Since initiation (17 April, 2008), we have maintained a negative stance on Deccan Chronicle Holdings Ltd, owing to concerns regarding its poor quality of growth, scalability issues and unsustainable margins.
A sharp fall in the stock price of DCHL by 70% during FY2009 and a 32% underperformance vis-à-vis Sensex vindicated our stance. However, we now change our negative stance on the company after the management meet and a shift to a consolidated model.
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A significant correction in newsprint prices (31%) over the past six months, coupled with higher profitability in the IPL venture is expected to drive a 42.8% CAGR in earnings for Deccan Chronicle over FY2009-11E.
DCHL had launched its Bangalore edition a year back and the latest ABC circulation figures of 13.5 lakh (Jan-June 2009), a 25.9% increase since its launch, indicate that the company is now focusing on its core print business as a key revenue driver.
The Deccan Chargers Sporting Ventures houses the Hyderabad IPL team, Deccan Chargers (100%), which won IPL-II. In terms of financials, we expect DCSVL to record a sharp jump in Revenue in FY2010E to Rs100.6 crore (Rs56.6 crore), driven by revised media telecast rights boosting the net profit to Rs22 crore (Rs1.6 crore).
Moreover, as balance sheet concerns fade (debt and receivable days both stand reduced), and the ongoing buy-back instills confidence, we believe that
DCHL warrants a re-rating. Hence, we upgrade DCHL to BUY, valuing the stock at 12x its FY2011E EPS (a 40% discount to its peers like Jagran and HT Media, due to scalability issues), with a 12-month target price of Rs142.