Political India: Engaging America

Commentary

Media stocks in India are all trading at high premiums today. With HT Media's IPO being the latest in a series of successful attempts to raise money from the market, it would appear that there is an ongoing boom in this sector. Analysts claim that this powerful upsurge has been fuelled by two factors; first, the 'rules of the game' are changing, and foreign players, for example, have been allowed to pump money into Indian media houses within limits; and second, readership, as assessed by the NRS, is growing rapidly like nowhere else in the world. While these are both excellent reasons for refuting the claim that this boom is a bubble, they do not inspire such confidence as to throw caution to the winds. As the article below suggests, the margins on many media stocks are lower than those of their international counterparts, and short- to medium-term downtrends (such as those seen recently in NDTV) could therefore lead to loss of value for shareholders, and a corresponding loss of investor confidence.

However, if a cautious, prudent position is adopted by big media, then there is little justification for any large player staying away from the market. In fact given the significant progress of the Sensex and Nifty over the medium term, there may never have been such a good time to raise money through an IPO as now. South India could well be the next media battleground after Mumbai!

From the Business Standard

Are media valuations justified? Government's move to allow FII investments and growth prospects are firing up media stocks.

The overwhelming response to the HT Media IPO had created quite a flutter recently. The stock debuted at Rs 700 on the NSE, a 32 per cent premium to the IPO price of Rs 530. While listing gains are almost guaranteed these days, what caught the eye in HT's case is the valuation at which the stock is trading.

Though the stock has slipped sharply since its debut, it is currently trading at a trailing 12-month P/E of 67x. If one digs a little deeper, HT's case is not isolated. Almost all media stocks are quoting at high valuations. Are these valuations backed up by fundamentals or are they running way ahead?

While equity markets have witnessed a good run in the past year, media stocks (news papers and channels) have generated quite a lot of interest. A look at the stock prices reveals that apart from TV Today and Zee Telefilms to an extent, all other stock prices have more than doubled in the past year.

Mid-Day Multimedia’s stock went up by more than 260 per cent in the past year, followed by NDTV (157.36 per cent) and Sandesh (103.52 per cent). For a better perspective, the CNX Midcap 200 Index gained 87.65 per cent during the period, while Sensex returns were 50.85 per cent.

Take a look at the trailing 12-month valuations. NDTV's stock is quoting at a P/E of 63.53, on a trailing 12-month basis. Mid-Day Multimedia is going at 56.82 times, Zee Telefilms at 55.66 times and Deccan Chronicle at 44.45 times.

"If we look at the past numbers, these companies will never be able to justify their current valuations," says Tejas Doshi, head of research at Mumbai-based Sushil Finance Consultants.

"Having said that the key to a proper assessment of these firms lies in the future where opportunities will abound. In that sense past performance is not truly reflective of future growth prospects," adds Doshi.

The big triggers

Analysts note that the current interest in media stocks has mainly been triggered by one factor - the government's move to allow foreign investment in print and television media companies within the 26 per cent ceiling.

Corporates like Anil Ambani-led ADA Enterprises have also been scouting for good acquisition targets. This, too, has improved the sentiment in the sector. It is believed that the government's decision to permit FII buying in print and television will lead to heightened interest in these companies.

Foreign holdings in companies such as Mid-Day Multimedia, Sandesh and NDTV are pretty low at current levels.

According to Nitin Khandkar, vice president (research) at Mumbai-based securities firm, Keynote Capitals, foreign media houses and private equity investors will look at acquiring strategic stakes in Indian television news channels and newspapers going forward, in anticipation of a further relaxation of foreign ownership norms.

Previously, only foreign direct investment (FDI) up to 26 per cent was allowed. Under the new ruling, FDI/FII investments have been capped at 26 per cent, unlike earlier when FII investment was not allowed at all.

Following this, Deccan Chronicle Holdings - owner of English dailies, Deccan Chronicle and The Asian Age - recently launched a $54.02 million (Rs 240 crore) FCCB issue, with the yield-to-maturity set at 6.90 per cent for the bonds which have a maturity of five years.

