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.
vinay satija says
Referring to the March 2013 balance sheet, I am unable to understand why the company needs to take an unsecured loan of 3.24 cr when it has reserves of 434.9 cr
Companies typically have cash management and overdraft relationships with banks. Companies tend to place their cash collections each day into money / cash management plans run by banks / MFs and any intra day to earn better returns and overnight shortfalls are met by the relationship banks. These will tend to show up as unsecured short term loans if they fall at the end of the quarter or the year or when books close.
Vishal Khandelwal says
Thanks for the response SPV! 🙂
Dear Vishal, The software I have developed is in complete agreement with you as on 20th Dec. It gives Debt Rating of 84, Size Rating of 83, Growth Rating of 78 and Profitability Rating of 81 to HMVL out of 100. Thus its Quality Rating is coming to 94 which is obviously fantastic. Its Price Rating is 81. So its valuation is worth the quality you are getting. Also the “Confidence Rating” of it is 74 which is little lower than it should be (My software docked some points because last quarter the promoter shareholding went down from 77.5 % to 75% but it actually went down because of sebi rules. So It should have been 80).
Overal its final rating is coming to 97 which might be 98 or 99 next quarter. I would really appreciate your thoughts on this. It would really really mean a lot to me.
Vishal Khandelwal says
Thanks for sharing your findings, Abhijeet! Would like to know more about your software. Please email. Regards.
Hi Vishal, I have sent you a document now. I hope that it will be worth your time. I appreciate your help on this.
Will the company be around and profitably better in 10 years?
We can break this up into 2 sections – Short to Medium term(1-5yrs) & long term(10yrs).
The Indian newspaper industry is continuing to grow and regional language papers will see head winds with increasing literacy, higher disposable income, more advertising targeting the segment.
Still most publishers depend heavily on advertising revenues (HMVL is very healthy at 69% of revenue from ads vs. multiple others where in its much higher) & ad revenues are extremely fickle – driven more by perceptions & emotions, advertising revenues fluctuates a lot even for established players . With more uncertainty & volatility (VUCA as per HUL president) its going to be difficult to forecast revenues and maintain consistency.
Though everyone is focusing on digital, another large segment eating into advertising spends is below-the-line marketing – tradeshows/exhibits/mall installations etc. This is considered more tactical, more engaging that pure media and directly impacts sales. In fact a lot of advertisers recently have not cut their marketing spends but re-jigged it to have more below-the-line component. This trend will continue for longer.
India is also a “leap frog” nation i.e. we tend to display not linear growth or step by step movement but leap over to a new innovation without going through the bases. Case in point – from low PC penetration directly to Mobile computing. This might threaten the newspaper industry as well – as players experiment with digital/ websites – we might adopt a wholly different medium(e,g, twitter) for news.
In the short term therefore HMVL is well placed primarily due to it clean balance sheet. It will give it flexibility in its strategy & ability to pursue profitable growth.
In the long term – anything is possible and 10yrs we might see the Indian newspaper industry also lose attractiveness like the US one. It is already happening with English newspapers but remains to be seen how fast winds will change.
Does the company have a sustainable competitive moat?
Yes, due to its brand name & the habit forming product. People are loyal to their newspapers – brands are sticky though not the industry. Personal point – My family read HT in Delhi & then we moved to Mumbai. But once HT launched it in Mumbai, even after 10 yrs of reading TOI – we moved back to HT. But this accounts for approx 30% of the revenue and will be under threat with new players launching in HMVL stronghold. Ad yield will probably also reduce under competition threat.
How good is the management given the hand it has been dealt?
Its a good management and have taken the right steps for the venture. The parent firm though – HT went through many problems and though I haven’t studied it in depth it was due to competition(TOI venturing into its space), delayed expansion(didn’t enter Mumbai even till 2000) and debt. I once attended a business panel discussion where the CEO – Rajiv Verma spoke on the turnaround and how difficult it has been. They were still in the process of engineering it late 2011.
Still so far the board & the directors have done a good job.
I have been watching this company for the past 3 months and though as an individual company its a good one, I still feel hesitant due to the above factors.
Vishal Khandelwal says
While I agree to your point about “below-the-line marketing – tradeshows/exhibits/mall installations etc”, I am not sure of the leap frog that Hindi media would see (like getting news on Twitter). Remember, we are talking about a populace that may never use the PC, forget using Twitter or any such media to access news. Regards.
