MANAGEMENT DISCUSSION AND ANALYSIS

OVERVIEW OF ECONOMY

International Monetary Fund (IMF), in its World Economic Outlook Report of April 2015, estimated the Global GDP growth to have remained flat at 3.4% for 2014. The IMF forecast for 2015 indicates a 10 bps increase to lift the Global GDP growth rate to 3.5%.

In India, the return of a single party majority government, after a long gap of three decades, lifted the hope of translating this political stability into steady policy reforms and sustained economic growth. Government's committed focus on reviving economic growth through increased foreign direct investment in a number of crucial sectors, an immediate thrust on fast-tracking growth in the core infrastructure sectors, connecting growth with the vast masses of rural and sub-urban populace and steely resolve of making India as an attractive global destination for doing business, has since gone on to increase the confidence and interest of global business and investor communities

While the true results of these measures would become visible on the ground with a lag effect; contained inflation, three consecutive cuts of 25 bps each in the Repo Rate by the Reserve Bank of India, and strengthening of Fiscal and Current Account Deficit were significant structural improvements achieved in the fiscal year 2014-15. The developments augur well for rebooting our economy to a path of sustained higher growth.

The Government moved to a new series of GDP estimation, making 2011-12 prices as the base price (factor cost). The GDP growth rate, as per CSO's estimation based on the new series, recorded a 40 bps increase to reach 7.3% as against 6.9% in the brvious year. The growth was led by the core sectors of manufacturing, utilities and construction, while agricultural activities recorded a drop in their growth, and the services sector recorded a moderate growth.

Government's drive to increase the share of manufacturing segment to 25% of the national GDP is being backed by an ambitious 'Make in India' campaign besides being supported through an increased thrust on mass scale and high impact factors such as core infrastructure, financial inclusion, land & labour reforms, etc. Making manufacturing the bedrock of economic growth, as and when accomplished, would help improve our overall socio-economic indicators by generating mass employment, reducing dependence on agriculture for a vast rural population, and generating additional demand for consumption of retail services.

INDUSTRY REVIEW

Indian Media and Entertainment Industry sustained its growth momentum of about 12% in 2014. From Rs. 580 billion in 2008 to Rs. 1026 billion in 2014, the industry has grown at a CAGR of 10.0% over the last 6 years. With a projected CAGR of 13.9% for the next 5 years, the industry is likely to reach Rs. 1964 billion by 2019, with the top three positions remaining unchanged and occupied by Television, Print and Films, in that order. Digital Advertising, though small today, would grow at an imbrssive CAGR in excess of 30% to become the fourth largest segment by 2019, from its current standing of the fifth largest.

Advertising revenue, a brdominant contributor to overall revenue of TV, Print, Radio, Outdoor and Digital medium recorded a strong annual growth of 14.2% in 2014 to reach Rs. 414 billion. It is estimated to almost double to Rs. 816 billion over the next five years at a CAGR of 14.5%.

Print Media

Print Media advertising grew by 8.5% in 2014 to reach Rs. 176 billion from Rs. 163 billion in the brvious year. Print contributed 43% to the total advertising revenue for the industry in 2014, retaining its No.1 position among various media segments. Television, though, is fast catching up in terms of advertising revenue.

Circulation revenue grew by 7.9% to reach Rs. 87 billion in 2014. Growth in circulation mainly came from Tier II and Tier III cities with regional language newspapers outperforming the National English dailies. This trend is expected to continue over the coming years.

Hindi and vernacular markets accounted for nearly 64% of the total print revenue in 2014. Contribution from the regional advertisement also increased in the overall print advertising pie this year

While growth in Hindi and language market accelerated in 2014, English market recorded a slowdown in growth. The moderation in growth rate of English print is primarily on account of consumption getting crushed in the urban areas more than the rural areas. Consequently, advertising revenue has shifted more towards non-English print media. Language print, which offers an economical mode of reaching the target audience in smaller cities and towns, will continue to grow its advertising revenue at an imbrssive rate, the time though has come for language print industry to fast evolve a strong digital strategy.

The advertisers are increasingly focusing on print as a medium to reach out to their customers in Tier II/III cities and rural markets. The FMCG sector continues to be the largest contributor to the advertisement revenue, with its share increasing to 13.5% in 2014 from 12.3% over the last year. Auto, Education and Real Estate were among the other big spenders.

OPERATIONAL REVIEW

Operating Geographies

While advertising revenue is related to the economic growth in the country, circulation revenue is expected to grow due to structural growth drivers like higher literacy levels and improving spending power of the readers. The states, where Hindustan has brsence, have witnessed a healthy improvement in the demographic as well as economic factors, auguring well for the newspaper.

