We initiate coverage on the Indian print media sector with a bullish view, primarily driven by the strong and promising growth potential of the language medium. Pick-up in advertising activity backed by economic revival and expectations of healthy gross domestic product (GDP) growth is likely to bode well for the print media sector as a whole.
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The recent advertisement rate hikes by newspaper publishers and improved advertising volumes clearly indicate that the advertising industry is making a strong comeback. Apart from healthy advertising revenues, other macro factors such as rising literacy, increasing penetration in semi-urban and rural areas and stable newsprint prices are likely to ensure profitable growth for the print media sector.
Within the sector, we expect future growth to be largely driven by semi-urban and rural areas on account of increasing commercial activity, higher spending power and rising literacy. With the language print medium dominating in these areas, we prefer language newspapers over english newspapers. We have already seen the language newspapers emerge stronger from the recent slowdown owing to the strong business model, which as a healthy revenue mix (20-25%circulation revenue and 75-80% advertising revenues). Moreover, with a higher proportion of localized advertising revenues, they managed to report healthy growth in advertising revenues during the FY09 slowdown.
Advertisement revenues, the prime contributor to print media sector, is expected to register healthy growth of 12% compounded annual growth rate over FY10-13, primarily led by economic revival and increased advertisement expenditure on healthy GDP growth. Advertisement revenues are directly linked to growth in the economy (GDP) and, hence, a strong GDP growth of 8-9% over the next few years would result in healthy advertising revenue growth.
Moreover, increase in advertisement expenditure by consumer-oriented companies and emergence of newer advertisement-spending industries such as telecom, retail and financial services are likely to ensure healthy advertising revenues.
The increase in population, literacy rate, and reach (penetration at just 39%) has led to increased circulation and readership of newspapers in India. Leading publication houses are slowly and steadily increasing their geographical presence by launching new editions, which helps improve circulation and readership of their publications, which in-turn reduces the cost per thousand for the advertisers.
Traditionally, the print media has had a dominant presence in metros and tier 1 cities in India due to a large literate population with high disposable incomes and adequate commercial activities in those regions. However, with a major portion of population in larger cities already being literate, the scope of increasing literacy and, hence, circulation and readership for newspapers lies in tier 2 and tier 3 cities. This, together with rising disposable incomes and increasing commercial activities in rural and semi-urban India, provides significant room for penetration of the print medium. The print media penetration in India at 39% is still very low, considering the large Indian literate population of approximately 80 million.
The print media sector enjoys very high entry barriers due to high capital expenditure requirement and very long gestation periods of three to eight years.
Strong brand equity and readership loyalty also act as strong entry barriers. Most newspaper publishers in India have a strong regional franchise, where they enjoy strong readership loyalty.
Graphic by Ahmed Raza Khan/Mint