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Deccan Chronicle: Margins take a huge beating - Views on News from Equitymaster
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Deccan Chronicle: Margins take a huge beating
Aug 16, 2011

Deccan Chronicle has announced its June quarter results. The company has reported a 78% growth in consolidated topline and a 40% YoY growth in profits. Here is our analysis of the results.

Performance summary
  • Topline suffers a fall of 13% YoY.
  • Operating profit declines by nearly 70% YoY as all the cost heads spike up as a percentage of sales. Margins contract by 33% YoY.
  • Higher depreciation and interest charges take further toll on profits, leading to 87% YoY decline in bottomline.

Standalone financial snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 2,318 2,018 -12.9%
Expenditure 1,119 1,645 47.0%
Operating profit (EBDITA) 1,199 373 -68.9%
EBDITA margin (%) 51.7% 18.5%  
Other income 90 111 23.2%
Interest (net) 118 169 43.8%
Depreciation 109 135 23.6%
Profit before tax 1,062 180 -83.0%
Extraordinary income/(expense) - -  
Tax 150 58 -61.1%
Profit after tax/(loss) 912 122 -86.6%
Net profit margin (%) 39.4% 6.0%  
No. of shares (m) 243.5 232.2  
Diluted earnings per share (Rs)*   3.6  
Price to earnings ratio (x)*   18.4  
(* annualised)

Note: The results are not exactly comparable as the results of amalgamated subsidiaries were given effect in the last quarter of FY11.

What has driven performance in 1QFY12?
  • Company's topline fell by 13% YoY during the quarter. The decline is surprising given the fact that most of the other listed print media companies in India witnessed decent growth during the same period. The fact that the company does not have a pan India presence also seems to have hurt its growth. Furthermore, the fact that the results for the quarter contains the performance of its subsidiaries, some of which are struggling to grow their topline, also appears to have played its part in the poor topline performance.

    Cost break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Raw material 749 1,081 44.3%
    % sales 32.3% 53.6%  
    Staff cost 182 247 35.7%
    % sales 7.9% 12.3%  
    Other expenses 188 317 68.8%
    % sales 8.1% 15.7%  

  • From a robust 52% in 1QFY11, the operating margins of the company tumbled to mere 18.5% and this resulted into a huge 69% decline in operating profits. All the major cost heads witnessed an increase as a percentage of sales. The biggest impact was caused by raw material expenses as they went up by 44% YoY on an absolute basis. Newsprint prices, which form the bulk of the raw material expenses, were on an upswing and given the company's inability to pass on the same, margins were negatively impacted. Staff costs and other expenses also jumped quite appreciably on a YoY basis.

  • With both interest costs as well as depreciation charges increasing at a much greater rate than the operating profits, decline in PBT was even worse and stood at 83% YoY. Interest expenses in particular, grew by a strong 44% over corresponding previous quarter.

  • Net profit decline for the quarter has come in at 87% YoY. This is greater than the PBT due to a less than proportionate 61% decline in tax outgo.

What to expect?
At the current price of Rs 66, the stock trades at a multiple of around 18 times its trailing twelve month earnings per share. In view of the performance well below our estimates, we have been forced to revise our estimates still further down for the company. Our new target price for the company stands at Rs 110 per share. We would also like to reiterate that in view of the increased risk profile, it will not be wise to average out at the current price. The idea is to have only a small percentage of one's portfolio invested in the company.

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