and December 2007, the nine months of 2007 contributed the lion's share with an inflow of $215.8mn. Incidentally, the highest FDI inflow for any single year during 2000-07 was $81.5mn way back in 2000-01. According to the Department of Industrial Policy and Promotion, FDI fell to a mere $4.5mn in 2001-02, but then rose to $36.5mn the next year (2002-03) and touched $56mn in 2005-06 and $43.6mn in 2006-07.

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Print Media
Notwithstanding the threat from Television and emerging media like Internet and Radio, the Print Media in India continues to dominate the M&E space attracting the highest revenues in terms of advertising. In CY2007, the Print Media segment in India stood at Rs149bn registering a yoy growth of 16.5%. Newspaper publishing, which accounts for 87% of the segment, registered a 16.6% yoy growth whereas Magazine publishing, which contributes the balance, grew at a marginally lower rate of 15%. Going ahead, Print Media is expected to deliver a 14% CAGR in overall revenues during CY2007-11 driven largely by advertising revenues as circulation growth is expected to witness a slowdown.

Newspaper publishing - Standing tall in India Contrary to popular belief and in defiance to global trends, Newspaper publishing still stands tall in India accounting for similar share of advertising pie as the popular idiot box (television). Newspaper publishing, a thriving business in India, generated Rs130bn in revenues during CY2007 out of which 61% came from advertising and the balance from circulation. In terms of advertising revenue growth, it once again outpaced television registering a robust 21.2% yoy growth during CY2007 as against 20.8% growth in advertising on television. Going ahead, the industry is expected to register a 13.9% CAGR in overall revenues during CY2007-11 largely driven by advertising revenue growth.

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The Big Divide - English v/s Regional The Indian Newspaper industry is highly fragmented with more than 60,374 registered newspapers including 6,529 dailies. Hindi language newspapers comprise 44.6% of the registered dailies while English language newspapers comprise a mere 7.4% of the total.

According to the National Readership Survey (NRS) 2006, reach of the press medium (dailies and magazines combined) increased to 222mn in 2006 from 216mn in 2005. A higher percentage of population in the urban areas read any print media than their rural counterparts. English language newspaper readers are largely located in urban areas while the readership of Regional newspapers (Hindi and Vernacular dailies) is more evenly distributed between the urban and rural areas. Approximately 7.7% of the population in urban areas read English dailies, compared to a readership of only 0.3% in rural areas. By contrast, Hindi dailies have a proportionately larger readership in rural areas, in addition to their strong presence in the urban areas, with a readership of approximately 15.7% and 6.5% in urban and rural areas, respectively.

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Even in terms of overall readership, the Regional dailies (Hindi and vernacular dailies) dominate the pie with The Times of India being the only English daily to feature in the Top-10 list. Moreover, the Regional dailies have a readership: circulation multiple of 7-9 times compared with English newspapers of 2-3 times. This is primarily due to higher cover prices of Regional newspapers compared with English newspapers and the readers of Regional newspapers are generally from the lower socioeconomic segment. Regional Newspapers enjoy a better distribution of readership TOI is the only English Newspaper to feature in Top 10

However, despite having higher number of registered newspapers, higher readership and a better proportionately distributed readership (urban + rural), the Regional dailies commands a lower share of the print advertising pie. English dailies (including Business dailies) attract the highest advertising revenues with approximately 50% of ad-spend followed by Hindi and other Indian language newspapers with approximately 25% of ad-spend each.

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English Newspapers advertising pie

command

almost

50%

of

the

Print

A substantial portion of large budget advertisers prefer English dailies because their readers belong to higher socio-economic brackets compared to the readers of the Regional dailies. Hence, despite a higher readership: circulation multiple and lower CPT (cost per thousand readers) in case of Regional dailies, the advertising rates are higher for the English dailies owing to their affluent readership base.

However, as tier-II and tier-III cities grow in terms of per capita income and consumer spends, advertisers are gradually opening their eyes to the cost advantage that the Regional dailies offer vis--vis English dailies. Hence, we expect the wide differential between Regional and English advertising rates to narrow, albeit gradually, as is evident from the higher ad rate hikes taken by the Hindi/Vernacular newspapers compared to their English counterparts. Hence, advertising revenue for the Hindi/Vernacular language newspapers is increasing at a higher average rate than for the English newspaper industry. We expect this shift to gain momentum owing to the following reasons: Stagnating Readership in Metros
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Regional dailies have grown from 191mn readers to 203.6mn readers while readership of the English dailies has stagnated around 21mn readers (NRS 2006). As metros stagnate in terms of readership and circulation, advertisers are increasingly shifting allocations to non-metros to cash in on the growing disposable incomes and improving literacy rates in these regions. Huge untapped potential in Hindi dailies There is significant scope for growth in the circulation and readership of Hindi newspapers as evident from the fact that out of the 359mn people in India who can read but do not currently read any publication, 68% can read Hindi. Moreover, 20mn of these literate non-readers belong to the upscale SEC A and B segments (higher socio-economic brackets). Favourable Business dynamics Hindi/Vernacular dailies have a lower ad-edit ratio, lower colour inventory and lower pagination compared to their English counterparts. Going forward, we expect the Regional dailies to increase colour inventory (as demand from emerging sectors like retail, education, banking, etc., pick up) and improve pagination (once the ad-edit ratios improve) enabling them to command better yields.

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We attribute this unique feature to the following: Family owned businesses Most Newspaper businesses in India are family owned and have a strong regional focus. Moreover, due to lack of funds and localised nature of the newspaper business, most of them have remained content in their own boundaries. Strong Entry barriers Newspaper business has extremely strong entry barriers owing to strong brand equity, readership loyalty and requirement for a wide distribution network. Moreover, as advertising revenue in a region is generally absorbed by the top-two players, in most cases it makes competition unviable. Niche focus In general, Regional newspapers (Hindi + Vernacular) offer local and regional focus to their readers, often issuing several different regional editions. The content and circulation of English-language newspapers, on the other hand, is largely focused on the primary urban centers. Hence, both enjoy their own set of readers and advertisers, which has left enough room to expand within. Nonetheless, the scenario is fast changing. Post opening up of FDI in the sector, several players have attracted large investments and also tapped the IPO market to raise funds. Equipped with a large war-chest of money,
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these players have broken from their regional strongholds expanding into newer geographies, launching new editions and even venturing beyond Print. We believe this trend will pick up further momentum in the future as Print companies taste the benefits of ad-bundling (arising out of the ability to offer advertising in multiple editions) and derive synergies from common infrastructure and brand equity. Attracting Big Investments Lack of funds to invest in new markets has been one of the key reasons constraining Print Media companies in India to their own regional strongholds. However, since the government opened the sector to FDI, Print Media has attracted several big ticket investments. In the Print Media segment, 100% FDI is now allowed for non-news publications and 26% FDI is allowed for news publications. Printing of facsimile editions of foreign journals is now also allowed in India. However, the FDI investments are subjects to certain conditions including: The largest shareholder must hold at least 51% equity Three-fourths of directors and all executive and editorial staff have to be resident Indians Over the last couple of years, several big deals have taken place in the Print Media segment. Players like Warburg Pincus, DE Shaw, Henderson, etc., have picked up stakes in Print Media companies. Besides P/E funding, Print Media companies like HT Media, Jagran Prakashan and Deccan Chronicle have also raised around US $250mn through the IPO/QIP route. DB Corp (Dainik Bhaskar) has also filed its RHP to raise money via IPO. Other recent deals include investment by the Times of India Group in Vijayanand Printers to enable its entry into the regional language publishing space. The Times Group also picked up 12% stake in Sandesh, a regional daily for Rs27cr.

Expanding Reach Beefed up with proper funding, a buoyant economy and better demographics have seen the Print Media breaking its shackles from the traditional strongholds to expand into new geographies. The English domain has seen the highest activity in terms of expansion. In 2005, Hindustan Times and DNA (Zee Telefilms - Dainik Bhaskar combine) broke into Mumbai (the largest Print Media market in the country), which has
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traditionally been a monopoly of Times of India (TOI). While defending its home turf in Mumbai, TOI has started its own battles denting Telegraph's market share in Kolkata and Deccan Herald's in Karnataka. The Southern markets witnessed their own share of action with Deccan Chronicle venturing outside its home turf of Andhra Pradesh to challenge The Hindu in Chennai. Buoyed by its success in Chennai, Deccan Chronicle is all set to enter Bangalore in 1QFY2009. However, TOI, an undisputed leader in Bangalore, has already entered Chennai to counter attack Deccan Chronicle and strengthen its presence in South India. Not to be left behind, Hindi publications have also started expanding. Dainik Jagran has moved beyond UP strengthening its position in Punjab and Bihar. However, it hasn't been easy as it had to fight the likes of Hindustan in Bihar and Dainik Bhaskar in Punjab (raged a cover price war). Hindustan is planning to expand aggressively into UP by launching 12-13 new editions over the next 2-3 years. Dainik Bhaskar has also gained significant marketshare in Gujarat and Rajasthan. However, Newspapers aren't simply sticking to geographic expansions. To truly expand their reach and widen their readership base, several Publishing houses have launched new editions of newspapers. The most prominent launches of 2007 included:

Convergence - Playing its part in Print Media Sitting on huge cash piles and with the ability to generate strong cash flows, Print Media companies have started to realise the importance of convergence of media platforms and moving beyond their core business. Rising competition, the need to capture a larger advertising pie and ability to derive cross-synergies are some of the key reasons necessitating this transformation. We believe the Print Media companies in India have just embarked on a global trend, which has seen emergence of big media
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houses like Dow Jones, News Corporation, APN News & Media, etc., which enjoy a strong and diverse presence across media platforms. While BCCL can be credited as the pioneer in terms of convergence in Print Media in India, others like HT Media, Jagran Prakashan and Deccan Chronicle have picked up fast entering most alternative media platforms including Radio, Out-of-Home (OOH) advertising, Event Management, Internet Portals and even Sports Management. Broadcasting majors like TV18, realising the potential that Print Media offers, has tied up with Jagran Prakashan to launch a Hindi financial daily. It has also picked up 40% stake in Infomedia, a company with business operations pan across business directories, B2B and B2C magazine publishing and publishing outsourcing. We believe such new initiatives will not only help the companies to maximise the use of their infrastructure and brands, it will also act as a stepping stone to unlock shareholder value once these ventures attain significant size.

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Key Concerns
Rising Newsprint Prices The cost of production of a newspaper is directly linked to the cost of newsprint, which varies with the market price of newsprint, availability and location of printing facilities and the number of pages used. Newsprint costs generally account for almost 50-70% of total expenses for a publishing business. Below we have enumerated newsprint costs for our Print Media universe vis--vis their total expenditure and revenue.

Newsprint prices vary according to quality. Newsprint is a freely traded commodity on the international markets and exhibits price volatility. India imports almost 70% of its newsprint requirement. The English newspapers generally use higher quality and mostly imported newsprint compared to the regional players which use a mix of imported and domestic newsprint. In our Print Universe, the ratio of Imported: Domestic newsprint stands at 90:10 for Deccan Chronicle, 70:30 for HT Media and 35:65 for Jagran Prakashan. After bottoming out in July 2002 at US $430MT, newsprint
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prices were on a steady rise for almost four years and peaked at US $640MT levels in July 2006. The rise in newsprint prices during the period was attributed to steady demand and cost push inflation. In FY2008 however, most Print Media companies reaped the benefits of lower newsprint costs on account of the dual benefit of declining newsprint prices and rising Rupee. India imports almost 70% of its newsprint requirement In FY2008 Print Media companies benefitted from declining newsprint prices and rising Rupee

Newsprint prices in CY2008 have already raised 10-12% Indian companies, over the last several years, have been able to purchase imported newsprint (largely from North America) at competitive prices owing to a positive supply scenario (vast capacities created by international newsprint manufacturers), declining demand in UK and parts of Europe and strong push by Chinese newsprint companies into the Indian market. But, the scenario has now changed. At the beginning of CY2007, global demand for newsprint was 38.3mn tons while the global supply was at 40.5mn tons - a surplus of 2.2mn tons. However, by the end of 2007, several mills closed down resulting in a shortage of 2mn tons taking the prices up. Newsprint prices in CY2008 have already risen 1012% to US $640MT levels with more hikes anticipated in the near future. We attribute the sharp rise in global newsprint prices to the following factors: Capacity rationalisation in North America - In CY2007, the North American newsprint market was suffering from a large demand-supply gap keeping the prices under check. However, owing to the merger of
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Abitibi and Bowater to create Abitibi Bowater, the largest North American newsprint producer accounting for almost 50% market share, this gap has vanished. The merged entity announced closure of the 600,000 ton/year of capacity as a part of its rationalisation plan and effected a price hike of US $60/ton for 1QCY2008. Further, Catalyst Paper acquired Abitibi Bowaters 375,000 ton/year Snowflake mill capacity resulting in an equation where the Top-five newsprint producers now account for over 80% of the newsprint capacity in the North American market. The Chinese equation - The Chinese suppliers, who were aggressively selling to the local buyers, have pulled out as recycled newspapers, the primary raw material for recycled newsprint, is in short supply. Old News Print (ONP), one of the main raw materials for recycled Chinese newsprint has seen an increase in price ranging from $130 to $270 per ton, in the last 5-6 months. Domestic consumption in China has also gone up owing to the run-up to the Beijing Olympics. Rising crude prices - High crude prices at US$100-105 per barrel are pushing up freight rates as well as the cost of production of newsprint, a highly energy-intensive process. Newsprint prices to stabilise post 2HCY2008 We expect newsprint prices to remain firm and rise to higher levels in the near term. However, we note that newsprint demand in the US, the largest consumer, has declined by 10.8% yoy in CY2007 and is expected to remain subdued. Besides, the strong domestic demand in China is more of a transitory phenomenon and is likely to witness moderation in 2HCY2008 leading to better supply situation. For our Print Media universe, we have modeled in an 18% rise in newsprint prices in FY2009E from $600/ton as a base case followed by a 6% jump in FY2010E. Our Sensitivity Analysis indicates the impact of an additional 100bp rise on EBITDA and PAT on our base case assumptions for the different companies. We believe HT Media is the most sensitive to newsprint price hikes owing to its large circulation base, higher use of imported newsprint and higher pagination compared to its peers.

