The overall market condition has deteriorated since I last posted on this thread. Central government spending which accounts for approx 40% of Jagran’s revenue (I think) has not revived. Private sector spending has also not sky rocketed. The management does say that the decline in government spending is because of the newly elected government and the high spending baseline around this time last year - I dispute this, because the commentary on government spending was sombre last year around this time as well.
However, the stock price has also depreciated precipitously, so now is a good time to do a back of the envelope valuation calculation.
Key Facts
- Current market cap - 1700 Crores (approx) - 25/11/2019
- Cash and highly liquit investments - 600 Crores (approx) - 30 Sep 2019
- Debt - 195 Crores in debt, 65 crores in lease liabilities (approx). - 30 Sep 2019
Key assumptions
- Net income - I am going to use the 6 month ended period to extrapolate for the whole year of 2019 with data coming from Sep 2019 financial statements. There was a massive adjustment on deferred tax liabilities to the favour of the company in Q2 FY20, I will eliminate this impact by calculating net income as NI = PBT*0.75
- Depreciation was 127 crores in FY19, it is about 71 crores for 6 months ended Sep 2019 in FY20. I will assume it will be about 130 crores in FY20.
- Net Interest expense - Investment income of about 40 crores and finance cost of about 25 crores in 2019 were recorded. Finance cost in 6M ended in FY20 is already 17 crores. I will assume that FY20 finance cost will be about 30 crores, a net interest income of +10 crores needs to be recorded.
- Capex of 24 crores has been recorded so far this year, giving a run rate of about 50 crores for the year. The equivalent figure for last year was 140 crores, while it was 50 crores in FY18. I will assume that it is about 50 crores for this year.
- Working capital investments for this year is negative, however they were about 100 crores in additional inventory last year and 100 crores the year before for increase in AR. I do not expect any of this to happen this year, nor do I expect the current negative WC cycle to persist. Inventory already is at a rather high level + newsprint prices are going down, AR is at about the level this business has always had (about quarter of sales). I will assume that WC investments will be about 50 crores per year going forward.
This is approximately equal to
Free cashflow to firm = Net income + Non cash charges - Net Interest income (1 - tax rate) - Capex - WC Investments
FCFF = 320*(0.75) + 130-10*(0.75)-50-50 = 263.5 or approx. 265 crores.
Assuming 0% growth in FCFF to perpetuity, and a required rate of return of 15%
Intrinsic value of the operating business = 265/0.15 = 1766 crores
Now that is just the value of the operating business without taking into account the 600 crores of cash the business has on its books.
Total value of equity = Intrinsic value of the operating business - MV of debt + book value of cash/liquid investments = 1766-260+600 = 2106 crores.
In essence, the market has added a negative growth premium to the business.
After taking the cash and cash equiv. into account AND assuming enterprise value fairly reflects the intrinsic value of the business,
Enterprise Value = FCFF/(Required return on equity- income growth rate)
1700 Crores MV - 600 crores of cash and cash equiv + 260 crores of debt = 265 Crores of FCFF/(15%-growth premium)
Growth premium = (-4.5%)
It comes to individual beliefs at this point - If one believes that this business is not going to degrow 4.5% year on year from this point on, there is significant valuation cushion at this price point. However, on the contrary this business could well be argued to be fairly valued at this price.
The final dimension is that of dividend yield - The current dividend yield is 7%+ and that is considering a retention ratio of 60%-70% of net income. If this were to go down to only 50%, dividend yield would go up to close to 10% - I’d expect that to happen should growth opportunities for this business completely vanish as the market expects it to now. There is comfort here too.
But all of this is forward looking given where we are. The reason why the investment thesis on this stock has perhaps not worked out so far are two pronged according to me
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None of the growth triggers including radio have worked out. This is a consequence of the industry/market situation since all players are suffering similar issues.
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The current equity market LOVES growth and does not hesitate to pay significantly for growth. The concepts of value investing taught by Ben Graham are perhaps ill suited for this euphoria seen all around.
P.S : I hold stocks in Jagran Prakashan and my view may be biased. I am not a registered investment advisor and this is not an investment recommendation. Please carry out your own due diligence.