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HT Media: Little operating leverage - Views on News from Equitymaster
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HT Media: Little operating leverage
Oct 20, 2008

Performance summary
  • Topline grows 18% YoY led by higher advertising rates as well as new offerings.

  • Operating margins decline in quarter as well as half year ended September 2008 on account of higher raw material and ad costs.

  • Higher interest costs and lower operating margins pressurise profitability.

Financial picture

(Rs m) 2QFY08 2QFY09 (%) Change 1HFY08 1HFY09 (%) Change
Net sales 2,828 3,342 18.2% 5,591 6,614 18.3%
Expenditure 2,324 2,943 26.6% 4,501 5,528 22.8%
Operating profit (EBDITA) 504 399 -20.8% 1,091 1,087 -0.4%
EBDITA margin (%) 17.8% 11.9%   19.5% 16.4%  
Other income 67 52 -23.0% 140 108 -22.9%
Interest 45 74 64.3% 88 125 41.6%
Depreciation 110 128 17.0% 216 257 18.9%
Profit before tax 416 249 -40.2% 927 813 -12.3%
Tax 97 86 -11.5% 266 274 3.0%
Profit after tax/(loss) 319 163 -49.0% 661 540 -18.4%
Net profit margin (%) 11.3% 4.9%   11.8% 8.2%  
No. of shares (m) 234.2 234.2   234.2 234.2  
Diluted earnings per share (Rs)*         5.24  
Price to earnings ratio (x)*         15.1  
* 12 month trailing

What has driven performance in 2QFY09?
  • HT Media reported a topline growth of 18% YoY led by higher advertising rates and new launches. Ad revenues for the quarter jumped 18% YoY. The company launched new editions of both its newspapers - Hindustan Times and Hindustan. Though the company took ad rate hikes, lower advertising spend especially by the BFSI and reality segments tempered the revenue growth.The industry witnessed 10% YoY growth in value terms, while volume growth was flat. HT Media took rate hikes in the range of 10% to 15% YoY and also gained market share. The company’s other ventures (radio, Mint and Shine.com) are performing as per management’s expectation. The company‘s topline performance is in line with our full year estimates.

    Cost break-up
    as a % of net sales 2QFY08 2QFY09 1HFY08 1HFY09
    Total Cost of goods 39.9% 43.8% 39.6% 40.1%
    Staff Cost 15.0% 14.8% 14.8% 14.3%
    Advertising 7.0% 9.5% 6.1% 8.8%
    Other Expenditure 20.3% 19.9% 20.0% 20.3%

  • On account of higher raw material costs and ad spends, the margins declined by 5.9% YoY during 2QFY09 and 3.1% YoY during 1HFY09. The company took ad rate hikes to offset the newsprint cost, which have increased around 24% YoY over the previous year.While the newsprint costs have gone up by 50% YoY, due to HT Media’s inventory built up and better management of the same it faced lower rise in the input costs. The company expects the newsprint prices to correct in the coming quarters. Advertising expenditure was considerably higher due to increased investment in re-launch of HT City and higher brand visibility of Hindustan though television commercials. The half-year margins are in line with our full year estimates.

  • Lower operating profits and other income coupled with higher interest cost led to the net profits decline by 49% YoY during 2QFY09. The higher interest cost was on account of prevailing steep interest rate environment and utilisation of borrowing facilities to fund expansion in existing and new businesses. The net profits declined 18% YoY in 1HFY09. Even the tax rates were higher at 33.7% in 1HFY09 as compared to 28.7% during 1HFY08.

What to expect?
At the current price of Rs 79, the stock is trading at a price to earnings multiple of 6.8 times our estimated FY11 earnings. HT’s printing facility at Meerut is expected to commence operations in near future, which would offer the company a further traction in Uttar Pradesh. It plans to further strengthen its position in the Hindi segment and would continue with its investment in this segment. HT Media further plans to expand its Mint, radio and internet venture. Though the company faced higher raw material costs, advance sourcing and building of inventories helped HT Media to source newsprint at better than industry procurement prices. Further, it could source high quality paper at highly competitive rates by successfully leveraging its joint venture relationship with Burda. The management expects the newsprint prices to reduce in the coming quarters and with the recent ad rate hikes taken, it expects the margins to improve. HT Media would continue investing in its ventures and has not made any major reductions in its capex plans. On account of its bundled offerings, the company expects to further increase its market share. While the risks of raw material prices and execution remain, we find the stock attractive at current levels.

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