Deccan Chronicle Holdings Ltd

Stock Opportunities
1

Deccan Chronicle Holdings owns

1). Deccan Chronicle newspaper )-- It is one of the largest selling English daily newspapers in South India. Main income of the newspaper is from advertisements. Between FY 03 to FY 08 the ad revenues have grown at a CAGR of 87%. Going forward, the ad revenues are expected to grow by around 12-15% because earlier growth rates were due to launch of new editions in different cities.

2). Deccan Chargers which owns the IPL franchisee.

3). Odyssey retail chain which is into selling of books and now venturing into eyewear segment.

4). Sieger solutions which used to handle the company’s internet ventures but which ran into troubled waters and has been currently shelved.

Now coming to total market cap of DCHL, at current market price of around 124, the total market cap is close to 3100 crores.

**DCHL enjoys the highest margins amongst peers in its newspaper business. For fy 10 full year, the sales was at around 890 crores and net profits was around 261 crores. EPS for FY 10 was around 10.7. **

For Q1 FY 11, the company posted sales of 231 crores and net profits of 91 crores which is a significant improvement over Q1 FY 10 – sales at 217 cr and net profit at 77 cr.

VALUATION EXERCISE

DCHL has cash around 591 crores and debt of around 341 cr.

IPL franchisee valuation is a very subjective exercise. Kochi franchisee paid around 1700 crores recently. If one were to consider around 1000 crores for the IPL valuation, then effective market cap comes to (3100-1000) 2100 crores. This includes the newspaper business and the odyssey retail chain which has around 84 stores now and is profitable at the net level since last quarter.

So effectively the newspaper business is available at around 2100 crores which generates net profits of around 260 crores (for fy 11 expected to be around 320 crores)

The newspaper business is fairly predictable and with improving economy, likely to do much better going forward.

Hence effectively there seems to be some value in investing in DCHL at current price and this could be a good portfolio bet over the longer term. Value unlocking from IPL venture and/or Odyssey retail could give further upsides.

Disc: I am invested in DCHL.

Views invited.

2

DCHL certainly has a strong brand. All Hyderabadis will vouch for that.

Deccan Chargers Valuation is a very interesting aspect, indeed. Was the Investment /expenses for Deccan chargers made/continue to be made out of DCHL books? Can we confirm that?

Given the recent 3yr record, one will have to agree with you, its becoming better managed and maybe an attractive investment too.

But if you look at a slightly longer timeframe, the track record has been pretty topsy-turvy.

Key operating ratios

Year end Mar 10 Mar 09 Mar 08 Mar 07 Mar 06
EPS(Rs) 10.26 5.38 10.59 6.61 16.32
Book value(Rs) 51.94 46.95 43.57 34.59 77.05
CEPS(Rs) 12.01 6.69 11.81 7.33 18.73
NPM(%) 29.23 17.19 34.76 29.19 20.51
OPM(%) 53.90 38.15 67.17 52.58 37.92
ROCE(%) 28.14 17.12 31.40 23.69 16.63
ROE(%) 21.67 12.64 28.72 28.19 23.29
Debt/equity 0.29 0.47 0.67 1.04 1.42
Interest cover 9.72 3.93 6.46 8.24 5.97

Book value/share has actually declined over the years. We see a dip every alternate year in net Profits. Operating cash flow was actually negative in FY07 and FY06 on the back of some 200 days of debtor days(can we have FY10 results updated for the company please)...that trend seems to have reversed with debtor days now around ~90 days

3

Thanks for your views, Arindam. Some details I can share with you.

Net profits for period from fy 05 to fy 10 are as follows

32 cr, 67 cr, 161 cr, 271 cr, 140 cr, 261 cr

For fy 09, raw material prices were abnormally high which was the reason for reduced profits.

Interest payments since last three years are around 77cr(fy 08), 71 cr(fy 09), and 45 cr (fy 10) Company has reduced debt since last three years.

