In today’s digital world, there is no industry that can escape disruption, particularly a vulnerable one like the print media. The classifieds-led traditional print advertising business has so far been steadily losing out to web and mobile-based applications. So, amid this declining ad share, when a traditional media company grows its revenue by a whopping 38% every year for five years running, you can’t help but take notice.
The company in question is Hindustan Media Ventures (HMVL), owner of the Hindi daily Hindustan, which has a readership base of over 15 million across Bihar, Jharkhand, Uttarakhand, Uttar Pradesh and Delhi. “Unlike in urban India, growth in rural India is much better, since income levels have not been badly hit despite low economic growth. On top of that, we have government spending through NREGS and other schemes, which have helped rural audiences retain their purchasing power. The shift in the regional focus of advertisers has driven the industry’s growth,” says Vivek Khanna, CEO, HMVL.
According to him, the fact that the rural market has been less responsive to the growing e-commerce, internet marketing and television advertising industries has allowed print media — particularly in Hindi — to get higher traction. Besides, companies have also shifted their focus on rural and regional markets to compensate for slow growth elsewhere, thus leading to higher growth in advertising.
“Over the past few years, revenue from regional advertisements has increased in the overall print advertising pie. Together, Hindi and other vernacular markets accounted for 64% of total print revenue in CY14 compared with 59% in CY10,” says Manoj Behera, an analyst who tracks the company at PhillipCapital. Companies in telecom, banking, automobile, education and real estate are now turning largely regional in terms of targeting a particular market.
“Categories keep on changing over time — today, FMCG is the fastest growing segment in advertising, while education was growing much faster earlier. Going forward, categories such as internet-based or e-commerce advertising might overtake other categories, which is already happening in some cases,” says Amit Jaiswal, company secretary, Jagran Prakashan. “Tier II and Tier III cities have seen a large amount of traction of late, and that is what is catching advertiser attention,” he adds.
What has helped regional and vernacular publications in capitalising on this traction is their ability to segment markets. For larger markets such as Uttar Pradesh (UP) and Bihar, segmentation works because of the reach and dense readership in some of the constituent cities. “In a market like UP, which has 70-odd districts, we have about 70 editions, which not only allows us higher customisation but nets higher revenue thanks to advertisers looking to cater to local markets or readers,” says Jaiswal. So, a carpet manufacturer or an education institution might be interested in advertising in and around Kanpur instead of all the districts.
Ad-ding it up
Currently, in print, particularly in the case of Hindi newspapers, close to 70-75% of revenue comes from advertising and the rest from circulation or the sale of copies. Originally incorporated in 1918 as The Behar Journals, HMVL today gets 73% of its revenue from advertising, which has grown at 15% annually over the past five years, from 300 crore in FY10 to 600 crore in FY15. Moreover, the company has grown faster than the overall industry. Khanna, an alumnus of IIM-A and who leads marketing and strategic initiatives for HMVL, says, “We have been able to grow faster than the industry average because we have invested heavily in our newspaper and distribution network, apart from building our brand in new markets, which has yielded us better advertising and circulation growth.”
Over the past three years, HMVL has grown its advertisement revenue at 11% per annum. Compare this with the 8% growth in case of Dainik Jagran, which is India’s largest Hindi language daily and has a readership of close to 15.5 million (average weekly readership as per IRS 2013), followed by the 7.2% growth reported by DB Corp, which runs Hindi daily Dainik Bhaskar.
HMVL, which generates over 70% of revenue from Bihar and UP, competes with Jagran Prakashan in these markets. It has a significant lead over its next largest competitor in Bihar. “In that state, we are more than 40-45% ahead of the No.2 player Dainik Jagran. We sell close to 8.8 lakh copies as against 6 lakh copies in the case of Dainik Jagran. So, we have been able to maintain our leadership in Bihar,” says Khanna.
Thanks to the recent assembly election, ad revenue saw a 25% growth in Bihar during the September 2015 quarter. While it is No.1 in Bihar and No.2 in UP, HMVL has still managed to grow at a higher pace than its competitors. As per the last readership survey of 2013, the company has become the second-largest selling newspaper, outpacing Dainik Bhaskar, which is present largely in Madhya Pradesh, Rajasthan and Gujarat.
While detailing some of the company’s initiatives, Khanna adds, “We carried out several promotional schemes to connect with readers, dealers and vendors. We have invested in our print capability and design to reflect a better look and feel. That apart, customisation of products and the launch of new supplements to reflect emerging trends in some of these markets has given us good mileage.” Initiatives like Hindustan ApkeDwar in Bihar, where certain government officials interacted directly with the audience, met with huge success in resolving local issues. It has weekly supplements such as Hindustan Job Search, Movie Magic and others targeting education, English learning, health and lifestyle.
The company’s strategy of expanding its markets is now paying a huge dividend in terms of growth. While it was growing in its primary markets of Bihar and Jharkhand, HMVL’s entry into UP, where it is the second-largest player after Dainik Jagran, has paid off really well. “HMVL’s advertisement revenue growth of 14% annually over the past two years is much higher than the print industry’s 10%, primarily driven by market share gains in UP due to an increase in ad yield,” says Behera of PhillipCapital.
