Sandesh (NSE: SANDESH)

(Disc: Invested. This is not a recommendation.)

Portfolio Activity

Before I get to the stock analysis, recent portfolio activity. I sold Oracle Financial Services Software at 3934/share today, booking a 38.7% return (including dividends) on the investment for the model portfolio. While the stock has performed well, I don’t see much upside from these levels to warrant holding the stock and with the model portfolio (and my own portfolio) fully invested, I needed to exit a stock to make this new investment. 

I had initially set out to sell Kaveri Seed but recent price trends make me hold onto it a bit longer. In my original writeup on the stock, I had expected a comfortable 20% return, and it currently sits 40% above the original purchase price. The stock has historically peaked around these levels before beginning a downtrend, and has exceeded the 700 levels only twice in recent history. I’ve placed a stop loss order of 620 on the stock which, if triggered, will free up enough cash for the next two investment in the model portfolio. 

A quick word on the model portfolio. Since starting on July 01 2022, there have been 12 total investments made (excluding Sandesh), and 3 exits. Of these 12 stocks I’ve written about:

2 are currently at or over a 100% since writing about them (Daawat 78.15 to 160.2 and Zensartech 221.65 to 480). I sold Daawat at prices well below what it currently trades at. 

8 of the remaining 10 stocks have generated positive returns, with 6 in the range of 10-80%. Everest Kanto and Ambika Cotton (the most recent investment) still bounce along their entry price (including dividends, Ambika is up 6%). 

1 stock, Kiri Industries is down around 6% but my thesis rests on it either becoming a multi-bagger (by receiving the 5000cr windfall) or a poor performer, but with minimal downside. 

1 stock, Jindal Poly Films, is down around 25% and is the worst performing stock in the portfolio. Seeing the recent quarter numbers of packaging stock Huhtakami, I’m hoping for similar performance in Jindalpoly. If that doesn’t transpire, I’ll be selling the stock and booking the loss.

For the first 15 months, the model portfolio has returned 31.1% including dividends against the Nifty TRI return of 23.93% (CAGR 21.55% vs 16.57%). 

Onto Sandesh.

The Company

Sandesh is a stable and predictable business. Founded in 1923 and operating from Gujarat, the company's operations span print, television, digital and Out-of-Home (OOH) advertising. Over the past century, it has solidified its position as a trusted source of news and information in the state. 

The core of Sandesh's operations remains its newspaper publications. Spanning 6 editions emanating from strategic locations across Gujarat, the company ensures comprehensive coverage of both urban and rural stories. Its publications are read by a large and loyal reader base, helping solidify its position as the second most read daily in Gujarat. 

In addition to print, the company also operates a 24x7 Gujarati news channel, ‘Sandesh News’, and an OOH advertising division, ‘Spotlight’. The news channel is the fastest growing 24x7 Gujarati News channel, and its OOH division has secured various prestigious tenders from statutory authorities in Gujarat. 

In recent years, acknowledging the global trend towards digital consumption, Sandesh has been focusing on enhancing its digital footprint. Their website not only offers an e-newspaper that mirrors its physical counterpart, but also provides real-time updates for those that prefer news on-the-go.

The Industry

While the global media industry has seen a significant decline in traditional media and a shift towards digital, India’s print (newspaper) sector continues to thrive and grow. This is largely due to the fact that India is one of the few countries where newspapers are still delivered daily to doorsteps, a practice that has cemented the role of print in the cultural fabric of the nation. Other catalysts for the sector’s continued growth include the rise in literacy rates and the continued preference in many parts of the country for tangible news sources over digital ones. 

Even within the print sector, there is a clear distinction between National and English newspapers, and Regional Newspapers. Though National Newspapers boast a broader reach, Regional Newspapers (especially in languages like Gujarati, Marathi, Bengali and Telugu) command a loyal readership that often surpasses their National counterparts.  For many, regional print journalism offers a credibility that is often unmatched, leading to a fiercely loyal readership base. This regional emphasis is particularly pronounced in states like Gujarat, where publications like Sandesh have become household names.

Like most other industries, the COVID-19 pandemics impact was greatly felt in Media, especially in the print sector. Both circulation levels and advertising revenues dropped dramatically at the onset, but have since gradually risen, and are now nearing their pre-pandemic levels. Even here, Regional Print fared better than their National counterparts, experiencing a less dramatic fall in both circulation numbers and advertising revenues, as well as a quicker bounce back. 

All told, the digital wave is still undeniable. With one of the world's largest internet user bases, India has seen a surge in online news platforms, digital streaming services and social media usage. The younger demographic in particular is driving the shift from traditional to digital. This growing shift to digital and the pandemics impact on the traditional print industry both underscore the need for print media houses to innovate and adapt, blending the strengths of traditional journalism with the reach and immediacy of digital platforms.

Sandesh Financials

A quick discussion on how Sandesh generates revenues and the trends following the pandemics impact. This part is important, as it pertains to the catalysts I discuss later as my reasons for investing. 

The company’s financials followed the general industry trends. Revenues from operations peaked in FY19 at 417cr, and subsequently dropped 18.2% in FY20 to 341cr and a further 20.3% in FY21 to 272cr as circulation of newspapers and ad revenues dropped due to COVID restrictions. Since then, revenues have bounced back, growing at a rate of 11.7% annually between FY21 and FY23. Revenues, however, still are 18.7% below their FY19 peak.

The bulk of the company’s revenues come from 1) The sale of publications, and 2) Revenues from advertisements. Advertising revenues generally accounts for between 70-75% of total revenues, with sale of publications accounting for the remaining 25-30%. 

