Fitch Ratings: Negative outlook for Indian media and entertainment

The Fitch Ratings report says that the outlook for the Indian print media and TV broadcasting sectors is negative in 2012, as growth in advertising spending is expected to slow down due to the moderating economic growth and cost reduction initiatives by corporates.

The report says that TV broadcasters are likely to be the worse hit in this area as they generate 70%-90% of revenues from advertising compared with about 70% for newspaper publishers. The report further says that the broadcasters that have diversified their revenue base towards subscription are expected to perform better than those with a higher exposure to advertising revenue.

The rising newsprint cost, which is the largest operating cost for newspaper publishers which accounts for 40-50% of total operating costs, is likely to pressure the operating margins of the print media industry. At end-November 2011, domestic newsprint prices increased by 13.4% and international newsprint prices increased by 7% compared with the average prices in 2010, respectively. The recent depreciation of the Indian rupee has also made the effective price of the international newsprint increase.

The report expects the Indian media industry to grow at a rate of 8-12% in 2012. Given the high newsprint costs and expected lower revenue growth, margins of the print media industry are likely to fall to the range of 18-22%. Broadcasting industry margins are expected to fall to the range of 24-28%. The lower profitability would lead to the deterioration of the credit metrics of the companies in these two sectors.

The report further states that the introduction of mandatory cable TV digitisation in India would improve the business profile of multi-system operators over the medium- to long-term. Also, radio phase-III auctions are believed to be positive for the industry in the long-term. However, the credit profiles of operators are expected to worsen in the short- to medium-term as successful bidders will have to pay non-refundable one-time entry fees.

The report, "2012 Outlook: Indian Media & Entertainment - Reduced Advertising Spending Threatens Margins", is available on www.fitchratings.com.