Dhwanil Desai says
Very good and crisp analysis and summary.of HMVL. Couple of weeks back, I too had posted my views on the stock as I found it very interesting considering the quality of business, opportunity size and valuation. Here is the link.
Though, I have posted my analysis on the business in the write up, I would like to add whatever little I have observed from my limited experience of the market.
– Market hardly differentiates between “uncertaitnty” and “risk”. Any thing that is uncertain is considered risky and discount this risk. Due to so many experiences of the cash being siphoned away by crooked promoters. Hence any company sitting on cash without strong rationale is heavily discounted. Similar examples are JB Chemicals when it sold its Russia business to J&J and Piramal sold its formulation business to Abbott. In spite of having very decent credibility in the market, it discounted the “hard cash” heavily and only when they saw sign of deployment market re-rated them. Such “uncertain” situations, where you can objectively analyze and differentiate between uncertainty, you can have a situation where odds are in your favour. Coming to specific of HMVL following are my views
1) As you rightly mentioned, english newspapers operate in challenging environment, Hindi and vernacular newspapers are likely to flourish due to (a) increasing literacy in rural areas and (b) relatively lower penetration.
2) Another trend which is slowly but steadily emerging is that premium that english newspaper command in Ad rates over hindi/vernacular newspaper is shrinking. Gap between ad rates commanded by english paper and hindi/vernacular paper is narrowing own. The change is slow but steady (hence slow contrast effect that Charlie munger talks about). Advertisement being major revenue contributor, this is a significant development
3) Prosperity in central/northern India is slowly rising hence companies will vie to capture this market leading to increased ad spend
So, over all long term growth drivers seem to be in place. Specific to company, it has room to grow significantly in UP and Uttarakhand. However, it’s definitely not a given as both of them are 3 newspaper state and competitors will fight back to protect their share. However, in the past, HMVL’s track record gives confidence on decent growth. Also, difference in ad rates charged by second largest player in UP (Amar Ujala) is significantly higher than that of Hindustan. As Hindustan’s circulation in 10 major towns is fast approaching that of AU, they have the leverage to increase ad rates (as indicated by management). So, at least in medium term, company should be able to grow at decent pace.
On management quality, very hard to predict. Only comfort is that HT group has been around for 50 years and there is no negative connotations attached with it. Having said that, it’s not implied that they will not do something silly (it will be wishful thinking, if we infer so!). However, management has very clearly outlined why they are not distributing cash and as soon as they reach the “comfort level” board will take decision on the same. As you rightly mentioned, in latest concall they have also indicated they are fast approaching that level.
So, seems to me a mispriced bet and odds in an investor’s favour for a high quality business. (If you remove, cash and investments, ROCE is around 50% on incremental capital)
Vishal Khandelwal says
Without getting into Confirmation Bias, let me say that I agree with your analysis Dhwanil! 🙂
Especially regarding your point about the way the market treats uncertainty regarding the deployment of cash and how things change when the deployment actually happens (for good or for bad).
Thanks for sharing your analysis here, and also for linking to your own post on the business. Regards.
Hi Vishal. No doubt that HMVL is a good business. But the question comes back again and again to as to what will the management do with the cash. Buffett and our approach can’t be equated as Buffett actually had access to the cash in the business which he could profitably invest in other places. Have you seen any instances where the management has made the best allocation of capital during your reading of the annual reports of the company?
Vishal Khandelwal says
Hardik, their improving return ratios are testimony to the better use of new cash in the operating business.
However, I would like to add a caveat here because they don’t have a long history of operations in their present avatar.
So yes, the circumspection regarding the usage of cash is good. But again, the question is – how much of that circumspection is already priced in.
Dear Vishal, I guess we need to see a little more performance from the company’s side to answer your specific questions, however, we may try and reflect on some points for our understanding.
As per what I have gathered till now, company is doing fairly well in the general operational parameters as you have already pointed out like steady improvements in margins, increasing turnover, low debt equity ratio and most importantly an improving ROE.
Apart from that, I would like to stress on the following points:
1. Focus: The company on the outset appears to keep its focus intact. We hear the terms like consolidation in the chairperson’s message and also in the con call. Management is even conveying that there would be no more increase in print orders in near term, instead there would be increase in price rise. Yield per cover is Rs 2, showing a 12-13% increase annually is a positive sign.
2. Cost Control: While I have not been able to find any clear explanation as to how they are doing their cost controlling exercise there has been repeated mentioning of this aspect by the management in annual report and also in con call. They do speak about opportunistic buying and innovation in newsprint mix as a cost controlling exercise, if they can throw some light on this matter, it would give us more clarity on this aspect.