The revenues from sale of publications has been in a general decline. In FY17, the figures were 99cr and by FY20 had declined to 93cr. After a drop of over 25% to 69.5cr in FY21, revenues from this division remained flat in FY22 before rising by 9.5% to 76.5cr in FY23, though still 17.8% below FY20 levels. 

Advertising revenues on the other hand experienced growth leading up to FY19, when it peaked at 262cr. These revenues fell by 10% in FY20 and a further 36% in FY21 to 151cr. Since then, revenues from this division bounced back sharply, first by 20% and then another 30% to 235cr - reaching FY20 levels and within 10% of the FY19 peak. 

The pandemic’s impact on Sandesh wasn’t all negative. Impacted by falling revenues, the company worked to improve its operating margins. The company grew EBITDA margins that were 20% in FY19 to between 25-28% in FY21-23. As a result, net income actually grew, from 57cr in FY19 to 76cr in FY23. [Note: I don’t include other income as part of revenues in my calculations, so they appear lower than reported figures]. 

Recent headwinds make this margin improvement even more impressive. The bulk of Sandesh’s expenses comes in the form of newsprint costs. As a result of the pandemic that disrupted the operations of newsprint mills, and the impact of the Ukraine war which affected the import of newsprint (Russia is a major exporter), both international and domestic newsprint rates shot up to as high as $1000 per metric ton by FY22. Despite this dramatic rise in an essential input cost, the company was still able to boost both operating margins and net profitability. 

Catalysts

I see two catalysts that could boost earnings and the stock price. 

First, I expect advertising revenues to continue rising on the back of election spending and other events such as the cricket world cup. While I don’t expect revenues from the sale of publications to rise much (de-growth is also a possibility), I expect overall revenues from operations to rise from a combination of the two. 

Second, newsprint prices will continue to fall, further boosting margins and net profitability. Newsprint costs are already down from their peak of over $1000/metric ton in FY22 to around $674 in Q1 FY24 (source: DB Group earning call). The impact of falling newsprint cost won’t be felt immediately however, as the company will first get through extant inventories, but will surely reflect sometime in the coming quarters. 

The catalysts mentioned above aren’t unique to Sandesh, of course. They apply to all companies in the print sector. Anticipation of growing revenues and increased margins seem to have boosted the share price of other companies in this sector, but not Sandesh's. DB Corp, publisher of Dainik Bhaskar, has seen its share price grow over 130% since May 2023 and trades at an EV/EBIT of over 20. Similarly, Jagran Prakashan has grown 60% in the same period and trades at an EV/EBIT of over 10. This, despite the fact that operating margins and net profitability are down for both, compared to their pre-COVID levels. Sandesh, of course, is a much smaller company. 

Valuation

The company is reasonably priced, if not cheap. It certainly trades at valuations far cheaper than industry peers. 

It currently trades at around 4.5x TTM EBIT. Historically, the company has traded between 5.5-8x EBIT, and averaged 6.2x between FY19 and FY23. Taking 6x TTM EBIT, we get an enterprise value of around 950cr. Add back the cash (the company is debt free), and we get a market capitalisation of around 1000cr, putting the stock price at around 1320/share. 

The company consistently generates healthy free cash flows. In FY23, the company generated around 90cr in free cash flow. Using a terminal growth rate of -1% and a 10% discount rate, I get a value of 1290/share. 

Book value per share has been growing each year and the company trades below book. Net current asset value per share (current assets minus all liabilities) is between 600 and 700 per share. This number, of course, doesn’t take into account the value of the company’s physical assets such as land and building, and the value of the brand. 

All said, I estimate the value of the company to be somewhere between 800 and 1500 per share. It’s most likely trading closer to fair value, but at a time when most stocks (including many in the portfolio) are trading at lofty valuations, this isnt bad news.

Risks/Concerns

The stock is pretty illiquid. With just 76 lakh shares outstanding, the average daily volumes are in the low thousands and on many days, it trades in the hundreds. While I don’t view illiquidity as a risk, its best to address it. Though volumes are low, it seems the stock price isn’t too volatile. Depending on the time frame chosen, the stocks beta is around 0.7-0.9. The stock is largely ignored, as seen by these low volumes. A stock like this can continue to be ignored without any meaningful catalyst, and a rush to exit could severely depress the stock price (but not value)- providing buying opportunities. Depending on the quantity, it could become a task to both accumulate and liquidate. For the long-term holder who is capitalising on price-value discrepancy, this shouldn’t be an issue, as volumes tend to rise in periods of optimism. 

Second, managerial compensation is pretty high. In the last 4 years, compensation has grown from 7.5cr in FY20 to 11.7cr in FY23. That said, the bulk of the compensation (between 80-90%) is tied to company profitability and performance, so growing compensation corresponds to growing profitability. Still, the compensation is high and amounts to around 3-3.5% of revenues. 

Finally, the company plans to take measures to increase its digital footprint. Poor capital allocation decisions in this aspect could affect company earnings and thus valuations. 

Final Thoughts

Sandesh is a largely ignored stock that trades at an attractive valuation. While it was impacted by the pandemic, the subsequent recovery has been strong and I expect both revenues and margins to grow in the coming year(s) on the back of growing advertising revenues and falling newsprint costs. I value the company at between 800-1500 per share, though its most likely trading at or near fair value. The stock is illiquid, and there is potential for wild swings in prices both to the down and upside, though the stocks price trends show that it isn’t too volatile. All said, I believe the downside is fairly low, and the stock holds potential to provide adequate returns.