The Hindu Business Line : HT Media: Invest at cut-off

AN INVESTMENT can be considered in HT Media, as it will be the premier print-media player in the listed space and has the potential to deliver attractive gains over the long term. Investors with an appetite for risk can participate in the initial public offering in the Rs 445-530 price band. HT Media publishes two daily newspapers — Hindustan Times in English and Hindustan in Hindi — apart from a couple of magazines.

Bidding at the cut off price will be the best option, as that may improve the chances of securing an allotment; this would require payment of Rs 530 per share upfront. If the final price is fixed at a lower level, the excess will be refunded. The principal risks to our recommendation are a failure of the Mumbai edition of Hindustan Times to make a mark, over the long term, and a spurt in newsprint cost in the near term.

Our recommendation is based on the following factors:

Pricing and valuation: The earnings growth over the next two-three years may not justify the pricing on offer, unless the Mumbai edition of Hindustan Times rakes in profits, or, at least breaks even within a couple of years. That seems a daunting prospect as of now.

But we believe the key drivers of the stock price would be the growth in earnings of the non-Mumbai operation, which is an emerging story, and the circulation numbers that Hindustan Times notches in Mumbai. The price-earnings multiple will acquire a critical role only over the longer term.

We would be more comfortable had the final pricing been closer to the lower end of the band, as it would provide investors some cushion. It could also lead to a higher degree of interest in the post-listing period which would augur well for investors in the IPO.

This would be important in the wake of risks imposed by HT Media's foray into the Mumbai market and aggressive pricing of the offer, which is partly attributable to the buoyant state of the equity market.

Leeway for FIIs: The stock is also likely to attract support from institutional investors as it offers quality exposure in the print media space. Investment through the FDI (foreign direct investment) route and by FIIs (foreign institutional investors) in print media stocks is capped at 26 per cent. Two strategic financial investors — Henderson group and Citigroup — would hold about 15 per cent of the post-offer equity in HT Media. The FIIs can buy about 10 per cent of the equity in the IPO and, subsequently, trade within the 26 per cent limit. The FII factor would ensure that the stock remains richly valued.

The Mumbai angle: We also take a positive view of HT Media's foray into Mumbai where it launched an edition of Hindustan Times earlier this month. HT Media is the first player with the financial muscle to battle for a share of the Mumbai market.

The entry of Daily News & Analysis — a Zee-Dainik Bhaskar group newspaper — should see intense efforts to expand the Mumbai market. The entry of DNA may not be a negative for Hindustan Times. As two players with financial backing challenge the supremacy of Times of India in Mumbai, they have a greater chance of succeeding in creating visibility and interest among readers for an alternative.

Even if Times of India does not lower prices, the attractive subscription offers from the new entrants may bring them a significant number of readers leading to an expansion of the Mumbai market.

Such a market expansion happened in New Delhi over the past decade, when Hindustan Times and Times of India battled it out. Though in Mumbai Times of India's leadership in circulation is unlikely to be altered, the expansion of the readership may help Hindustan Times pick up a respectable share of the most lucrative advertisement market in the country.

Yet, the payoffs are likely to emerge only over three to five years and, till then the Mumbai venture could act as a drag on HT Media's per share earnings. We expect the robust growth in profitability from the non-Mumbai editions of Hindustan Times and Hindustan to absorb the losses from the Mumbai operations in the initial years.

An emerging story: There is scope for significant expansion in operating margins and earnings of the non-Mumbai operations, as the scars of the bruising battle with Times of India for market share in Delhi are likely to be erased over the next couple of years.

Hindustan Times has managed to come through a difficult period with a substantial expansion in circulation for the New Delhi edition; its circulation has stabilised at the one-million-plus level since last year. This has led to a greater clout with advertisers. The hike in the advertisement rates in May and the rise in average daily page levels are also likely to improve profitability.

As the circulation of Hindustan (the Hindi daily) is on the verge of crossing the million threshold, its contribution to revenues is also likely to improve, as it may be able to command higher rates from advertisers.

Price-cuts that hurt profitability — an integral part of its battle with Times of India in Delhi — appear to be a story of the past.

In March, Hindustan Times and Times of India raised prices by about 30 per cent to Rs 2. In the wake of this move, the discount wars are also likely to abate. The benefits would be reflected in the financials from FY-06 onwards and will be largely earnings-accretive.

In New Delhi, even if the growth in circulation declines to single-digit, it would be on a high base after a five-year period when the annual growth was about 10 per cent.

Over three-five years, even such a modest rate of increase in New Delhi, coupled with robust growth in places such as Punjab, Chandigarh, Haryana and Himachal Pradesh, could drive revenue growth and enhance clout with advertisers.

The commissioning of a contemporary printing facility near New Delhi is also likely to aid profitability, as HT Media would be able to publish editions with more colour pages and improved print quality.

As tariffs are higher for colour advertisements, this should also expand profitability levels. The benefits of the new facility are likely to be reflected in earnings only over the next couple of years.

With an improvement in earnings and cash flows from FY-05 and a cash pile of about Rs 400 crore after the offer, HT Media is also well-placed to cut its sizeable debt burden.

Hindustan Times' coverage of sports, lifestyle, movies and city life is fairly comprehensive and impressive; this coupled with an attractive layout of pages are facets that should enable it connect with readers in the 18-25 age group; this would be a crucial positive from a long-term perspective and a significant factor in luring readers in the Mumbai market.

The offer details

HT MEDIA is offering 46.4 lakh shares. Thirty per cent is earmarked for investors who apply for shares with a value of less than one lakh. The offer would raise Rs 200-250 crore, depending on the pricing. Its proceeds are largely intended to bankroll its Mumbai foray. At the lower end of the price band of Rs 445-530, the stock would be valued at a price-earnings multiple of 40 times its likely earnings in FY-06.

The Henderson group is making an offer for sale of 23.5-lakh shares that would fetch it between Rs 100 crore an Rs 125 crore. The book running lead manager is Kotak Mahindra Capital Company. Bidding in the book-built offer starts on August 4 and would end on August 10. The offer document is available on the Web sites of SEBI (www.sebi.gov.in) and Kotak Mahindra Capital Company (www.kmcc.co.in).