We maintain that a slowing economy will throw up medium term challenges for the domestic Media and Entertainment (M&E) stocks given the high co-relation between economic growth trends and advertising revenue growth.
Indian M&E businesses remain skewed towards advertising revenues, and thus only a revival in outlook for advertising spends will remain the key trigger for most stocks.
Cautious optimism in industry regarding a revival in advertising revenue trends on the back of anticipated policy action leading to a recovery in economic growth and corporate earnings.
While the macro-environment is materially better than 2Q ago; we have pointed out in earlier notes that stock prices were factoring in a significant up tick in advertising revenue trends.
We see the recent correction in stock prices as warranted given lack of evidence of a meaningful improvement in the macro for advertising spends. While trends have stabilized, we note that a recovery is not underway, yet.
We reiterate that traditional media (print, TV broadcasting) will be the early beneficiaries of a pick-up. We await more visibility on a sustainable revenue outlook and will prefer to focus on stock specific opportunities.
For Q1FY10, we expect revenues to contract c2% y-o-y across the coverage universe; PAT is expected to also de-grow c30% y-o-y on account of a slowing revenue trajectory, impact of new investments and higher costs of operation (competition). Print and TV broadcasting are likely to show q-o-q benefits.
Belying of hopes of a recovery in economic growth and corporate earnings and excessive competition pose key downside risks for the sector.
We also await any stock specific valuation bargains that may be thrown up in a volatile market. Retain positive bias for Zee Network Limited and Jagran Prakashan.
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