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Rising cost pressures likely to lead to industry consolidation If newsprint price hikes sustain at this rapid pace for another few quarters, we believe the smaller publishers, which largely depend on circulation revenues, will likely witness sharp erosion in profitability rendering their business model unviable. The large newsprint publishers are in a better position to absorb the hikes owing to their strong Margin profile, high Operating leverage and ability to garner high amount of advertising revenues. Moreover, most large publishing companies have strong cash flows and balance sheet, which gives them the additional advantage to explore acquisition opportunities, which arise due to changing business dynamics. We believe the Newspaper publishing companies are likely to use a combination of counter-strategies to mitigate the impact of rising newsprint prices to protect their Margins and remain competitive.

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Threat from Internet Globally, internet is posing a serious threat to Print Media companies due to which they are losing both readers and advertisers to the emerging medium. However, we believe Internet hardly poses a threat to Print in India owing to the dismal broadband penetration, which stands at 3.1mn subscribers in CY2007. In fact, we expect Internet to emerge as a complementary medium for Print companies in India as most players have enhanced their online presence via electronic versions of their paper (epaper) and making their various services like classifieds, jobs, matrimonial etc available online via dedicated portals. Slowdown in economy The advertising industry, the bellwether of Print Media revenues in India, tends to exhibit a strong correlation with GDP growth. Moreover, newspaper publishing business in India is moving towards the free paper model (in-line with western countries) where readers are highly subsidized (especially in case of English newspapers) increasing dependence of Print companies on ad revenues. Thus, any significant slowdown in the economic growth can have a direct impact on Print Media companies' revenue and profitability.

Outlook and Valuation We believe the Indian Print Media sector offers an excellent opportunity for investors to cash in on the strong economic growth and emerging consumerism theme in India. Contrary to popular belief and in defiance of global trends, Newspaper publishing in India still stands tall beating television in terms of advertising growth. Going ahead, the Rs130bn Newspaper publishing industry is expected to register a 13.9% CAGR in revenues during CY2007-11 largely driven by advertising revenue growth. We expect our Print Media universe to register a robust 21% and 30.3% CAGR in Net Sales and Profits during FY2007-10 respectively, outpacing industry growth.

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Robust advertising growth to boost Margins For Newspaper publishing companies in India, advertising remains the key revenue driver (especially for English Print publications). Advertising revenues for the industry are expected to grow at 17.1% CAGR during CY2007-11 outpacing circulation revenue growth at 8.3% CAGR skewing the revenue mix in favour of advertising. We expect our Print Media universe to register a robust 22.3% CAGR in advertising revenues and modest 9.4% CAGR in circulation revenues during FY2007-10. We believe that sustained ad rate hikes, better inventory utilisation and increasing proportion of local and colour ads will be the key drivers for robust advertising growth. Circulation revenues are expected to witness moderation as intensifying competition will keep cover prices under control (decline in certain regions). Pertinently, incremental advertising revenue growth does not entail any major expenses (besides capex in terms of machinery). Hence, growth driven by rate hikes and higher proportion of colour ads percolates directly to the Bottomline perking up Margins disproportionately. Thus, Print Media companies enjoy extremely high operating leverage once their editions/launches stabilise and start generating strong advertising revenue. However, sharp jump in newsprint prices over the last six months is expected to dent margins of Print Media companies particularly in FY2009. Nonetheless, we expect Print Media companies to resume Margin expansion trend in FY2010 as their investments in new ventures/editions start generating returns, newsprint prices stabilise and further operating leverage kicks in.

We expect Jagran to be the largest beneficiary registering a 705bp Margin expansion during FY2007-10. HT Media is expected to witness a modest
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200bp Margin expansion during the period as it remains the most sensitive company to rising newsprint prices. Moreover, we believe FY2009 will continue to be an investment phase for the company as it is incurring losses in its HT Mumbai edition, Mint and new editions of Hindustan (scale up in UP). In case of Deccan Chronicle, we expect the company to register the highest Margin expansion amongst our Print universe of 810bp during the period. However, we believe DCHL's Operating Margins have peaked in FY2008E at 61.2% and are expected to decline by almost 630bp during FY2008-10. We believe it would be difficult for DCHL to sustain its high-Margin model owing to stiffer competition in Chennai, initial losses on account of the Bangalore edition launch and higher newsprint prices. Premium Valuations to sustain Globally, Print Media companies usually command premium valuations owing to the unique nature of their business model, which entails high operating leverage and generates strong free cash flows. This allows Print Media companies to venture into new businesses/ alternative media platforms and emerge as a complete media house, which further improves their bargaining power with advertisers and expands their total advertising pie.

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In line with these global trends, our Print Media universe also commands premium valuations to the benchmark indices and their global peers. We expect this premium to sustain on account of the following: Vibrant Newspaper publishing market - India is expected to be amongst the fastest growing newspaper publishing markets in the world. While the Global industry is expected to register a mere 2.1% CAGR during CY200611, India is expected to register a much stronger 14.5% CAGR during the same period. Strong Revenue and Earnings growth - Our Print Media universe is expected to deliver a robust 21% and 30.3% CAGR in Net Sales and Profits during FY2007-10 respectively, compared to its global counterparts, which are likely to register growth in the range of 5-15%. Strong Balance Sheets - Our Print Media universe has an extremely strong Balance Sheet in terms of low leveraging. While debt-equity in case of Jagran and HT Media stand at a low 0.2-0.3x, Deccan Chronicle also enjoys comfortable position of 0.7x debt-equity. Moreover, all the three companies are sitting on huge cash balances ready to fund their new launches and cash in on any acquisition opportunities available. Emerging as complete Media plays - Sitting on huge cash piles and ability to generate strong free cash flows, our Print Media universe has
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already started capitalising on available opportunities by entering alternative media platforms including Radio, Out-of-Home (OOH) advertising, Event Management, Internet Portals and even Sports Management. Initiate Coverage with Jagran Prakashan as our Top Pick We Initiate Coverage on the Print Media sector in India with a positive outlook for our universe of stocks. We believe the impact of rising newsprint prices on Print Media companies' profitability has already been discounted in the market as reflected in the sharp fall in the stock prices of Print Media companies in the range of 30-45% during the last three months. Moreover, we believe the rise in newsprint prices is likely to stabilise in 2HCY2008 as the supply situation from China improves post the Olympics in Beijing. We have valued the companies in our coverage on DCF basis for their core Print Media business and used sum-of-the-parts (SOTP) method to derive the Target Prices in case of multiple businesses ascribing different values to each business. To negate the uncertainty regarding newsprint prices, we have modeled in an additional 1% stock risk premium in our DCF model for all the companies implying a higher WACC. We rate Jagran Prakashan as our Top Pick in the sector followed by HT Media. We remain Neutral on Deccan Chronicle as despite its cheap valuations, strong concerns render the risk-reward ratio in the stock unfavourable.

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Jagran Prakashan
Printed to Lead Jagran Prakashan (JPL), with 37 editions of its flagship Hindi daily Dainik Jagran, is the leading newspaper publisher in the country. Strong advertising growth owing to rate hikes, rising proportion of colour ads and high differential between English and Hindi daily ad rates is expected to boost JPL's Margins. Leading Daily newspaper publisher: JPL is the publisher of India's largest read and circulated daily newspaper, Dainik Jagran, which has a strong base of 16.5mn readers (IRS R2 2007) and circulation of 2.5mn (ABC JJ 2007). The Hindi daily is published in 37 editions and 275+ sub editions and enjoys dominant position across the Hindi belt (covering almost 40% of population). Further, the company has expanded beyond its home market (UP/ Uttaranchal) by launching 18-20 new editions post FY2000. Robust advertising growth to boost Margins: Rising disposable incomes/ literacy rates in its key markets, high differential between English and Hindi daily ad rates and increasing proportion of local and colour ads in its advertising mix is expected to help JPL sustain robust advertising growth going ahead. We estimate JPL's advertising revenues to grow at a CAGR of 27% over FY2007-10, which would in turn perk up its Margins as well. New Ventures/ Alternative platforms to de-risk business: Jagran's strategy to branch into alternative media platforms like Out-of-Home (OOH) advertising and Event Management will help it de-risk its business model along with opening up new revenue streams. The company's innovative extension of its publishing business like City Plus, I-Next and the tie-up with TV18 for Hindi/Regional business dailies augurs well in the long run in terms of building strong entry barriers.

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Business Overview Jagran Prakashan (JPL) is the publisher of Indias largest read and circulated daily newspaper Dainik Jagran and enjoys dominant position across the Hindi belt (covering almost 40% of the countrys population). JPL also publishes magazines like Sakhi and Jagran Varshiki. More recently, JPL initiated several new print offerings in its existing as well as new markets like youth focused tabloids such as I-Next and City Plus. JPL has also tied up with TV18 to launch a Hindi business daily. Besides its strong presence in the Print Media, the company is also present in alternative media vehicles like Out of Home (OOH) advertising (via Jagran Engage), Event Management (via Jagran Solutions), value-added mobile services (via J9) and Internet portals (via its co-branding tie up with Yahoo!).

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JPL derived 65% of revenues from advertising and 28% from circulation in FY2007 JPL derives majority of its revenues from its core Print business comprising advertising and circulation revenues. In FY2007, the company earned Rs388cr advertising revenues, which accounted for almost 65% of total revenues. Circulation revenues accounted for 28% of total revenues amounting to Rs168cr. The other businesses OOH and Event Management accounted for the balance 7% of revenues. JPL derives a higher portion of its revenues from circulation compared to its English counterparts on account of higher cover price, larger circulation base and lower ad rates. The English newspapers, on an average, derive 85% of their revenues from Advertising.

Investment Argument leading daily newspaper publisher in India Dainik Jagran has a strong base of 16.5mn readers and a daily circulation of 2.5mn Jagran Prakashan publishes the Hindi daily Dainik Jagran, which is Indias largest read and Circulated newspaper, with a strong base of 16.5mn readers (IRS R2 2007) and a daily Circulation of 2.5mn ( ABC JJ 2007). First published in 1942 as Jagran, the paper is now published in 37 editions (five launched in the last couple of months) across 11 states. Dainik Jagran enjoys the distinction of maintaining its lead over the other Hindi newspapers, and its readership base is substantially higher than the Topfive English dailies combined.
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Uttar Pradesh to remain the key focus market Leader in UP with 14 editions and 51% market share in terms of readership Dainik Jagran is the leader in its home market Uttar Pradesh, with around 51% market share in terms of readership ( IRS 2007 R2) and enjoys almost a near monopoly position in key cities like Kanpur and Lucknow. The company started its operations in UP way back in 1947, with its Kanpur edition and has since expanded to almost 14 editions including the three new editions of Rai Bareily, Ayodhya and Mathura, which were recently launched. Owing to its strategy of focusing on local news coupled with large number of sub-editions and innovative supplements, Dainik Jagran continues to be the No1 publisher in the state. Dainik Jagrans main competitors in UP include Amar Ujala and Hindustan. Uttar Pradesh is expected to remain the key focus market for JPL in the future as well as it accounts for almost 50-55% of its advertising revenue and 60-65% of circulation revenue for JPL.

