Jagran prakashan

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102

Sometime in mid 2016, the promoters merged their radio business (Shri Puran Multimedia Limited) and MBL (Music Broadcast Limited) into MBL. In return they got shares in MBL. The complete details are available here. (Refer to the site http://jplcorp.in/new/pdf/JagranPostalBallot_final_pages.pdf).
Page 48 of the E&Y valuation report values MBL at 640.65 crores or Rs. 152.8 per share.

Fast Forward to Mar 2017. MBL IPO Price 333. That is a cool 117% return for the promoter in less than a year. What changed in the business? Absolutely nothing.

Corporate Governance? Big 4 audit firm? Hehe…

Disc: I hold Jagran Prakashan inspite of this as part of a diversified portfolio.

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103

The valuation of MBL is done in October 15 and excludes the radio business of SPML. It also excludes new stations which it got under Phase III. Overall market has also gone up. As a general rule all IPOs are at least a little bit overvalued, and MBL is no exception. It is difficult to argue that E&Y undervalued the company while the IPO price is fair. Valuation is subjective, and a consultant will not factor in a “possible future IPO 18 months hence” into his current valuation. There is no governance issue in this. Overall transaction seems favourable for Jagran shareholders.
Disc: Invested

104

a. Shares of MBL were given in lieu of shares of SPML to the promoters as per the E&Y fair valuation of SPML and MBL. Therefore the valuation cannot increase after the merger. In other words the value of MBL + SPML would not have increased after the merger as equal value (by way of shares of MBL) was given as consideration to the promoters. Therefore SPML valuation is also built in here.
b. Jagran Prakashan had to incur 262 crore for Phase 3 auction + migration fee (http://content.icicidirect.com/mailimages/IDirect_Radio_SectorUpdate_Sep15.pdf - Page 3), Even assuming that the entire cost has already been incurred by Jagran (which I dont think is true), this is around Rs. 8.45 per share. I seriously do not want to value this at upwards of Rs.100 !!
c. 117% increase is not a bit overvalued in my opinion, it is overvalued by a wide margin. Market has certainly not gone up 117%
d. Why is it difficult to see that E&Y undervalued the company? You have provided no data to disprove this. I am not sure if your arguments lead to the conclusion that there is no governance issue here (Apologies if I sound rude here, but I am only challenging your arguments and conclusion, no offense meant). I agree there is benefit to the Jagran shareholders but I would not touch MBL at the moment.

In summary I believe it is one thing to be optimistic about a business (which I am as regards Jagran) but completely another not to take note of governance lapses by the promoters or gloss over them as if nothing happened. Too many of such lapses should well indicate a sell.

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105

It may even be overvalued by a wide margin. I am not justifying the valuation. My point was that today’s IPO price does not determine the correctness of the valuation exercise done at that time. We need to see the valuation methodology and calculations to judge that.

106

While valuations can be different in public markets at different time periods depending on a variety of factors which I dont feel the need to elaborate upon. Can you point out how is the current valuation adverse to the interests of minority shareholders (in case previous valuation was right) or how was the past valuation adverse to the interests of minority shareholders (in case current valuation is right)?? Basically I dont understand what do you mean by governance issues?

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Hi Sarvesh,

If 333 is the right price, then JPL the company has given more than double of its shares in MBL than is necessary to the promoters. This will be a governance issue.

If 152.8 is the right price, then one should not subscribe to the MBL IPO (which was the question in the first place). But that is no governance issue, in fact I like it as a minority shareholder of JPL. But remember that the IPO includes an offer for sale of 2.66 million personal shares of the promoters in MBL. And they got 3.1 million shares of MBL in exchange for SPML. Essentially, that would then mean that the promoters have sold SPML to get shares of MBL at 152.8 per share and then in turn are selling shares in MBL through the IPO at 333.

I do agree with you that valuations can differ at different points in time. Perhaps all this was just coincidence. However I would like to believe that promoters who are very keen on corporate governance should have done both transactions at nearly the same price (290 - 333), especially when they are happening so close together. Therefore I will reduce some marks from JPL for corporate governance. Also IMO, the management is very capable and is not totally unfair to the minority shareholders. So I continue to hold this stock as part of a diversified portfolio.