Book value since fy 05 to fy 10 is given as follows:

64, 77, 34.5, 43.5, 47, 52.

The stock was split in 2007 from Rs 10 face value to Rs 2.

Regarding holding in subsidiary–Deccan Sporting Ventures, in a report by equitymaster I had read, it was mentioned as a 100% subsidiary. Deccan Chargers was bought in auction at a price of around 107 m dollars.

4

Hitesh,

I had tracked this company during the March lows. Though I very much liked the company and the business model but there were lots of concerns which came to my notice (don’t know if they are still there) - the co has a subsidiary through which it is booking majority of the advt revenues and the co has given some right (convertible bonds or something) through which the promoters have the right to take a major stake in that subsidiary.

If that still holds true then it is a serious corporate governance concern. Plz check the same.

Regards,

Ayush

PS: I may be wrong also as it has been quite a lot of time since I last checked on this co

5

Ayush,

I have not come across anything which points to something which you refer to. But I will look into it and try to find out if that indeed is the case.

hitesh.

6

Hi Hitesh,

Did you manage to check further with respect to concerns raised by Ayush?

I prepared this valuation band chart today. This helps me understand how the EPS has changed for the better or worse and how the share prices have moved in tandem. Also extrapolating the target EPS and a target PE, how much of a margin of safety exists.

This type of chart is commonly available for US stocks, but I am not aware of a single source where this is available based on historical data. (Donald: Is it possible to work on this for Valuepickr?)


7

Hi

I couldnt locate any articles etc about corporate misgovernance referred to earlier.

But the chart u put up seems to imply that at around 10 PE the stock seems to be getting attractive.

The company has announced buyback scheme but there doesnt seem to be too much follow up from the management side post this announcement.

8

Hi Vikram,

Thanks for your valuable suggestion. Charting of various hues is on the cards. Many have urged us to make things that much more easy and user-friendly to absorb on ValuePickr.

We might be able to assemble a formal team in the next 2-3 months to take on this among the other requirements. I am sure to get back to you once we have a formal team to take your suggestions in.

Cheers

1 Like
9

Hi Hitesh,

The quarterly results Q3 was disappointing in terms of revenue drop and expenses going up. The earnings for 3 quarters is at 8.59 and the stock matching last year’s full earnings or the estimate of 12 looks like a far fetched at this time. The stock price has hit 77 and looks like it will further fall. Do you know why the revenue fell? Is it expected in the next quarter as well?

3Q results attached.

Rgds,

Binu

DCHL-3Q2011.pdf (64 KB)

10

All I can think of is the Telengana agitation effect. As such the business climate is very muted in Hyderabad due to telengana issues. Once the political decision is taken and normalcy returns we can hope things to be better. As such Andhra is headed for a election due to Jagmohan Reddy floating his new party after splitting with Congress and there is lot of political ambiguity in this state now. All projects have been on hold and the general economy is sluggish.

11

Current market cap is around 1400 crores and the valuation of the deccan franchisee alone could fetch similar valuations. So the company is there available for whatever net debt there is in the books. Telangana or no telangana, this one looks very attractive with the dividend yield around 5-6%, buyback in the offing and almost free of cost valuation.

12

Hi Hitesh,

I admire your conviction

I did think in the similar lines and and started buying at 90, now its at 57 but will keep buying unless some thing comes out like Ayush mentioned about proxy subsidiary being used to book advertisement revenues. I hope that isn’t true :slight_smile:

Cheers

Binu

13

This has been one of my flop investment. Good I did not put too much money into it.

14

Trying to learn how could I have avoided the DCHL investment and spotted the fraud as early as I could, I think experienced/senior’s comments can add value to learners like me.

Hi Hitesh, have you exited this one? When and what was the trigger?

Here are few things I think I should keep in mind.

  1. I did not keep a continuous track of all stocks in my portfolio including this one. I can blame other engagements but I think it is crucial. I could come back to Valuepickr and ask others who found this stock interesting and could have worked together to understand the scenario better.

