Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.
Let me be upfront here. Across all my Workshops and other interactions with Safal Niveshak tribesmen, I have maintained my stance on the futility of reading newspapers, especially to get your investing ideas.
My stance is that the more you read newspapers, the less you would know because everyone is looking at the same things with similar pair of eyes. Moreover, newspapers create recency bias, which is such a destructive force when it comes to making investment decisions.
So I have been happy to know all this while that newspaper is a dying industry.
Even Warren Buffett has mentioned this in the past that newspapers have lost a notch in their economic attractiveness from the days when they appeared to have a bullet-proof franchise. Over time, he expects the competitive strength of newspapers to gradually erode.
Anyways, given the price wars being fought by top newspapers in cities, it surely seems that circulation is under pressure. After all, everyone’s getting information online nowadays.
So, in the face of all this negative opinion about print media, I was surprised to read Buffett’s latest letter to shareholders (2012) where he wrote this…
During the past fifteen months, we acquired 28 daily newspapers at a cost of $344 million. This may puzzle you for two reasons. First, I have long told you in these letters and at our annual meetings that the circulation, advertising and profits of the newspaper industry overall are certain to decline. That prediction still holds. Second, the properties we purchased fell far short of meeting our oft-stated size requirements for acquisitions.
We can address the second point easily. Charlie and I love newspapers and, if their economics make sense, will buy them even when they fall far short of the size threshold we would require for the purchase of, say, a widget company. Addressing the first point requires me to provide a more elaborate explanation, including some history.
News, to put it simply, is what people don’t know that they want to know. And people will seek their news – what’s important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost. The relative importance of these factors varies with the nature of the news and the person wanting it.
Before television and the Internet, newspapers were the primary source for an incredible variety of news, a fact that made them indispensable to a very high percentage of the population. Whether your interests were international, national, local, sports or financial quotations, your newspaper usually was first to tell you the latest information. Indeed, your paper contained so much you wanted to learn that you received your money’s worth, even if only a small number of its pages spoke to your specific interests. Better yet, advertisers typically paid almost all of the product’s cost, and readers rode their coattails.
Additionally, the ads themselves delivered information of vital interest to hordes of readers, in effect providing even more “news.” Editors would cringe at the thought, but for many readers learning what jobs or apartments were available, what supermarkets were carrying which weekend specials, or what movies were showing where and when was far more important than the views expressed on the editorial page.
In turn, the local paper was indispensable to advertisers. If Sears or Safeway built stores in Omaha, they required a “megaphone” to tell the city’s residents why their stores should be visited today. Indeed, big department stores and grocers vied to outshout their competition with multi-page spreads, knowing that the goods they advertised would fly off the shelves. With no other megaphone remotely comparable to that of the newspaper, ads sold themselves.
As long as a newspaper was the only one in its community, its profits were certain to be extraordinary; whether it was managed well or poorly made little difference. (As one Southern publisher famously confessed, “I owe my exalted position in life to two great American institutions – nepotism and monopoly.”)
Over the years, almost all cities became one-newspaper towns (or harbored two competing papers that joined forces to operate as a single economic unit). This contraction was inevitable because most people wished to read and pay for only one paper. When competition existed, the paper that gained a significant lead in circulation almost automatically received the most ads. That left ads drawing readers and readers drawing ads. This symbiotic process spelled doom for the weaker paper and became known as “survival of the fattest.”
Now the world has changed. Stock market quotes and the details of national sports events are old news long before the presses begin to roll. The Internet offers extensive information about both available jobs and homes. Television bombards viewers with political, national and international news. In one area of interest after another, newspapers have therefore lost their “primacy.” And, as their audiences have fallen, so has advertising. (Revenues from “help wanted” classified ads – long a huge source of income for newspapers – have plunged more than 90% in the past 12 years.)
Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.
Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities – while it may improve profits in the short term – seems certain to diminish the papers’ relevance over time. Our goal is to keep our papers loaded with content of interest to our readers and to be paid appropriately by those who find us useful, whether the product they view is in their hands or on the Internet.
A Declining Market, But…
Buffett, like any smart business person, knows that even though some markets may be shrinking, they can still be very profitable.
There’s no question that the newspaper print industry is in decline. Just like the PC industry, book stores, rental videos, and records. But a declining market doesn’t mean no market at all. It just means a smaller market.
For example, it’s been big news that the PC industry is suffering an enormous decline because of the growth of tablets and other portable devices. In 2012, global worldwide shipments of PCs declined 1.2 percent from the prior year. But here’s the thing: in 2012 there were still around 350 million PCs shipped!
Then, no one can argue that e-books have cut into the bookstore business. But many are now reporting that there’s still plenty of money to be made as an independent bookseller.
No one wants to be in a declining industry. But if there’s still money to be made, well, then there’s still money to be made. Growth is good. But it’s not everything.
I get a lot of my news online and I generally don’t read newspapers. But holding a fresh newspaper in your hand still has its charm, my father tells me often.