Regards
Shivram.

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108

I agree that promoters have timed their purchase of MBL shares and its sale of MBL shares very well. I respect the depth in which you have read the issue documents.

I am just feeling that can the valuations especially when one is a private transaction where sanity prevails a bit more while other is IPO valuation which is dependent on current demand vs supply of IPO shares which is very favorably placed is something which is not even completely under the hands of promoters. They are utilizing it for their benefit but the existing minority shareholders are benefiting as well. The issue of whether a new investor should enter MBL at this price is completely different.

Now, while the current price is punchy, should the management have acted much more aggressive in pricing a private transaction in anticipation of extremely bullish IPO markets in a year’s time is something I am not completely sure of. However given the current high price, an extremely fair management might have found some way to make good of loss in some returns to minority shareholders. But expecting that is a bit too much in India I guess.

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110

Hi,
My understanding from your reads are this that you are considering the same promoter for both Jagran Prakashan and SPML. I think that is the core point for clarification and needed to be delved into the history of Jagran group a little bit. I promise to keep it short. Jagran group was started by noted journalist and nationalist Puran Chandra Gupta (PC Gupta). PC Gupta along with his 4 brothers - Gyan Chandra Gupta, Jay Chandra Gupta and KC Gupta were the co-owners of the trademark of Jagran Group. PC Gupta’s family owns 63% in the listed Jagran Prakashan ltd. (JPL). After Puran Chandra Gupta, Narendra Mohan Gupta (his eldest son) took the reigns of the print business and under his leadership JPL became the largest print daily. His eldest son is Sanjay Gupta who is the current CEO of JPL. PC Gupta’s second son is Mahendra Mohan Gupta, whose eldest son is Shailesh Gupta (the current independent director of JPL). PC Gupta’s 3, 4 and 5th sons viz. Dhirendra Mohan Gupta, Devendra Mohan Gupta and Shailendra Gupta and serving directors of JPL and their base is Uttar Pradesh

Now, PC Gupta’s younger brother Gyan Chandra Gupta (GC Gupta) was second after PC Gupta. GC Gupta’s family and PC Gupta’s family have always had a discord between them. So much so, that GC Gupta’s family (elder son Rajendra Kumar gupta, whose daughter Sapna Gupta and son Sanjiv Mohan Gupta) have their base of operations in Madhya Pradesh. Because Jagran Group was formed by 4 brother together (as mentioned above), the other brother used Jagran Group’s name but had separate businesses. As per the deal between the two different groups of Gupta family, The GC GUpta family does not hold the right of Jagran name in UP and PC Gupta family does not have a right of Jagran name in MP. Which is the reason now you would appreciate as to why JPL had to buy Nai Dunia in MP (ex. Bhopal), instead of having a deal with GC Gupta family to take over Dainik Jagran paper in MP. Yes you read it correct, there is Dainik Jagran present in MP but it is not a part of JPL.

Re-iterating, broadly 2 companies were created - (1) Jagran Media Network, the holding company of Jagran Prakashan Ltd. (listed) in which PC Gupta family owns 63% and Blackstone holds 12.83% of post issue capital of Jagran Media Network. and (2) Jagran Publication Pvt. Ltd. (JPPL). 15% stake of JPPL is held by Sanjiv Mohan Gupta, 60% total is held by GC Gupta family (incl. Sanjiv Mohan Gupta’s stake) and some 10lac shares are held by PC Gupta family. JPPL holds the publishing rights of Dainik Jagran (DJ) in Bhopal and Rewa in MP.

AFter years of legal disputes between the family, in March 2005 a kind of peace agreement was signed b/w JPL and JPPL. As per the agreement and I quote - “JPPL (GC Gupta family) will not undertake publication of any newspaper with the name Dainik Jagran or any other similar name or any combination thereof from any place including Meerut and Dehradun and any newspaper in Hindi from the states of UP, Uttaranchal, Haryana, Bihar, Jharkhan and Punjab.”

