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Deccan Chronicle: The margin boost - Views on News from Equitymaster
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Deccan Chronicle: The margin boost
Feb 4, 2010

Performance summary
  • Topline grows by 9% YoY during the quarter
  • Operating profits more than double as margins expand by a superlative 29%
  • Bottomline more than triples as lower interest as well as tax rates further add to the operating level buoyancy
  • Profits for the nine month period nearly double on the back of a sedate 10% growth in topline


(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 2,147 2,334 8.7% 6,347 7,008 10.4%
Expenditure 1,603 1,067 -33.4% 4,086 3,296 -19.3%
Operating profit (EBDITA) 544 1,266 132.8% 2,260 3,713 64.2%
EBDITA margin (%) 25.3% 54.3%   35.6% 53.0%  
Other income 136 75 -44.7% 350 221 -36.8%
Interest (net) 191 113 -40.6% 587 335 -42.9%
Depreciation 78 102 29.9% 226 303 34.0%
Profit before tax 411 1,127 174.1% 1,798 3,296 83.4%
Extraordinary income/(expense)            
Tax 154 350 126.8% 478 750 56.8%
Profit after tax/(loss) 257 777 202.6% 1,319 2,546 93.0%
Net profit margin (%) 12.0% 33.3%   20.8% 36.3%  
No. of shares (m) 244.9 242.2   244.9 243.6  
Diluted earnings per share (Rs)*         10.8  
Price to earnings ratio (x)**         14.1  
(* on trailing twelve months earnings)

What has driven performance in 3QFY10?
  • Company’s topline grew by 9% YoY during the quarter. Advertisement account for more than 90% of the company’s revenues and hence, it is quite obvious that the growth was led by a similar growth in advertisement revenues. Between FY05 and FY09, advertisement revenues grew at a CAGR of 51% and hence, the growth for the first nine months of the current fiscal does look a lot out of place. However, it should be noted that the 51% growth was achieved in the backdrop of a surging economy and company’s foray into new territories, both of which were absent during the current fiscal. However, with economic growth picking up, advertisement revenues should definitely improve from the current levels.

  • Operating margins have surged a whopping 29% during the quarter, leading to a huge 133% jump in operating profits. Newsprint prices, which were making record highs during the same quarter last year have fallen drastically from the peak and since the same accounted for a bulk of the company’s cost structure, the impact on company’s operating profits has been phenomenal. However, we believe such improvement to be one time in nature and going forward, operating margins should stabilize around the 50% mark provided newsprint prices do not witness another spike of the order it witnessed last year.

    Cost break-up…
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Raw materials 1,290 735 -43.1% 3,229 2,424 -24.9%
    % sales 60.1% 31.5%   50.9% 34.6%  
    Staff cost 135 177 31.0% 369 475 28.8%
    % sales 6.3% 7.6%   5.8% 6.8%  
    Other expenditure 177 156 -12.3% 489 397 -18.9%
    % sales 8.3% 6.7%   7.7% 5.7%  

  • Bottomline during the quarter has surged more than three fold as lower interest charges as well as tax rates has added further to the operating level buoyancy.

What to expect?
At the current price of Rs 152, the stock trades at a multiple of around 10x its expected FY12 earnings per share. The company’s performance has been in line with our estimates and as such we do not feel the need to make any changes to our projections. We remain positive on the stock from a medium term perspective.

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