“When we launched in UP, our ad-yield was about 100 per sq cm; today, it stands at 800-900 per sq cm,” says Khanna. The company has aggressively scaled up in UP, with its distribution network and local printing helping it capture the market. Currently, Dainik Jagran holds a 55-60% share in the UP market with an operating margin of 30%, while HMVL has a 20-25% share with an operating margin of only 10%. The difference in margin is because of the difference in their ad rates. According to advertisement aggregation website releasemyad, a black-and-white education advertisement in Lucknow would cost 520 per sq cm in Dainik Jagran compared with 250 per sq cm in Hindustan.
But this gap is narrowing. “HMVL’s UP market readership has increased significantly over the past couple of years and the difference in readership compared with the market leader is now 17% (as against 30-35% in CY12). Consequently, the ad-yield differential has also shrunk significantly over the past couple of years to 40% in CY14 from 70-75% in CY11-12,” says Behera. The company has grown its readership in UP at an average of 26%, from 2.5 million in FY09 to 8.1 million in 2014. Over the past two years, on an average, the company has hiked rates by 12-15%. So, the UP market, which it started investing in around 2006, has not only given it an additional reader base, but also added to revenue because of the strong growth in advertising.
In terms of advertising, UP is the largest market in India and since the company is the second-largest player there, it has been able to get a sizeable chunk of the advertising. “The UP market, which accounts for close to 40% of the company’s advertising revenue, has had a huge impact on overall margin because of higher yields, growing circulation and realisation over the past three to four years, says Ritwik Rai, analyst, Kotak Securities. “Besides, newsprint price has come down, which is adding to overall margin.”
The cost of paper accounts for about 40-50% of the total newsprint cost, depending on the quality of the paper. Thankfully, newsprint prices have been falling worldwide as a result of low demand, particularly in the developed markets, and that has helped many Indian companies. Since FY12, global newsprint prices have fallen from a peak of about $677 per tonne to around $500 per tonne at present. Even after accounting for the rupee depreciation, this has contributed to higher operating margin for HMVL. Raw material cost as a percentage of sales for HMVL has fallen from 41% in FY12 to 39% in FY15, which has added 200 basis points straight to the bottomline.
The newspaper business enjoys high operating leverage. With higher scale, one can bring down cost per unit and at the same time with high circulation, one can command advertisement rates boosting overall revenue. For HMVL, expansion in newer markets and building on its lead in Bihar has led to better revenue growth and margins; operating margins have moved up from 16.9% in FY11 to 20.3% in FY15. “I think operating leverage is yet to kick in in UP because the capex has already been made upfront. As advertising yields start to move higher, we might see a further improvement in operating margin,” says Rai.
One big questions mark facing all media companies though is how the digital medium will impact print. While readers in the metros or other urban markets might be shifting to digital, the shift in rural and regional markets is still nascent. “While many English newspaper subscribers are shifting to online platforms, regional print markets are largely insulated from this trend,” says Behera.
Adds Khanna, “Today, the size of this segment is very small, with about 2-3% of revenue coming from the digital side. But we are ready with a strategy and hope to be a player of significance in this space within the next two to three years.” Currently, the company operates its digital operations through the website livehindustan.Jagran, the digital platform of its competitor Jagran Prakashan, generated close to 20 crore of revenue in FY14, which was 1.2% of the company’s revenue.
“Digital is a complementary space. It might grow to 5-6% of industry revenue over the next three or four years, but it will still be complementary for the next few years because of distribution advantage, cost, language, local news and reader stickiness to newspapers. So, if advertisers want to target Tier II and Tier III cities, they will have to rely on print. If at all thereis a threat, it is that the classified advertisement market will be hit first (it currently accounts for not more than 6-7% of the industry advertising revenue),” says Jagran’s Jaiswal. That may not be a big threat considering there is a vast canvas to play with.
So far, higher growth in revenue and better margins have led to earnings growth for HMVL. Over the past five years, earnings have grown on an average by 57%. With marginal capex and zero debt on its books, the company has seen continuous improvement in return on equity from 15.5% in FY12 to the current 19%. Cash flow from operations has jumped three times from 53 crore in FY10 to 153 crore in FY15. And the company’s improving performance hasn’t escaped investor attention either. The stock has given close to 65% return in the past year and more than doubled over the past three years.
Analysts expect the good run to continue. “We are forecasting an average 11% growth over FY15-17, primarily driven by 12% ad revenue growth and 10% circulation revenue growth. Driven by lower newsprint prices and stable employee costs, we expect operating and net profit growth of 26% and 22%, respectively, during the same period,” says Behera. At 296, the stock trades at 12x its FY16 earnings compared with peers like JagranPrakashan, which is trading at 15.5x. While better circulation numbers and return ratios (HMVL has an RoE of 19% compared with 22.3% in case of Jagran) explain the discount, the valuation gap is likely to shrink as HMVL continues to post higher revenue and earnings growth. And that is definitely good news for the company.