DB Corp: Steaming ahead or floundering?

 

If DB Corp can be likened to a vessel from the pre steamship era, the first nine months of fiscal 2017-18 seems like a case of strong headwinds stalling its serene progress of the earlier years. But a more nuanced reading might well suggest it to be a case of the company trimming its sails to take better advantage of the winds blowing against it while still moving ahead at the most optimum speed possible, given the conditions.

Over the years, DB Corp had gained from an increasingly prosperous population’s appetite for news purveyed to them in Hindi and other vernacular languages of the Northern and the Western parts of India. The company’s operational revenues from a combination of circulation and advertising incomes grew at a comfortable pace. From a figure of Rs 672.4 crore in 2006-07, total revenues grew to an impressive Rs 2,275 crore in 2016-17, thus registering a respectable 13% annual growth, on a compounded basis.

There was more than a proportionate growth in profit after tax too, which grew at an annual rate of 20%. The figure improved from Rs 59.8 crore to Rs 377.31 crore during this same period.

But the performance in the first nine months of 2017-18 suggests that the era of consistent, year after year growth, has been halted. Profits after tax, had slipped to Rs 267.03 crore in the first nine months of 2017-18 from Rs 313.14 crore in the same period of fiscal 2016-17.

It would now require a substantial managerial effort to scale at least the level of financial performance of the previous year, leave alone improve upon it. This is notwithstanding the fact that the fourth quarter of 2016-17 was a difficult one financially for most companies, including DB Corp as the full impact of demonetization of high denomination currency notes announced by the Government in November 2016 was felt in that quarter.

 

Media companies, long weaned on a liberal dose of advertising income to keep their operations going, had seen the income on this count take a big hit in the immediate months that followed. By common consensus, the adverse effects of demonetization have now fully dissipated themselves and the current conditions represent an improvement in economic fundamentals.

In the event, one might well see a more robust improvement in business fortunes and DB Corp could well be on its way to registering a growth in profits that wipes out the earlier shortfall. But whether the company is able to do so or not would depend a great deal on how successful it is in keeping a lid on newsprint and wage costs.

 

The pressure points

From a closer reading of the financial performance of the first three quarters of 2017-18, a few things stand out. The company has been under some pressure on all its principal cost elements that eventually took a toll on the final figure of net profits.

The consumption of newsprint as a percentage of operating revenues has gone up marginally from 29% in 2016-17 to 31% in 2017-18 (nine months).Similarly, on other cost parameters too, numbers are marginally worse than the same time of the previous year. Thus staff costs are now 19% of operating revenues as against 18% this time last year and ‘other expenses’, the third major component of costs, is now 24% (22%) of operating revenues.

When these cost parameters suffered an adverse five per cent differential compared to the same period of the previous year, the outcome was a nearly Rs 80 crore dip in operating surplus which got reflected in the decline in net profits as seen in the first nine months of 2017-18.

But this apparent reality of a difficult first nine months in 2017-18 masks a larger truth - one that is true of almost all companies and more so that of companies in the media space, heavily reliant as they are on advertising incomes - a notoriously volatile source of income stream: an exceptionally good year is always a harder act to follow.

The year 2016-17 was an exceptionally good one for DB Corp. The company performed very well in the first three quarters of that year (April 2015 to December 2016). So much so that that even a muted performance in the much publicized difficult fourth quarterof 2016-17 (full impact of demonetization announced in November 2016) could not fully erase the positive impact of the performance in the period leading up to that.

 

In the circumstances, the performance of 2017-18 for the same period must necessarily pale in comparison. Just to put the 2016-17 performance in perspective, between 2011-12 and 2015-16, the company’s profit after tax grew from Rs 202.1 crore to Rs 296.6 crore, registering an average rate of growth of 10% per annum.

But in the nine months ending December 2016 (first three quarters of 2016-17), net profit shot up to Rs 313 crore. Not only did it comfortably exceed the full 12 month profits of 2015-16 (Rs 296.60 crore), on a comparative basis the performance bettered the profit record of nine months of fiscal 2015-16 (April-December) by more than a third, at 34%.