Amidst this, I wish to bring to you a company known as Hindustan Media Ventures Ltd. (HMVL), the name behind India’s second-largest selling daily newspaper, Hindustan.
I first came across this company in a screener I was working upon at Screener.in (see here). Then, a tribesman wrote to me seeking my view on the business. And then, just yesterday, a relative from my in-laws place in Varanasi who came home brought with him a recent edition of the newspaper which he was talking highly about.
I have recently read up on the company’s past 2-3 years’ annual reports, and here are some facets of the business I have come across.
HMVL is a 75% subsidiary of HT Media Ltd., the publisher of Hindustan Times and Mint. The company was incorporated in 1918 under the name The Behar Journalist Ltd. The name was changed to Searchlight Publishing House Ltd. in 1987, and till 2008, the company primarily undertook printing and job work for ‘Hindustan’, the then Hindi newspaper of HT Media.
In November 2008, the name of the company was changed to Hindustan Media Ventures Ltd. In November 2009, it purchased the Hindi newspapers business from HT Media, comprising Hindi daily newspaper ‘Hindustan’ along with ‘Nandan’ (famous children magazine that’s running ever since 1964) and ‘Kadambini’ (a well-known literary periodical since 1961), and the internet portal of the said publications, including all assets, liabilities and employees pertaining to the Hindi business.
In July 2010, HMVL came out with its IPO to raise Rs 270 crore, and issued shares at Rs 166.
As of now, ‘Hindustan’ is the second-largest selling daily newspaper in India (across languages), and a leader by a wide margin in the Hindi markets of Bihar (68% share) and Jharkhand (46%). Apart from this, it has a 34% share of the Uttar Pradesh market, 29% in Uttarakhand, and is the second largest read Hindi daily in the Delhi-NCR region. Overall, it has a total readership base of almost 4 crore.
As per the Audit Bureau of Circulations (ABC), the Indian newspaper market, contrary to global trends, just keeps growing. Now, while English newspapers are in trouble, Hindi, Malaylam, Marathi and Telugu are the boom markets.
As per ABC, in the 7-year period from 2006 to 2012, the total number of paid copies rose by over 10 million to hit 48.3 million. If you take unpaid circulation into account then the total goes well over 100 million copies making India the second largest newspaper market in the world after China.
One interesting fact from ABC is that Indian language newspapers, especially Hindi, Malayalam, Marathi and Telugu are seeing phenomenal growth. What is more interesting and important, despite the growth in the number of readers, there has been a decline in the ratio of readers per copy sold. This means that less people are sharing newspapers and many are now buying their own copy. This is despite the fact that regional language newspapers are typically more expensive than English.
As per a report from Crisil…
…about one-third of total 17 crore Indian readers (in 2009) preferred to read Hindi dailies, followed by English, Marathi, Tamil and Telegu language dailies.
Circulation and, hence, readership are directly correlated with the economic well-being and literacy of the addressable population. Hindi-speaking states, primarily Bihar, Jharkhand, Uttar Pradesh (UP), Uttarakhand, Rajasthan, MP, Delhi and Haryana have registered strong economic growth over the past few years. Higher disposable income, improved literacy and, hence, increased penetration of newspapers will continue to drive the readership in most Hindi-speaking states.
Given this backdrop, we believe the Hindi newspaper industry is poised for >15% growth over the next four years. This growth will beat the growth of the entire newspaper industry.
A newspaper typically earns revenues from two streams – circulation and advertisement – with advertisement revenues generally being twice in size of circulation revenues for a typical newspaper company.
Overall, the Hindi newspaper industry seems to be working like Bollywood movies. Although films are being produced in other languages, Hindi movies are the first choice of the audience. How large the Hindi game is becomes quickly evident on looking at the list of the most widely read dailies in India – Dainik Jagran, Dainik Bhaskar and Hindustan are all Hindi newspapers.
What is more, emerging rural markets are playing an important role in the growth of Hindi print, where a newspaper is not only a source of information, but leads to a lot of discussion as well.
What Numbers Say
Here are some facets of HMVL’s financial performance…
- The financial performance of HMVL can be assessed starting FY11 only because the company was just a printing business prior to that. Since FY11, the company has grown its sales at an average rate of 11% annually.
- During this period, advertisement revenue (72% of sales) has grown by 11% annually, while circulation revenue (28% of sales) has grown by 13% annually.
- Operating margins have improved from 17% in FY11 to 18% in FY13, and to 23% in the first half of the current financial year (FY14). Declining raw material (newsprint) prices as percentage of sales leads the improvement in margins. The company’s shift to higher proportion of domestic newsprint consumption has led to the reduction in raw material costs.
- The company has also recently raised cover prices of its newspapers, which has helped operating margins.
- Newspaper is a high operating leverage business where, after breaking even on the investments, companies see sharp increases in margins. This is what HMVL is also seeing as its UP market has achieved breakeven and Uttarakhand is expected to follow soon.
