“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 ” Buffet, 2012 Annual letter.
Hindustan Media Ventures limited (HMVL) is a leading print media company focusing mainly on Hindi language publications. The company publishes the popular Hindi newspaper “Hindustan” and is a leading player in the Hindi heartland of Bihar, Uttar Pradesh, Jharkhand, Delhi-NCR and Uttarakhand.
The bull market has as usual ensured that virtually unknown stocks, stocks with poor ROE, companies with high debt and even those making losses have seen smart uptick in their share price. And then we have this curious case of HMVL.
Even with a strong balance sheet, double digit ROE, a decent management the HMVL scrip is found to be languishing around INR 270 for the past two years. What is more interesting is the fact that more than 50% of HMVL’s Market Cap is available as cash and bank equivalents. This virtual non-participation in the current bull market intrigued me.
In this post, we take a hard look at the business of HMVL from an investment perspective.
HMVL is a 75% subsidiary of HT media and has a rich history of around 100 years. The company was incorporated in 1918 as “The Behars Journals limited and the founders included Dr. Rajendra Prasad. Until about 2008 the company was acting primarily as a printing agent for the parent company.
In 2009, to have greater focus on Hindi and vernacular content, all the Hindi assets of HT media was transferred to HMVL on a slump sale basis. The company also got listed on both NSE and BSE in the year 2010.
Publication brands owned by HMVL
(Source: Annual Report)
Basic Scrip Details
The business model of HMVL is pretty straight forward. The company has primarily two sources of income:
a. Subscription / circulation revenue, which is the per copy price of a newspaper or a magazine
b. Advertising revenue, which typically accounts for the major share of the revenue for a print media company
A KPMG India analysis puts the share of advertising revenue in the total revenue as high as 80% with FMCG, Real estate, Banking and Financial services, E commerce and Jewelry companies being the main advertisers.
HMVL’s Business model
Key Financial Data
HMVL is part of the print media industry, which in turn is part of the larger Media & Entertainment (M&E) industry consisting of Television, Radio, Films, Digital, OOH, Gaming and Music companies.
Indian Print Industry
In contrast to de-growth seen in the developed markets like USA & UK, the Indian print industry grew at a CAGR of 7.8% in the last 5 years with growth across all the segments. The India “growth story” aside there are some interesting reasons for this.
First and foremost is the price point. The newspaper cost is heavily subsidized by the advertising revenue with a daily costing less than 5 INR. Also worth mentioning is the well-oiled and efficient delivery system where the daily newspaper is delivered at home in time to read with the morning cup of coffee.
Contrary to what we generally read about the industry prospects of print media, as per the same KPMG report reference above, it is expected to grow at 7%-8% over the next 5 years.
Top 10 Indian Daily newspapers
[Source: Audit Bureau of Circulation (ABC), May 2017)
Having had a high level overview of the printing industry, let us now look deeper into HMVL’s business.
As per the 2011 Census, the average literacy increased in both urban and rural centres. The literacy stands at 74% with a rural literacy of 68.9% and an urban literacy of 84.9%. Increased literacy is found to have positive impact on the demand for newspapers and there is still a long way to go before achieving 100% literacy. This augurs well for HMVL as the potential readership base has further headway to grow.
Growth in Language papers
Non-English papers in Hindi, Telugu, Kannada, and Malayalam have seen higher growth than English newspapers. There are multiple reasons for this including growth in rural India, demand for regional localized news and the general desire to read news in mother tongue.
The last 10 years data from ABC indicate that with an 8.76 % CAGR, Hindi dailies grew 3 times than the English newspapers.
Growth by Language 2006 to 2016 (10 years, Source – ABC)
All this augurs well for HMVL as it is in a sweet spot being in the largest and fastest growing segment of the newspaper industry.
HMVL enjoys market leadership in the Hindi heartland of Bihar, Jharkhand and Uttarakhand and a strong No.2 in the largest state of Uttar Pradesh along with presence in NCR region and Punjab.