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Dainik Jagrans Rajasthan)

footprint

covers

entire

Hindi

belt

(except

After consolidating its position in its home market, Jagran entered other Hindi speaking states to capture a larger pie of readers thereby increasing its circulation and advertising revenue potential. The company launched the Delhi edition in 1990, entered Punjab in 1999, Bihar and Haryana in 2000, Jharkhand in 2003 and Jammu and Himachal Pradesh in 2005. It also has a presence in Madhya Pradesh (3 editions) through its associate company and is present in West Bengal through its Siliguri edition. Jagran publishes 37 editions covering almost the entire Hindi Belt Post FY2000, the company has been on an expansion spree launching 1820 editions most of them outside its home market. With the recent launches (five editions Rai Bareily, Ayodhya, Mathura, Haridwar and Bhatinda), the company now has totally 37 editions spanning the entire Hindi Belt (covers almost 40% of the countrys population) and enjoys a dominant No2 position in the states of Uttaranchal, Punjab, Haryana and Bihar.

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Most editions of Jagran have already achieved breakeven barring 8-9 editions, which were launched in the past 3-4 years including the Punjab editions (owing to severe competition from Dainik Bhaskar). Going ahead, we believe Jagran will focus on consolidating its position in its existing key regions, and growth is likely to come from further penetration in these under-developed markets. A buoyant economy, rising disposable incomes and improving literacy coupled with Jagran's strong brand franchise should help it achieve steady circulation growth in the future. Moreover, the fact that out of the 359mn literates who do not read a newspaper, 68% can read Hindi and a large chunk of this populace resides in the Hindi belt also works in favour of a strong player like Jagran. Robust advertising growth to boost Margins Advertising revenues to grow at a CAGR of 27% over FY2007-10E We believe that sustained ad rate hikes, better inventory utilisation and increasing proportion of local and colour ads in its advertising mix will help JPL sustain robust advertising growth in the future. We estimate advertising revenues to grow at a CAGR of 27% over FY2007-10 to Rs796cr giving a strong boost to its Margins as higher advertising revenues flow directly to the Bottom-line. We expect UP to remain the key revenue driver accounting for more than half of the advertising revenues in FY2010.
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 Ad rate hike to sustain: Rising disposable incomes/ literacy rates in its key markets coupled with high differential between English and Hindi daily ad rates is expected to help JPL sustain its ad rate hikes. We have factored in a 12.8% CAGR growth in blended ad rates during FY2007-10. In March 2008, Jagran implemented its annual ad rate hike for FY2009 increasing all edition rates by 35% and UP/ Uttaranchal edition rates by 44% respectively, for B&W display ads. Higher Ad space: We estimate a CAGR growth of 12% in the space sold during the mentioned period on account of improvement in ad-edit ratio and the rise in amount of total ad space owing to new editions and initiatives like City Plus and INext. Better inventory utilisation: Jagran's launches in the past five years are nearing maturity and we expect this to drive an improvement in inventory utilisation rates from the current 75% to 80% over the next 2-3 years.

Differential between English and Hindi daily ad rates to narrow Favourable demographics in Jagran's markets to help sustain ad rate hikes We believe Jagran is extremely well placed in terms of favourable demographics owing to its dominant presence in several Tier-II and III cities, which account for a substantial chunk of the country's population. The factors favouring Jagran and which are expected to support the strong growth in advertising rates include: Jagran is either No1 or a strong No2 in most of its key markets due to which it garners a substantial share of advertising revenues in those regions. Moreover, advertisers have entered these markets only in the last
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few years making them some of the fastest growing markets in terms of print advertising spends due to their low base. Jagran's advertising revenue pie is tilted towards the local ads owing to its presence in under-developed markets. The current local: national ads mix is 55:45 as against the reverse a few years ago. This works in favour of the company as local ads yield higher rates and are less sensitive to advertising budget rationalisations in the event of a slowdown in the economy. Moreover, we expect this trend in local advertising to further accelerate on the back of higher penetration in Tier-II and III cities by retailers, which tend to localise their advertising campaigns. English dailies, on an average, command 7-9x premium in terms of advertising rates over their Hindi counterparts (which have a larger circulation and readership base) due to the affluent nature of its audience. Market estimates suggest that Hindi advertising space sold is around 80% of the total English advertising space sold but accounts for a mere 25% of the overall print advertising revenues. However, as metros stagnate in terms of readership and circulation, advertisers are increasingly shifting allocations to non-metros to cash in on the growing disposable incomes and improving literacy rates in these regions. Hence, we expect this wide differential to narrow down over a period of time directly benefiting players like Jagran, who have a dominant presence in these markets.

Proportion of colour ads to rise Contribution of colour space to total ad space sold to rise to 47% in FY2010 Over the last several years, Jagran has witnessed a change in its advertising mix in terms of Colour and B&W space sold, wherein the proportion of colour advertisements has increased from 20% in FY2005 to almost 35% in FY2007. This has worked in favour of the company as colour ads command a 25-40% premium over B&W ads. In case of Jagran,
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the premium is even higher owing to the limited availability of colour ad inventory. Moreover, incremental cost of printing colour ads is marginal, with additional revenue directly percolating to the Bottomline. We expect the proportion of colour ads to rise to almost 47% in FY2010 supported by augmented colour capacity and rising demand for colour space in Jagran's key markets. This is expected to give further impetus to Jagran's overall advertising revenue growth going ahead.

New Ventures/ Alternative platforms to de-risk business model New Ventures - to consolidate JPL's position in its existing Markets Jagran Prakashan is the leading daily in the Hindi Print space which accounts for around 25% of the total Print advertising pie. However, realising the need to capture a bigger pie and pressed by competition in its key markets, JPL has initiated several new ventures. In line with this strategy, JPL has selectively entered the English Print Media with the launch of two new offerings viz., City Plus (English weekly infotainment) and I-Next (bilingual compact tabloid) in its existing as well as new markets. We expect these offerings to act as a flanking brand to ward off competition for its main brand, Dainik Jagran, and build a new growth engine for the company in the future. We forecast combined revenues of I-Next and City Plus to grow at a fast paced CAGR of 102.5% over FY200810 to Rs57cr and account for almost 5% of total revenues in FY2010 (estimated at Rs14cr in FY2008). JPL has also entered into a joint venture (JV) with TV18 to launch a Hindi/Regional business dailies. It is also planning a facsimile edition of The Independent in India. City Plus - marks selective entry into English Print City Plus: Launched towards late 2006, City Plus is a 'youth focused' English infotainment weekly. The paper includes largely local content like information on movies, markets, shopping, entertainment and weekend events and is distributed at places with large footfalls like malls, airports,
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clubs, BPOs, restaurants, etc. As the newspaper is distributed free (first free newspaper launched by a large print media house), the only source of income for the company is advertising revenue. Each edition is expected to achieve a turnover of around Rs1cr once established. The paper is mainly in colour and maintains high 60:40 advertising: editorial ratio. Jagran has already launched nine editions this far and primarily in its existing markets (eight in Delhi/NCR and one edition in Bangalore). It plans to launch 14 editions of City Plus by 2HFY2009 and scale it upto 30 by end FY2010. According to management, City Plus has already achieved a weekly circulation of 1.72 Lakh copies. I-Next: I-Next is a compact bilingual (Hindi and English) tabloid targeted at the youth in the age group of 18-35 years. The 24-page city-centric publication (12 pages in colour) is priced at Re1 and is dedicated to local news apart from content on national, international, sports, lifestyle, career and health related issues. Jagran launched the first edition (Kanpur) in December 2006 and has since scaled upto 7 editions mainly in Uttar Pradesh where Jagran is the leader. However, 5 out of the 7 editions have been recently launched in 3QFY2008, with the latest being the Dehradun edition in Uttaranchal. I-Next has met with significant success in a very short span of time and is already No2 in cities like Kanpur and Varanasi. According to management, it has already achieved a daily circulation of 2.7 lakh copies. However, the daily is currently running into losses and Management expects it to breakeven in the next couple of quarters. Apart from having high revenue potential, we believe I-Next is a strategic launch by Jagran to ward of intensifying competition from Hindustan reminiscence of launch of Mumbai Mirror by Times of India in 2005 to counter the competition from Hindustan Times and DNA. JPL - TV18 JV to launch Hindi business daily: In December 2007, Jagran announced a 50:50 JV with TV18 to launch a Hindi business daily in the second half of CY2008 starting with first launch in Uttar Pradesh. This will subsequently be followed by other regional language dailies focused on financial and economic news. Both TV18 and JPL have agreed to copromote the offerings and exploit cross platform synergistic opportunities by sharing their respective domain expertise. The JV will be funded through an initial equity infusion from both sides and later through internal accruals and debt. The Rs560cr business daily market is currently served by around 10 national newspapers and magazines, all in English, with the lone exception of Economic Times in Gujarati. However, the Hindi space is already facing heightened competition, with Economic Times and Business Standard launching their Hindi business daily versions. Even Amar Ujala is expected to enter this space. While we remain optimistic on the long-term potential of the JV, we haven't factored in any numbers in our projections due to lack of operational details.

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Jagran derives almost 90% of its revenues from its core business of publishing newspapers. However, realising the need to de-risk its business model and reduce dependence on a single media vehicle, the company branched out into alternative platforms like OOH advertising and Event Management. It has also entered into a tie up with Yahoo! to co-brand its Internet portal. Entry into such emerging and fast growing platforms has given Jagran access to an additional 8-10% advertising pie expanding its horizons beyond just Print Media. Moreover, it also allows Jagran to cross-leverage on its expertise in Print Media to offer a more diverse mix to its clients in terms of advertising options. This reinforces our confidence in the management to focus on long term value creation and improves the overall visibility in terms of future growth.

Out-of-Home Advertising (OOH): Jagran operates in the OOH advertising segment through its wholly-owned subsidiary, Jagran Engage. The company operates nearly 2,500 sites predominantly in North India where JPL is present including places like Mumbai, Bangalore, Hyderabad, Pune, Surat, Kolkata and Delhi. It owns properties in the form of traditional hoardings, kiosks, bus panels, unipoles, mobile vans and even railway stations (Lucknow). Going ahead, the company plans to have almost 75% properties by way of hoardings and rest in street furniture and mobile format. It also proposes to enter more tech driven properties like LEDs (has already started one in Bangalore). Termed as a primitive and fragmented segment in India, OOH advertising is finally picking up owing to steady infrastructure development and higher investments by organised media corporates. The Indian OOH advertising industry currently stands at Rs1,250cr and is expected to grow at a CAGR of 14.5% during CY2007-11 to Rs2,150cr ( Source: FICCI-PwC
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Report on Indian Media, 2008). We believe Jagran is well placed to encash on this opportunity owing to: Its strong brand franchise, established relations with local advertisers and widespread presence in North and Central India. Indrajit Sen, former President of Primesite (Mudra's OOH agency) for almost six years, is the head of Jagran Engage. A post-graduate from BITS, Pilani, Sen has spent 10 years with The Times Group. Jagran's strategic tie up with Independent News and Media (INM owns 20.8% stake in JPL) provides a substantial edge to the company over its competitors by way of technical expertise and support. INM is a strong player in the outdoor advertising market in Australia, New Zealand, South East Asia and South Africa through its stakes in APN News and Media and Clear Channel Outdoors. It owns 75,000 outdoor panels and registered a revenue of Euros 136mn in CY2006 from its Outdoor Division alone. Jagran Engage typically operates its sites on a lease model i.e., it leases sites from third parties, which are then on-leased to its clients at higher rates typically for three month period. As the business matures, Jagran plans to move to an ownership model, which will ensure higher returns and better control. Currently, the business is operating at 65-70% utilisation levels and is clocking monthly revenues of Rs3-4cr. Overall though, the business is registering losses. But, by 1QFY2009, it is expected to achieve breakeven. Jagran has already started consolidating its media properties by taking a decision to quit non-remunerative sites. After establishing its position in the bigger towns, Jagran is once again training its eye on its home market to achieve better returns with lower investment. Management expects this segment to record EBITDA and PAT Margins of 23-25% and 12-15% respectively once the operations stabilise. We estimate this Segment to grow its revenues at a CAGR of 68% over FY2007-10 to Rs85cr (Rs18cr in FY2007). Event Management: Jagran operates in the Event Management Segment through its wholly-owned subsidiary, Jagran Solutions. Established in 2004, Jagran offers variety of promotional marketing and event management services including loyalty and incentive programs, road shows, product launches, presentation, dealer conferences and internal sales team events. Its past clients include Hutch, TVS Motors, Gillette, LML, Asian Paints, HUL, etc. The Rs1,100cr Live Entertainment industry is expected to grow at a CAGR of 18.9% during CY2007-11 to Rs2,200cr (FICCI-PwC Report on Indian Media, 2007) . A pan-India infrastructure and comprehensive media services offering gives Jagran a natural edge over its competitors in this Segment, which typically offers below-the-line marketing activities. We forecast revenues in this Segment to grow at a CAGR of 51% over FY2007-10 to Rs43cr (Rs12.5cr in FY2007).
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Internet Portal: Jagran has entered into an agreement with Yahoo! India to launch a new co-branded Hindi News and current affairs Internet property integrating Jagran's content online in e-paper format and Yahoo!'s other services. Prior to this arrangement, Jagran.com was the most visited Hindi portal in the world. Under the terms of the agreement, Jagran and Yahoo! will share graphical and keyword advertising revenues generated by the property. Both companies will also partner in distributing Yahoo! India's search offerings. We believe the step to offer its content online in electronic format is in line with the global trend and has already been initiated by most print media companies in India. This should help Jagran avoid losing its readers as new media habits develop and digital formats evolve. However, we remain wary of its ability to monetise such offerings in meaningful terms at least in the short run. Hence, we have not factored in any incremental revenues in our projections from this tie-up. Other Businesses: Besides its Hindi daily, the company also publishes magazines like Sakhi, a monthly magazine targeted at women, Jagran Varshiki, an annual general knowledge digest and various national and state statistical compilations. The company also operates a separate mobile value-added services division called J9, which runs a short code service (7272) providing mainly SMS related services. The company earns revenues from operators for providing the services on a sharing basis. Jagran also proposes to launch a classifieds vertical under J9. The company also runs a home shopping network, which it plans to expand and has already tied up with a Kolkata-based company for logistics.