3. Strategy in Bihar and Jharkhand: Bihar and Jharkhand market accounts for roughly 50% of the total revenue for the company. They do guide us that they are more focused on maintaining their presence in this market rather than trying to expand in other markets. DB has already announced a launch in Bihar in the third week of January next year. cover prices of all major players have already witnessed a downward revision, HMVL has also dropped its cover price in bihar from 4 to 2.5, this is a major threat for the company..Company on the other hand gives the example of Jharkhand, where during the launch of a new player, prices were revised downwards for a brief period but it is back to normal rates in quick time. If the company manages to upgrade its prices going forward in Bihar, just like jharkahand, it will signify its presence.. Only time will tell that.
5. Brand Image and Product Strategy: The company true to its name Hindustan, uses the Hindi language in its promotional campaign too, hindi phrases like tarakki ko chahiye naya nazariya, Bihar Maango Insaaf, Aaao rajneetee Kare and Jago Agra does leave you with a lasting impression. Moreover focus on localization of news like Agra Plus may augur well in the long run as well.. READ the acronym used for Regionalisation, Expansion (to newer segments) Activation and Digitization also looks sensible and achievable. Here again we may note that they are stressing the fact that they look to expand in different segments, not in different geographies.
6. Cash: While it is clearly evident that it is sitting on a pile of cash, there can be two ways of looking into it. Firstly, in the chairperson’s speech we see that they are preparing for investments during tough times when others would be bleeding and waiting to divest. Repeatedly, management conveys that they are looking and evaluating opportunities and still they have not made an acquisition is also a sign that they are not in hurry for inorganic growth. Secondly, the analyst community seems to put immense pressure on the management for a clarity on the cash. My feeling is that in FY14 or may be in the annual report of FY14, we must get some mentioning of either an acquisition, or special dividend. If the management again stays silent, we should take it with a pinch of salt.
While on P/E based parameters it does look cheap, but I have not done a DCF calculation yet, so cannot say with certainty about the investment decision.. My take is to wait for some clarity on the cash and cost control issues, till then it should be on our radar for sure.
Vishal Khandelwal says
Thanks for your analysis Ankit!
Good to see the specific mention about the brand image and product strategy.
I believe that is what has helped ‘Hindustan’ connect so well with its audience. The brand tells a unique story, and in today’s world, good stories sell very well. Regards.
I have been following this company for sometime now(it came up on my screener as well)…But I cannot convince myself to invest in this company even though company is doing so well…not very sure about the print media’s future…We always try to find companies for which market is quoting cheap prices when compared to their profitable business..but we need to question ourselves – now I have found a cheap company with fantastic business but can the price bounce back to its fair value?
In this case my logic says no…because even though company does well in future, the stock price may not reflect that due to people’s pessimistic perception about the print media’s future… and this may remain as one of the undervalued stocks for ever…
So as per me when we are not sure about the company, we should not put our money…I believe that there are and there will be enough opportunities in the market which will can be far more easy to envision the prospects and far more rewarding than this one…Well this is my personal opinion and I could be wrong…So Vishal and other tribesmen, please let me know what you think about this..I will be more than happy to listen to your feedback.
Vishal Khandelwal says
Dear Prasanna, thanks for sharing your analysis of this opportunity.
Well, if the company does well in the long run and it shows in the numbers, I believe it will show up in the valuations the stock gets.
Perceptions drive stock prices in the short term but, as Graham said, the markets are a weighing machine in the long run. Regards.
Hindustan went into UP. Dainik Jagran went into Bihar. Times of India went to Chennai and is lining up against Anand Bazaar Patrika in Kolkata. Dainik Bhaskar went very successfully to acquire MP and then move beyond in a big and successful way.
There is clearly a turf war going on currently in the Indian newspaper industry. The reasons could be any or all of the following.
Dainik Bhaskar started it by overnight coming up in Jaipur with a case study level master piece. This made the incumbents sit up and take notice. The digital is coming up in a big way and to survive and remain relevant, newspapers are expanding their market. The newspapers do not know what will happen to them 10 years from now and they are just doing something they think they can do
The consequences are financially bad for the industry because the newspapers will remain as they are, with a few changed positions. What I mean is that in any market, only the top 2 newspapers make money. So no matter how much you fight, there will still be just 2 players per city.
As far as the valuations are concerned, Buffett says it should be monopoly newspaper with a market price not more than 10 times its PAT.