Bihar and Jharkhand

Hindustan is the No.1 Hindi newspaper in Bihar and Jharkhand. As per the IRS Survey, 2014, it has maintained its leadership position in both the states with a readership of 43.8 Lacs and 13.1 Lacs respectively. This reaffirms Hindustan's leadership position in the two states even after recent entry of new players. Besides having a large literate population (5.44 Crore and 1.88 Crore in Bihar and Jharkhand respectively), both the states are witnessing healthy growth. Between 2008-09 and 2013-14, GDP of Bihar and Jharkhand have grown at a CAGR of 21.1% and 16.5% respectively (Source: Indian Public Finance Statistics 2013-14, Ministry of Finance). The overall growth, which has been possible due to socio-political changes in the states, has created an opportunity for newspapers like Hindustan to leverage on its readership mix to attract high quality advertisers.

Uttar Pradesh and Uttarakhand

Sensing the growth potential of Uttar Pradesh, the Company had identified the state as a growth area in early 2000s and aggressively invested into it from 2006. As per Census 2011, Uttar Pradesh, the second largest state in terms of GDP (8.1% contribution in India's GDP) had its economy growing  at a CAGR of 15% between 2008-09 and 2013-14.  (Source: Indian Public Finance Statistics 2013-14, Ministry of Finance). With 11.84 Crore literate population, the state also has a large number (12 out of 62) of Tier II cities, and therefore, a high-focus target market for the advertisers. It is not surprising that Uttar Pradesh is the largest advertising market for Hindi newspapers (Size: Rs. 1200 Crore approx.)

Today, out of the 19 printing locations of HMVL, 12 are located in Uttar Pradesh and Uttarakhand. During the year, Company re-launched its Kanpur edition, which has been hugely successful. Company's effort in the state for several years has borne fruits with Hindustan bagging the No.2 spot in Uttar Pradesh in IRS Survey, 2013 and maintaining it in the latest IRS Survey, 2014 as well. As per 2014 Survey, Hindustan has a combined readership of 81.30 Lacs in Uttar Pradesh and Uttarakhand.

Delhi-NCR

Delhi-NCR is one of the key markets for Hindustan. In between 2008-09 and 2013-14, GDP of Delhi has grown at 16.7%. (Source: Indian Public Finance Statistics 2013-14, Ministry of Finance). Hindustan is confident of leveraging on its affiliation with its promoter's publication Hindustan Times which provides greater visibility and reach for its brand in the region. As per the IRS Survey, 2014, Hindustan maintained its No.2 position in Delhi with a readership of 10.7 Lacs.

Reader Engagement

Reader engagement programs have continued to play a key role in maintaining and expanding our reader-base. Hindustan's voter awareness initiative Aao Rajneeti Karein has been hugely successful in engaging large number of people in different cities. Various programs on cleanliness were conducted with customised names for higher local connect. In Kanpur, it was named as Swachh Kanpur-Sunder Kanpur, while in Agra, it was christened Agra Hai Ganda, Kya Aap hai Sharminda. Other key reader engagement programs deployed during the year were Hindustan Aapke Dwar (a program to bring regulatory bodies and citizens face-to-face, at the citizen's doorstep for on-the-spot resolution of their issues), Hindustan Swachh Ganga Abhiyan

(a program to create awareness & public consciousness towards need for cleaner Ganges), Kyon Batti Gul (a program to keep deeper level of engagement between the public and electricity distribution entities) etc.

Hindustan Masti Margis an innovative way for Hindustan to engage with its readers. Through this, families in our markets reclaim roads for health, fitness and fun promoting activities during the weekends. The activity is being undertaken in our 6 markets - Kanpur, Lucknow, Agra, Meerut, Bhagalpur, and Muzaffarpur at a fixed periodicity and is receiving great response.

Productivity Improvement

Sluggish market growth, impact of Wage Board ruling and price cut by the competitors, posed cost challenge for the Company. Company's focus on yield improvement, gaining shares from the competition in specific markets and product innovation has helped in overcoming these challenges.

The Company has a "Total Cost Productivity" program that continuously reviews the cost structure. Various measures have been taken to keep a check on the newsprint and production cost during the year. The use of 42 GSM newsprint instead of 45 GSM has brought down the cost, and change in Ink Software and Ink Bucket has helped in improving productivity.

The Company is continuously investing in enhancing the capacity and improving colour capabilities. Presently, investment is being made in establishing a new printing unit in Haldwani, which will be the second unit in Uttarakhand.

FINANCIAL REVIEW

Revenue

The Company's revenue increased by 15% to Rs. 875.0 Crore in FY15 from Rs. 760.3 Crore over the last year due to strong growth in both advertisement and circulation revenue. The advertisement revenue grew by 13% to Rs. 596.5 Crore from Rs. 530.0 Crore in FY14 on the back of higher advertising yields. Circulation revenue also increased by 13% led by both higher circulation as well as higher net realization per copy.