Financial Outlook Revenue growth of 24.3% CAGR during FY2007-10E largely due to strong growth in advertising revenue. Over FY2007-10, we expect JPL to post a CAGR growth of 24.3% in revenue largely on the back of strong growth in advertising revenues (expected to grow by 27% CAGR during the period) supported by sustained ad rate hikes, higher proportion of colour ads and better inventory utilisation of space sold. In terms of circulation revenues, we expect Jagran to post a CAGR growth of 6.7% during the period aided by addition of I-Next to its portfolio and its focus on consolidating its position in its existing markets. Alternative media vehicles viz., OOH and Event Management, put together are expected to register a strong CAGR growth
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of 61.4% in Revenues during the mentioned period largely owing to low base, strong industry growth rates and technical support from INM.

The estimate Jagran to register a 37.5% CAGR growth in EBITDA over FY2007-10 driven by strong Margin expansion of 705bp during the period on the back of the following: Strong advertising revenue growth - Pertinently, incremental advertising revenue growth does not entail any expenses. Hence, growth driven by rate hikes and higher proportion of colour ads percolates directly to the Bottomline perking up Margins disproportionately. Rising contribution of alternative businesses to revenue - As OOH and Event Management are high-margin businesses, we expect them to contribute to Margin expansion going ahead once their operations stabilise and achieve breakeven. More editions maturing - Jagran has launched 18-20 editions since FY2000 with around 8-9 editions still clocking losses (including three in Punjab due to cover price war with Dainik Bhaskar). However, most of these editions are nearing breakeven (an edition generally takes 3-4 years to register sufficient advertising revenues to cover the fixed costs of newsprint and employees). We expect further operating leverage to kick in once these editions mature and start contributing to Margins.
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On the Earnings front, we expect Jagran to report a CAGR of 33.8% (on reported basis) over FY2007-10 boosted by robust Topline growth and sharp Margin expansion. We expect JPL's Return Ratios to improve significantly during the period owing to strong Earnings growth, more editions getting mature and better operating leverage. Jagran is extremely well placed in terms of funding for future operations as its debt: equity ratio is comfortably placed at 0.2x and its working capital requirements are modest. Moreover, it is already sitting on a cash surplus from its IPO proceeds. Hence, we expect Jagran to fund its future requirements from internal accruals. Jagran has invested heavily over the past couple of years to augment its colour capacity and expand into new markets and verticals. We have factored in capex of Rs107cr in FY2008E and Rs128cr in FY2009E for Jagran's new business initiatives. We expect Jagran to start generating significant free cash flows post FY2010.

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Key Concerns
Rising Newsprint Prices During 9MFY2008 Jagran reaped the benefits of low newsprint prices and strong advertising growth leading to an almost 340bp Margin expansion. In case of Jagran, Newsprint costs account for 50-55% of total expenses and circulation revenues cover 70-75% of the newsprint costs. During 9MFY2008, the newsprint prices were on a downturn at $580-600/ton. However, owing to capacity rationalisations in the North American newsprint market (major supplier), prices have again started picking up with the first rate hike of 10-12% already implemented in January 2008 and we expect more to follow. The Sensitivity Analysis throws light on the impact of the rise in newsprint prices on PAT. We have assumed 18% rise in newsprint prices in FY2009E from $600/ ton as a base case followed by a 6% jump in FY2010E. While Jagran is best placed amongst its
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counterparts to battle the rise in newsprint prices (owing to its mix of 65:35 in favour of domestic newsprint, which is cheaper and lower pagination), any additional rise in newsprint prices could impact our forecasts.

Impact of slowdown on Advertising Revenue Advertising Revenue is the key growth driver for the company and contributes 65-70% of its revenues. However, advertising revenues are linked to overall GDP growth. Hence, any slowdown in the overall economy can adversely impact Jagran's revenues. Increase in competitive intensity In the past, Jagran has successfully entered new markets and established its position. Moreover, it continues to be the leader in UP and is a dominant No2 in states like Uttaranchal, Punjab, Haryana and Bihar. However, intense competition (as witnessed in the case of Punjab with Dainik Bhaskar) in its key markets can adversely impact JPL's circulation revenues thereby hitting its profitability. Players like Hindustan in UP and Amar Ujala is Punjab are already planning major activities.

Outlook and Valuation

JPL has seen multiple re-ratings in its short trading history owing to its superior Earnings growth, long-term potential (due to presence in underdeveloped markets) and entry into new markets and segments. Previously, JPL traded in the 14-19x two-year forward P/E band and at a significant discount to HT Media owing to its limited presence in the Print Media sector (Hindi daily with dominant position in UP covering only 25% of the Print advertising pie). However, over the last 12-15 months, post
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launch of new formats (City Plus and I-Next) and scale up of its new segments (OOH and Event Management), the stock has got re-rated on the bourses to the 19-24x two-year forward P/E band. We expect JPL to continue to command premium valuations in the future also owing to: Huge customer base - Jagran's dominant position in the Hindi Belt through its flagship daily Dainik Jagran (India's largest read and circulated newspaper) provides a strong platform for long-term sustainable growth. Expanded addressable market - Entry into alternative media vehicles like OOH and Event Management has expanded Jagran's addressable market in the Media Sector by an additional Rs2,350cr giving better visibility in terms of future revenue growth. Superior Earnings growth: We expect Jagran to report a CAGR growth of 33.8% (reported basis) over FY2007-10E, which is superior than most of its domestic and global peers.

We rate Jagran Prakashan (JPL) as our top pick in the Print Media sector and believe current underperformance of the stock offers attractive entry point for investors. At the CMP of Rs88, he stock is trading at 14.5x FY2010E Earnings and 8.7x EV/ EBITDA. We have used the DCF methodology to value the company owing to its steady cash flow generation in the future. Assuming a WACC of 12.9% (including an additional 1% stock risk premium owing to uncertainty surrounding newsprint prices) and a terminal growth rate of 6%, our FY2010E Target Price works out to Rs125 at which the stock would trade at 20.6x in line with its two-year forward P/E band of 19-24x. We Initiate Coverage on the stock, with a Buy recommendation. At our DCF-based Target Price of Rs125, the stock would fetch handsome returns of 42% from current levels.
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HT Media
Time to Mint HT Media (HTML), a dominant player in the North, publishes India's two leading newspapers viz., Hindustan Times (second largest English daily) and Hindustan (third largest Hindi daily). In the last couple of years, HTML has transformed itself into a diversified media play by entering new segments and geographies. Emerging diversified Media play: HTML is the only Print Media House in India enjoying the Top-3 position both in the Hindi and English domain. Recently, the company also entered the business daily segment through Mint. Combined with HTML's entry into Radio (Fever 104) and scale up of its internet properties, its addressable market now covers 42.4% of the overall advertising pie in Media making it one of the top media preferences for any advertiser in the country. Strong Portfolio in Print, HT Mumbai and Hindustan to drive growth: HTML enjoys leadership position in Delhi ( HT), Bihar and Jharkhand (Hindustan). We expect HT Delhi to remain the mainstay in terms of contribution to advertising revenues. However, strong growth in HT Mumbai along with rising contribution from Hindustan, UP will be the key growth drivers. We have factored in 33% and 48% CAGR in advertising revenues from Mumbai and UP respectively, over FY2007-10E. New Initiatives to lay foundation for sustainable growth: Over the past couple of years HTML has entered into new complementary businesses through strategic partnerships. We expect Mint to grow exponentially in the ensuing years to Rs78.5cr in FY2010 and expect the Radio business to post revenues of Rs73cr in FY2010 growing at a CAGR of 61% over FY2008-10.

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Business Overview HT Media, with its rich heritage and diversified brand portfolio, is one of the largest Media companies in the country today. A dominant player in the Print Media (second largest in revenue terms), its two dailies HT (English) and Hindustan (Hindi) are amongst the leading dailies in their respective segments. The company also publishes two Hindi monthly magazines, Nandan (targeted at women and children) and Kadambini (targeted at the Hindi literary readers) HTML has adopted the route of strategic partnerships to achieve the status of a media powerhouse. In 2007, the company launched Mint, its business daily, with an exclusive agreement with Wall Street Journal. Recently, it tied up with BCCL to launch a city centric daily tabloid called MetroNow in Delhi. Expanding its horizons beyond the Print Media, the company has entered the Radio segment in partnership with Virgin Radio UK by launching Fever 104 Radio station.

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HT Media belongs to the KK Birla group. Dr Birla, a renowned industrialist, has established one of India's well-known business conglomerates, spanning a wide spectrum of key industries like sugar, fertilisers, chemicals, heavy engineering, textiles, shipping and media. HTML has on its Board of Directors eminent personalities like Shobhana Bhartia (Editorial Director of HTML - 20 years of experience in newspaper industry), YC Deveshwar (ITC - Chairman), Ajay Relan (MD - India, Citigroup Venture Capital International) and KN Memani (ex- Chairman and Country Managing Partner of Ernst & Young). Moreover, its editorial team is rated as one of the best in the industry owing to quality staff like Pankaj Paul (Editor-in-Chief, ex- Managing Editor of The News Journal in Delaware), Raju Narsetti (Chief Editor - Mint, worked as Editor of the WSJ's European edition), Mrinal Pande (Editor of Hindustan) and Vir Sanghvi (Advisory Editorial Director, a prominent TV anchor and journalist)

Investment Argument
Emerging diversified media play Only Print Media House with a top 3 position in both Hindi and English domain HTML, a dominant player in the Delhi and North-East regions, publishes two of India's leading newspapers Hindustan Times (second largest English daily) and Hindustan (third largest Hindi daily). Both combined have a daily circulation of around 2.5mn (ABC JD 2006) and a wide readership base of 11.9mn readers (IRS 2007 R2). HTML is the only Print
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Media House in India with a top 3 position in both Hindi and English domain.

HTML enjoys leadership position in Delhi (HT), Bihar and Jharkhand (Hindustan). However, realising the need to reach out beyond its core markets to achieve sustainable growth, HTML has expanded its footprint in the Print domain by entering new markets and segments. The company entered Mumbai in 2005 by launching Hindustan Times and has already achieved daily circulation of close to 300,000. It has also expanded its reach in UP beyond Lucknow by launching four new editions (Meerut, Agra, Kanpur and Varanasi). More recently, the company also entered the business daily segment through Mint and launched a city centric tabloid Metro Now in Delhi (JV with BCCL) expanding its presence to cover almost 75% of the Newspaper Print advertising pie of Rs8,000cr. Combined, with HTML's entry into Radio last year (Fever 104 FM) and scale up of its internet properties, its addressable market opportunity now constitutes 42.4% of the overall advertising pie in Media estimated at Rs19,540cr. This transformation into a diversified media play with a national presence along with its core strengths of strong brand equity and editorial superiority has made HTML one of the top media preferences for advertisers in the country.

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Hindustan Times - A solid platform Dating way back to 1924, HT Media's flagship publication Hindustan Times has established itself as the second largest English daily in the country. Renowned for its editorial excellence, today the publication has achieved a daily circulation of around 1.4mn copies (ABC JD 2006) and a readership base of 3.3mn (IRS 2007 R2). Over the past several years, the daily has enhanced its look (first smart-age newspaper in India to evolve into a new international size) and has revamped its supplement offerings by introducing daily supplements catering to specific target audience. Hindustan Times is published in six editions (Delhi, Mumbai, Lucknow, Patna, Ranchi and Kolkata) with a dominating presence in Delhi and the Northern regions. In July 2005, the daily successfully entered the biggest print market in the country - Mumbai. Apart from its six core editions, it is also circulated in other regions like Punjab and Rajasthan through its nine printing locations. The publication's Delhi key edition is also India's largest single-edition daily in terms of circulation.