Print media is one such industry where market leadership is a virtuous cycle giving it significant advantages. Market leadership means larger readership base. Larger readership means better bargaining power with advertisers and the power to charge a leadership premium rates for ad rates. This in turn brings in larger revenue which further strengthens the leader.
HMVL’s market leadership gives it a competitive advantage or edge against other players as the readership base cannot be increased overnight.
Significant Cash Pile
HMVL has a strong balance sheet, minimum debt, decent ROIC in the region of 17%. The icing on the cake however is the share of cash and bank equivalents of around 1000 crores (greater than 50% of market cap). This significant cash position provides it a great safety net to withstand adversities and business downturns as well as plan for inorganic growth through acquisitions.
Virtually Zero debt
“Look for companies that do not have a lot of debt” Walter Schloss
HMVL has very healthy cash generation from its core business adding to the fact that the underlying business is not so capital intensive. The debt equity ratio of 0.1 is very healthy from a financial leverage perspective. It is another story that given the enormous cash pile, the company still has debt in its balance sheet.
Excellent profit margins
“Look for companies with high profit margins” Buffet
HMVL enjoys around 20% net margin (Refer Key financial data table). The margin is greatly dependent on the price of news print, 50% of which is imported. A softening of newsprint price directly leads to better margins. The excellent margins is also a reflection of the tight ship the management runs with a strong focus on cost reduction.
“When investing, pessimism is your friend, euphoria the enemy”- Warren Buffet
My underlying thought process while analyzing a business is to take a hard and critical look, trying to identify as many things that could possibly go wrong and then see if the idea still makes sense for investing.
It’s best to remember Murphy’s Law “If anything can go wrong, it will” before betting on an investment idea.
Low single digit growth
Various long term reasons like rise of the digital media as well as short term reasons like Demonetization, GST and passing of Real Estate bill (RERA) etc. has all led to an insipid growth for HMVL. The last 3 years CAGR (Refer table) comes at an uninspiring 8.54% and the trailing 12 month growth comes at -0.22% (de-growth).
The latest quarterly results also follow the same pattern with total revenue increase of 1% and a decrease in circulation revenue of 2.5%.
Spectacular growth of Digital Advertising
Advertising is the primary source of revenue and there is intense competition for a share of marketer’s advertising budget. The traditional avenues of television, print, films, Out of Home (OOH) ads are facing the heat due to the spectacular growth of digital advertising. Digital advertising grew 28% last year and as per a KPMG study, it is expected to grow at 30% CAGR over the next 5 years.
This huge growth can be attributed to an increased broadband penetration, rapid rise of mobiles (smart phones), rollout of 4G services and cheaper data charges (thanks JIO). All these factors have led to an increased adoption of digital channels by the consumer especially video content like YouTube and Facebook thereby affecting print players like HMVL.
Newer Digital technologies
Digital has disrupted every industry and print media is no exception. The traditional players like the print media are now competing with newer channels and players like Live streaming (Facebook live) and Over The Top Video on demand players ( Amazon Prime, Netflix, Hotstar etc.).
Along with this, they also have to face newer technologies like Augmented Reality (AR), Virtual Reality (VR). All these are a threat and competition to print media companies like HMVL. This is also reflected in the subdued expected growth rate of 8% for the industry as a whole.
Market loves a growth story and gives rich valuations for business which are expected to have a spectacular growth. Sadly in HMVL’s case a scenario of spectacular growth is very hard to envisage currently.
The cash and bank equivalents have swelled to over 1000 crores (over 50% of Market Cap). The stated purpose for this is a war chest for acquisition in the vernacular / regional space. Having gone through the earnings transcript call for the last few years it is quite apparent that the management has been trying in vain for few years now with no end in sight.
