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Will Print Media companies rebound in FY13? - Views on News from Equitymaster
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  • Jun 28, 2012

    Will Print Media companies rebound in FY13?

    Fiscal Year 2012 was not a great year for print media companies. After registering revenue growth rates in the range of 18 to 25% in FY11, they clocked lower double digit 13% to 16% rates in FY12. While revenues still grew, the profit picture was terrible with both operating and net profits precipitously declining in FY12 after strong gains in FY11. In fact, the situation turned so grim that the Print media companies would want forget FY12.

    Why was FY12 such a disappointment? And can Print Media companies expect a better FY13?

    What went wrong in FY12?

    The two key factors that affect Print Media companies profits are advertising revenues and newsprint costs.

    Ad Revenue: As stated in our earlier articles, Print Media is now primarily dependent on advertising revenues which in turn depends on the country's economic health.

    When the economy is stronger, ad budgets are higher and so are ad revenues for Print Media companies. And naturally, as the economy worsens, ad budgets are reduced resulting in lower ad revenues for these companies.

    This is evident from the graph below, and the fact that Print Media companies performed very well during 2007-2008 when the economic gloom had not yet set in. Then, as the economy worsened in FY09, the performance of the Print Media companies deteriorated. Again, in FY10, when the economy started picking up, these companies experienced stellar performance with strong revenue growth ranging from 18% to 25%, and profit margins and profits being correspondingly stronger.

    Source: Business Standard
    * adjusted for calorific value

    Newsprint costs: On the cost side, newsprint cost is the major cost driver accounting for 40-50% of total operating expenses. During FY2011, (data through November 2011) newsprint costs were up as compared to average prices in 2010. This resulted in higher operating expenditure and reduced profit margins and profits in FY12.

    How specific Print Media companies fared in FY12?

    Print Media Companies - FY12 Declining Profits
    (% YoY) Sales growth Operating profit growth Operating margins Net profit growth Net profit margins
    Jagran Prakashan 18 12 26 -9 29 25 17 -13 18 14
    HT Media 25 13 27 -14 18 14 37 -9 11 8
    DB Corp 23 16 18 -12 32 24 34 -22 21 14

    The table highlights that the FY12 weak performance for the Print Media sector was experienced by all the major Print Media companies. For each of them, growth in revenues slowed, and more importantly, for all of them, operating and net profit margins declined! Not a pretty picture.

    What can we expect in FY13 and beyond?

    The volatility of exchange rates affects imported newsprint prices, and at least in the near term, this key factor will impact the performance of Print Media companies. The rupee is expected to continue to be weak for some more time and so the costs of imported paper will remain high.

    This will have significant consequences for some Print Media companies. For example. HT Media imported 75% of newsprint in FY11). HT Media publishes English newspapers which require a higher grade of paper which needs to be imported.

    Domestic newsprint prices also can dent the profit margins of companies. However, in near future these domestic newsprint prices are expected to stabilise or even fall further. Thus the profits of Print Media companies that have a higher content of domestic newsprint will get a reprieve relative to those importing newsprint.

    The fact that newsprint costs are directly inversely correlated to net profits of companies is clearly demonstrated in the two graphs belowl

    Data source: Fitch Report on Media Sector (February 2012)

    Data source: Fitch Report on Media Sector (February 2012)

    Going forward, ad budgets are likely to be reduced as the outlook for the Indian economy is not encouraging. So Print media companies are expected to see muted single or at most lower double digit revenue growth in 2013, and correspondingly weaker margins and profits.

    We also observed an interesting strategic shift in FY12. Print Media companies moved to consolidate their existing markets and businesses, as opposed to expanding into newer territories and businesses. For example, DB Corp shelved its plans to launch in Bihar, and HT Media decided to focus more on its existing businesses.

    Given the uncertain global and domestic economic scenario, we believe that this consolidation strategy will allow companies to better weather economic storms, and by focusing on markets where they are leaders, it will afford them better pricing power.

    Print Media companies that focus and consolidate are likely to emerge winners for their investors in the long run.



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