Cherry-Picked Media Stocks Are Good News!

The media and entertainment (M&E) industry consists of the following nine segments – television, radio, print, films, digital advertising, music, out-of-home (OOH), animation and VFX, and online gaming. The industry demonstrated healthy growth at a CAGR of 10.90 per cent and touched Rs.1,436.00 billion in FY18. As of 2017, the industry provided employment to 5 million people. The future of M&E is being constructed on three fronts – engineers, designers and storytellers. India is at the forefront, as it produces the maximum number of hours of content globally – with 2,000 films, and over 800 television channels, 250 radio stations, 100,000 newspapers and magazines and thousands of live events.



M&E Industry Overview
All the segments of the industry demonstrated satisfactory growth, consolidation and innovation due to digital advancements on both the consumer side and the content supply chain. The industry has embraced digitisation seamlessly. With the reach of television increasing to 64 per cent of India and extensive implementation of cable TV digitisation, the television market saw substantial subscription growth. As of March 2018, active DTH subscriber base in India stood at 67.53 million. In 2017, the television viewership accelerated at the rate of 12 per cent YoY. In 2018, the television industry generated revenue of Rs.651.90 billion. Broadcasters’ subscription revenue stood at Rs.107.00 billion, while broadcasters’ advertisement revenue stood at Rs.224.00 billion in FY18. The print segment held a market size of Rs.318.90 billion in FY18. The de-growth in certain segments was offset by growth in subscription revenues as the reader base increased and, in some cases, the cover prices were raised to compensate for the loss. In the radio segment, a total of 243 FM channels are operational from phases – I and II. The cabinet has permitted further 162 FM channels under phase III. With a view to enhancing transparency and offering more choices to consumers, Telecom Regulatory Authority of India (TRAI) intends to announce a policy for the broadcasting sector by 2020, by means of which the MRP of the TV channel will be declared by broadcasters directly to consumers. Although the print, OOH and radio segments were impacted by demonetisation and GST implementation, they showed good recovery towards the end of the year. Since the last few years, OTT content has surpassed traditional media, registering revenue growth at a CAGR of over 40 per cent during 2005-2017. The animation and VFX segments grew to Rs.73.90 billion in FY18 from Rs.62.30 billion in FY17, registering a CAGR of 18.60 per cent owing to increased number of outsourced services and the heightened use of animation and VFX services in the domestic television and film industry. The Indian film industry has progressed rapidly due to digitisation and outsourcing. The number of screens in PVR Cinemas reached 625 in FY18. The cinema exhibition industry in India is likely to have over 3,000 multiplex screens by 2019. The film segment achieved a market size of Rs.158.90 billion in FY18. The box office saw higher realisations on both the domestic and foreign front. India is experiencing a rise in co-productions and collaborations between Indian and overseas filmmakers, as the government has entered into treaties with China, Canada, France, Germany, Brazil, Italy, New Zealand and the UK. The events segment performed well on account of increase in sports events, premium properties and activations. The in-app purchases in the gaming segment witnessed healthy growth as well. The media sector, including print media, witnessed FDI inflows of USD 7.17 billion in information and broadcasting from April 2000 to June 2018. The M&A activity increased and major players paved their way into the market. Massive deals such as Walt-Disney-UTV, Sony-ETV and Zee-Star enhanced the competitiveness and prospects of the sector. M&E stocks deliver a subdued performance Since January 2018, three film production and exhibition companies namely Adlabs Films, Pyramid Saimira Theatre and Wire and Wireless India lost their market cap by 76 per cent, 77 per cent and 78 per cent, respectively. Similarly, Dish TV India fell 67 per cent, while Inox Leisure, Prime Focus and Television Eighteen India dropped 64 per cent, 69 per cent and 60 per cent, respectively. Deccan Chronicle Holdings, Jagran Prakashan and HT Media plummeted 53 per cent, 55 per cent and 53 per cent, respectively. Of the 19 listed media stocks, the average P/E multiple dropped sharply to 30.63 in September 2018 from 62.35 in January, 2018. Contrarily, the stock that fared better in comparison during the January- September 2018 period was UTV Software Communications, as it dropped 11.49 per cent. Some of the companies that showcased highest profit growth during FY18 include Repro India, Sun Gold Capital, Pritish Nandy Communications, Inox Leisure and Saregama India.