Expenditure

Expenditure increased by 13% in FY15 over the last year due to higher raw material costs and employee expenses. The raw material costs increased by 12% in FY15 over last year on account of increase in newsprint prices till the second quarter and also increased consumption owing to higher circulation. The employee expenses increased by 23% to Rs. 106.8 Crore in FY15 from Rs. 86.6 Crore in FY14 due to a one-time regulatory compliance cost coupled with increased employee count and increments.

EBITDA

EBITDA growth was 22.6% in FY15 with EBITDA margins expanding to 25.5% from 23.9% in the last year.

Interest Expense and Other Income

Interest expenses increased by 85% in FY15 albeit from a smaller base last year. Other income increased by 85% to Rs. 56.4 Crore from Rs. 30.6 Crore in FY14. As a result, PAT has grown by 26.71% to Rs. 140.9 Crore in FY15 from Rs. 111.2 Crore in the last year. PAT margin improved to 16.1% from 14.6% in the last year.

EPS (basic as well as diluted) grew to Rs.19.19 for the year under review, recording a growth of 27% over the corresponding figure of Rs. 15.15 for the brvious year.

Fixed Asset

Gross Block as at March 31, 2015, increased to Rs. 290.2 Crore as compared to Rs. 254.4 Crore as at March 31, 2014. The Company continued to invest in expanding capacity in existing units.

Investments

Investments as at March 31, 2015 increased to Rs. 547.2 Crore from Rs. 368.6 Crore as at March 31, 2014. The increase was on account of investment of free cash generated by the Company.

Inventories

Inventories as at March 31, 2015 increased to Rs. 44.8 Crore from Rs. 33.0 Crore as at March 31, 2014.

Trade Receivables

Trade receivables as at March 31, 2015 increased to Rs. 107.2 Crore from Rs. 93.3 Crore as at March 31, 2014 due to increase in Turnover. Daily Sales Outstanding (DSO) increased from 45 to 47 days, due to delay in government collections.

RISK MANAGEMENT FRAMEWORK

Like any other business, the Company too is exposed to various uncertainties and risks such as changing customer brferences and behavior, competition, volatility in raw material prices and economic uncertainties. Thus, with the objective of assessing and addressing such business risks and their prioritization on regular basis, a combrhensive risk management policy has been put in place, which describes the scope, objectives, processes as well as roles and responsibilities of various functions in risk management.

By way of a systematic risk assessment process, a detailed enterprise risk identification exercise is carried out every year; and risks are evaluated for their likelihood of materialization, potential impact and mitigation efforts. Management has assigned ownership of key risks to various risk owners who are responsible to monitor and review these risks from time to time, and plan for their mitigation measures.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has an adequate system of internal control which is commensurate with its size, nature of business and complexity of operation. It ensures accurate, reliable and timely compilation of financial and management information reports and optimum utilization of organisation resources. The system comprises a well-defined organizational structure with clearly defined authority levels and documented policies, guidelines and procedures covering all business areas and functions. These systems have been designed to safeguard the assets and interests of the Company, and also ensure compliance with the Company's policies, procedures and applicable regulations. The Company uses a robust ERP system (SAP) for accounting across its locations and has Shared Service Center (SSC) in place for procurement to payment processes that enhances the reliability of financial and operational information. During the year, the Company has initiated the process of tracking and monitoring of applicable regulatory compliances and their adherence through an online compliance portal which has further strengthened the compliance environment.

Besides, the Company also has a well defined process for formulating and reviewing its annual and long term business plans and monitoring progress of all its operating activities and projects on regular basis.

The internal control system is supplemented with an extensive program of internal audits and their reviews by the management.

HUMAN RESOURCES

The Company has built a robust people culture which weaves the different parts of the organization into one enterprise. The Company provides an equitable work environment that fosters collaboration, openness, high performance, teamwork and shared values. HR initiated a number of people-centric programs during the year.

The Company is fully compliant with the provisions of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. The Company's formulated policy in this regard is available on the employee intranet portal. The Internal Complaints Committee (ICC) has been constituted. Two such concerns were reported in FY 15 which were adequately dealt with by the ICC.

As on March 31, 2015, the Company had 2,187 employees on its rolls.

OUTLOOK

The Company has a positive outlook for FY16 and beyond. The print industry is expected to grow by 8% to reach at Rs. 28450 Crore in FY 16 over the last year, as per the FICCI-KPMG Report, 2015. The advertising revenue will continue to contribute higher share of the total revenue pie.

With expansion in Uttar Pradesh being complete now, the Company is well poised to gain from its investment made, in the past years. This, accompanied with overall economic recovery, is likely to shore up the revenue of the Company. The benefit of the same has already started coming now in terms of higher advertisement volume accompanied by higher yield. This trend is expected to get further traction in the next year, as the Company expects to command higher yields and increase in advertisement volume, translating into rise in advertisement revenue. The raw material costs are expected to be in control as the newsprint prices have been in the downward trend from the second half of FY15. This should lead to margin expansion.