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HTML derived almost 77% of its revenues in FY2007 from its flagship daily, Hindustan Times of which 92% came from advertising and balance from circulation. While HT Delhi remains the key market in terms of contribution (accounted for 61% of total revenues), HT Mumbai is expected to remain the key growth driver for the publication. We expect Hindustan Times to post a CAGR of 13.6% in overall revenue during FY2007-10 largely on the back of steady growth in advertising revenues.

We estimate the Mumbai edition to achieve breakeven in FY2009 and start contributing meaningfully to net circulation revenues (as discounts reduce) in FY2010. We have factored in an overall 10% CAGR growth for HT Delhi and 39.4% CAGR for HT Mumbai in the mentioned period. While leadership position and strong brand equity remain HT's key strength in the Delhi market, we expect the Mumbai market also to witness significant traction in ad revenues in the future owing to higher circulation/readership levels. Moreover, the ability to offer bundle
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packages for the top two print markets (Mumbai + Delhi) gives it a significant edge over some of its competitors like DNA boosting the publication's revenue prospects. Delhi market to remain mainstay for HT Delhi, a duopoly (TOI and HT), is the country's second largest Print market in terms of advertising revenues (next only to Mumbai). Over the years, HT has maintained its leadership position in Delhi while combating aggressive competition from TOI, which throws light on its strong brand equity. In 2005, HT ended a 10-year cover pricing war with TOI raising its cover price from Rs1.5 to Rs2 and subsequently to Rs2.5 in 2006. More recently, TOI and HT came together to launch a daily tabloid called MetroNow as a flanking strategy against new entrants. We rate Delhi as a mature market (expect 10-12% growth in advertising revenue) in terms of Print Media and expect no significant competition for the duo in the future as both the players are well established and have very old relations with advertisers and distributors in the region. Moreover, due to exhaustive offerings from both the players there is hardly any value a new publication can offer to the Delhi readers.

Delhi is the single largest market for HT in terms of revenue accounting for almost 78% of the publication's revenue and 61% of total revenue for the company (both advertising and circulation revenue combined for FY2007). We expect Delhi to remain the mainstay for HT owing to its dominant position in the market and large circulation and readership base. However, we expect the contribution of HT Delhi in total revenue of HTML to decline to 50% in FY2010E owing to significant scale up in Mumbai operations of HT along with planned expansion of Hindustan in UP. We have factored in a 10% CAGR in HT Delhi's overall revenues over FY2007-10E largely on the back of 10.6% CAGR in advertising revenues. HT has witnessed a significant slowdown in ad revenues in the Delhi market in 9MFY2008 owing to poor bookings by the Real Estate and Auto Sectors (partially owing to higher base). We believe this situation is likely to improve in the future and expect HT Delhi to continue to benefit from scale up of its Mumbai edition (owing to ad-bundling packages). Mumbai - All set to post rapid growth
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HT entered Mumbai, the country's largest Print media market in terms of ad-spends, in July 2005 simultaneously with DNA, which was also launched during the same period. Traditionally, a monopoly of TOI, entry of HT and DNA into the Mumbai market marked a new era of competition, which saw TOI respond with launch of its daily tabloid Mumbai Mirror. However, backed by heavy discounts and aggressive subscription schemes, the new dailies helped expand the Mumbai market, which still lags Delhi in terms of circulation. Both dailies have garnered a decent subscriber base with TOI still leading the race followed by DNA and HT. However, HT Mumbai continues to remain loss-making owing to heavy marketing expenses and lower ad revenues (not enough to cover fixed costs).

HT Mumbai accounted for 10.6% of the publication's revenue and contributed to almost 8% to total revenues of HTML in FY2007. It is expected to scale up its operations significantly over the next couple of years and account for almost 14% of total revenues in FY2010. We expect HT Mumbai to post revenue CAGR of 39.4% over FY2007-10 backed by 33% CAGR in advertising revenue and positive net circulation revenues in FY2010 (we expect Mumbai edition to achieve breakeven by FY2009E). Since its launch, HT Mumbai has grown its readership base, albeit at a slower pace, and is well placed to exhibit strong growth traction on account of the following: Ad Rate differential to narrow - HT Mumbai's ad-rates are significantly lower than the market leader TOI (in absolute terms). We expect this differential to narrow once HT Mumbai achieves a circulation base of 400,000+ subscribers. Moreover, the readership: circulation (x) multiple is the lowest in case of HT Mumbai and we expect this situation to change as the publication gains in popularity giving further boost to ad rates.

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 Ability to offer bundle packages a key advantage - HT's ability to offer bundle packages for the top two print markets (Mumbai + Delhi) gives it a significant edge over some of its competitors like DNA boosting the publication's revenue prospects in both regions. Positive Ad Revenue dynamics - Improvement in ad-edit ratio of 25% to 33% in FY2010E (relative to Delhi, which enjoys 50%) coupled with better inventory utilisation and 10.5% CAGR hike in ad rates is expected to drive a 33% CAGR growth in advertising revenue for HT Mumbai during the period FY2007-10. Hindustan - Better focus and expansion to drive growth Hindustan, the company's Hindi offering, is the third most widely read Hindi daily in the country, with a total circulation of 1.1mn (ABC JD 2006) and readership base of 8.6mn (IRS 2007 R2). The newspaper has eight key editions (Delhi, Patna, Ranchi, Lucknow, Kanpur, Agra, Varanasi and Meerut). Hindustan is the leader in Bihar and has consistently been maintaining a wide gap from its closest competitor in terms of both readership and circulation. Hindustan is also a strong player in regions like Jharkhand and Delhi.

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We believe Hindustan is well placed to capture the huge potential offered by the Hindi newspaper market owing to the following reasons: Rich editorial content - Edited by Mrinal Pandey, a noted journalist, Hindustan is well recognized for its width and depth of editorial content. Moreover, a range of acclaimed supplements gives the daily a significant edge over competition in the Hindi language newspaper market. Strong brand equity - A widespread presence in the Northern region coupled with strong brand equity allows Hindustan to cross leverage and offer bundled packages/ better deals to advertisers looking to cash in on the Tier-II and Tier-III consumption boom. Significant expansion plans in UP: Hindustan is looking at aggressively expanding in states like UP (largest Hindi newspaper market) where it has already achieved the status of being the fastest growing publication. HTML plans to launch 12-13 editions of the daily in UP over the next 2-3 years at an investment of Rs200cr and has already launched three new editions in 2006 (Meerut, Agra and Kanpur). Management expects to achieve incremental circulation of 50-60,000 per edition from these expansion plans over the next 3-4 years. Hindustan currently accounts for around 20% of total revenues of HTML of which 65% is derived from advertising and the balance from circulation (Hindi newspapers derive a larger portion of their revenues from
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circulation owing to higher cover prices and lower ad rates). The Bihar/Jharkhand region contributes more than half of the publication's revenues. During FY2007-10, we expect Hindustan to post a CAGR of 23% in revenues backed by 29% CAGR inadvertising revenues and 11% CAGR in circulation revenues. We expect the UP region (owing to significant expansion plans) to be the key growth driver for the publication and expect its contribution to the total publication revenues to increase from the current estimated 30% to 47% in FY2010. To harness the full potential that Hindustan has to offer and to improve its focus on the segment, HTML has already transferred Hindustan into a separate wholly-owned subsidiary. While value unlocking at this stage looks less likely (owing to the current stock market turmoil), we believe HTML is well placed to fund Hindustan's expansion plans from internal accruals. New Verticals - Laying the foundation for sustainable growth Over the past couple of years, HT Media has made conscious efforts to derisk its business model and dependence on its existing properties by entering into complementary businesses where it can leverage its brands, existing customer base and infrastructure. It has successfully adopted the route of strategic partnerships to exploit such synergistic opportunities and we believe HTML stands to benefit immensely from its range of new initiatives over the long term. 'Mint' - Truly means business Launched in February 2007 with an initial presence in Mumbai and Delhi, Mint marked HTML's foray into the Rs560cr business daily space. A differentiated offering in the domain dominated by BCCL's Economic Times, Mint has already emerged as the second largest business daily in key cities like Mumbai and Delhi, with a circulation of more than 100,000 copies. Recently, the daily was also launched in Bangalore (HTML's first offering in the Southern market) taking its total daily circulation to an estimated 120,000 copies. HTML plans to achieve a pan-India presence for Mint with priority launches in cities like Kolkata and Chennai. Since majority content in a business daily is national (entailing lower content costs), we believe Mint with its strong editorial team in place is all set to roll out nationally leveraging on HTML's printing and distribution infrastructure. Mint is positioned as a premium offering in the business daily space (commands higher ad rates on CPT basis compared to Economic Times) and has achieved significant success in a short span of time owing to its inherent unique features: Mint has been launched in association with Wall Street Journal (WSJ), which contributes 4
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pages of content daily (out of total 24 pages) giving the newspaper an edge in international reporting. Moreover, Raju Narisetti, editor of WSJ Europe, has been appointed as the Managing Editor of Mint. WSJ does not have any equity stake. The partnership only entails a management fee for the services. Mint is the first white business newspaper in the country which is sized between a tabloid and broadsheet (Berliner) making it easier to read. The layout of Mint is highly differentiated from other business dailies and includes an index on page 2 for easy navigation. It focuses on more news and analysis and publishes regular contributions from renowned industry experts. Mint is extremely well complemented by its online portal Livemint.com and its unique weekend supplements Lounge (lifestyle magazine) and Campaign (advertising magazine).

We estimate Mint to grow exponentially during the next couple of years to Rs78.5cr in FY2010 drawing from its aggressive subscription-based model, better ad-edit ratio (currently at a low 15-20%) and higher ad rates (as more editions are rolled out). In terms of circulation revenues, we expect the daily to achieve breakeven only in FY2010 owing to higher commission and discount structure. Overall, we expect Mint to scale upto 4.7% of total revenues of HTML in FY2010 from an estimated 1.8% in FY2008. We have modeled Mint to achieve almost 12-13% marketshare of the advertising pie for business dailies by FY2010E, which we believe is possible owing to HTML's distribution strength and Mint's premium positioning. During 9MFY2008, Mint reported almost Rs30cr loss on EBITDA level owing to high marketing expenses. However, it is expected to achieve breakeven in the next 2-3 years. 'Fever 104' (Radio) - A Long term haul
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HTML entered the Radio segment with launch of its FM channel Fever 104 in association with Virgin Radio, UK (consulting partnership). The radio business is housed in a separate subsidiary company, HT Music and Entertainment, in which HTML has 75% stake and its parent Hindustan Times owns the balance 25%. During the Phase II license distribution, it acquired licenses for four territories (one-time fee of Rs75cr for 10 years) all of which are now operational including the recently launched Kolkata radio station. Fever 104, was launched in Delhi (Nov 2006), Mumbai (Jan 2007) and Bangalore (March 2007) during the initial rollout. A youth centric radio station, Fever 104, is credited as the first format station in the country with a tagline 'More musicless talk'. The format has been designed in consultation with Virgin Radio, which follows similar format globally. Radio is one of the cheapest forms of entertainment in India owing to its nature of being a free medium. Over the past couple of years, the Radio industry has undergone major changes owing to liberal government policies on licensing (Phase II) and foreign investment. Although radio as a medium covers 99% of the population in India, its share in overall ad spend is relatively low at 3.2% as against global average of 7-8%. FICCI-PwC expects the Radio industry in India to register a CAGR of 25% from Rs620cr to Rs1,500cr (3.8% of overall ad spend) during the period CY2007-11.

We forecast the company's Radio business to post revenue of Rs73cr in FY2010 (FY2008E revenue at Rs28cr) growing at a CAGR of 61% during FY2008-10. It is expected to achieve breakeven by FY2010 at the PBT level as inventory utilisation levels and ad rates improve. By FY2012, we expect the business to achieve 7.3% market share of Rs1,500cr radio advertising pie and post PBT margins of 17%. We have valued HTML's Radio business using the DCF model assuming a cost of equity of 13.6% and terminal growth rate of 6%. On FY2010E basis, we have arrived at a Target value of Rs391cr for the business. After accounting for 25% share of the parent, the value on per share basis for HTML's Radio business works out to Rs13.