- Net margins have improved from 10% in FY11 to 15% in 1HFY14.
- Return on equity (on a debt-free balance sheet) has improved from 14% in FY11 to 18% in FY13.
- The company has a reasonable working capital situation, as debtors usually pay in 45 days and the company is managing an inventory of around 19 days.
- Debt on balance sheet is almost nil, while the company continues to generate huge amount of free cash.
- Net cash balance (including short and long-term investments) as of now stands at Rs 370 crore, or around Rs 50 per share (~50% of stock price).
1. Too Much Cash: As I mentioned above, HMVL is sitting on too much cash. What is more, its payout ratio remains low and this has caused some nervousness among investors in the stock.
“What will the management do with so much cash?” is the question begging an answer.
While Charlie Munger says that having so much cash is a “high quality problem” and that “excess cash in an advantage, not a disadvantage”, given the way so many Indian promoters have mistreated cash in the past raises the concern here as well.
The management has however indicated in its recent interactions with analysts and investors that it is reaching a stage where it will decide what to do with the cash – make acquisitions (of smaller newspaper companies), expand its own business (entering new markets and raising printing capacity), pay a special dividend to shareholders, or a combination of these.
So this is one thing worth watching out for.
Prof. Sanjay Bakshi mentioned this of cash-rich businesses in his interview with Safal Niveshak…
The metaphor I like here is that of a “tijori” (Hindi term for a safety locker for storing valuables).
Some of your money is in a tijori, and it is open, and you don’t have access to it but the fellow who has access to it is a crook.
What’s your money really worth? How much would you expect to fetch for your interest in that tijori when you sell it to another person in an arms-length transaction?
Well, the owner of a “cash bargain” in a company run by crooks is the functional equivalent of the part-owner of such a tijori.
As for the quality and integrity of the management of HMVL, I have not come across any wrongdoing so far, but it always pays to search for any cockroaches in the kitchen.
2. Competition in established markets: HMVL is the largest player in the Bihar and Jharkhand markets (a few of my friends from there suggest that reading ‘Hindustan’ is in fact a habit). However, the competition is expected to heat up soon as the DB Group (Dainik Bhaskar) is launching its Patna edition.
While HMVL has not yet cut the price of its newspapers in preparation for DB’s entry, some price competition can be expected.
Some comfort can however be derived from the fact that while cover prices in Jharkhand had dropped from Rs 4 to Rs 2 when DB entered the market, prices are back to Rs 4 (can be explained by more people buying their own papers, and that reading the paper and then discussing news is a habit in the Hindi heartland).
The company’s huge cash balance and uncertainty regarding its usage and low dividend payout has been an overhang on the stock, which is down almost 30% since its IPO in 2010.
At the current price of Rs 112, the stock is trading at just around 8.3 times its trailing 12-months earnings, which is at a discount to the P/Es that bigger players like DB Corp (19x P/E) and Jagran Prakashan (13.5x) command.
This is largely because of a larger scale and wider base (several languages) of the latter two and concentration (Hindi only) of HMVL. There is however no major difference between the margins and return ratios of HMVL and these two companies.
Overall, being in a habit business, clean balance sheet, high cash generation and attractive valuations work in HMVL’s favour.
On the other hand, uncertainty regarding the usage of cash and competition from bigger players getting into its entrenched markets act as key risks.
Before I end, here is something from Buffett’s 1984 letter that may interest you as you analyze HMVL further…
Once dominant, the newspaper itself, not the marketplace, determines just how good or how bad the paper will be. Good or bad, it will prosper. That is not true of most businesses: inferior quality generally produces inferior economics. But even a poor newspaper is a bargain to most citizens simply because of its “bulletin board” value.
Other things being equal, a poor product will not achieve quite the level of readership achieved by a first-class product. A poor product, however, will still remain essential to most citizens, and what commands their attention will command the attention of advertisers.
By the way, HMVL is not the poor paper – but the dominant one – Buffett is talking about. 🙂
In 1996, Buffett wrote…
In the 1991 Annual Report, I explained that newspapers had lost a notch in their economic attractiveness from the days when they appeared to have a bullet-proof franchise. Today, the industry retains its excellent economics, but has lost still another notch.
Over time, we expect the competitive strength of newspapers to gradually erode, though the industry should nevertheless remain a fine business for many years to come.
I believe as long as the market is big enough (and growing), and a company is excellent at doing its business, it can earn its owners decent profits. And if it is run the right way, it can do even more than that.
What do you say?
I would suggest you read up the last 2-3 years of annual reports of HMVL and post your analysis – both to and for – in the Comments section below.
Basically, work on answering these three key questions…
- Will the company be around and profitably better in 10 years?
- Does the company have a sustainable competitive moat?
- How good is the management given the hand it has been dealt?
It will make for an interesting, and a learning, exercise.
Disclaimer: I have invested a small amount in the stock from a tracking perspective. Please make your own decisions, as blindly acting on anyone else’s research and opinions can be injurious to your wealth.