This was supposed to be a year of consolidation for media firms.
In 2006-07 and 2007-08, the country saw the launch of at least 75-80 channels, 60-odd new newspaper printing facilities, which means nearly as many new editions, and about 11 new newspapers (including Mint, published by HT Media Ltd), and 20 new magazines, according to industry estimates that took into account visible channels and publications.
Uday Shankar, CEO, Star India. Photograph: Ashesh Shah / Mint.
The economy grew by 9.6% in 2006-07 and 8.7% in 2007-08. Coming on the back of 9.4% growth in 2005-06 and 7.5% in 2004-05, this translated into a “boom” period for most sectors. People and companies had more money to spend, and advertising in print and electronic media soared. While advertising in print media grew by 15% in 2005 over the previous year, it grew by 24% in 2006 and 21% in 2007, according to a report by industry body Ficci (Federation of Indian Chambers of Commerce and Industry) and audit firm PricewaterhouseCoopers. Advertising in TV grew by 14% in 2005 and 21% in 2006 and 2007 each, according to the report.
But the party may be winding down.
High growth has resulted in inflation that has been at a 13-year high. Economists and banks are revising downwards estimates of the rate at which the economy will expand this year — the consensus estimate is around 8.5%. And the Bombay Stock Exchange’s Sensex index was down 40.22% till 15 July (from January). And there is political uncertainty at the Centre.
All that bad news gives news media a lot to write about, but newspapers (hit by newsprint prices that have risen 50% in 2008), news magazines and news channels aren’t cheering. And the bullishness of the past three years has given way to caution.
“The last fiscal has been good for us,” says Uday Shankar, CEO, Star India Pvt. Ltd, a leading broadcaster. “But, media is an extremely vulnerable sector during a recession, when advertising is bound to slow. In India, it is also typically seen that many smaller advertisers hold back ad spends ahead of elections. And now, we have some uncertainty at the Centre and elections in some key states are coming up. The combination of a slowing economy and political uncertainty is certainly not good news,” Shankar adds (Star is a subsidiary of News Corp., which owns The Wall Street Journal. Mint has an exclusive content partnership in India with the Journal).
To be sure, there is little evidence yet to suggest advertising spends will shrink anytime soon, and analysts say the “fundamental strengths” of the media business remain the same. “The factors that made media an attractive sector for new investments haven’t changed. India remains a hugely underserved market in many media segments. The ad-GDP (gross domestic product) ratio is still much lower than global averages, and there is plenty of room for more realizations from subscriptions,” says Salil Pitale, head of media practice at Enam Securities Pvt. Ltd’s investment banking division.
The real proof of all this, however, will come in the first quarter results of listed media firms such as Television Eighteen India Ltd, New Delhi Television Ltd, Zee Entertainment Enterprises Ltd, Sun TV Network Ltd, HT Media and Jagran Prakashan Ltd.
An extrapolation of financial results of these firms in the last two quarters (January-March and October-December) doesn’t read well.
A comparison of the stand-alone net profit of 11 pure-play media companies for the third and fourth quarters of the fiscal year ended March shows the beginning of a slowdown. Eight of the 11 firms registered a fall in net profit between the October-December and January-March quarters. Together, these firms registered a 29.2% decline in net profit (see table).
However, one analyst at a Mumbai-based brokerage says he wouldn’t read too much into this. “There are business-specific reasons. Some companies pay the bulk of their tax in the fourth quarter. Some have made provisioning for receivables and most are investing in new businesses. Also, third quarter is generally the best quarter for media firms due to the festival season,” the analyst says. His company’s media policy doesn’t allow him to be quoted in the press.
N. Murali, Managing director, Kasturi and Sons. Photograph: Arjoon Manohar / Mint
And all’s well on the advertising front, says the chief of one of India’s largest media buying firms. The fortunes of media companies are linked closely with advertising—newspapers don’t recover even the cost of production from the cover price, and only a few leading broadcast companies have sizeable revenue from subscription. Sam Balsara, chairman of media buying firm Madison Media Ltd, says there was no slowdown in advertising in the fourth quarter. “If there is any concern, it started only in June. Even in May, IPL (Indian Premier League) was happening, and there was no slowdown.”
“Yes, there appears to have been a slowdown in advertising revenues in the last two-three months. This is entirely reflective of the larger slowdown in the economy and this will probably continue till we are able to rein in inflation and oil prices come down. But the long-term growth story is intact and we don’t see an impact on that. This slowdown is unlikely to last beyond a few quarters or may be a year,” says Ravi Dhariwal, CEO, Bennett, Coleman and Co. Ltd.
Madison Media estimated in January that advertising spends would grow by 20% in 2008-09. Balsara says his firm will decide if this number needs to be revised only after the July-September quarter. “This is the crucial quarter. If there is going to be a slowdown, this is where it will start,” adds Balsara.