On the face of it, therefore, the latest nine months’ performance ought not to be seen as casting any doubt over the wisdom of the strategic choices that the company has made. And make no mistake, the company has made some big strategic bets in recent times. It has in the recent past, expanded its flagship offering Dainik Bhaskar significantly in the Bihar, Gujarat and Punjab region and launched a newspaper in English ‘DB Post’ in Bhopal.

It is early days yet to conclude if these and other strategic initiatives are going to pay off. But a more relevant question would be this: Is there anything in the performance of the recent past that reinforces a belief that the company is proceeding in the right direction?

 

Is the basic direction sound?

As it happens, the decline in net profits in the first nine months of 2017-18 notwithstanding, the company could legitimately feel satisfied with the fact that certain key matrices of business performance have not entirely been thrown out of kilter in its pursuit of long term growth.

 

A key matric of performance is the mix between circulation revenue and advertising income. It is axiomatic that for a company in the print media business striking a proper balance between circulation revenues and advertising income is a key to its long term survival and growth.

From a managerial perspective, a media business (be it print or broadcast or digital) can be seen as a unique product in that it is consumed by two customers (the reader/viewer who buys it for the news and commercial messages that it carries and the advertiser who buys space/time slots for his marketing communication).

Of even greater significance is the fact that the consumption of this product (newspaper, for instance) by one is not at the expense of the other. It would be tempting to see the ‘reader’ as the sole consumer and the money that the advertiser brings, as an added bonus. The fact that the reader/viewer tends to be more loyal in his consuming habits as opposed to the advertiser who tends to be fickle in his value perceptions about a media product, makes the case for seeing it as a product consumed principally by the former just that bit stronger.

 

Balancing the advertiser with the reader

But historically, media businesses in general and newspapers in particular have not operated on those lines. They have tended to see the advertiser and the reader as two distinct consumers of one and the same product who simply happen to perceive different value propositions in consuming it. Consequently, their operations have invariably aimed to strike a balance between the needs of both sets of consumers. That said, there can be no rigid formula for determining what the right mix ought to be.

But this much can be said with certainty. Any trend which tends to emphasise the interests of one over that of the other is not a happy situation for a media company. The excessive reliance on advertising income over circulation revenue is fraught with risks to the long term viability of the media business.

On the other hand, an increasingly larger share of circulation revenue might just suggest that the business is not monetizing the opportunities presented by a wider circulation base adequately enough. DB Corp’s record on this count in the totality of all the available evidence suggests that it is the latter.

The proportion of circulation revenue to that of advertising income in 2014-15, stood at 25% with the company notching up Rs 375 crore in circulation revenue against an advertising income of Rs 1516 crore that year. This ratio moved up to 29% in the following year (Rs 435 crore and Rs 1481 crore) and further still to 30% in 2016-17. In the nine months ending December 2017, the company’s circulation revenue was 40% of the advertising income that it had registered.

On the face of it, therefore, it would appear that the company is strengthening its circulation revenue base. This perception is reinforced by the fact that such revenues as a percentage of newsprint consumption  has been consistently rising to a point that today an average reader of one of DB Corp’s many print offerings is almost entirely defraying the cost of the newsprint paper on which news is printed.

 

In 2014-15, circulation revenue was 58% of the newsprint consumption cost. It spent Rs 647.9 crore in newsprint consumption as against a circulation revenue of Rs 375.5 crore that year. This proportion went up progressively in later years. So much so, in the first nine months of fiscal 2017-18, a circulation revenue of Rs 505 crore represented roughly 94% of the total expenditure on newsprint consumption.

 

Protecting the cover price

The growth in circulation has thus not come at the cost of sacrificing the cover price. Indeed the volume growth has been reinforced by hikes in cover prices as the rising proportion of circulation revenues to newsprint consumption indicates. This is an important parameter of a newspaper’s financial viability that is far superior to anything captured by any mere growth in circulation numbers.

