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Deccan Chronicle: Merger blues - Views on News from Equitymaster

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Deccan Chronicle: Merger blues

May 17, 2011

Deccan Chronicle has announced its 4QFY11 results. The company has reported a 60.8% YoY increase in topline and a net loss of Rs 466 m in the last quarter. Here is our analysis of the results.

Performance summary
  • Topline registers a 60.8% YoY growth during the quarter. For the full year, the sales grow by a modest 9.4% YoY.
  • The company reports operating loss for the last quarter of 2011 resulting in a fall in the yearly operating profits by 35%. Operating margins decline from 50.6% to 30% for the year.
  • There is a net loss amounting to Rs 466 m in 4QFY11 as compared to net profit of Rs 65 m in the same quarter last year. For the year, net profit margins decline from 29% to 16.6%.


Financial performance snapshot *
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 1,917 3,081 60.8% 8,925 9,762 9.4%
Expenditure 1,104 3,280 197.2% 4,409 6,829 54.9%
Operating profit (EBDITA) 813 (199) -124.5% 4,516 2,933 -35.0%
EBDITA margin (%) 42.4% -6.5%   50.6% 30.0%  
Other income             73 268 264.6% 295 547 85.8%
Interest 116 195 67.8% 451 584 29.4%
Depreciation & amortisation 126 183 45.2% 423 514 21.6%
Profit before tax 644 (310) -148.1% 3,937 2,383 -39.5%
Profit before tax margin (%) 33.6% -10.1%   44.1% 24.4%  
Tax 579 156 -73.1% 1,327 758 -42.9%
Profit after tax             65 (466) -816.5% 2,609 1,625 -37.7%
Net profit margin (%) 3.4% -15.1%   29.2% 16.6%  
No. of shares (m)         243  
Diluted earnings per share (Rs)*         6.7  
P/E (x)         11.4  
(*trailing twelve month earnings)

* The numbers for the fourth quarter and the full year are not strictly comparable with corresponding periods in the previous year because the company’s wholly-owned subsidiaries have been merged with the company.

What has driven performance in 4QFY11?
  • The company’s topline grew by 61% YoY during the quarter and 9% for the full year. However, the numbers are not strictly comparable as outlined in the note above. If one takes into account the average run rate of the last three quarters, then revenues on a like to like basis seemed to have grown by 17%-18% for the quarter, which is a decent growth as per us. Revenues for the full year though have grown by only 9% YoY. This was mainly on account of a decline of 5% witnessed during the first nine months of the fiscal.

  • The expenditures rose substantially by around 197% QoQ and by 55% YoY during 4QFY11 and FY11 respectively. This adversely affected the operating margins which shrunk by 20%.

  • Among the costs, other expenses grew by 472% YoY and 177% YoY during 4QFY11 and FY11 respectively. The other expenses could be on account of the merging of the wholly owned subsidiaries into the holding company. Raw materials saw an increase of nearly 158% for 4QFY11 and 34% for FY11. Raw materials accounted for more than 62% of the total sales for the quarter and 44% for 2011.

  • The company declared a loss at the net level to the tune of Rs 466 m during the quarter. While the main culprit was operating losses reported during 4QFY11, higher interest and depreciation charges also played a role in magnifying the overall loss. This is despite the rise in other income by 265% YoY,

    Cost break-up...
    (% of sales) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw materials consumed 747 1,924 157.5% 3,176 4,258 34.1%
    % sales 39.0% 62.4%   35.6% 43.6%  
    Staff cost 181 350 93.9% 655 969 48.0%
    % sales 9.4% 11.4%   7.3% 9.9%  
    Other expenses 176 1,006 472.6% 579 1,603 176.9%
    % sales 9.2% 32.7%   6.5% 16.4%  
    Total expenditure 1,104 3,280   4,409 6,829  

What to expect?
At the current price of Rs 76 the stock is trading at a multiple of 11 times its trailing 12-months earnings. The company has recently announced a buyback of up to 34.5 m shares from the open market through stock exchanges at a maximum price of Rs 180 per share. In view of the above announcement, we are in the process of revising our estimates and will update our subscribers shortly.

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