Sandesh Ltd. - A Rare Cash-Rich Play on Print Media & OOH Segments

[maheshi]

Company :- Sandesh Ltd.

BSE Code :- 526725
NSE Code :- SANDESH

Current Market Price :- Rs. 295
Target Price :- Rs. 538

Current P/E :- 7.01
Mcap-to-Sales:- 1.02

Industry :- Print Media
Industry Avg. P/E :- 22.5


Investment Arguments in Favour of Sandesh Ltd. :

(1) A well-established print media company with a regional focus and a strong association with Times Group which holds a strategic equity stake of 12.16 % in the company (Times Group has bought the stake at Rs. 262 per share in 2006 and after that there has been no equity dilution by the company). Promoters hold a high 66.49 % stake in the company which adds to the comfort.

(2) The Sandesh group publications enjoy 2nd position in TR rating and 3rd position in AIR rating in Gujarat. With regards to AIR rating, Sandesh lags behind No. 2 Divya Bhaskar by only 1 %.

(3) A consistent growth in circulation as well as advertisement revenue which is evident from a CAGR of 6.15 % over last 10 years achieved in publication division.

(4) Increased focus in publication division with a goal to regain No.2 position in Gujarat which is evident from recent investment worth Rs. 23.07 cr. into modernisation of plant & machineries at all publication centres which will make it on par with Divya Bhaskar.

(5) Foray into OOH segment by begging a contract for advertisement of all Bus Shelters of Bus Rapid Transit System (BRTS) opened for bid by Ahmedabad Janmarg Limited as also winning of contract for outdoor advertising on hoardings located on 132 Ring Road in the city of Ahmedabad. This segment expected to contribute heavily from FY12-FY13 onwards.

(6) Gujarat being one of the most sought after place in India as business destination augurs very well for regional publications like Sandesh, Gujarat Smachar and Divya Bhaskar as each will enjoy higher circulation as well as advertisement revenue over next many years which ensures a good visibility to publication division of Sandesh.

(7) Sandesh has almost zero debt with a Cash & Cash Equivalents worth Rs. 100.8 cr. on books which makes it a safe and rare pick in Print & Advertisement Media.

(8) 1stHalfFY11 Results look very promising for publication division of Sandesh with a prospect of highest ever growth of 20 % + YoY which is highest in last 10 years' history which signals better days ahead for the segment.

(9) Even with a respectable revenue of around Rs. 205 cr. (FY11E) accruing from Print Media, the company is trading at a market capitalisation of just Rs. 251 cr. and a single digit P/E which signals a gross undervaluation vis-a-vis peers as no peer trades at less than 2 times revenue and single digit P/E multiple. Even if we don't consider here DB Corp., Jagran, Deccan, HT Media, etc. considering that their revenue tick size is almost 3-4 times Sandesh's revenue from publication division, and take the case of one regional print media acquisition deal of that of Mid-Day Multimedia whose publishing division was taken over by Jagran recently at 1.8 times its revenue (its revenue was 95 cr. with no consistency in EBITDA over last many years and debt-ridden balance sheet) then also by its publication division alone, Sandesh needs to command a market cap of not less than Rs. 369 cr. which is 47 % premium to current market cap.

(10) If we add Rs. 100.8 cr. cash on books of Sandesh and also consider the loans given by its finance division worth 80-100 odd cr. and consider the replacement value of assets at its five publication centres, the company's presence in print media industry as well as OOH segment is available at almost zero price at current market price of Rs. 295.

(11) We assign a target price of Rs. 538 for the share which is arrived at by giving 50 % discount to Cash & Cash Equivalents on Books, 60 % discount to Loans given by the company and 1.8 multiple applied to FY11E revenue of publication division which is the lowest multiple applied to any Indian Print Media company.


Company Overview :

Sandesh Ltd. Is a publisher of SANDESH a premier Gujarati daily newspaper in Gujarat Region, incorporated on March 11, 1943 to carry on the business of editing, printing and publishing newspapers and
periodicals. The Company started its first printing facilities at Ahmedabad. Late Shri Chimanbhai S. Patel acquired the entire business from the original promoter in the year 1958, and had put his efforts to strengthen the activities carried out by SANDESH. Presently, Mr. Falgunbhai C. Patel, Chairman & Managing Director is running the entire business affairs of the Company along with Mr. Parthiv F. Patel, Managing Director and a professional team of the Executives of the Company.