Growth drivers
The demand for M&E increased with rising incomes, developing lifestyle and favourable demographics – all of which heightened the demand for knowledge, escapism, sports and news. The growth in screens and internet broadband penetration and reduced data rates resulted in increased data consumption and time spent on digital media. YouTube intends to expand its user base in India to 400 million as increased internet penetration in rural areas will facilitate video access on smartphones. Furthermore, the digital advertising industry is expected to develop on the back of affordable data and growing smartphone infiltration. The number of internet users is expected to cross 500 million in 2018. Most businesses are capitalising on this opportunity and reinventing creative content, business models, and regulation to create an extraordinary consumer experience. To achieve the same, heavy investments are being made in developing the requisite skills and institutions. Digital subscription and online gaming are showing signs of exponential growth due to rising per capital GDP and dwindling data costs. Moving forward, micropayments through avenues like UPI and the BHIM app will further augment subscription revenues. The growth in the online audience, increasing FM radio licensing revenues and rising popularity of live music shows are key profit/value drivers. Moreover, companies are endeavouring to monetise digital music content to drive their revenues. The OTT video streaming market in India is burgeoning due to rising affluence, growing penetration of data in rural markets and increased participation by women and older generations. Most sports leagues and teams are taking advantage of data – right from fan engagement and ticketing to performance enhancement and digital interactions. With fans wanting to be in the thick of things and demanding access to real-time stats and pictures, creative exclusive content has become a priority for marketers. The micro blogging platform Twitter has signed 12 premium video content partnerships in India for live streaming and video highlights programming in sports, entertainment and news. Red Chillies Entertainment, Vh1 Supersonic, Comic Con India, Network 18, NDTV, Filmfare and the mobile app CricBuzz are some of the partners involved.
  


Challenges
Advertising revenues showcased modest growth on account of macro headwinds like demonetisation and the impact of regulations like RERA on ad expenditure of the real estate sector. Widespread piracy, digital downloads and inexpensive rental options are major concerns. Furthermore, content acquisition costs are astronomical. For example, music companies have to fork over a hefty 25 to 30 per cent of the film’s total cost, pay for content rights upfront and shoulder the entire risk of the film’s success. Most music consumers are unwilling to pay for music; thus, a subscription model ecosystem needs to be developed to curb this. The competition amongst music video websites has escalated. Royalty payments per stream are meagre. Diverse content preferences, low price points and distinct regional sub-markets pose a challenge for global M&E companies looking to invest in the Indian market as they are tasked with formulating an appropriate market entry strategy in line with the economic and social fabric of the country. On the macroeconomic front, the Indian rupee has declined about 10 per cent this year, thereby rendering it Asia’s worst performing major currency. Thus, the RBI had to ease liquidity conditions by allowing banks time to shore up capital, increasing lending to small businesses and facilitating open market operations. This has allowed the rupee to regain about 2 per cent since then.

Government support
The Government of India came up with several policies to bolster the progress of the sector, such as increasing the FDI limit from 74 per cent to 100 per cent, increasing liberalisation and tariff relaxation. In H12018, five private equity investment deals of USD 115 million were recorded. Moreover, digitisation of cable distribution augmented profitability and facilitated ease of institutional finance. The government has set in place anti-piracy regulations and IP rights unit to combat digital piracy and has agreed to establish a National Centre of Excellence for Animation, Gaming, Visual Effects and Comics industry in Mumbai. A National Film Policy has been formulated to tap the potential in the animation segment. Furthermore, the governments of India and Canada have signed an audio-visual co-production deal to facilitate exchange of creativity and content between producers of both countries.

Opportunities
The television and AGV segments are expected to propel industry growth. The lucrative prospects in digital technologies like DTH, Conditional Access System (CAS) and IPTV over the next 5 years will influence the industry and alter consumer behaviour across all segments. Mandatory digitisation across India is bringing in substantial subscription revenues for broadcasters. The advent of digital platforms has kept the industry participants on their toes as they are required to continuously innovate and upgrade their products and services in order to withstand competition. Regional markets offer tremendous scope for growth in the media sector as most metros are already heavily saturated. The Hospital, Airlines, Media (HAM) stocks continue to entice investors owing to demographic consumption, under-penetration, and valuation. However, they are unlikely to generate long-term wealth.