The GC Gupta family are promoters of following listed companies - Trilogic Digital Media (owns Jagran Music), Jagran Production, Luminaire Technologies, Bharat Zinc and a pvt. company called Jagran Social Welfare Society. PC Gupta’s family only owns JPL (listed) and its associate companies. Well the fate of most of these companies can be gauged v.easily on your own.

So, the point of all this story is that - just because there is GUpta attached to it, doesn’t mean they are the same promoters. Same promoter group YES, but not same promoter. Deal of acquiring SPML from GC Gupta family should not be viewed in context to MBL’s IPO. Look at it as a seperate M&A deal, the MBL’s IPO may be a part of the deaal acquisition price. A risk if you may for both GC Gupta Family as well as PC Gupta family as No 1 can predict the success of an IPO. With acquisition of Radio Mantra, PC Gupta family gets radio presence in MP (complements with Nai Dunia) without paying an annual license fees to the government for 15 years (Phase III licenses are for 15 years). GC Gupta family bets on successful listing of MBL IPO, make money and do not trouble JPL. The way I see it, it is a sweet deal for JPL’s shareholders too. MBL is a strong entity and can leverage its brand name to make Radio Mantra extremely profitable.

Finally to close all this above opinion of mine. On October 4, 2016- jPL posted a scheme of arrangement notice on BSE. Link below
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/B41E4C28_2EEF_4DDA_9011_562DC6619D1B_164122.pdf
As per this arrangement (you may need to make a flow chart to understand the arrangement better), you will realise that JPL was cleaning up its structure of holdings for its various subsidiaries and making MBL a stronger and more consolidated subsidiary. My sense at that point was that a company will do this kind of re-allignment only if : (1) it needs to sell off its subsidiary. and believe it or not, there were market rumors supporting this theory (http://www.vccircle.com/news/media-entertainment/2016/04/07/exclusive-jagran-prakashan-shed-stake-radio-business) - this idea was fortunately shot down by the promoter on questioning and (2) seperately list its subsidiary. This was a more probable conclusion considering that Mr. R K Agarwal in all analyst conversation was requesting an SOTP basis valuation for JPL’s radio business. and was disgruntled by the fact that radio was not getting its due.

Hope it clears a little bit of your doubt. I used a round about way to tackle your problem instead of hitting the nail directly.

Oh yes, whether 265cr was spent by JPL. Sir, have no doubts, most of this has been spent. You may verify from FY2016 annual report (reflects in the capex of the balance sheet) as well as the capex calculated from BS numbers given in 1HFY17 financials. About 15-25cr of the spends are only left to be spent for the radio stations acquired/renewed in Phase III

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112

Shashi Tharoor on India’s print media -

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113

A Rs.300 crore buyback last year and another Rs.300 crore buyback this year – an excellent step rarely seen among Indian promoters. Almost the entire profits for the year are being returned to shareholders (TTM PAT is around Rs.325 crore). A payout ratio of 90 – 100 %, so to speak. One cannot ask for more. After the current buyback, the equity base will be 10% lower than what it was a year and a half ago, boosting all future EPSes. Even though the business has faced headwinds for growth, the management attitude seems in the right place.

Even the business may pick up soon. The disruption of demonetization & GST is behind us and corporate profits are improving. This should improve ad budgets. With 2019 elections approaching, government advertising will increase. Yogi government on coming to power last year had ordered sharp spending cuts which hit state government advertising. The base effect of this will now wear off. The latest IRS 2017 survey results were also positive. On the whole, things should look much better in the coming year.

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114

Jagran completes it’s 2018 buyback with a mere 30% Acceptance ratio.This buyback turned out to be collateral damage of sorts,it was solely responsible for crashing of share prices of Jagran from ~170 to ~125 now.

I say Crashing because Jagran anyways didn’t participated in the uptrend rally of the broader market, so had no compelling reasons for this fall.Existing long term shareholders lost as even if they applied they are net net in loss as to prior to buyback.

People who eneterd just for Buyback also lost, brokers etc who loaned money to participate also lost. So no one seems to have gained in this whole process.