The Company had started its printing facilities at Baroda during 1985-86, at Surat during 1989-90, at Rajkot during 1990-91, and at Bhavnagar during 1998-99 to cater to the semi urban and rural areas. The Company has its regional offices at Mumbai, Delhi, Kolkata, Bangalore, Chennai and Pune, which have experienced staff and well equipped communication facilities. Besides the Company also publishes STREE, a weekly magazine and also the periodical SANDESH PRATYAKSHA PANCHANG which remaines popular among the local public. The company has a strong regional franchise, where it enjoys strong readership loyalty.


Investment Rationale :

With regards to investment rationale for Sandesh Ltd., we will not dwell into management's quality as it is out of question with more than 50 years of presence in Print Media Industry as well as a respectable spotless image of the group in Gujarat. The focus of the management has always been profits and cash generation which is evident from a razor sharp regional focus and deployment of generated cash in profitable avenues. While adopting this policy since last many years of not burning cash by indulging in severe competition, management has enabled company reach a stage where cash and cash equivalents (after including loans given) are almost equal to the yearly revenue generated by the company in print media segment. From this stage we believe management will chart the company's next phase of growth by venturing into high-growth segments which is evident from management's reduced focus on Finance Division of the company since last two years. The foray into OOH segment is also a step in this direction only.
Hence, for discussing Investment rationale for Sandesh Ltd. We will straightaway focus on Business of the company as also its comparative valuation aspect as follows :

Presence in Print Media Segment - 70 % Contributor to Topline :

Sandesh's presence in print media comprises of publishing of daily gujarati newspaper Sandesh as well as many weekly, monthly and yearly periodicals. Company's revenue accruing from print media in the form of circulation revenue as well as advertising revenue is clubbed under 'Publication Segment'. Lets first look at last 5 years as well as 1st Half FY11 revenue and EBITDA performance of publication segment of the company as also its contribution to reported total revenue of the company as also total EBITDA :

Revenue & EBITDA of Sandesh from Print Media

1stHalf FY11
FY10
FY09
FY08
FY07
FY06







Revenue
97.52 cr.
170.08 cr.
161.92 cr.
168.34 cr.
147.23 cr.
125.86 cr.
% of Total Revenue Reported
87.39%
73.29%
56.12%
60.76%
57.74%
89.84%







EBITDA
19.07 cr.
33.87 cr.
22.24 cr.
22.18 cr.
6.12 cr.
- 0.88 cr.
% of Total EBITDA Reported
70.29%
56.90%
51.42%
91.76%
73.03%
(overall profit of 0.93 cr. reported)

As is evident from above, company's presence in print media industry is the main activity of the company with average contribution of 70 % + to the overall reported revenue of the company over last 10 years and an equal contribution of again 70 % + in EBITDA over last 10 years. The other segments revenue and EBITDA includes income from 'Finance' division of the company as well 'Treasury' operations which are started just for efficient utilisation of surplus cash available with the company. It is worthwhile to note here that it is this policy of the company to generate profits out of surplus cash of the company that resulted in it reporting positive profits over last 10 years even when other print media companies suffered due to slowdown as well as rise in raw material prices. The case in point here is FY05 and FY06 when the company's publication division reported losses but the company overall generated profits worth 8.85 cr. and 0.93 cr. respectively.
The management has been very shrewd so far in utilising surplus cash which has resulted the company achieving cash and cash equivalents worth 200 cr. + (after including loans given) which is almost same as the revenue of the publication division. After reaching this comfortable stage, management has rightfully charted a vision to regain No.2 position in Gujarat which was snatched by it from Divya Bhaskar in 2006. An investment worth 23.07 cr. towards modernisation of plant & machineries at all publication centres in FY10 is a step in this direction only which will help it fill the thin 1 % gap existing between it and Divya Bhaskar for No.2 spot. It is worthwhile to note here that even after adopting aggressive strategy, Divya Bhaskar has not been able to put Sandesh out of competition by widening the gap between its and Sandesh's circulation since last many years. The result of this is that as per latest IRS Q3 2010 statistics, Sandesh lags behind Divya Bhaskar by only 1 % which depicts the efficient management of Sandesh even against a national leader like DB Corp.


Foray into OOH :

In FY10, Sandesh made a foray into OOH segment by begging a contract for advertisement of all Bus Shelters of Bus Rapid Transit System (BRTS) opened for bid by Ahmedabad Janmarg Limited as also winning of contract for outdoor advertising on hoardings located on 132 Ring Road in the city of Ahmedabad. We believe this is the step in right direction as OOH is a potentialy rewarding segment which is still nascent in India and Sandesh's association with Times Group (Times group holds 12.16 % stake in the company) will help it a lot to prosper in this segment. OOH is a capital intensive asset-building business and utilisation of surplus cash available with the company in this end could increase intrinsic value of the company significantly as it will make Sandesh the only debt-free play on OOH as well as Print Media segment amongst listed space in India. This segment is expected to contribute heavily from FY12-FY13 onwards.