The irony is that a significant acquisition may not even actually materialize. A Kotak analyst report has put this brilliantly:
HMVL would ideally be looking for a company: i/ the vernacular space, which is ii/ in the top 3 newspapers in the geography, and iii/with a likely payback period of 4-5 years. With these in mind, and imposing the conditions that: a/ no major listed newspaper publishers are willing to sell, and the possibility of sales from newspapers with political affiliations is low, b/ no #1 in geographies will be willing to sell at reasonable valuations, and c/ valuations paid will not be higher than Rs 1500/ reader (HMVL’s own valuation is closer to Rs.1000/reader), we believe that the possibility of HMVL making a significant acquisition, say that involves an outlay of over Rs 5Bn- Rs 6Bn, becomes very slim
Low Dividend payout
The investors have received a constant dividend of INR 1.20 per share with no increase for the last 5 years. With acquisition not materializing and cash piling up, keeping the dividend per share constant for 5 years is slightly puzzling.
Short term borrowings for interest arbitrage
Given the comfortable cash and cash equivalents of INR 1000 crores, one would assume HMVL is a zero debt company. Interestingly its current debt equity ratio is at 0.1 which while in itself is not alarming, it is definitely worth probing deeper. The last year annual report states that the company has availed Buyer’s credit facility and vendor financing from a handful of banks.
A little digging around and I found the management reasoning to an earnings call transcript for Q4 2015-16:
The borrowings are mainly for the buyer’s credit that we take for the imported newsprint. As you know the cost of buyers credit is much lower than the return that we get on our own investment by the cash we have. So basically, we get arbitrage borrowing money at a cheaper rate and investing money at the higher rate. The other thing is that our investments are in securities and lot of them qualify as long-term investment and gains, therefore are also tax exempt. So, it makes more sense to take the working capital from wherever it is available and that too at a lower cost.
Arbitrage operations are treasury functions and investments in securities can be left to investment management companies. I am not sure if these are the core competencies of HMVL’s management. Today’s challenging environment demand total focus and an undivided attention from the management.
Personally, I prefer business which are apolitical or politically neutral. In HMVL’s case, Shobhana Bhartia is a known Congress loyalist and has also been nominated to Rajya Sabha (MP term 2006-2012) on a congress ticket. If you guess which way the political winds are currently blowing then please connect the dots.
Web of Subsidiaries
A cross holding structure and operations through a web of subsidiaries generally increases the responsibility on minority shareholders to be ever vigilant that their interests are protected always.
In the case of HMVL, the parent company HT Media operates through a network of subsidiaries. As of last year, HT Media had stake in 8 subsidiaries: HMVL, HT Music and Entertainment, HT Digital Media Holdings, HT Education (a non-profit), HT Global Education, Ed World Pvt Ltd, Topmovies Entertainment, and HT Digital Streams.
HT Digital Media Holdings in turn held a 100 per cent stake in three subsidiaries – Firefly e-ventures, HT Mobile Solutions and HT Overseas. This subsidiary was created as part of another restructuring exercise last year to supply digital content to both the HT group and also to third parties. It is part owned by HT Media (57.2%) and HMVL (42.8%). Phew!
HMVL has been moving in a tight range between 250 and 270 in the past year. The possible positive triggers for the scrip:
- Announcement of a significant acquisition
- Increased dividend payout to shareholders
- Announcement of any special centenary bonus or dividend. The company was formed in 1918 and within few months it is going to be 100 year milestone.
HMVL has all the ingredients of being a blockbuster scrip. A strong balance sheet, high net profit margins, presence in the growing segment of the print media and experienced management are all positives for the company.
However, the strong headwinds like the rise of digital advertising means that it is getting difficult to envisage a spectacular runaway growth for HMVL in the near future. Market rewards growth disproportionately and the reverse is also true. HMVL with single digit growth prospects is unlikely to excite the market unless some inorganic growth in the form of an acquisition materializes.
Additionally, the management’s penchant for cash accumulation and operating through a web of subsidiaries means the investor should very carefully evaluate the investing odds before taking a position in the scrip.
Audit Bureau of Circulations (ABC) press release, May 2017 [PDF]
HMVL Annual Reports
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(Disclosure: Not Invested, No current positions)
(Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial adviser prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only)