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We believe HTML's entry into the Radio segment is a well thought out strategy to cross leverage from the synergies arising out of two segments, which involves high amount of local advertising. It would also help HTML de-risk its Print business and capture a bigger pie of advertising. According to management, Fever 104 has already achieved 10-12% volume share in Delhi and Bangalore, and Mumbai station is also nearing similar share. In value terms, it is already a number three or four player in its key markets. The company's strategy to enter the most lucrative markets (the four metros account for almost 40-50% of radio advertising pie) is in-line with Virgin's global strategy in the Radio business to target key markets. We believe this would help HTML develop a strong platform before entering smaller markets. HTML has plans to bid for more licenses and multiple licenses in the same city (when permitted) during the Phase III bidding process. However, its strategy is to be a large-city group as returns on investments in the smaller towns is relatively poor. Internet Ventures - The wild card in HTML's portfolio The 2008 FICCI - PwC Report on Indian Media pegs the Indian internet advertising industry at Rs270cr in CY2007 and expects it to register a CAGR of 37% over the next five years to touch Rs950cr in CY2011. HT Media is well positioned to exploit the growing opportunities available in the Internet domain, with a strong content database of more than 80 years. The group's news portal HindustanTimes.com (re-launched with new positioning along the lines of NY Times website) with over two million unique visitors and 100 million page views per month is one of the largest news portals in the country. It offers a range of content through dedicated links such as HT Cricket, HT Next, HT Tabloid, etc. In FY2007, the portal generated Rs3cr in display advertisement revenues.
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 HTML has launched Livemint.com (to support business daily Mint), which has the potential to develop into a fully integrated financial/economic domain. As part of its strategy to build a robust Internet business, HT Media has launched Firefly e-Ventures, recognising the importance of Internet as the most important media vehicle of the future. The subsidiary would take up activities in the new media space covering activities like social networking, classifieds, matrimonial and job websites. Recently, HT Media acquired a social networking site Desimartini.com to establish its presence in the social networking space. HTML has already launched the beta version of its online job portal Shine.com. We believe HTML is working to create a diversified mix of internet properties targeting a range of audiences by leveraging on its expertise in the Print domain and existing client base. The revenue model of these websites is likely to be advertisement driven as competition would make the subscription model unviable (owing to easy availability of free content). However, for the classifieds, matrimonial and job portals, we believe it would look at a combination model in-line with what most industry players follow. While we remain bullish on the potential revenues which can be generated from a set of portals, we believe the key issue remains the company's ability to monetise such properties in a profitable model and on a sustainable basis. HT Media's presence in the classified and job segment via its Print domain remains an advantage. But, we believe the overall pie of on-line revenue streams is much smaller and more competitive. Moreover, entry into the on-line business is much easier as the model has no substantial entry barriers. Since, HTML's internet properties are at a nascent stage of development, we have not factored in any revenue/profits from the internet ventures in our estimates indicating an upside risk to our estimates.

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Financial Outlook During FY2007-10, we expect HTML to post a CAGR growth of 17.1% in revenue to Rs1,670cr aided by 18.4% CAGR growth in advertising revenues and 12.5% CAGR in circulation revenues.

We expect HT Delhi to remain the mainstay in terms of contribution to advertising revenues. We have modeled in a 10.6% CAGR in HT Delhi's advertising revenues for the period. However, strong growth in the Mumbai region (Hindustan Times) along with rising contribution from UP (new edition launches under Hindustan), will be the key growth drivers for the advertising revenue. We have factored in a 33% and 48% CAGR in advertising revenues from Mumbai and UP respectively, during the period. Foray of Mint into new regions is also expected to boost advertising revenues.

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Over the last couple of years, HTML has registered lower circulation revenue growth due to its aggressive subscription based model for HT Mumbai, Mint and Hindustan (UP). However, we expect the Mumbai region to achieve positive net circulation revenues in FY2009 and start contributing meaningfully to circulation revenues in FY2010. We expect UP region to be the key growth driver (factored in 23% CAGR in circulation revenues from the region). On the operating front, we expect HTML to post a CAGR of 21.2% in EBITDA to Rs338.9cr during FY2007-10 owing to steady advertising revenue growth, strong pricing power in its core market Delhi and higher operating leverage (plays a major role in Print Media business owing to higher fixed costs). Moreover, reduction of losses in HT Mumbai and Mint editions (as they achieve better traction in terms of advertising revenues) will also arrest the Margin fall. However, we have modeled in a decline in OPM of 90bp for FY2009E followed by a 180bp expansion in FY2010E owing to following: Still some more pain for HT Mumbai and Mint - While we have factored in lower losses for HT Mumbai and Mint during the next couple of years, we believe breakeven for both the properties is still a year away. We expect Mint to achieve full breakeven in FY2010 owing to its lower ad-edit ratio and expansion mode (HTML is planning a pan-India presence for the daily). HT Mumbai is expected to turn-around only in 2HFY2009 owing to strong competition in the Mumbai market entailing high marketing expenses. Scale up of Hindustan in UP - HTML has lined up significant expansion plans for Hindustan in the UP market and plans to launch 12-13 new editions over the next couple of years. Most new editions take a minimum of 12-24 months to achieve breakeven and hence would be a drag on the Margins in the short term until a modest circulation level is achieved. Rise in newsprint prices: Since January 2008, the newsprint prices are on a significant uptrend and have already risen by 10-12%. Newsprint costs
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account for almost half of the expenditure for the company. We expect HTML to take a hit of 360bp in its Gross Margins in FY2009 (modeled a 18% hike for the year in newsprint prices) owing to this steep rise coupled with higher circulation (owing to scale up in Hindustan, Mint and launch of MetroNow).

On the Earnings front, we expect HTML to report a CAGR of 23.6% (on reported basis) over FY2007-10 largely boosted by robust Topline growth and moderate Margin expansion. We believe HTML is extremely well placed in terms of funding for its expansion plans owing to a low debt: equity of 0.2x and modest working capital requirement. HTML has the lowest debtor days amongst its listed peers. Over the last couple of years, HTML's capex has been close to its depreciation costs. However, we expect capex requirement to rise and have modeled in Rs310cr capex over the next two years (accounting for Man Roland Press for Mumbai and couple of machines for expansion in the Hindi market). HTML has substantial liquid funds balance of Rs335cr (pending deployment of IPO money), which has depressed its return ratios relative to its peers. Despite the significant rise in capex and high investments in its new initiatives, we expect HTML to generate positive free cash flows, which will raise its liquid funds balance to Rs382cr in FY2010.

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Key Concerns
Rising Newsprint Prices Since January 2008, newsprint prices have been on a significant uptrend and have already risen by 10-12%. Newsprint costs account for almost half of the company's expenditure, and HTML's circulation revenues cover only 32% of the raw material costs, which is predominantly newsprint. Moreover, HTML's procurement mix is tilted highly towards the more expensive imported newsprint (75:25). We believe these two factors along with higher pagination (English newspaper
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have higher number of pages) makes HTML more sensitive to newsprint price hikes than its competitors. Now, with newsprint prices on a significant uptrend coupled with higher circulation (owing to scale up in Hindustan, Mint and launch of Metro Now), we expect HTML's gross margins to take a hit of 360bp in FY2009. The Sensitivity Analysis throws light on the impact of the rise in newsprint prices on PAT. We have assumed 18% rise in newsprint prices in FY2009E from 600$/ton as a base case followed by a 6% jump in FY2010. Any additional rise in the newsprint prices could impact our forecast.

Increase in competitive intensity HTML is well placed in its core market, Delhi, in terms of a duopoly with TOI. However, strong competition in the Mumbai market and stiff competition from Jagran Prakashan in UP could hamper HTML's aggressive growth plans and impact its overall revenues and profitability. Execution risk Even though HTML has time and again proved its expertise in launching new editions and entering new markets and segments, we believe any delay in execution of its expansion plans in UP, scale up of its business daily Mint and its Radio business Fever 104 FM, will have a negative impact on our earnings forecast for the company.

Outlook and Valuation HT Media has always traded at a premium to its peers owing to its superior business model and strong brand equity. During its initial trading history, the stock witnessed a sharp dip owing to uncertainty regarding its entry into Mumbai market. However, after posting almost double Profits and sharp Margin expansion in FY2007 coupled with scale up of its Radio and Internet business, the stock has got re-rated moving into a P/E band of 20-25x two-year forward earnings. We expect the premium commanded by HTML to sustain going forward owing to:
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 Superior Management: HTML is headed by Dr KK Birla, a well established business conglomerate having an interest in diverse range of businesses like sugar, fertilisers, chemicals, textiles, etc. Moreover, its editorial team is rated as one of the best in the industry. Diversified Media Play: HTML enjoys dominant position in Print Media covering 75% of the print advertising pie. Moreover, its presence across media verticals and geographies allows it to leverage from bundled deals. This transformation has made HTML one of the top media preferences for any advertiser in the country. Strong Financials: HTML is the second largest Print Company in the country in terms of revenue. It boasts of an extremely healthy Balance Sheet, with almost Rs390cr as cash and investments (FY2007) and strong operating cash flows. During the last three months, HT Media has witnessed a sharp fall of 35% in terms of stock price owing to broader market correction and heightened concerns over rising newsprint prices. We believe this sharp fall offers an attractive entry point for investors to enter into an emerging national media play. At the CMP of Rs147, the stock is trading at 16.1x FY2010E Earnings and 10.3x EV/ EBITDA.

We have valued HT Media on a sum-of-the-parts basis by ascribing separate values to the core Print business and Radio business (Fever 104 FM) using the DCF methodology. We have not ascribed any value to the internet ventures indicating an upside risk to our valuation. Our fair value based on FY2010E numbers stands at Rs187 for HTML's Print business and
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Rs13 for the Radio business (accounting for only 75% stake held by HTML in the venture). We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs193. For the core Print Business, we have assumed a WACC of 12.8% (including an additional 1% stock risk premium owing to uncertainty regarding newsprint prices) and terminal growth rate of 5% (lower than Jagran Prakashan owing to HTML's dominant presence in mature markets). On FY2010E basis, our DCF-based Target Price for HTML's Print business works out to Rs187, which implies a P/E multiple of 19.7x FY2010E (at a discount to its historical trading range).

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The following table outlines a sensitivity analysis on fair value of the Print Media business based on different scenarios of WACC and Terminal Growth Rates.

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Deccan Chronicle
A Southern Chronicle Deccan Chronicle Holdings (DCHL) is the publisher of Deccan Chronicle, India's 4th largest English daily. A dominant player in the Southern markets, it is the leader in Andhra Pradesh and No2 in Chennai. Besides publishing, it also has two subsidiaries - Odyssey (Retail) and Sieger (Media space selling and Internet Portals). Emerging Southern Play: Expanding outside its home market Andhra Pradesh, DCHL has set ambitious targets of emerging as a complete southern Print media play. In 2005, DCHL entered the Chennai market and achieved a strong base of circulation within a short span of time. In the future, it plans to launch Coimbatore and Trichy editions to expand its reach in the Tamil Nadu market. Moreover, DCHL is expected to enter the Karnataka market in Q1FY2009 with its launch of the much awaited Bangalore edition. Most Profitable business model: DCHL enjoys highest EBITDA margins in the Print industry owing to extremely low overheads (due to proximity to its target markets) and low employee expenses. DCHL has witnessed a significant margin expansion of 2,270bp driving an EBITDA CAGR of almost 109% during the period FY2004-07 aided by strong advertising revenue growth, lean cost structure and lower newsprint prices. Concerns overshadow the positives: Despite stronger earnings growth, DCHL generally trades at a discount to its peers as it is characterised as a single publication company with limited reach. We believe DCHL's margins have peaked (owing to stiffer competition in Chennai, initial losses on account of Bangalore edition launch and higher newsprint prices). Moreover, significant delays in several of its plans (including unlocking value in its subsidiaries Odyssey and Sieger) coupled with poor corporate governance has made us maintain Neutral rating on the stock.

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Business Overview
Deccan Chronicle, a dominant player in South India, publishes India's fourth largest English daily Deccan Chronicle Holdings (DCHL) is the publisher of Deccan Chronicle, India's fourth largest English daily with a total circulation of 948,311 copies and readership base of 1.3mn readers. A dominant player in South India, the company enjoys leadership position in Andhra Pradesh and has made significant inroads in Chennai, a market dominated by The Hindu. Besides the two key editions, DCHL is also in the process of launching a Bangalore edition for its flagship daily. In addition, DCHL also publishes daily, weekly and monthly editions of Andhra Bhoomi (regional publication in Telugu) and Asian Age (English daily circulated in the metros) through its subsidiary Asian Age Holdings.

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Apart from its core business of publishing newspapers, DCHL has twowholly owned subsidiaries viz., Odyssey India and Sieger Solutions. Odyssey India, acquired by DCHL in September 2005, is a leisure retail store chain selling books, music, cards, stationary, multimedia and magazines. It has a presence in 12 cities through 24 stores. Sieger Solutions, formed in July 2006, handles media space selling for DCHL. Through Sieger Solutions, the company also plans to foray into alternate media platforms such as internet portals and satellite radio.