It is well recognized that it is possible to register impressive growth in circulation numbers merely by the expedient resort to a dramatic reduction in the cover price. Publications have been known to do that especially when they foray into virgin markets. But it is far from certain that as a growth strategy it is efficacious even in the short run, in reaching the intended audience leave alone retaining them for the longer term.

But there can be no better testimony to the ‘value-for-money’ proposition of a newspaper’s editorial offering and the socio- economic profile of its readership that a rising trend of a cover price demonstrates, especially when supplemented with documented proof of an increase in the circulation numbers. From that perspective, a ratio of circulation revenue to the newsprint consumption cost is not only a testament to the reader-connect that a newspaper enjoys but is also a pointer to a certain level of affluence of the target audience.

But it is one thing to have a large base of readership with a demonstrated capacity for superior purchasing power as evidenced by a rising proportion of circulation revenue to newsprint consumption cost. It is quite another thing to see it also reflected in advertising income exploiting it to the hilt.

A stagnant or worse still, a rising ratio on this count (ratio of newsprint costs to advertising income) implies a case of lost business opportunity for the company. On the other hand, a declining ratio suggests that the company is able to more successfully market its reader audience to a community of advertisers.

Moreover a superior performance in generating higher advertising income without compromising on yield rates must also mean that newsprint consumption costs must bear a lower proportion to advertising income. DB Corp’s performance on this count has been a mixed bag.

 

A lost business opportunity?

Newsprint consumption accounted for 47% of advertising income in 2014-15. The company was able to maintain this ratio at the same level in the subsequent two years (2015-16 and 2016-17). It deteriorated somewhat to 48% in the nine months of fiscal 2017-18, testifying perhaps to the difficult business conditions that the company encountered in the current financial year.

Given that this ratio has practically remained constant in recent years, it is fair to say that the vertical (higher circulation in legacy markets) and horizontal expansion (new geographies and products) in readership has not as yet translated into higher operational advertising revenues for the company.

In that sense, the performance of recent years is a case of lost business opportunity. Of course it could be argued that strategic choices made (investments in men and material) in the past take a longer time to fructify and that the performance of the last three and three-quarter years is too short a time to pass any judgment. That may well be the case. The future may tell a different story.

 

But this much can be said at this point in time: time is running out for strategic initiatives (vertical and horizontal expansion) undertaken by the company to manifest themselves in the form of an even more robust financial performance than has been witnessed thus far.

 

Turning around the radio business

Like print, radio too had been a difficult business for DB Corp in the first nine months of 2017-18. It reported a profit before interest and tax of Rs 15.2 crore during this period as against Rs 38 crore for the whole of 2016-17. While there is still another three months left for the financial year to 2017-18 to come to a close, it is difficult to see how the company is going to turn things around in the time left to scale up to the level of the previous year’s financial performance, leave alone improve upon it.

Having said that, it is still a profitable business though not quite on the scale of print operations. The strategic rationale for DB Corp to be involved in the radio business is still intact.

Many companies in print and broadcast space have viewed radio as a logical extension of their presence in the media space and successfully either bid for radio licences or taken over companies which held such rights. DB Corp has been no exception. The company began its foray into the FM Radio business with a controlling interest in the company, Synergy Media Entertainment which got integrated into the parent company in the later years.

The year 2006-07, the first year of radio operations, saw the business registering a modest revenue of a little less than Rs 2 crore in 2006-07. But it grew in size with the acquisition of more radio frequencies in later years. Today, it is present across 30 towns/cities in seven states. The revenue from this business in FY 2017-18 (first three quarters) was Rs 99.7 crore and registered a profit before interest and tax of Rs 15.2 crore.

While the turnover in the first nine months of fiscal 2017-18 is comparable to that of the previous year (2016-17) at Rs 127.2 crore, there has been a sharp decline in the figure of profit before interest and tax which stood at Rs 38.0 crore in the previous year. The company claims it is number 1 in markets across Madhya Pradesh, Chhattisgarh and Rajasthan. It aims to repeat this feat elsewhere too such as in Maharashtra, Gujarat and so on, where it has a presence.