One large advertiser, however, says he sees a slowdown in advertising spends if inflation continues to put pressure on margins. “We are facing a tight squeeze on the margin front as we are unable to pass on increases in input costs to our consumers. So we have to ensure the highest level of efficiencies in everything we do and media spends will be no exception... If sales slow down and we feel pressure on revenues as well, then I have no doubt that media firms will feel the heat because media spends are considerable for firms such as ours and there will be pressure to cut down on them,” says V. Ramachandran, director, sales and marketing, LG Electronics India Pvt. Ltd. His firm has budgeted Rs200 crore for media spends for 2008-09, a 35% increase over the previous year’s allocation.
Newspaper firms have been hit hard by soaring newsprint prices. Newsprint, which accounts for 55-65% of a newspaper’s costs, has gone up by more than 50% this year. The commodity that was trading at $610 per tonne (around Rs24,000 then) last December now costs $920.
According to Harish Nagpal, assistant vice-president, materials and production, HT Media, a combination of factors—rising crude prices, supply-side consolidation and a Beijing-ordered shutdown of polluting newsprint mills ahead of the Olympics—could see newsprint breaching its 1995, all-time high price of $1,000. In 2006, China contributed 32% to Asia’s newsprint production, according to data from RISI, an industry source for information on forest products.
Similarly, printing ink, which contributes 5-7% of a newspaper’s costs, has also become more expensive. It is trading at Rs170 per kg, compared with Rs120 per kg a few months ago. Pigment manufacturing plants in China have also been ordered to close down, contributing to the spike in ink prices, Nagpal says.
To offset rising costs, most newspapers have increased ad rates. Kasturi and Sons Ltd, publisher of The Hindu and The Hindu Business Line, increased rates by 15% in April, while Deccan Chronicle Holdings Ltd (it publishes Deccan Chronicle, Asian Age and Financial Chronicle) hiked rates by 30% the same month. HT Media, which also publishes Hindustan Times, has raised ad rates by 20%, through two rounds of increases in February and June.
“Newspapers are not insulated from a larger slowdown, so we also expect some impact, but we haven’t felt it so far. High newsprint costs add to the difficulty,” says Kasturi and Sons managing director N. Murali. He calls for a rethinking of newspaper pricing structures. “There needs to be a healthier balance between revenues from advertising and subscription. As an industry, we need to increase cover prices, even if it means sacrificing some circulation numbers, which are, in any case, mostly artificial.”
K.U. Rao, CEO, Diligent Media Corp., the publisher of Mumbai-based daily Daily News and Analysis (DNA), says: “The first quarter of fiscal 2009 has been very good for us. If there is a slowdown, it will hit those newspapers that are charging high ad rates... In times of a slowdown, advertisers would want to stretch the rupee as much as possible.”
K.U. Rao, Chief executive officer, Diligent Media
For TV channels, the cost of connectivity, in the form of carriage fees, has been increasing. India’s cable market is predominantly analogue (which limits the number of channels aired), and channels that want to be on bands at the most accessed end of the cable spectrum have to pay a high premium that is increasing every year. “Carriage fee is the biggest pressure point today. That is one overhead we have no control over. It’s a losing proposition for the industry as money just circulates among the players in the industry. It doesn’t come from consumers into the system,” says the CEO of a leading news broadcaster who did not wish to be named.
One ballooning overhead common to both print and TV firms is wage costs. With fast-paced expansion in media, experienced hands in the editorial, creative and technical divisions are highly sought after, and have come to command high salaries. “Salaries in the media sector, and I am talking across marketing, business and editorial functions, have easily gone up by 60-100% over the past three years,” says Gauri Sarin, president of Approach International, a human resource consulting firm. HT Media chief financial officer M.S. Venkatraman says his firm hasn’t experienced very high inflation of wage costs. “Our wage costs have gone up by 10-15% year-on-year for the past three years. The brand equity and reputation we enjoy means we don’t have to pay very high rates like the new players do, to attract top quality talent.” Venkatraman couldn’t comment on the firm’s larger business performance as he is under a silent period ahead of announcing first quarter results.
Despite all this, firms are going ahead with expansion plans. “Our expansion plans are long-term and there is no reason to revise them because a few months have been bad. We are committed to investing in our expansion keeping in mind long-term prospects and growth,” says Dhariwal.
“Our Bangalore edition is on track for a 1 January launch,” says Rao.
Saumitra Saha, senior vice-president and general manager at Turner International Asia Pacific Ltd, says his firm’s joint venture with Alva Brothers for a general entertainment channel (GEC) is on track for a year-end launch. His firm is also launching an English GEC with sister firm Warner Bros. Entertainment Inc. “These are long-term plans, we haven’t felt a need to revisit them.”
Peter Mukerjea, chairman, INX Media Ltd, says his firm’s plans to launch a network of regional channels will be on as per schedule: “We are staying the course. I don’t think firms that are well funded will change any expansion plans... In my experience, big advertisers tend to advertise more in an environment like this because they need to sell more aggressively when they are hiking the price of their products. The consumer needs more convincing to spend.” He accepts that those who have not yet invested in expansion might defer their plans.
Raising funds has also become difficult, given the slump in equity markets and the dip in valuations. “Raising money from the market now is, of course, challenging,” Enam’s Pitale says. “Private equity, however, is still available, but promoters agreeing on a price point is the challenge.”
Yet, nobody doubts the potential of India’s media industry in the long-term. “The growth story is intact,” Murali says.