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Deccan Chronicle: The slide continues - Views on News from Equitymaster
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Deccan Chronicle: The slide continues
Feb 15, 2011

Deccan Chronicle has announced its December quarter results. The company has reported a 14.5% drop in topline and 54.7% YoY fall in net profits for the quarter ended on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Topline registers a 14.5% decline during the quarter. For the 9 months period, the decline was relatively modest at 4.7% YoY.
  • Operating margins contracted by 16.5% YoY resulting in 40.4% YoY decline in operating profits. The margins declined as raw material and employee costs were up by 9.2% YoY and 3.2% YoY respectively (as a % of sales). For the 9 months period, operating profits declined by 4.7% YoY and operating profits contracted by 13.3% YoY.
  • Bottomline declines at an even higher rate of 54.7% YoY. For the 9 months period, the decline was arrested at 18% YoY. The net profit margins for the quarter and 9 months period came at 17.6% (down 15.7% YoY) and 31.3% (down 3.6% YoY) respectively.

(Rs m)  3QFY10  3QFY11  Change  9mFY10  9mFY11  Change
Net sales  2,334 1,996 -14.5%  7,008  6,681 -4.7%
Expenditure  1,067 1,242 16.4%  3,296  3,549 7.7%
Operating profit (EBDITA)  1,267 754 -40.4%  3,713  3,132 -15.6%
EBDITA margin (%)  54.3% 37.8%   53.0% 46.9%  
Other income  75 97 28.5% 221  280 26.6%
Interest (net)  113 138 21.6% 335  389 16.0%
Depreciation  102 111 9.5% 303  331 9.3%
Profit before tax  1,127 602 -46.6%  3,296  2,693 -18.3%
Profit before tax margin (%) 48.3% 30.1%   47.0% 40.3%  
Extraordinary items             
Tax  350 250 -28.6% 750 602.5 -19.7%
Profit after tax/(loss)  777 352 -54.7%  2,546  2,090 -17.9%
Net profit margin (%)  33.3% 17.6%   36.3% 31.3%  
No. of shares (m)           243  
Diluted earnings per share (Rs)*          8.9  
Price to earnings ratio (x)*          9.1  
(* on trailing twelve months earnings)

What has driven performance in 3QFY11?
  • The 15% decline in company's topline during the quarter has really come in as a surprise for us. Especially since most other companies in the space have managed to grow their revenues at a robust pace. Majority of the company's revenues are accounted for by income from advertisement. Hence, looks like the company has had to settle for lower advertisement expenditure over same quarter last year. It should be noted that Andhra Pradesh, the state where majority of the company's revenues accrue from has been in some sort of a political turmoil in recent times. This would have thus made the advertisers in the state cut down on their ad spends in order to conserve cash and this in turn had an effect on the company's revenues.

  • Company's costs however, have continued to grow, thus taking a significant toll on the operating margins. With all the cost heads going up as a percentage of sales as well as on an absolute basis, margins have contracted to the tune of 16.5%.

  • Higher interest and depreciation charges and also higher effective tax rate has led to the bottomline faring even worse than operating profits, registering a decline of 55% YoY. Profits for the nine month period however have suffered a lower fall of 18% YoY on account of better performance in the first half of the year.

    Cost break-up...
    (Rs m)  3QFY10  3QFY11  Change  9mFY10  9mFY11  Change
    Raw materials  735 812 10.5% 2,424 2,334 -3.7%
    % sales  31.5% 40.7%    34.6% 34.9%  
    Staff cost  177 220 24.3% 475  619 30.3%
    % sales  7.6% 11.0%        
    Other expenditure  156 210 34.9% 397  597 50.3%
    % sales  6.7% 10.5%   5.7% 8.9%  
    Total expenditure 1,067 1,242   3,296 3,549  

What to expect?
At the current price of Rs 76, the stock trades at an attractive multiple of 6x our revised FY13 earnings per share. It should be noted that due to the poor performance in the current fiscal, we have had to lower our forward earnings projection for the company. Furthermore, we are now assigning a lower multiple of 12x to the company as we believe that risks to the business and also certain qualitative parameters like inadequate disclosures have taken a turn for the worse. Taking all these factors into account, we now arrive at a target price of Rs 180 from an FY13 perspective.

It should also be noted that in view of the increased risk profile, it will not be wise to have a higher concentration of the stock in one's portfolio. The idea is to have only a small percentage of one's portfolio invested in the company.

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