The impact of elections on M&E sector
The role of media is unparalleled in facilitating contact between political parties and voters. This translates into revenue growth for the industry not only during election campaigns, but also after formation of the government as the reforms taking place provide a boost to the economy. With the elections fast approaching, the appeal of media stocks has intensified. The substantial pick-up in advertising revenue is evident as potential voters clamour for information pertaining to the latest developments taking place ahead of the elections. It is intriguing to note that the outlook for Indian stocks for 2019 has been downgraded for the first time this year, according to a Reuters poll. However; the market is expected to bounce back from the losses incurred once the uncertainty around the upcoming elections diminishes. The BSE Sensex was pressured by the sharp sale of global equities and a downward spiralling credit supply. The month of October witnessed the worst monthly decline post the financial crisis that plagued the markets a decade ago. With the state elections looming over us and the general elections scheduled for April-May, the uncertainty is high. Moreover, the deterioration of the India rupee, capital outflows from emerging markets, including India, and the policy-related rifts between the RBI and the government dampened the performance. As a result, Indian stocks have been subdued and are likely to remain so in the short-term. However, once the new government is formed at the Centre and the uncertainty ebbs away, the local market is poised to recover most of the losses, particularly on account of rising corporate earnings.

The positives of media stocks
With the digital revolution enabling personalisation of content and the reach of both traditional and digital media expanding, the sector has truly been democratised. This trend has propelled India’s animation, VFX and post production facilities up the value chain, projecting them as superior quality service providers with a cost advantage. The media stocks are a good bet ahead of the elections as they benefit tremendously by the massive advertisement blitz launched by political parties before the elections. However, it is prudent to remember that in the long run, the media companies may experience margin pressure due to intense competition. The sector’s future prospects look promising as India’s advertising expenditure to GDP ratio of 0.4 per cent is lower than the world average of 0.9 per cent.

Conclusion
There is no denying the fact that most Indian media stocks have taken a beating that is worse than the overall stock market this year. Of the 19 major listed M&E companies, 13 have reported a significant loss in market capitalisation since January 2018. The average market cap loss for the M&E sector was 55 per cent, i.e. substantially greater than the 33 per cent crash in the BSE Sensex. Most media stocks in India are mid-cap, with the exception of two large-cap stocks namely Sun TV Network Ltd. and Zee Entertainment Enterprises Ltd. The media sector has plummeted more than the BSE Mid-Cap index, which has fallen 47 per cent. The losses can be attributed to inflated valuations during market peaks, volatility due to precarious political environment and high beta stocks. In the short-run, such economic slowdown will impair advertising growth, while intense competition will fragment the market and drive up costs. However, the long-term prospects of the M&E sector remain positive as the M&E industry is contributing to economic growth at a rate almost twice the GDP and is creating growth opportunities for other industries as well. This is due to favourable demographic and economic factors like growing middle class, young generation, uptake on digitisation and rising consumer incomes.The conducive regulatory environment and high volume of content consumption have attracted FIIs. The 100 per cent FDI permitted in film, advertising, TV broadcasting (except news) and cable networks bode well for the sector. Moreover, media sectors like newspapers, which are declining in mature markets owing to stiff competition from digital media, are actually thriving in India. As a result, the propensity to invest in M&E has grown faster than the economy itself. With the state elections just around the corner and the general election scheduled for April-May, the political drama likely to unfold in 2019 might be a high voltage one.

Although the companies' earnings growth has not peaked in India, there are unmistakable signs of slowdown over the next year. The earnings have been under pressure because of liquidity concerns, rising cost of funds and input cost inflation. However, the markets have corrected considerably as companies have recovered lost earnings and improved their liquidity positions. The P/E ratio for the BSE Sensex is presently well above its long-term average. Thus, we have reasonable basis to believe that media stocks are likely to perform once the uncertainty subsides. Therefore, we urge investors to adopt a stock-specific approach while evaluating media stocks as an investment option. In the face of such volatility, looking at the 52-week lows or highs is misleading; instead, investors must assess stocks in terms of their valuation and earnings visibility