Recently, General Atlantic (GA) European Investments, Cyprus, picked up a stake in broadcasting major NDTV in a secondary market deal for a consideration of just over Rs 116 crore.

GA Investments bought 48.36 lakh shares of NDTV at around Rs 240 per share at a face value of Rs 4 each, representing 7.95 per cent of the equity share capital of the company. Considering the deal, NDTV is valued at around Rs 1,450 crore.

Increasing penetration

Another factor which investors seem to have taken into account is the big growth opportunity that the sector presents. Currently the per capita penetration of newspapers and TVs in the country is pretty low.

According to estimates, India sells just 60 daily newspaper copies per thousand people compared to around 196 in the US and 326 in the UK. Same is the case with television.

"In India television penetration is only around 45 per cent, while cable and satellite channel penetration is even below at 24 per cent. In US, for example, the penetration levels are close to 80 per cent. Considering the sheer size of the population, Indian media companies have only scratched the surface," notes Khandkar.

Increasing penetration will also bring in more ad revenues, the biggest revenue driver for media companies. According to estimates, total ad-spend in India in 2004 stood at Rs 11,800 crore. Print advertising accounted for the largest share at 46 per cent, followed by television at 41 per cent.

Analysts note that though media industry has been one of the fastest growing sectors in India, in terms of ad-spend as a percentage of GDP, the country still lags behind other nations.

According to industry estimates, Indian ad-spend as a percentage of GDP stood at 0.34 per cent in 2004, compared to 1.34 per cent in US.

A recent report estimated that India's advertising pie grew 8.90 per cent in 2004 and is expected to expand 12.60 per cent to Rs 10,690 crore by the end of 2005 with television and print each accounting 44 per cent of the pie.

Other factors such as improving literacy are also driving the sentiment in the segment. An analyst with a Mumbai-based securities firm notes that as literacy levels improve, more and more people are taking to reading news papers, improving circulation. "The younger generation prefers English news papers these days, which is a good sign for those papers."

According to NRS (National Readership Survey) 2005, all English dailies have a readership of 21.90 million compared with a readership of 18.60 million in NRS 2003. English editions attract the highest advertising revenues with around 50 per cent of ad-spend, followed by vernacular and Hindi newspapers with about 25 per cent ad-spend each.

The foray of several newspapers into the competitive yet lucrative Mumbai advertising market is expected to boost their revenues. HT Media's flagship Hindustan Times recently made its entry into Mumbai.

Analysts feel that the market in Mumbai - where The Times of India is the runaway leader- is still under-penetrated. Besides, considering the big advertising potential in Mumbai, newspapers which have made entries can expect a steady growth in advertising revenues, say analysts. However, considering the intense competition, it may not be possible for players like HT to make a mark.

Analysts note being a ‘habit business,’ it will be tough for new entrants to penetrate the markets in a big way. HT seems to have taken that factor into account and expects to incur losses in its Mumbai operations in the early years. However, analysts note that it is too early to speculate how the situation will pan out in the future.

Apart form consolidating its Delhi and Mumbai operations, HT hopes to expand in Madhya Pradesh, Uttar Pradesh and Rajasthan. It is also looking at publishing vernacular editions and adding a financial newspaper to its product basket.

It also has plans to get into non-print media as exemplified by its tie-up with Richard Branson-promoted Virgin Radio for private FM radio services.

Sweet music

The contribution from FM radio services is expected to boost bottomlines of players like Mid-day Multimedia which owns Go 92.5 FM radio station.

Considering that the government has decided to roll out a one-time license fee and revenue sharing (pegged at 4 per cent of gross annual revenue by the expert committee), the companies operating in the segment are expected to tread a smoother path going forward. The current regime is based on city-specific license fee (Rs 15 crore for Delhi, Rs 12.50 crore for Mumbai, Rs 7.50 crore for Chennai, etc.). Analysts note that Mid-Day Multimedia is likely to draw a major share of future revenues from its radio operations.