Peer Valuation vis-a-vis Sandesh Valuation :

With regards to peers like DB Corp., Jagran, Deccan, HT Media, etc., they are national players and have revenues almost 3-4 times Sandesh's publication division revenues. Sandesh has no plans to change its regional focus and it is worthwhile to note here that regional dailies are the one tipped of as high-growth segments amidst entire print media as per latest surveys. This fact is evident from the recent acquisition of Mid-Day, a regional daily by Jagran Prakashan at almost 1.8 times Mid-Day's publication division revenues. Mid-Day's publication division had a revenue of 95 cr. which is almost half of Sandesh's revenues with a widely fluctuating EDITDA and a debt-ridden balance sheet.
Hence, rather than considering bigger peers' valuation like DB Corp., Jagran, Deccan, HT Media, etc. it is better to take benchmark of the valuation applied to Mid-Day by Jagran during acquisition. It is worthwhile to note here that Mid-Day was applied the valuation which was lowest amongst the industry as each of the print media companies are quoting at between 2-3.5 times their FY11E revenues and in higher double digit P/Es. Considering the clean balance sheet of Sandesh as well as its positioning in Gujarat market, if the acquisition of it was to happen then it would be applied much higher valuation than Mid-Day. Still, to our surprise, Sandesh is trading at a market-cap of just Rs. 251 cr. (1.2 times FY11E publication division revenue of 205 cr.) with a single digit P/E which singnifies gross undervaluation of Sandesh on the bourses.


Conclusion :

Sandesh Ltd. is today the most undervalued play available on India's growing Print Media Industry. The factors making Sandesh the most attractive amongst the peers are management's focus on cash generation and the company's cash-rich balance sheet. With Cash & Cash Equivalents (including loans given) worth approximately 200 cr. which is almost equal to the FY11E revenues of company from Print Media, Sandesh becomes the most lucrative exposure to Print Media industry as at current market capitalisation, its respectable presence in Print Media in the form of it being the 3rd Largest read Newspaper of Gujarat, is available almost free-of-cost.
A case in point to consider here is Times Group taking strategic equity stake of 12.16 % in the company in the year 2006. At that time the revenue from publication division (Print Media) of Sandesh was just Rs. 125.86 cr. whereas its overall revenue was just Rs. 144 cr. ; Still it was valued by Times Group at Rs. 222 cr. (1.76 times revenue from print media) at that time and so Times Group took 12.16 % stake by paying Rs. 262 per share. Today, after 4 years, when Sandesh's revenue from publication division (Print Media) is on verge of crossing Rs. 200 cr. mark with overall revenue slated to cross Rs. 240 cr. mark in FY11 which entails to a growth of 62 % in publication division alone over that when Times Group took stake, the company is still available at just Rs. 251 cr. market capitalisation which entails to a growth of just 13 % over the valuation applied by Times Group for taking equity stake 4 years back. Another important thing to note here is that after diluting equity in favour of Times Group in 2006, Sandesh has not had any equity dilution in the form of any stake sale or bonus, etc. On the contrary, it has had a nominal equity reduction because of a Buy Back by the company at the rate of Rs. 180 two years back.
Hence, considering all these factors, it is imminent that in a segment such as Print Media, which has entered into a consolidation phase with a hightened M&A activity in the form of recent deal of Mid-Day Multimedia & Jagran at 1.8 times revenue, Sandesh, with a respectable presence in India's fastest growing state like Gujarat, can't trade at just 1.2 times print media revenue as well as low single digit P/E for long and it is just a matter of time before which the market starts giving it a respectable discounting on lines of its peers.
The fair price considering the current business and balance sheet strength of Sandesh works out to be Rs. 538 which is at 82.3 % premium to current market price of Rs. 295. This price can get discovered very fast by the market on whiff of even the smallest positive trigger. The fair price of Rs. 538 is arrived by :
giving Sandesh's print media revenue a multiple of 1.8 times (which is the lowest amongst listed print media peers and is in line with the multiple given by Jagran to Mid-Day Multimedia which had half the size of Sandesh as also the valuation applied by Times Group while taking a stake in Sandesh in 2006),

applying a 50 % discount to real Cash & Cash Equivalents worth Rs. 100.8 cr. on Sandesh's books (which is the lowest discounting given for uncertainity rgdg. utilisation of cash),

considering just 40 % of the value of loans given by the company (bulk of the loans are given to promoters' group entities and so are fully recoverable in cash or kind in the form of land bank in group companies)

Here, we have not considered the OOH business of the company atall because of its recent foray into it. If the company can turn OOH business into a profitable one with a reasonable scale, it could increase company's intrinsic value significantly in future but to be on a safer side, it is best to base an investment decision based on current visible factors only.
All in all, Sandesh is a rare cash-rich play available in Print Media & OOH Segments at a decent undervalued price.




