(Current market price is Rupees 78.05 per share.)
In the 1980s Shobhana Bhartia, shortly after she joined her father K. K. Birla’s Delhi-based newspaper Hindustan Times, decided that The Washington Post was the broadsheet to emulate. She met Katherine Graham, the owner-publisher of the Post, in Washington D.C. and spent some time noting the best practices at one of the best run newspapers in the United States. Ms. Bhartia returned to India and, after many years of organizational resistance, has been able to mould HT Media into a media company of her liking. Like Katherine Graham, she is a woman who inherited from her father the leading daily of its nation’s capital and has defied stereotypes and doubters to emerge as the leader of a strong and well-run company.
However, The Washington Post has faced severe headwinds in its print media business over the last few years and was sold on October 1, 2013 by the Graham family. Does this augur poorly for the future of HT Media?
HT Media has three main print properties: Hindustan Times – the no. 1 English language newspaper in Delhi; Hindustan – the no. 3 Hindi property in the country and no. 1 in the states of Bihar and Jharkhand; and Mint – a Wall Street Journal partner and no. 2 financial daily in India.
The Indian print media market has grown revenues at 7% per annum over the last few years and is projected to achieve 9% over the next few years. This is partly due to increasing literacy levels and partly because broadband internet penetration in India is so pathetic that it will be many years before even half the population reads broadsheet-quality news online. Hindi and regional language papers are particularly insulated from digital media for the foreseeable future. HT Media’s consolidated revenues from the print business have grown at a compounded annual growth rate (CAGR) of 11.3% over the last three years, comfortably ahead of the market average, mainly due to the growth of the Hindi business.
Having made the case that the main print business is not going to decline or incur losses any time soon due to “the death of newspapers”, let’s look at some components of HT Media which can be valued. The following numbers are for the standalone entity.
The company holds net cash of around Rs. 700 crores (Rs. 1 crore = $160,000). HT Media’s 75% ownership of Hindustan Media Ventures Ltd. (HMVL – where the Hindi language properties reside) is valued in the public market at roughly Rs. 620 crores (I think HMVL is worth at least double but let’s keep that aside for now). Net tangible assets (fixed assets plus net working capital; the physical assets on which the operating income is earned) are Rs. 420 crores. Operational pre-tax income levels for the newspaper business are currently around Rs. 140 crores (excluding interest on debt on the expense side and interest on cash or investments on the income side). Finally, there are the radio and digital media businesses which are, collectively, making losses. Ms. Bhartia doesn’t seem to be the type of business person who will tolerate losses due to inertia or lack of focus. The negative income has the specific purpose of building value through online franchises in a nascent environment. I will assign a value of zero to these businesses but you can apply a negative number and make your adjustments accordingly. Current market capitalization is Rs. 1,800 crores.
Therefore, we have here a business kernel with a 90-year-old franchise that earns about 33% (140/420) pre-tax on its net tangible assets, available at a price to earnings before interest and taxes ratio (P/EBIT) of 3.4 ((1800-700-620)/140).
The Washington Post, even though it is in a much tougher and more mature market, where broadband penetration is high, was sold for a price to earnings before interest, taxes, depreciation and amortization ratio (P/EBITDA) of 17.
Commentators have talked about the high valuation at which Jeff Bezos bought the Post but in any case the components of HT Media along with its status, current earning power and the life stage of its markets suggest that the disparity in valuations is not merited.
Here are some risks:
- The English newspaper business revenues have remained stagnant for a few years. If these decline significantly, it could affect earnings negatively.
- If the losses in the digital businesses ramp up significantly or stay high for many years, returns might be affected negatively.
- If the cash in the company is not used judiciously, intrinsic value will be affected.
Note: Although I prefer using price to earnings (P/E) ratios, I have used P/EBIT and P/EBITDA because the reporting for the Washington Post deal mentions these ratios.
Image © Saktishree