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Deccan Chronicle: The newsprint costs boost
May 18, 2010

Deccan Chronicle has announced its FY10 results. The company has reported a 9.5% YoY and 86% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by 6% YoY during the quarter
  • Operating margins expand by a huge 19%, resulting into a 93% growth in operating profits
  • Nearly threefold increase in tax outgo leads to a bottomline decline of 20% for the quarter
  • Bottomline for the full year grows by 86% YoY on the back of a 10% growth in topline

(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales             1,803             1,917 6.3% 8,149               8,925 9.5%
Expenditure             1,381             1,104 -20.1% 5,467               4,400 -19.5%
Operating profit (EBDITA) 422 813 92.6% 2,682               4,525 68.7%
EBDITA margin (%) 23.4% 42.4%   32.9% 50.7%  
Other income    77    73 -4.8% 427   294 -31.0%
Interest (net) 123 116 -5.1% 709   451 -36.4%
Depreciation    95 126 32.9% 321 429 33.7%
Profit before tax 282 644 128.5%               2,079               3,940 89.5%
Extraordinary income/(expense) -   -     -   -    
Tax 200 579 189.0% 679               1,329 95.8%
Profit after tax/(loss)    81    65 -20.2% 1,401               2,611 86.4%
Net profit margin (%) 4.5% 3.4%   17.2% 29.3%  
No. of shares (m)             244.9             242.2   244.9               242.2  
Diluted earnings per share (Rs)         10.8  
Price to earnings ratio (x)         13.0  

What has driven performance in FY10?
  • Company's topline grew by 9.5% YoY during the fiscal. Advertisement accounts 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 FY10 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.

    Cost break-up...
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Raw materials             1,199 747 -37.7% 4,427               3,171 -28.4%
    % sales 66.5% 39.0%   54.3% 35.5%  
    Staff cost 125 181 44.2% 494   655 32.7%
    % sales 7.0% 9.4%   6.1% 7.3%  
    Other expenditure    56 176 212.6% 546   573 5.0%
    % sales 3.1% 9.2%   6.7% 6.4%  

  • Operating margins have surged a whopping 19% during the quarter, leading to a strong 69% jump in operating profits. Newsprint prices, which ruled at very high levels 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.

  • Furthermore, had it not been for the more than tripling of the company's other expenditure during 4QFY10, operating margins for quarter as well as for the full year would have been slightly higher. Important to add that during the quarter, the company merged three of its subsidiaries with itself and hence, higher other expenditure would have been a result of the same.

  • Thanks to lower interest charges and less than proportionate rise in depreciation charges, net profit for the full year has come in higher by 86% YoY. Had it not been for 96% jump in tax expenses on account of year-end adjustments, growth in profits would have been even better.

What to expect?

At the current price of Rs 140, the stock trades at an earnings multiple of around 9 times our expected FY12 earnings per share. While the company's performance has come in slightly below our expectations, we believe that it is due to factors which were one time in nature and hence, may not repeat in the future. We remain positive on the long term future and maintain our BUY view on the stock.

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