Anyways leaving past behind i think there is merit in looking at Jagran for fresh investement,the following parameters do offer significant margin of safety:
PE of 13 , Median PE 15.5 in last 5 years, Max of 20 and min of 10
Price to book is at 1.9 which is its minimum as of date.

Moreover a stable and ever increasing readership as more and more people start to read Newspapers , quite contrary to what is happening in the west.I think it should do good over long term

Disclosure:Invested with 1.5% portfolio weightage as of now

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115

Did promoter participated in this buyback and reduced stake ?

116

This is an incorrect understanding mate. Because of this buyback:

  1. All long term shareholders gained from a per share increase in intrinsic value of business of Jagran as the excess cash is paid back. It might be worth understanding that the cash returned by Jagran this year is almost ~300 cr in buyback and ~90 cr in dividend → which is almost 8-9% of market cap. The loss that your are referring to is only paper loss and not real loss. Infact for existing small investors, the opportunity was to tender 30% of their stock and use the amount to buy the same shares again at 70 rs discount to their sale price.

  2. Stock prices of newspaper were under pressure anyways because of a steep short term rise in newsprint prices by ~30-40%+. It may be noted that for high value add companies like Jagran, the impact of commodity prices on the real worth of the business is nothing but temporary as they will eventually pass it on. Moreover there is no real reason for the newsprint prices to not normalize as paper demand overall in the world is lessening and more so for newspapers. It is just that in a bear market with excessive short term momemtum like outlook of many investors have caused damage to stock price.

  3. People who have done trades on buyback have also lost just a meagre ~7% which they would have lost anyways had they invested in any other small or mid cap stock during this period. However such losses are part and parcel in the life of an speculator.

  4. For new investors as well existing investor who are convinced about the long term outlook, the current stock price does offer an attractive proposition.

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117

Friend i dont know why you think my understanding is incorrect, i said that Buyback was the sole reason for Share price fall of Jagran, it fell almost ~25% exactly on the record date.June 15 was record date, and you can see the fall in stock after June 13 (T-2).

My friends from Broking industry tell me that there was easy loan options available for applying in the Buyback, all were eyeing 12-13% rerurns over 3 Months,most of those who bought on loan sold their shares to unblock their money only to buy after when actual date for tendering arrives.

Since broader market was already stressed,the market could not absorb the heavy supply, again yesterday i.e 26th July when acceptance ratios were out the stock fell 7-8%.

Jagran never participated in the 2017 rally, so its falling >25% was not justified, So all this points that stock moved in perfect sync with Buyback related dates.

This episode will bring sanity amongst those who blindly buy just for buybacks.

Current investement: Yes as i said earlier,i think there is margin of Safety while investing in Jagran at today’s price based on PE and PB ratios etc.Plus it remains one of those super brands in the hindi heartland.

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I believe Promoter has Participated, but that should be OK, as in Most of the recent Buybacks promoters have participated, Instead of large dividend , companies are preferring Buybacks as it is more tax efficient.

Anyways post buyback promoter holding will marginally increase owing to less no of total shares.

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But promoter has decreased their holding morally though not theoretically. Promoters themselves feel that at Rs 195, valued at 17 X FY17 EPS, want to sell shares instead of holding them. Even if I assume they had some personnel reason or found that 20% short term gain as attractive, it will be important to see had they increased their stake again when price fell 35% from buyback. If not, then why I should add aggressively. I am holding 1% in PF.

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Below link provides a good insight into various facets of Buybacks, especially from management conduct point of view.

Personally i dont think Jagran management has done anything wrong by participating in the buyback, being a debt free company they keep sharing dividends, do Buybacks etc at pretty regular intervals.

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122

The repeated buybacks more than anything else signals a lack of investment opportunities in the print/media businesses. So the cashflows are better returned back to the shareholders. A more efficient way to return money back would have been to do an open market repurchase as opposed to a tender offer (like BSE did very recently). Does the job of supporting secondary market price while reducing the outstanding equity.

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My query may be awkward amidst all the discussions taking place. But I can’t prevent myself from asking one very simple question to all of you here-

– Jagran Prakashan was and is still the most circulated and most widely read newspaper across the nation.What is it doing now or planning to do so that it maintains this ranking/position

Thanks to all of you