Emerging Southern Play Expanding outside its home market Andhra Pradesh, DCHL has set ambitious targets of emerging as a complete Print media play in South India. In 2005, DCHL entered the Chennai market and achieved a strong base of circulation within a short span of time. Going ahead, it plans to launch the Coimbatore and Trichy editions to expand its reach in the Tamil Nadu market. DCHL is also expects to enter the Karnataka market in Q1FY2009, with the launch of its much-awaited Bangalore edition. The Southern states are highly attractive for advertisers owing to their large English readership base (due to high literacy levels) and affluent population (aided by strong growth of IT and BPO industries in the region), which make it a perfect mix for their clients.

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We believe DCHL is well placed to capture the strong growth in advertising revenues from the Southern markets owing to its youth-based infotainment positioning, low cover prices and higher number of colour pages. While its huge cash reserves provide it an added advantage, its execution and ability to tackle competition in the new markets will remain the key to sustainability of its growth. Andhra Pradesh - A Deccan Fortress Andhra Pradesh (AP) is DCHL's home market and remains the backbone of its operations generating strong revenues and cash flows. Deccan Chronicle is a dominant market leader in AP accounting for almost 60% of the readership. It publishes seven editions in the region (Hyderabad, Vijaywada, Rajahmundhry, Vishakapatnam, Anantpur, Karimnagar and Nellore). Over the last three years, it has grown its circulation in the region at almost 21% CAGR despite competition from The Hindu and Times of India (TOI). Rich history dating back almost 70 years, a larger set of offerings (with highly localised content) and higher pagination has helped DCHL maintain its stronghold in the region.

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Cashing in on its strong positioning in the state, DCHL has managed to grow its revenues from AP almost 4x during FY2004-07 from Rs99cr to Rs401cr in FY2007 (Angel estimates). Significant ad rate hikes, more colour ad space (colour commands a premium over B&W rates) and better inventory utilisation have contributed to this strong ad revenue growth. Moreover, despite its leadership position DCHL still continues to be a cost effective medium for advertisers in AP which should allow DCHL to sustain modest ad rate hikes even in the future.

Going forward, we anticipate AP's share in total revenues for DCHL to decline from the current 78% to almost 68% in FY2010 owing to rising contribution from the Chennai market and launch of the Bangalore edition. We estimate total revenues from AP to grow at a CAGR of 19% during FY2007-10 to Rs721cr largely driven by a 19.8% CAGR in advertising revenues during the period as circulation is expected to grow in single digits.

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Chennai - A successful foray In line with its broader strategy to emerge as a complete Southern media play, DCHL expanded its operations in Tamil Nadu by launching its flagship daily in Chennai in March 2005. By adopting a low cover pricing strategy (priced the edition at Re1 against Rs3.25 for the leader, The Hindu), using innovative content and higher number of colour pages (published 20 pages of colour as against The Hindu's 4 pages), it was able to mop up strong circulation within a short span of time. Deccan Chronicle currently enjoys the No2 position in the Chennai market with a daily circulation of 298,822 copies (ABC JJ 2007) and a readership base of 257,000 readers (IRS 2007 R1).

Owing to poor competition, a weak No2 in the form of New Indian Express and absence of TOI, DCHL was able to ramp up its operations in Chennai garnering a significant chunk of advertising revenues. We estimate DCHL to account for almost 25% share of the Rs650-700cr Chennai Print advertising market in FY2008. We estimate its revenues from the Chennai market to grow at a CAGR of 29.5% during FY2007-10 to Rs267cr largely driven by a CAGR of 32% in advertising revenues to Rs253cr. However, we believe DCHL's growth story in Chennai has reached a plateau and is likely to witness moderation owing to several factors.

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 Firstly, DCHL's ad rates are at a slight premium to the leader The Hindu in CPT terms despite its lower readership multiple. Hence, we believe future growth is likely to come from better inventory utilisation of space sold (particularly higher colour space) rather than ad rate hikes. Secondly, unlike The Hindu (which continues to charge high cover prices), DCHL's circulation is highly sensitive to price hikes as witnessed in mid-2006 when it registered a small drop in circulation as it raised its cover price to Rs1.5. The circulation has now stabilised. Finally, competition in Chennai is heating up. TOI has just launched its Chennai edition. We believe this is a sound strategy by TOI to counter attack DCHL (expected to enter Bangalore market in 1QFY2009 which is a stronghold of TOI). Media reports suggest TOI is also adopting aggressive cover pricing strategy, with an initial yearly subscription rate of Rs299. We believe this could be the beginning of a price war in Chennai which has seen even The Hindu react by reducing its prices to Rs2.5 (Rs3.25). Moreover, Indian Express has also revamped its edition look. Generally in such wars, players tend to reduce prices and ramp up circulation to maintain their market position. This is likely to hurt DCHL the most owing to its low cover prices, rising newsprint costs and slowdown in ad rate hikes (owing to stiffer competition) impacting its overall profitability.

Bangalore - A tough market to penetrate Post expansion into Chennai, DCHL plans to venture into the Karnataka market by launching a Bangalore edition of its flagship daily. It has a presence in Bangalore with The Asian Age al eit on a very small scale. The company has already spent around Rs150cr to set up the infrastructure in terms of printing facility and distribution network. Bangalore's attractive demographics coupled with its fast growth in terms of print advertising make it a strategic market for any player who wants to make it big in South. Bangalore being an IT and BPO hub, boasts of a sizeable cosmopolitan, high-earning and high-spending population, which is the key attraction for English daily players like DCHL. Moreover, besides
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Mumbai and Delhi, Bangalore is rated as the next biggest market in terms of Print advertising, with an estimated size of Rs700-750cr. We believe DCHL would adopt a similar strategy as Chennai (low cover price, discounted ad rates and higher credit periods) when entering Bangalore to boost its initial circulation. However, in case of Bangalore, DCHL faces a much formidable competitor in TOI and it would need a much stronger differentiating factor than simply pricing. Strong Competition - Almost 80-85% of advertising revenues in the Karnataka market are shared between three key players - TOI, Vijay Times and Deccan Herald. Of this, TOI accounts for 60%. However, post acquisition of Vijay Times (English daily) by BCCL in 2006, along with its sister publication Vijay Karnataka (largest selling Kannada daily in Bangalore), TOI has bolstered its position in the region. With Vijay Times under its fold, TOI has extended its reach from Bangalore city to the entire state of Karnataka. Content not to be the differentiating factor - Both TOI and DCHL enjoy a similar positioning in their key markets viz., a youth based infotainment newspaper. Moreover, with the entry of daily tabloid, Mid Day, in June 2006, the space is already getting competitive. Pertinently, the city is also on the radar of other leading dailies like Hindustan Times (HT Media has entered Bangalore by launching Mint) and DNA.

DCHL's foray into the Bangalore market has been doing the rounds since almost a year now. We have factored in the launch towards late 1QFY2009 (management had guided for a 4QFY2008 launch), with an initial circulation of 100,000 copies at a cover price of Rs1.5 splitting the competition midway (TOI has an estimated circulation of 350,000 and Deccan Herald around 80,000 copies). We expect DCHL to register Rs34cr advertising revenue from the region in FY2009 growing to Rs62cr in FY2010. In terms of Profitability, we expect the edition to incur significant marketing expenses in the initial period and achieve breakeven only towards late FY2010 when the advertising revenues grow to a level that they can absorb the fixed costs. However, we remain cautiously optimistic on DCHL's Bangalore venture as unlike The Hindu in Chennai, TOI is a much aggressive competitor with a strong brand equity and national foothold. While DCHL is well placed to absorb the losses (owing to its cash-rich nature), its success in this region will truly depend on the positioning it adopts and its ability to bundle its offerings in AP and TN along with Bangalore to push up its revenues.
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DCHL enters Business Daily market DCHL recently entered the Rs560cr Business daily market, by launching its newest print offering, Financial Chronicle simultaneously from Hyderabad and Chennai. The daily business broadsheet, priced at Rs1.50, has an initial combined print run of around 70,000 copies. In the future, DCHL plans to extend the daily to Bangalore, Mumbai and Delhi. We remain cautiously optimistic on DCHL's foray into this space as it is already crowded with several offerings by large Print Media houses. We have not factored the potential revenue/earnings from this offering into our projections due to lack of operational details. Subsidiaries - Scope for un-'locking' DCHL has two wholly-owned subsidiaries viz., Odyssey India and Sieger Solutions. Odyssey India, acquired by DCHL in September 2005, is a leisure retail store chain selling books, music, cards, stationary, multimedia and magazines. Sieger Solutions, formed in July 2006, has been established to handle media space selling for DCHL. Through Sieger Solutions, Deccan Chronicle also plans to foray into alternate media platforms such as internet portals. Odyssey Retail DCHL marked its foray into organised retailing when it acquired 100% stake in South-based retail chain Odyssey India in September 2005 for Rs61.4cr (3.3x FY2005 sales of Rs18.6cr). Primarily a bookstore, Odyssey retails a vast collection of gifts, toys, music and other stationery goods. Starting with a 3,500 sq ft store in the southern suburb of Chennai - Adyar in 1995, Odyssey now occupies 142,373 sq ft of retail space through its 24 stores spread across the country. The chain receives over three million walk-ins every year.

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DCHL management has been trying to unlock value in Odyssey India by coming out with its IPO. It even filed a draft RHP with SEBI in April 2006 but later withdrew the proposal. Almost two years have passed and the fund-raising plans still remain on paper. This has impacted Odyssey's expansion plans as witnessed in its flat revenue growth of Rs26.3cr in FY2007. Odyssey is already profitable at the PBT level and registered a 2.6% margin in FY2007. However, it registered a marginal loss at the PAT level. Odyssey has firmed up plans to increase its retail space from 142,373 sq ft to 1.2mn sq ft over the next three years. This expansion would take the company to new markets in metro and non metros, besides expanding in its existing markets. Odyssey basically follows a dual format model under which it opens either Express stores (smaller stores with less than 1,000 sq ft) or larger standalone stores (2,000sq ft+). Odyssey currently has six express stores and 18 larger format stores (some even larger than 10,000 sq ft).

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Contrary to management guidance, we anticipate the store count to rise to 72 by FY2010 with 19 Express stores and 53 larger format stores taking the total space at almost 450,000 sq ft. We estimate revenues to grow by almost 5x during FY2007-10 to Rs125cr and PAT to grow at similar pace to Rs5.2cr. Timely roll out of the stores along with adequate funding would be the key to Odyssey's expansion plans. However, owing to Odyssey's poor track record on both fronts, we have valued the subsidiary at Rs61.4cr (the purchase price paid by DCHL), which equates to Rs2.5/share value for DCHL. Sieger Solutions Sieger Solutions, a wholly-owned subsidiary of DCHL, was formed in July 2006 to handle media space selling for DCHL. Deccan Chronicle books a part of its advertising revenues through Sieger for a commission of 5%. The subsidiary registered revenues of Rs255cr and a PAT of Rs3.9cr in FY2007. Through Sieger Solutions, Deccan Chronicle also plans to foray into alternate media platforms such as internet portals and satellite radio. It already manages a website called Papyrusclubs.com (student community forums) under which it has tied up with several institutes to publish and share the campus news over the Internet. The company plans to enroll more than 1,000 institutes over the next few years. We believe this could provide DCHL with a good platform to tap a large youth base. The company also plans to position Deccan.com as a gateway to South India offering various domain specific services such as user communities, e-mails, travel, matrimony, cookery, online news, etc. In October 2007, DCHL management had guided for a private placement in Sieger Solutions by diluting 24% stake at a floor price of Rs1,200 -1,500cr enterprise value. Given poor primary market conditions, we believe that the unlocking would get delayed. Moreover, we have refrained from assigning any value to this subsidiary owing to the following concerns: We do not believe the business model of Sieger Solutions adds any significant value to DCHL. Sieger simply books ad revenues for some of DCHL's clients, charges a commission of 5% and passes on the revenue to DCHL. Hence, while Sieger registered a turnover of Rs255cr in FY2007, the difference between consolidated and standalone ad revenues stood at Rs9.4cr (part of this is also contributed by Asian Age). While we like the concept of Sieger's internet portals, we remain wary of its ability to monetize such properties solely from advertising revenues (until it is able to achieve substantial mass and shift to a subscriptionbased model).