Vishal Khandelwal says
Thanks for your views Saket!
Nice writeup as always. i am currently invested in this stock but here are few questions for which I have not been able to find answers. I am just playing devils advocate here.
The risks of one language and only limited territory is not a new information. Infact things only got better since IPO. While the profits have increased and the risks have reduced compared to 2 years back, why is the market continuously pushing the valuations cheaper and cheaper?
I do not know much about the promoters but I read somewhere they are related to the Birlas. Birlas have proven time and again that they are capital hoarders who worry not about return on shareholder equity but growing bigger is the key objective.
Second unknown is this growing cash. There are too many scars before that the investors have had with Deccan Chronicle in print media space to the Shree Ganesh Jewelry, which always shows consistent profit increase but the market kept pushing the price down until last qtr when they bundled up all the losses. If one looks at the AR, this fear would be low as the taxes paid and the current tax calculated are close enough and also, the surplush cash is all in mutual funds.
Another factor for low valuation could be the illiquidity of the stock and the recent sell of by the promoters to bring down their holding below the sebi mandated limit.
Given these unknowns and the risks that you already pointed out, one can take a calculated bet of exposing not more than 5% in their portfolio in my opinion. Comments are welcome.
Vishal Khandelwal says
Dear Ravi, thanks for your observations! I see rising cash as the biggest overhang on the stock.
Arun Prakash Singh says
What is the worst case scenario if one gets in at present price? valuations are already low and there is no event that market is pinning hopes on which if not met can lead to huge sudden decline. Excess cash concerns already reflected in valuation. Increased competition from aggressive DB group is indeed justified; however, HMVL has shown in the past it can tackle such challenges. So this in all probability will not be a black swan event.
Biggest concern is capital allocation concern. Even though fraud or siphoning concerns may be exaggerated; the fact that such huge cash is lying unutilized for so long thereby denying optimum returns to shareholders is a tyranny in itself. Not to mention shows an attitude of taking minority shareholders for granted which can lead to other much more serious developments.
What can lead to re-rating? If management indeed decides to do something about the cash. How sure we can be of this that this will happen soon enough?
So downside risk is not much; however, we should be prepared to wait for re-rating of stock. No problems in waiting; however, even after waiting if management does something stupid with cash (remember Hindalco) re-rating would never materialize.
So at this point it has to be more of call on management ability (and integrity) rather than business itself.
Vishal Khandelwal says
Very valid points, Arun. The ability and willingness of the management to deploy cash effectively is what the market may be look at.
Now, how soon can this deployment happen? As per the management in its latest conference calls, the company has almost reached a “comfortable” cash level where it will be deciding soon what do of it. So there’s nothing else than a wait-and-watch approach that can be followed here.
Arun Prakash Singh says
I came across the following passage in an interview with Peter Bevelin
Trouble often comes from the direction we least expect. I like this fable by Aesop: “A Doe who had had the misfortune to lose the sight of one of her eyes, and so could not see anyone approaching on that side, made it her practice to graze on a high cliff near the sea. Thus she kept her good eye toward the land on the lookout for hunters, while her blind side was toward the sea whence she feared no danger. But one day some sailors were rowing past in a boat. Catching sight of the doe as she was grazing peacefully along the edge of the cliff, one of the sailors drew his bow and shot her. With her last gasp the dying doe said: “Alas, ill-
fated creature that I am! I was safe on the land side, whence I looked for danger, but my enemy came from the sea, to which I looked for protection.”
After going through this, I feel I was naive in concluding that only because trouble doesn’t exist in most visible areas (valuation and competition) downside risk is limited. So I am going to get deep into annual reports and other details and look for “trouble areas” before I invest.
As Alice Schroeder wrote on Buffett inThe Snowball: “He tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will.” One more “in financial markets, almost anything that can happen does happen.”
Vishal Khandelwal says
Very valid points, Arun!
As Karl Popper wrote about Einstein in his autobiography – “What impressed me most was Einstein’s own clear statement that he would regard his theory as untenable if it should fail in certain tests. Einstein was looking for crucial experiments whose agreement with his predictions would by no means establish his theory; while a disagreement, as he was the first to stress, would show his theory to be untenable. This, I felt, was the true scientific attitude.
“…Thus I arrived, by the end of 1919, at the conclusion that the scientific attitude was the critical attitude, which did not look for verifications but for crucial tests; tests which could refute the theory tested, though they could never establish it.”
