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

st
1 Half 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 87.39% 73.29% 56.12% 60.76% 57.74% 89.84%
Reported

EBITDA 19.07 cr. 33.87 cr. 22.24 cr. 22.18 cr. 6.12 cr. - 0.88 cr.
% of Total EBITDA 70.29% 56.90% 51.42% 91.76% 73.03% (overall profit
Reported 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 3 rd 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.