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Indian Premier League (IPL) - DCHL enters Sports management business Deccan Chronicle has bagged the rights for the IPL team of Hyderabad for US $107mn payable over the next 10 years. The IPL Hyderabad rights would be a part of Sieger Solutions. DCHL has named the team Deccan Chargers and has spent around $5.9mn in annual fees to recruit 11 players. VVS Laxman has been appointed as the Captain of the team and Adam Gilchrist the Vice Captain. Besides Laxman and Gilchirst, the team includes Andrew Symonds, Herschelle Gibbs, Shahid Afridi, Rohit Sharma, Rudra Pratap Singh, Scott Styris, Chaminda Vaas and Nuwan Zoysa. We believe IPL poses an attractive long-term opportunity for the participating franchises owing to its ability to attract significant advertising revenues. From an economic perspective, we anticipate DCHL to register losses under IPL in the initial years until the business achieves significant mass following enabling higher revenue potential. In terms of funding, we believe DCHL is well placed to fund the venture through internal accruals and its huge cash balance. However, owing to lack of operational details on the venture, we have not factored IPL into our projections for DCHL.

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Financial Outlook
During FY2007-10, we expect DCHL to post a CAGR of 24.1% in revenue to Rs1,057cr aided by 25.2% CAGR in advertising revenues and 9.1% CAGR in circulation revenues. We expect advertising to increase it share in total contribution to almost 95% in FY2010 as circulation growth slows down.

During FY2004-07, DCHL registered a phenomenal 73% CAGR in ad revenues on the back of strong ad rate hikes, entry into Chennai (leading to higher ad space volumes) and increasing share of colour inventory (colour ads command a significant premium over B&W ad rates). Going forward, DCHL is expected to witness slight moderation in its advertising
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revenue growth as it has already achieved a significant share in the Chennai market (its key growth driver). We expect AP to remain the key contributor to advertising revenues growing at almost 20% CAGR during FY2007-10 primarily led by modest ad rate hikes. Chennai is expected to grow at a robust 32% CAGR during the period driven by a combination of ad rate hikes and better inventory utilisation. However, entry of TOI poses substantial threat to DCHL's prospects in Chennai leading to a cap on ad rate hikes. The Bangalore edition is expected to be launched in 1QFY2009 and could become the most critical factor in DCHL's growth sustainability. We anticipate it to contribute almost 4% of advertising revenues for DCHL in FY2010 and achieve 8-10% market share of the Bangalore print advertising market.

We believe DCHL's ad revenue growth will be driven by two key factors: Ad Rate hikes - During FY2005-07, DCHL's blended ad realisations grew at a CAGR of 20.9% to Rs389 per sq cm driven by strong circulation and its entry into Chennai (allows DCHL to bundle ad space). However, we have factored in a 10.9% CAGR hike in blended ad realisation during FY2007-10 owing to Chennai's strong competitive scenario and impact of Bangalore edition's launch (low ad rates in Bangalore edition at the initial stage will dilute overall blended ad realisation). DCHL has recently announced a 30% average ad rate hike for FY2009 across editions. Increasing share of colour advertising - Colour ad space accounts for almost 35% of DCHL's total inventory and commands an average 30-40% premium over B&W rates. Moreover, as colour ads do not entail any significant costs, higher rates percolate directly to the Bottom-line leading to higher Profits. We have factored in colour space to rise to 44% of total in FY2010.

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In terms of circulation, DCHL almost doubled its revenue during FY200507 driven by steady circulation growth in AP and its entry into the Chennai market. DCHL has registered this strong growth despite a drop in realisation per copy (owing to low pricing strategy adopted in Chennai). Going forward, we expect circulation revenues to grow at a slower pace, despite DCHL's Bangalore launch, owing to moderation in AP and Chennai circulation. We have factored in an initial print order of 100,000 for the Bangalore edition at a cover price of Rs1.5. On the Operating front, DCHL had witnessed a significant Margin expansion of 2,270bp driving an EBITDA CAGR of almost 109% during FY2004-07 aided by strong advertising revenue growth, lean cost structure and lower newsprint prices (stronger Rupee has also helped). DCHL enjoys highest EBITDA Margins in the Print industry owing to extremely low overheads (due to proximity to its target markets) and low employee expenses. DCHL's employee costs in FY2007 stood at Rs21.5cr (4% of sales) as compared to HT Media's Rs148cr (14% of sales and Jagran Prakashan's Rs70cr (12% of sales). Large investments in automated capacities and VRS offered to plant workers coupled with the strategy to use outsourced content have enabled DCHL to achieve such a low-cost employee model.

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Going forward, we expect DCHL to post a 30.9% CAGR in EBITDA to Rs579.6cr during FY2007-10 aided by steady advertising revenue growth. However, we believe it would be difficult for DCHL to sustain its highMargin model owing to stiffer competition in Chennai, initial losses on account of Bangalore edition launch and higher newsprint prices. We believe DCHL's Operating Margins have peaked in FY2008E at 61.2% and expect it to drop by almost 630bp during FY2008-10. DCHL would have to make significant investments in terms of content to achieve success in its Bangalore foray. Moreover, its low ad spends at Rs6.5cr in FY2007 (ad spends of Jagran - Rs33cr and HT Media - Rs64cr) would have to rise significantly to combat a national giant like TOI head on. DCHL's circulation revenues cover a mere 20% of its raw material costs. Hence, rising newsprint prices (have already risen 10-12% in CY2008) make DCHL more vulnerable than its peers in case its ad rates slow down. On the Earnings front, we expect DCHL to report a CAGR of 33.3% over FY200710 boosted by robust Topline growth and strong Margin expansion (largely in FY2008E).

We believe DCHL has already completed most of its capex. It has installed state-of-the-art machinery from Goss International, which has to a large extent automated the time consuming post-printing activities. Further, to increase its printing capacity, DCHL has installed six such machines with high capacity of printing up to 75,000 copies per hour. The company incurred close to Rs475cr as capex during FY2005-07. Hence, we have modeled in only regular capex during FY2008-10, which DCHL can easily fund via its internal accruals. DCHL had a cash balance of Rs333cr in FY2007 owing to money raised via FCCB issue Rs242cr) and QIP (Rs224cr) during the period. While part of the FCCB has been converted to Equity, Debt in FY2007 still stood at a high Rs605cr (Debt:Equity of 0.7x). However, we expect Debt levels to
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reduce significantly going forward boosted by lower Capex requirement, higher Operating Cash flows and retirement of FCCB (we have assumed full conversion by end of FY2008E leading to a fully diluted equity capital of Rs49.3cr). Post entry into Chennai, DCHL's working capital requirements have risen sharply owing to steep rise in receivables to almost 201 days in FY2007 (highest amongst peers as compared to Jagran's 70 days and HT Media's 51 days). DCHL's strategy of lenient credit terms to advertisers to boost revenues in Chennai has led to this sharp increase in working capital putting a significant strain to its Cash flows. Management has already securitised its receivables of Rs300cr (FY2007) with ICICI Bank at a discount of 12.5%, which has been adjusted in the Interest outgo in FY2008. Post this securitisation, we expect the Debtor days to stabilise at 115-125 days (still higher than its peers) leading to a sharp improvement in Cash flows (also aided by lower capex requirements).

Outlook and Valuation

Despite stronger Earnings' growth and significantly higher EBITDA Margins, DCHL has historically traded at a discount to its peers as it is characterised as a single publication company with limited reach (only present in two states). Significant delays in several of its plans and poor corporate governance have also impacted its valuation in the last couple of years. As a result, DCHL trades in the P/E band of 10-14x two-year forward Earnings compared to HT Media and Jagran, which trade in the band of 20-25x and 19-24x, respectively. At the CMP of Rs150, the stock trades at 9.7x FY2010E Earnings and 5.4x EV/ EBITDA.

We have used the DCF methodology to value the company to capture the full impact of improving cash flows as receivables stabilise to 115-125 days level. We have assumed higher WACC of 15.5% for discounting DCHL's cash flows owing to its higher beta (0.90 compared to HT Media's
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and Jagran's 0.65). In line with our conservative approach towards all Print Media stocks, we have also modeled a 1% stock risk premium for DCHL to account for uncertainty surrounding newsprint prices. However, in case of DCHL, we have modeled in an additional 1% stock risk premium to account for poor corporate governance and delays in execution of plans. We have assumed a Terminal growth rate of 4% in our valuation for DCHL (lower than Jagran and HT Media owing to its limited market presence). Factoring in our assumptions, our Fair Value based on FY2010 estimates works out to Rs164 (including Rs2.5 for Odyssey) at which the stock would trade at a P/E of 10.6x (at the bottom end of its historical valuation band of 10-14x two-year forward earnings). However, as severe concerns overshadow the positives rendering risk-reward ratio unfavourable, we maintain Neutral view on the stock.

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Concerns
Poor quality of growth In FY2007, DCHL registered strong yoy growth of 67% in Topline and 138% in Bottomline. Its Operating Margins also expanded by a whopping 1,525bp driving a yoy growth of 148% in EBITDA. However, despite such phenomenal growth, its cash flow from operations was negative. This was largely owing to the steep rise in its working capital requirement as its receivables rose to almost 201 days (consolidated - 246 days) in FY2007 from an already high 150 days in FY2006. DCHL's strategy to offer lenient credit terms to boost its Chennai edition revenues and to support the preBangalore launch were to blame. While management has securitised its receivables with ICICI Bank, the logic and merit behind such an approach to grow revenues eludes us. Firstly, receivables in Print Media companies generally range between 60-90 days as most of the business is dealt with INS accredited agencies (governing body for Print Media business), which are required to pay within 90 days as per the norms. Generally, Print Media companies derive almost 50% of their business from such agencies. Hence, we fail to understand the build up in DCHL's receivables. Moreover, such a lenient approach of boosting revenues through longer credit periods also raises questions on quality and sustainability of its advertising revenues. It also raises concerns over DCHL's limited bargaining power with media buyers and its quality of readership/circulation despite its strong position in AP and Chennai markets. Poor corporate governance Over the last couple of years DCHL has undergone significant de-rating owing to questions raised over its corporate governance. Firstly, we fail to understand the logic behind the purchase of an Aircraft (worth Rs38.9cr) in FY2007 by a Print Media company. Secondly, we believe DCHL has over-promised and under-delivered in case of both its subsidiaries, Sieger Solutions and Odyssey. In case of Sieger Solutions, management had guided for a private placement by diluting 24% stake at a floor price of Rs1,200 -1,500cr enterprise value. However, six months down, there have been no further developments on this front. Moreover, we don't believe Sieger Solutions' business model adds any significant value to DCHL (as discussed earlier). As for Odyssey, DCHL has been on constant look out to unlock value in the company by coming out with its IPO. However, almost two years have passed and the fund-raising plans still remain on paper. This delay coupled with problems related to mall development and retail expansion impacted have Odyssey's expansion plans as was evident in its flat revenue growth to Rs26.3cr in FY2007.
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 Lastly, DCHL's promoter ownership has declined from 77.8% to 60.9% since September 2006. During the period, the company issued around 38.75mn shares (on account of FCCBs and QIP) leading to almost 19.5% dilution. However, our concern arises from the fact that the promoters have sold 11.18mn shares (almost 7% of their holding) during the same period. Moreover, to support its declining shareholding and heavy dilution, the promoters announced a share buyback scheme at Rs250 upto maximum of 5% of its equity. However, six months down, there have been no further developments on this front. Moreover, given the sharp decline in DCHL's share price it looks even less likely.

Margins have peaked We believe DCHL's Operating Margins have peaked in FY2008E at 61.2% and are expected to decline by almost 630bp during FY2008-10. We believe it would be difficult for DCHL to sustain its high-Margin model owing to stiffer competition in Chennai, initial losses on account of the Bangalore edition launch and higher newsprint prices. Competition in Chennai is heating up. TOI has just launched its Chennai edition. We believe this is a sound strategy by TOI to counter attack DCHL (expected to enter Bangalore market in 1QFY2009 which is a stronghold of TOI). Media reports suggest TOI is also adopting aggressive cover pricing strategy, with an initial yearly subscription rate of Rs299. We believe this could be the beginning of a price war in Chennai which has seen even The Hindu react by reducing its prices to Rs2.5 (Rs3.25). Moreover, Indian Express has also revamped its edition look. This is likely to hurt DCHL owing to its low cover prices, rising newsprint costs and slowdown in ad rate hikes (owing to stiffer competition) impacting its overall profitability. The Bangalore edition launch is expected in 1QFY2009 and could become the most critical factor in DCHL's growth sustainability. In terms of profitability, we expect the edition to incur Significant marketing expenses in the initial period and achieve breakeven only in late FY2010. However, we remain cautiously optimistic on DCHL's Bangalore venture as unlike The Hindu in Chennai; TOI is a much aggressive competitor with a strong brand equity and national foothold. DCHL's circulation revenues cover a mere 20% of its raw material costs. Hence, rising Newsprint prices (have already risen 10-12% in CY2008) makes DCHL more vulnerable than Peers in case its ad rates witness a slow down. We have assumed 18% rise in newsprint prices in FY2009E from 600$/tonne as a base case followed by a 6% jump in FY2010E. Any additional rise in newsprint prices could impact our forecast.
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