Citigroup has downgraded the stock of HT Media to SELL from BUY after a disappointing first quarter of FY-2008 with a Target Price of Rs 212.
Earnings growth for HT Media is slowing, partly because of new investments, but also because fixed costs have continued to increase rapidly. In 1Q FY08 it reported the slowest growth of the last two years.
HT Media’s fixed cost base compares unfavorably to other Indian media companies. While it has made some new investments, the extent of increase in fixed costs is too high. Employee costs rose 400bps over the last three years, despite revenues doubling, which is surprising given high operating leverage inherent in media businesses.
1QFY08 results were below expectations. Even after adjusting the 500bps impact on margins due to new investments, EBITDA grew only 7.1% (33% adjusted for new business investments), the slowest over the last two years.
Citi reduced EPS estimates for FY08-09E by 10.3-12.2%. At 27xFY09E P/E, HT Media trades at an 80% premium to its regional print media peers, which is excessive. HT Media is likely to report an EPS of Rs 6.64 and Rs 8.49 for FY-2008 and FY-2009 respectively.