While a dramatic turnaround in profit performance would be welcome, even if it merely chugs along in the future at the same rate as it has been in the first three quarters of 2017-18, it wouldn’t be a bad proposition either. At an investment of Rs 175 crore as of end December 2017 in the profits from the radio business such as it is, is something that the company can live with.

 

The digital drain

But the digital business is a different proposition altogether. While not as capital intensive as radio business and certainly requiring far less capital than the print business, digital has certainly become a big drain on the resources of the company.

Losses have been mounting over the years. From a figure of Rs 7.4 crore operational losses (before interest) it has gone up to Rs 27.5 crore in 2015-16 before coming down slightly in 2016-17 at a reported figure of loss of Rs 24.9 crore. The first nine months of 2017-18 saw the business registering a loss of Rs 19.4 crore which on an annualized basis, works out to Rs 26 crore. If there is a silver lining at all in the existing state of affairs in the internet business, it is that the losses appear to have been capped around Rs 25 crore per annum. At least that seems to be the evidence from the financial results of the last two years or so.

On the other hand, there is as yet no evidence that the digital business has turned the corner and is on its way to registering profits. The company runs news websites in Hindi and Gujarati which they claim to be number 1 (based on Comscore data as of November 2017) in their respective languages. In addition they also operate a financial website, besides multilingual sites devoted to fashion and lifestyle.  The company also claims that its digital platform attracted 79.1 million unique visitors and 1.3 billion page views as of December 2017. 

To be fair to the management of the company, they face the same predicament with regard to a digital presence, as many others in the media business do. One cannot afford to be seen as not interested in a digital presence. Yet there is the ever present reality of losses and the absence of a viable business model for digital content.

For all the growth in digital advertising, it is only some platforms (Google, Facebook, Twitter etc.) that seem to be garnering all the revenues. The alluring prospect of getting readers to pay for content has remained just that - an alluring prospect rather than a distinct and current reality. 

 

Missing: Uttar Pradesh

A discussion on DB Corp’s operations would not be complete without a reference to the company’s continued absence in Uttar Pradesh, arguably the biggest market for a Hindi language newspaper. The company is clearly under a legal constraint that prevents it from operating in any part of western Uttar Pradesh. It is far from certain whether this restriction extends to the whole state.

 

It is pertinent to note that the company’s Director, Girish Agarwaal, while answering a question at a conference of investment research analysts recently, did mention that the company has no plans to enter the Uttar Pradesh market. Is that only for the present or for all time to come?

There are no clues as to what the management is thinking at this point. A decision to enter Uttar Pradesh is fraught with huge strategic implications. With two well entrenched players and a third one who has been around for a long time, the company must be prepared for a financially bruising war for market share should it decide to do so, assuming that the legal hurdles such as there are, are overcome.

At the same time, the state could well be on the cusp of a dramatic turnaround in economic fortunes and not being present in such a lucrative market might prove to be a handicap for the company.

Does the Hindi language newspaper market of the states where the company has the freedom to operate offer enough scope for growth in profits in the future? Does the company want to explore business opportunities in publication in other languages other than Hindi? They have no doubt made a beginning with the launch of newspapers in Gujarati and Marathi some years ago. Is that the route for the future? There are no easy answers.

But for the ordinary investor, they assume relevance. For those who had invested in the shares of the company back in December 2009 when the company went public at Rs 212 per share, there hasn’t been much joy to be had with the share currently trading at Rs 306 (closing price on March 28, 2018). The share has generated a mere five per cent return on a compounded basis.

At the time of the IPO, more than 58,000 retail investors reposed faith in the future prospects of the company. That has dwindled in the years since then. But as of December 2017, the retail investor community is still 17,000 strong. They would certainly like some more clarity on what the future holds for the company.  

 

* The author is former editor of the Hindu Business Line.