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A DuPont filter for Print media companies-I

Sep 21, 2011

Du Pont analysis is a performance measurement technique that has been followed since the time DuPont Corp first used it in 1920s. It breaks up the RoE of a company into three components namely net profit margin, asset turnover and equity multiplier. In this series of articles, we will evaluate the print media companies on the basis of the components of their RoE- the DuPont analysis. A step by step break up will help us understand why and how exactly is the RoE shaping up.

Return on Equity (RoE) is an important ratio to look at when deciding whether a company is able to generate wealth for shareholders. Simply put RoE = Net Profit/ Equity. But, a deeper look tells us it is much more than that. If broken into various components RoE can be expressed as:

(Net Profit/ Sales) *(Sales/Total Assets) * (Total Assets/Equity)

(Net profit margin) * (Asset turnover) * (Equity multiplier)

The FY11 RoE for Jagran Prakashan, HT Media and DB Corp were 31.4%, 16.3% and 34.3% respectively. The DuPont analysis will reveal whether the higher return ratios are sustainable for Jagran Prakashan and DB Corp. While Net profit margin speaks about the operating efficiency; the asset turnover ratio gives an indication about how well are the assets being utilized. Equity multiplier tells us what is the leverage position implying what percentage of total assets is equity.

The first component of the Du Pont analysis is the net profit margin. The FY11 net profit margins of Jagran Praksahan, HT Media and DB Corp were 18.5%, 14.6% and 21.3% respectively. Here, DB Corp emerges as the winner.

Net profit itself is derived from operating profit. i.e. Net profit= Operating Profit - interest expenses - tax rate. So, let us look at the operating profit margins of all the companies. The operating margins of the companies are 27.7%, 22.1% and 30.4% respectively (in the same order as mentioned earlier). DB Corp seems to be doing well on this parameter as well. The operating expenses determine the operating profits. We will look at the operating expenses as a percentage of sales for all the companies in consideration and decide what has led to better operating performance by DB Corp.

There are mainly 3 operating cost drivers- raw material cost, employee cost, other operating expenses and selling and distribution (S&D) expenses. Considering these, we know that DB Corp has the lowest S&D and other operating expenses. The raw material and employee costs are similar for the 3 media companies. Jagran is the next best in operating performance with lower S&D and employee expenses. However, for HT Media, expenses as a percentage of sales are the highest for all the 4 cost heads. This surely reflects in the operating margins of these companies.

Interest expenses as a percentage of sales are the highest for HT Media (1.5%) which had a debt to equity ratio of 0.3 times in FY11. However, Jagran Prakashan (0.6%) is better on this parameter than DB Corp (1.2%). Taxes paid are as per the normal tax rates prevailing with locational advantages and loss making subsidiaries in consideration (for set off purpose). This does not necessarily reflect the operating efficiency of the companies.

We thus, get to conclude that based on net profit margin and all the underlying parameters, DB Corp seems to be doing well. In the next article, we will discuss the asset turnover of print media companies and their equity multipliers.

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