At present, the bulk of its consolidated turnover comes from the tabloid Mid-Day. In FY05, the company's topline from radio was around Rs 6 crore (of a total income of Rs 102.43 crore) - all of it from the single station running in Mumbai for the last two-and-a-half years.

"The company had to shell out close to Rs 13 crore as radio licensing fee in FY05. Now with the licensing fee fixed at 4 per cent, that outgo will be much less going forward," says an analyst. Mid-day expects revenues from radio to touch Rs 10 crore in FY06. The government has also decided to allow 20 per cent foreign direct investment in the radio segment, which is also likely to invite foreign money into the business.

Future holds the key

Considering the fact that the media sector has been among the fastest growing segments in India, the high valuations may not be entirely out of place. The sector is estimated to have grown at 13.40 per cent in 2004. However, some analysts feel that current valuations are unjustified.

"Valuations in the media sector are looking quite stretched right now. Most of the recent surge in stock prices has been driven by liquidity. I expect a consolidation in stock prices at current levels, if not a serious correction," notes Khandkar. Doshi sees a brighter future.

"It is better to take a long-term view on these stocks. The key to the success of these companies lies in changes in the government’s policies and demographical factors," he notes. "Markets seem to have realised the future growth potential of these stocks, which explains the interest in these counters."

According to Harrish Zaveri, media analyst with domestic securities firm, Edelweiss Capital, one has to approach valuations in the segment on a case-to-case basis. "For example, considering the high valuations of NDTV, one can say there is no margin of safety in the stock, in the event of another earnings shock as happened in the last quarter," he says.

NDTV reported a 98.82 per cent decline in net profits to Rs 9 lakh in the June quarter, mainly due to a near 50 per cent jump in employee costs. However, with the operations of its Profit channel stabilising, the company is expected to see better days ahead. The prospects of established players like Zee Tele and Television Eighteen are also looking good, says Zaveri.

"While Zee should be able to post a growth rate of 15-18 per cent in the next fiscal, Television 18 should see a 30-32 per cent growth."

As for Deccan Chronicle, it recently acquired Odyssey India, a retail chain in southern India, for Rs 61.20 crore. Odyssey has 12 retail stores in six cities.

According to analysts, the company is expected to continue exploring the inorganic route for growth, especially since it could soon be flush with funds from the FCCB issue. Deccan Chronicle expects Odyssey's revenue to go up to Rs 90 crore in FY07 and Rs 150 crore in FY08. The FY06 revenue guidance of Deccan Chronicle has been revised to Rs 330-350 crore from Rs 280-300 crore after the company's board approved the acquisition, while profit guidance has been increased to Rs 70-90 crore from Rs 65-70 crore.

As for HT Media, analysts do not expect topline growth to translate into bottomline growth, at least in the next three years. Domestic research firm, SSKI had recently initiated coverage on the company with an ‘under performer’ rating.

According to a media analyst with a domestic securities firm, HT Media is likely to post revenues of Rs 70 crore in FY06 (of an estimated total revenue of Rs 786.60 crore) from its Mumbai operations alone. "But considering the investment mode the company is currently in, especially in Mumbai, the bottomline is expected to take a hit," he noted.

Total operating expenditure of about Rs 100 crore in Mumbai is likely to take the net profit down to Rs 4.50 crore in FY06, compared to Rs 27.25 crore in FY05.

Valuations are looking stretched

Analysts are unanimous that the current valuations of print media companies are looking stretched. They note that valuations are high compared to not only domestic standards but global peers.

"Global media companies operate at much higher margins - at 20 per cent on an average, but still the stocks trade at 20x forward earnings," says a media analyst.

Apart from Deccan Chronicle, all other print media majors have low margins (HT Media - 4.36 per cent and Mid-Day Multimedia - 7.05 per cent). However, the market cap to sales ratios of Indian media companies are pretty low. While a robust topline is a good thing, whether print media companies will be able to justify their premium valuations will ultimately depend on the earnings growth, say analysts.