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Why print media stocks may languish...

Jan 19, 2012

Print news media (newspaper) industry across the globe is on the verge of demise. Internationally, newspapers may soon be a thing of the past. However, for the Indian companies, the penetration levels are still too low to result in any such scenario in the near future. In fact, the advertising premium gap between English and Hindi/regional print media is fast reducing thereby providing scope for growth in the industry. Companies are betting big on regional languages with their foray into tier2 and tier 3 cities. However, the Indian print media companies have their own set of problems to deal with. Let us discuss these and decide whether it makes sense to invest in the sector presently.

Low cover prices: Deja-vu? The race to further reduce the already low cover prices of newspapers in India reminds us of something that has happened in the past. We are referring to the tariff war of telecom companies here. We believe that such an aggressive approach towards pricing will ultimately help the consumers and not the shareholders of media companies. Intense competition in the industry resulted in a substantial fall in the selling prices of newspapers. With newspapers being available at dirt cheap prices these days (cheaper than the waste paper being used to manufacture them) many times they go straight in to the recyclers. This obviously is of no use to the newspaper makers who are selling their newspapers at lower than cost.

Too much dependence on advertising: The business model of print media companies is based on subscriptions and advertising. In the recent times, the dependence on advertising has been too heavy. In fact, low cover prices result in negligible growth in subscription revenues despite the geographic expansions taking place. This causes the companies to actually earn almost all of their revenues from ads. The trend does not speak well of the sustainability of the business that is reliant more on external triggers than inherent strengths. The fate of the industry has always been linked to economic growth. But nowadays, it is more affected by growth in specific sectors like education, financial services and real estate that contribute to maximum advertisements.

Rapid expansions hurting margins: Given the low penetration in the tier 2 and tier 3 cities and rural areas, media companies have been fast expanding their operations in these areas. While the scope does exist for growth in these cities, it is important to remember that the rate of literacy in India is still very low. Also, expansion comes at a cost which the media companies incur in the form of launch expenses and other preliminary charges. These exert pressure on the profit margins thereby impacting shareholder wealth.

Rupee depreciation- Higher cost of imported newsprint: Constant fall in the value of rupee vis-a-vis the dollar has made imports expensive. Newspaper companies basically use two kinds of newsprint -domestic and imported. In the recent past, there has been shortage in the supply of newsprint domestically. This has altered the newsprint consumption ratio towards more of imported variety being used. With the rupee depreciating against the US dollar, the newspaper companies have been severely affected. However, this problem seems to be temporary.

Duplicity of readership: There are two parameters that are used to ascertain the level of penetration of print media. One is circulation numbers and the other readership numbers. Cover prices have been lower than the value of waste paper lately and thus circulation cannot be certified by Audit Bureau of Circulation. In such a scenario, results of readership survey gain more importance. But, these numbers are based on samples and may not be accurate. Also, there is duplicity of readership in Indian households with one newspaper being read by more than 1 person. This may not give the exact picture about the penetration levels.

To conclude

The electronic media companies have a similar business model with revenues coming from either subscription or advertisements. But they have now started with paid content concept whereby they are getting paid for the content that they offer. This provides more stability in their business by reducing dependence on advertising. We believe that Indian print media companies should also focus on increasing the share of subscription in their revenues. They could also look at increasing the share of local ads as compared to national ones. The local advertisements suffer less during times of economic slowdown. In the wake of all the above mentioned problems and electronic media replacing the printed newspapers and magazines, challenging times are ahead for the industry. While investors could look out for relatively resilient business models at attractive valuations, the medium term upside for players in the sector is very limited.

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