  2. When the company stopped publishing audited statements and continued with unaudited statements, should have served as a warning. But I think fraudsters can find auditors like in Satyam’s case so not sure how to spot trouble earlier on if they kept publishing audited results.

  3. market knows the real value, can’t ignore the price downwards trend. In this case, i assumed the adverse business environment in Andra and the weakness in income was the cause but I think it was not proportional and should have compared with any other possible stock doing business in Andra.

  4. Obviously I went ahead with my conviction, without sufficient research. Also did not think why valuepickr community did not favor this one.

15

Even I was tempted when I saw it at 33. But then capital is a scarce resource and I had to gradually accumulate India Nippon electricals, so decided to leave Deccan Chronicle for some other day. But coming to the point you have raised, I think there was practically no red flag with Deccan Chronicle…may be venturing into unrelated businesses should have alerted the investors.

16

CAUTION !

Hi,

Today there are some reports in telugu media that case is lodged on chairman venkatramireddy and two vice chairman’s on forgery and cheating charges.Company DP Karvy stock broking and future capital holdings both lodged complaints on them.With wrong information and forged documents they raised 160 cr from Future capital agnst share pledging.Also there are some news that in this way they raised more than 1000 cr loans.RBI started investigation into this matter.ICICI,Axis also in their bankers list.

17

There are two possible outcomes of this situation:

1)Promoters bring in money and release their pledged shares from Kishore Biyani (note: not Future Capital). This means there is still some value and upside in the business.

2)Promoters default and Kishore Biyani becomes the promoter, by default, owing to the 54% pledge.Maybe, Biyani sees some value in the business and hence he has put in his own money or maybe has put in the money to salvage his other deal and he stands to lose more if the FCHL sale is delayed. My suspicion is the former. Even if not, newspapers, the IPL franchise and Odyssey would be very valuable assets for Future group at the current fire sale prices. As per publicly disclosed data, the current value of these assets is Rs 1800 crore (1450 crore debt+350 crore equity) approx.

In either of the two scenarios the current share price is a good deal. Short term in former case and long term in latter. It would be great if the stock crashes to single digit and the lender gets the possession of the shares. The crooks will be kicked out and everybody gains. Very small downside and a significant upside.

18

I took a short term small position in this stock as per my last argument and exited at about 10% loss (prudent in retrospect). Trigger was ballooning of the debt from 1500 crore to 5000 crore plus with every paperweight being mortgaged to the financiers sometimes twice or thrice.

Even white Knights like Kishore Biyani would shudder to enter this mess now. This was more like a Call option that had the potential to give big returns in the short term. Things were murkier though, making a joke of rule of law and prudential norms among the financiers.

This was a falling knife in retrospect, not a fit case for entering the street when there was blood.

19

This can be used as a lesson to uncover the reverse multibaggers. It has been one of the biggest wealth destroyers in last two three years.

I still cant digest the fact that the management took the company to the cleaners. DCHL was very well placed to succeed having a very good presence through the Deccan Chronicle newspaper, balance sheet strength and valuations of deccan chargers.

I guess when management starts resorting to fraud and malintent, they can destroy any company.

20

Yet another fraud Hyderabadi company n Telugu promoters adding to the long list like Satyam,Tanla,ICSA,XL Telecom,Mic , Prajay Engg, Sanghi,Karuturi, Betalactam, n so many power cos n scam tainted cos like Ramky, Athena, AMR,NavBharat,Gayatri ,GVK, Reddy bros of karnataka, YSR Sakshi group ,matrix the list is endless. BGR energy is another co which though based in Chennai is a Teleugu owned co with same traits. Others can add to the list so that innocent investors stay away.

Kaveri seeds our favourite hopefully shud be on the lines of Dr Reddy and Apollo group cos the better Telugu owned cos.but there was an article yesterday in Libe mint where DuPont group has accused Kaveri seeds of gene piracy for their corn product .