HDFC Securities has recommended outperformer rating on Deccan Chronicle with target price of Rs 270. At the CMP of Rs 223, the stock trades at a PER of 23x and 17x our FY08E and FY09E EPS estimates of Rs 9.9 and Rs 12.9.

Key Investment Triggers

Pole Position in AP :

Andhra Pradesh is DCHL’s home ground. The circulation of the Deccan Chronicle increased from 296,430 copies/day in CY03 to 607,000 copies/day in CY06. Its closest competitors The Times of India (TOI) and The Hindu clock 170,000 and 390,000 copies/day respectively.

Close No. 2 in Chennai :

DCHL launched the Chennai edition of Deccan Chronicle in early 2005. Since then, it has given The Hindu (the leader) a run for the money. As per ABC figures for January-June 06, Deccan Chronicle had a circulation of 295,000 copies/day against The Hindu’s 370,000 copies/day. The paper managed to challenge The Hindu through very aggressive product pricing and Ad rates. Going forward, we believe DCHL will continue to put pressure on its rival and garner a circulation of 340,000 copies/day during H1FY08E.

Expecting a replay of Chennai’s success for Bangalore edition :

DCHL plans to launch its Bangalore (Karnataka) edition by H2FY08E. It has conducted a thorough research (18 months) on the target market and hopes to replicate its Chennai success in Bangalore. The company has already invested Rs 320 million to set up the infrastructure. Presently, the Bangalore market is dominated by The Times of India and Deccan Herald which hold 45% and 30% of the total market respectively.

Outlook and Valuation

We expect DCHL to post a CAGR of 31% in revenues between FY07- 09E and 40% in earnings. At the CMP of Rs 223, the stock trades at a PER of 23x and 17x our FY08E and FY09E EPS estimates of Rs 9.9 and Rs 12.9. We have a price target of Rs 270, thus an upside of 21%. At our target price, the stock would trade at a PER of 21x our FY09E estimates. We initiate coverage with an “OUTPERFORMER” rating.

Key Concerns

Lacks a pan-India presence:

DCHL currently operates in two states of southern India (AP & TN) and is planning to enter Karnataka by H2FY08E. It lacks a pan-India presence like its peers TOI (Bennett Coleman & Co.) and Hindustan Times (HT Media). We believe, competition in regional markets will increase with national players including TOI and HT Media planning to enter them where DCHL is already present or is planning to enter.

Sensitivity to volatility in newsprint prices:

DCHL uses Chinese newsprint as its raw material. There is minimal discount on Chinese newsprint unlike the Canadian variety. During FY07, the average cost of newsprint for the company was USD 700/tn. We have modeled in our estimates, newsprint cost at USD 650/tn in FY08E and USD 620/tn for FY09E. But due to the volatility in newsprint prices in the last few years, we cannot rule out a further increase, going forward.