How about competition? Dainik Jagaran is going to publish Hindi newspaper from Bihar in a month from now?
and Dainik jagran is a well established brand in 15 states. They have done very well.
Also, Too much cash is not very comfortable with me. Remember Satyam?
What your views on this?
Vishal Khandelwal says
Saurabh, your points have been well covered in the post and comments above.
How to track the stock holders equity of top 500 NSE companies?
Vishal Khandelwal says
Saurabh, your points have been well covered in the post and comments above.
Nitin Sharma says
I had got HT Media Ventures as well in my screener and have given it a pass. Nothing wrong in the company but I found other a better value than this one. I am currently invested in other 2 stocks in the same screener.
– Kolte-Patil Developers Ltd.
– PC Jeweller Ltd.
I have one basic doubt …..pardon me for my ignorance – 🙂
I found two companies – HT Media and Hind. Media Ventures.
1) This discussion is about HMV, but why not consider HT Media stock?
2) What is the difference between these two companies and their relationship (holding, subsidiary, etc)?
Although this is an elementary question I feel its important to consider both stocks and then pick the one whose business model suits one’s preference.
Circulation vs. Advertising
About 28% circulation revenues seems good though Im unaware of industry average or benchmark.
Hopefully if circulation revenues dominate in future the business will sustain well and be less dependent on advertising, which can be subject to demand and market forces
Most of the newspaper companies are also having presence on the internet, FM radio channels and education/training segment. Are these segments profitable ? The cash from newspaper business (cash cow) would get deployed in to these, but we have to be sure if these are good enough. Otherwise they might be expanding their empire across all channels while shareholder’s returns remain poor. You will agree with my question if you follow TV media stocks and their business – their business is good and they prosper – but are the minority shareholders benefiting or getting returns? definitely not.
Vishal Khandelwal says
Sridhar, HT Media owns 75% in HMVL.
The newspaper business typically has a 70:30 breakup between advertising and circulation. This has been the norm so far.
HMVL is certainly proving itself as poor asset allocator.
-No buyback possible.
-High one time special divided but I don’t think so it would be wise. Remember promoters has high stak.
-investing on new region which is not seen from desire
-diversification into non media business. Tiny success ratio.
-invest on other media like radio, channels,
-buying smaller successful media business
Last 2 options are the best cases. If anybody is interested how media company shall utilize cash then study Mcgraw Hill’s investments.
Hitesh Patel says
Thank you posting such a good write up on HMVL. I think I am little late on this discussion as most of the crucial points have been already covered by most of the readers. As most of the things have been duly covered above , I’ll just share couple of observations from my side.
1 – company has equity exposure to GTL Infra which was hammered down in the market, (unrelated business for HMVL)
2 – azim Premji holding more than 1% stake in the company.
I was already looking at two stocks with very high cash values(wrt share price) but could not decide on the process/parameters to evaluate the high cash situation. The main issue was the same as is present in HMV. When companies have a lot of cash (which is usually invested with banks/MFs/stocks), shall we not value them based on revenues only from operational sources? For example, in this case of HMV, if we exclude other income (Earnings = last 4 quarters EPS minus FY13 other income), then the PE ratio shall be above 10 (109/10.56) – closer to jagran prakash’s PE of 13. On the other hand (as mentioned in comments above), if we discount cash from the price (let’s consider extreme case of discounting it fully), the stock price will reduce by approx 49 rs (359 cr), thus the PE ratio will be even lower : 5.7 (60/10.56). Any views/comments
Now, when we are looking to invest in a stock where cash forms a large portion of stock price with no clear indication by the management on the purpose, we can look at it as a partial investment in the stock (rs 60 out of 109) and partial investment with the investment manager of the cash available with the company(rs 49 out of 109). This can also help us in rebalancing our personal asset allocation by reducing same amoun of investments from MFs/FDs.
With this thought process, will it not be safer to invest in stocks which keep their investments/cash in FDs(you know what your cash will earn) rather than those investing in mutual funds / equities (relying on unknown portfolio manager)? The risk is also evident in the example of HMV wherein the other income in H1 2014 is only 9.66 cr vs 28.5 cr for full year 2013 (decrease of over 32%) although the total average investment funds increased from 245 cr (avg of year start and year end investments) in FY13 to 318.5 cr in H1 FY14. Any views/comments?
