Strong earnings and profitability on aggressive expansion DB Corp Limited (DBCL) continues to expand aggressively, which would enable it to achieve strong growth in earnings and profitability; currently, the emerging editions contribute 10% to the company's total revenue. Expansion in Jharkhand would be completed with the launch of Dhanbad and Jamshedpur editions by end-FY11. The Bihar edition will be launched in FY12. Moreover, the company would be setting up around 9-10 new printing centres in its existing territories of Rajasthan, Punjab, Madhya Pradesh and Gujarat.

Ad-driven business model The company's strategy of aggressive cover prices renders ad revenue as its main growth driver, enabling it to attain No. 1 position from the first day of a launch. Moreover, attractive growth opportunities in Hindi/ regional print dailies make a strong case for DBCL, where the model is skewed toward ad revenue (76% of total revenue), which entails higher operating leverage (during 1HFY11, ad revenue grew 18% although 1HFY10 was a festive period). We expect ad revenue to grow at 20% CAGR over FY10-12.

Multiple growth opportunities from uniformly diversified business model DBCL has presence in all major tier II and tier III markets, largely capturing the Hindi belt. It is also the second-largest circulated newspaper in Gujarat. The company expanded to 14 new states in the past 14 years (which implies a new state every year) and it entered the radio business with 17 stations. DBCL's presence across multiples languages, geographies and media platforms differentiates it making it a preferred player over competition.

VALUATIONS AND RECOMMENDATION The company is self sufficient for expansion into new regions. It has already undertaken capex of Rs3.5bn over the past two years for upgrade and addition of printing facilities. After factoring in capex requirements of Rs1bn over the next two years, we expect healthy ROE of 27%, ROCE of 35% and FCF of Rs2.4bn by FY12. With revenue CAGR of 16% over FY10-12E, we expect DBCL to maintain its operating margins at 32% and net margins at 19%. We initiate coverage with 'BUY' with 12 month target price of Rs315 (21xFY12E EPS).

Aggressive expansion to drive earnings and profitability DBCL plans to launch Bihar and Jammu editions by next financial year. The company would be covering Jharkhand extensively by launching the Dhanbad and Jamshedpur editions. In addition, it would be setting up around 9-10 new printing centers in the existing territories of Rajasthan, Punjab, Madhya Pradesh and Gujarat. DBCL intends to launch new editions in the existing areas to increase localization of content. We believe this would not only increase the readership base, but also enable the company to command higher rates. We believe that as the emerging editions start moving toward the matured ones, DBCL’s revenue and profit growth would outperform the industry.

Business model driven by ad revenue DBCL’s strategy of aggressive cover prices renders ad revenue as its main growth driver; this has enabled the company to attain No. 1 position from the first day of a launch. Moreover attractive growth opportunities in Hindi/regional print dailies make a strong case for DBCL, where the model is skewed toward ad revenue (76% of total revenue) entailing higher operating leverage (during 1HFY11, ad revenue grew 18% despite the high base effect).

Uniformly distributed business model provides multiple growth opportunities DBCL has presence in all major tier II and tier III markets and it has almost covered the Hindi belt. It expanded to 14 new states in the past 14 years (a new state almost every year). Aggressive expansion into new markets such as Jammu, Jharkhand and Bihar, to capture growth opportunities in ex-UP high-growth print markets, will enable the company to lead other competitors, driving robust growth in ad revenue. DBCL’s presence across multiples languages, geographies and media platforms differentiates it from competition.

Radio business DBCL has presence in the radio business with 17 stations in seven states (under the brand name ‘My FM’). This segment contributed ~3.5% to the top line in FY10. For phase III licenses, the company is well prepared to bid for tier II and tier III cities, where it already has print business operations. Considering that phase III bidding will happen only for classified C and D cities, capex and one-time license fees would be low. We expect the radio segment to grow at 22% CAGR over FY10-12.

Strong financials to support growth DBCL is self sufficient for expansion into new regions. It has already undertaken capex of Rs3.5bn over the past two years for upgrade and addition of printing facilities. Strong operating cash flow would ensure steady free cash flow from the business. Over the next two years, we expect capex requirements of ~Rs1bn for new launches (Bihar, Jharkhand and Jammu) and new printing centers in existing territories, with an additional Rs100mn in annual maintenance capex. After factoring in capex requirements of Rs1bn over the next two years, we expect healthy ROE of 27%, ROCE of 35% and FCF of Rs2.4bn by FY12. With revenue CAGR of 16% over FY10-12E, we expect DBCL to maintain its operating margins at 32% and net margins at 19%.

Valuations and Recommendation DBCL’s strategic penetration into high-growth markets, optimum exploitation (its ability to leverage its readership base well) of readership base and a uniformly distributed business model make us positive about the company’s growth prospects. Attractive growth opportunities in Hindi/regional print dailies make a strong case for DBCL, as the business model is skewed towards ad revenue (76% of total revenue). At CMP, the stock is trading at 17x FY12E earnings. We initiate coverage with 'BUY' with 12 month target price of Rs315 (21xFY12E EPS).

Company Snapshot DB Corp Limited (DBCL) is one of the most diversified print media groups with presence across the high-growth Hind belt (ex-UP), multi-language dailies, and other verticals of the media business such as radio. The company publishes seven newspapers with 51 editions in three different languages (Hindi, Gujarati and English) across 13 states. It is the secondlargest read newspaper with combined readership of 17.2 mn for Dainik Bhasker, Divya Bhaskar and Saurashtra Samachar. It enjoys leadership position in all its major markets.