For Downloading the odf of the report click http://www.scribd.com/doc/47444329

 

[maheshi]

find my replies to one of the fellow members' queries on Sandesh below...

1. Any possibility of promoters of Sandesh try to use market conditions to delist the scrip at very low buyback price (the way Nirmas/shakti Metdor have done/doing?)

Ans.- Highly unlikely as they have mega plans for real estate sector wherein from this year i.e. 2011, their 2000 cr. project for building a high-end township will start as also if they wanted to delist they would have easily done by now... for ex. before 2 years instead of announcing buyback at 180 they could have easily triggered a delisting... here one imp. thing to note is that in buyback there was very thin tendering and even if they want to delist I don't think they will get the opp. below Rs. 400 as BCCL has taken the stake at Rs. 262 4 yrs. back..

What I think could happen logically is the company will remain listed with 3 divisions viz., Print Media, OOH and Real Estate few years down the line.



2. How is the regional media in Gujarat,what is the kind of dominance they have in this market, how has it changed over years?

Ans.- Till the time Divya Bhaskar was launched Sandesh was No.2 behind Gujarat Samachar.. after that it lost its position and was down at No.3.. now since 2009 Sandesh is regaining the position by thinning the margin between DB and itself and as per the latest figures it lags behind DB by approx. 1 %.. Also since 2009 it has launched US Edition of its newspaper as also launched revamped www.sandesh.com which has fast become very popular amongst urban new generation... the focus of management has always been carving maximum profits and chart a steady growth and in future too I don't think management will indulge in any severe capital-intensive competition.... The position of Sandesh is intact in Gujarat as one of the prominent daily and it is not likely to loose its position in many years to come... No.2-No.3 shifting could go on but I don't think Sandesh will go far ahead of DB or far lower either..


Results on 28th Jan. will be interesting to see as if in that its publishing div. maintains the trend of first 2 qrtrs. then it will mean highest growth year in last 10 yrs. history which will be very positive trigger for the company.

Rgds.
mahesh

 

[maheshi]

Please find my take on many queries raised on Sandesh by fellow members below :


1. Loans given to promoter group companies -- this does not sound too good -- one doesnt know how much interest it is going to earn for the shareholder -- and how much is going to be recovered --these days when most companies are viewed sceptically due to the scams etc, this point is going to weigh against the company.

Ans.- I partially agree with you on this point as far as loans to group companies not ethical goes but here one needs to look deeply into the history of finance division to assess whether such loans given are earning good profits for shareholders or not.... If you observe the history of finance division of Sandesh then you will find that it has performed very well in past and infact has been a saviour in adverse conditions faced by publishing division...also if you observe since last two years there has been considerable reduction in loans given as also management has categorically stated its intention to move away completely from this business into some kind of core business like OOH. If you look at other angle of this then you will notice that if the funds blocked under finance division worth 120-150 cr. gets freed up for some core business like OOH (which has already started if you closely study 1stHalf FY11 balance sheet) it has the potential to increase the intrinsic value of the company significantly in a very short time.



2. Coming to growth of the media sector in Gujarat, the penetration of newspapers in Gujarat is very high even to the village levels -- so I dont know how much more space there is to grow -- the only way the company can significantly grow is by grabbing market share enjoyed by other players -- according to me gujarat samachar is way ahead of others in terms of loyalty, quality of content etc-- it needs to be seen how sandesh fares against the top two. I dont see sandesh in my city too much when i go to my friends or relatives place -- it might be strong in some pockets of gujarat -- but strong growth for sandesh looks far fetched

Ans .- I agree with you on this that strong growth of Sandesh only based on publishing division is not likely but if Sandesh is able to regain No.2 position in the coming 2 years then it will have a good ramp up in advertising revenues which will be very profitable for the company. Also, ur. observation on Sandesh's reach is right as Divya Bhaskar has snatched from it the No.2 position becuase of its stronghold in urban areas only but if you observe closely then since 2009 DB is unable to penetrate deep into urban market and has reached a saturation level so what it is doing is it is concentrating on Saurashtra Samachar to stay on No.2 slot which itself is having wide swings in popularity. The reason for DB's popularity in urban market had been becuase of quality of its printing but that edge is now going to get diminished post modernisation of Sandesh's printing centres... it is because of this only that you are finding a good growth in revenues of publication division in 1st HalfFY11 for Sandesh and if in 28th Jan. results this growth continues then I feel it would have easily snatched some market share in urban areas from DB.