Saket Saraogi says
DEAR VISHAL JI,
HAVING GONE THROUGH THE ANNUAL REPORT OF THE PARENT COMPANY OF HMVL (HT MEDIA), I FOUND SOME THING FISHY. THE COMPANY HAS TAKEN A HUGE HIT LAST YEAR AS EXCEPTIONAL LOSS OF ABOUT 150 CR. NOW THE INVESTMENTS OF COMPANY SHOWS INVESTMENTS INTO SOME COMPANIES CLOSE TO 50 CRS WHICH WERE ANYDAY UNDERSTANDABLY FRAUDULENT COMPANIES. ALL SHARES HAVE CRASHED SUBSTANTIALLY HAVING NO SCOPE OF REVIVAL. NOW WHAT WORRIES ME IS THAT WHETHER COMPANY’S PROMOTER HAVE DONE IT INTENTIONALLY MAY BE TO DRAIN FUNDS OUT OF COMPANY FOR INDIVIDUAL BENEFIT. VISHAL JI PLEASE CHECK BECAUSE ITS NOT SOMETHING THAT COULD HAVE HAPPENED OUT OF COINCIDENCE.ALL COMPANIES WHICH THEY INVEST ARE LATER FOUND TO BE CHEATS. MAY BE THIS HAS BEEN THE REASON FOR FALL IN SHARE PRICES OF BOTH HMVL AND HT MEDIA.(LACK OF CORP GOVERNANCE).
Hi Vishal, the company has come out with good numbers again in Q3, but what is more heartening is the fact that as per the recent 2013 IRS results, Hindustan is now the Second largest Hindi Daily in the country with a readership of 14.25 million… If the management takes a prudent call on the cash issue, it looks like a good investment theme. Analyst conference call should provide us with some cues I guess.
While I do agree with you that we should avoid the recency bias, but there was a news, which we may like to note.
In the business standard on 6th feb,2014, there was a report regarding Newspapers calling for boycott of IRS, the same company which gave favorable survey results for HMVL.
Hmm… Now that RJ enters the fray with what his stake purchase in the parent, does anything change for HMVL ? Do worries around excess cash, corporate governance issues get mitigated with RJ’s entry?
I request you to shed some light on a peculiar feature I noticed in the 2014-15 annual report based on your experience with reading annual reports and financial analysis.
Here is what I found:
Net increase in financial investments/securities = 398-219= 179 cr
Cash flow from operating activities after paying for fixed asset purchase and dividend= 137-16-9= 112 cr
112 (Cash flow) + 68 (new loan –interest) = 180~Net increase in financial investments
Well, the company clearly took high cost short term loans to buy bonds and mutual funds. Why?
Are the returns from investments in bonds and conservative mutual funds guaranteed to be more than the cost of funds?
– If yes, then why not borrow more?
Can you hazard a guess behind such a seemingly irrational behavior from the company, which is doing exceptionally well operationally and is continuously increasing margins and profits?
Uday Nath says
I think Saket has some very valid points.
The HTML – FEVL Merger was pointed out to be a stunt by InGovern, who said that 146 Cr was too high a price to be paid for FEVL. Shine.com was bleeding at the time. If anything was a stunt, this was a stunt.
Now to the crux matter.
Why is the Eid ka Bakra (HMVL) being fattened?
It seems that promoters probably don’t wish to use the 600 odd Cr in net cash + short term investments + long term investments in the AR FY 2015 data.
It seems they probably wish for this figure to keep fattening, and then lo and behold, suddenly, another big stunt could be pulled, this time probably not plummeting the company into losses, because the lamb was fat enough.
Sure, everything is open to interpretation.
However, I’ve spent the whole day delving into the stock, and now I’m getting this bad feeling about probable promoter intentions, so I’m red-flagging the stock for myself.
(Disclosure : I’m not invested in the stock. It showed up upon screening, and looked good, until I found the above findings, and now i’m not keen to invest in the stock. I’m posting this for public benefit).
I see that no one has commented on this old article since 2013. I too had concerns about the growing cash in balance sheet which the management was not sharing. However, based on their commentary during quarterly conference calls, I was hopeful that they would share it very soon with minority shareholders. It has been 5 years now since then. I continued to hold it as any long term investor would with the hope that management would do what is right. However, it turned out to be a value trap with the management refusing to share the proceeds. Result is that the stock went to 320+ levels inbetween and now back to the same levels it was in 2013 and that too market cap below the investments. It is a big learning for me not to partner with bad people with no ethics in management. This learning has made me now give more weightage now to corporate governance and then only industry, company and valuation. This is a clear case where even if you got all other call right if we are wrong about the promoters, we end up with a bad investment. Just curious if you still hold this one.