Jagran Prakashan

Improving advertising yields, tight management of newsprint costs, maturing editions that have begun to contribute to profits and strides in new initiatives such as event management and outdoor advertising, are factors behind the strong FY-07 performance of Jagran Prakashan, publisher of the leading Hindi daily, Dainik Jagran. The Rs 622-crore company has more than doubled its profits to about Rs 75 crore.

Prospects remain bright for the newspaper, which now runs 31 editions across 11 States in North India and has a stronghold in Uttar Pradesh. At the current market price of Rs 472, however, valuations are a tad on the high side at 37 times the FY-07 per-share earnings, offering modest scope for appreciation.

The stock is at a modest premium to Deccan Chronicle Holdings and at a 20 per cent discount to HT Media.

The company, however, offers a good exposure to the language print market in a manner akin to Sun TV in television, and is suitable for investors with a two/three-year perspective.

Investors can consider picking up the stock on declines linked to broad-market weakness.

Improving ad yields

Dainik Jagran derives about 65 per cent of its revenues from advertising, that take up about 40 per cent of the total space. Advertising yields for language newspapers tend to be at a steep discount to that enjoyed by English newspaper s, which cater to a more premium target group. However, the realisations are set to improve as marketers increasingly use language papers to reach the under-penetrated small towns and rural markets.

We believe that Jagran is well-placed to capitalise on this trend given its penetration in the northern States. According to a recent NRS survey, it has a readership of 21 million, making it the most widely read daily in India, but is closely followed by Dainik Bhaskar. While the market is competitive, we expect yields to improve for Jagran over the next year.

A key driver in the immediate term will be the increasing share of colour advertisements in the total advertisements space, a function of both increasing demand and Jagran's newly expanded colour printing capacities. Colour ad vertisements now take up 35 per cent of its ad space; the management sees the share going up to 50 per cent over the next two years. Jagran's colour advertisement tariffs are at an average 50-70 per cent higher than its black and white advertisements, although the costs of printing colour pages are not commensurately higher.

Jagran has initiated another advertisement-rate hike this year, which will also boost revenue growth. If the trend in language newspapers advertising does continue, there will be sufficient room to sustain an increase in tariffs.

Third, Jagran has a high share of local advertisers in its overall clientele, which bodes well for profitability since the yield per copy on all-edition advertisements are typically lower. We also see an accelerating trend in local advertising on the back of higher penetration of Tier-II and Tier-III cities by retailers who tend to localise their advertising and promotional activities.

Stable to higher margins

Jagran's operating margins are at about 20 per cent, a sharp improvement from 15 per cent a year earlier. A combination of improving advertisement yields, lower newsprint prices and maturing editions have driven margin growth. Wi th newsprint prices cooling off from their highs and a stronger rupee, there is likely to be less pressure on operating margins on the raw material front.

Jagran's expansion into newer markets between 2000 and 2006, when it launched about 15 editions, had depressed profitability. Some of these editions, now in the third or fourth year of operations, have begun to mature and contrib ute to profits. Eight-nine editions continue to make losses, which include those recently launched at Indore and Amritsar. Jagran's aggressive entry into Punjab, where it has taken on Dainik Bhaskar, has also dented profitability. Over the next couple of years, these editions could begin to contribute to profits. However, a significant jump in operating margins is unlikely in the near future as Jagran embarks on some new initiatives.

Testing new waters

A significant part of the proceeds of its Initial Public Offering last year went towards funding its initiatives in event management and outdoor advertising. The new forays have managed to record revenues of Rs 30 crore in 2006-07 and the businesses are expected to break even over the next year.

Jagran has forayed into these businesses as a way of reducing its dependence on circulation revenues, and its associated demand for newsprint, and also sees them as providing comprehensive advertising solutions to its vast client base. It, however, does not see this business contributing more than 10 per cent to its overall revenues, which limits the impact on profitability.

On the other hand, poor acceptance of its new bi-lingual daily newspaper, I-Next, and English infotainment weekly, City Plus, could be a strain on margins. Targeting English readers in its existing markets does se em to be high on the agenda for Jagran, as it aims to attract premium advertising. I-Next, which carries a mix of articles written in English and Hindi, has been launched in Jagran's home markets of Kanpur and Lucknow; about five more are expected to be launched in mini-metros this year.

Jagran has also launched six editions of City Plus, which is a free newspaper that gets all of its revenues from advertising. It plans to launch eight more editions this year and has come out with the English version of its annual ge neral knowledge publication Jagran Varshiki.

Upside triggers to watch out for would be the approval to publish the facsimilie edition of The Independent, the success of the new Internet portal to be launched in association with Yahoo! and any acquisition of smaller regional players.