3. OOH could be next growth driver but again it needs to be monitored how is grows and how is its profitability--- I think ENIL is also into OOH but doesnt seem to be making too much headway.

Ans.- Yes.. ENIL sold off its OOH business recently to Times group at throwaway price but here you need to look closely at OOH assetes being build by Sandesh vis-a-vis Times OOH as also Sandesh's strategy in business... If u look closely at Times OOH then minus its airport assets all other assets were quite profitable... Sandesh's management so far since last two decades have not done a business which posts looses on a sustainable basis... hence, in OOH too they have taken bus sheters and prime location hoardings to start with which are profitable ventures.... Also, Times group's association with Sandesh will be quite fruitful in this regard as Times group is very bullish on their OOH business going forward and see a tremendous opportunity there... However, I agree on 1 point that management has to come clear on OOH business and we need to closely monitor co.'s progress on that front.





4. For a company with so much cash to burn, dividend payout is very poor with dividen yield at cmp around 1% (Rs 3 per share). Doesnt speak too much about the investor friendliness of management. For a company with eps of around 40 with nothing else to do with cash, it can easily dole out dividend per share of around 15-20 instead of hoarding the cash.

Ans.- I 100 % agree on this but here comes the selfishness attitude of indian promoters.... They want to buyback and increase their stake in the listed entity so that they can then acquire real estate business of the group under the listed entity..... as per sources the tonship which is going to be built by Sandesh is going to come under listed co.'s fold...



5. Because this correction has thrown up lots of wonderful opportunities to buy stocks with sustained growth visibility, the question that begs to be answered is Why buy Sandesh? Only point in favor is margin of safety.

Ans.- In addition to margin of safety there is scope of tremendous growth in capital in a very short time becuase of co.'s undervaluation vis-a-vis peers.



The basic premise in investing here is that one can make good money if the company were to be sold off to some worthy suitor but there also one is sceptical whether something like what riddhi siddhi did is not repeated. According to me there are too many ifs and buts here.

Cash generation over the years is very good but if investor is not going to see any cash in his hands I dont think the cash is doing him any good.

Ans.- We have entered an era where cash is going to be valued by the market more fairly than before... Debt-ridden companies are going to take a back seat atleast for 1-1.5 years and cash-rich companies will find buyers at every fall..The case of divestment of publishing business is not possible in case of Sandesh as it is a prestige issue for promoters hence a case like riddhi siddhi is impossible... In a int-rising economy if one is able to utilise cash well then it will be a great opp. of capital appreciation for its shareholders. The shifting away of focus from finance business since last two years is a welcome move of the management and in any case a running co. with 200+ cr. revenue and healthy EBITDA with a good positioning in the operating sector can't get valued at just cash level on its books for too long. If you study closely the balance sheet of Sandesh then you will find that in case the funds utilised for finance division gets freed up then around 200 cr. cash sits on the balance sheet of the co. which itself takes care of any downside in the stock.... the upside can get taken care of by the rising revenues of publication division and clarity rgdg. foray into other core businesses like OOH as also regaining of No.2 position against a national leader like DB. Hence, although I don't advise over exposure to the stock but Sandesh deserves to be part of any shrewd investor's portfolio because such stocks appreciate very fast even on whiff of a small positive trigger and can give one an excellent return over medium to long term.



Rgds.

Mahesh

 

[arvind.kumar.bhardwaj]

Hi,
I am looking your post now. What do you think about this script now. Do you think in current time it is also a good investment option.

BTW you do great analysis and I like the way you present. I also would like to know your view on piramal healthcare.

 

[maheshi]

Hi,
I am looking your post now. What do you think about this script now. Do you think in current time it is also a good investment option.

BTW you do great analysis and I like the way you present. I also would like to know your view on piramal healthcare.

Hi Arvind,

Sandesh is a pure long term play which will give return in one go...One needs to have extreme patience in this kind of shares as capital preservation is highest but capital appreciation timing is uncertain...

I don't track piramal healthcare closely so it will not be proper for me to comment on it...

Currently 3 companies are under my active coverage, viz., PI Ind., Jubilant Industries and LG Balakrishnan....with a hold on PI and Buy on Jubilant Ind. and LGB.....In case you have any query on any of these companies feel free to get back to me.

Rgds.
Rgds.