Fitch Ratings predicts tough days for Indian M&E industry

As per the Fitch Ratings, the Indian media and entertainment (M&E) industry is expected to grow at the rate of 8-12 per cent, which is lower than the expected growth. The report points out that the outlook for the Indian M&E industry will be slow in the financial year 2012/02 due to decrease in the margins and ad spends.

Among print and television media, broadcasters are likely to be the worst hit since 70-90 per cent of their revenue comes from advertising, whereas advertising contributes not more than about 70 per cent to the revenues of newspapers.

Fitch Ratings considers the outlook for the Indian print media and TV broadcasting sectors to be negative as moderation in economic growth and cost reduction initiatives by corporates lead to slower growth in ad spends. However, despite the negative outlook for the sector, the report says that Fitch-rated issuers have a stable outlook "because of their comfortable credit profile".

For the print industry, the rising newsprint cost, which accounts for 40-50 per cent of total operating costs (largest operating cost), is likely to put pressure on the operating margins of the print media industry. "At the end of November 2011, domestic newsprint prices increased by 13.4 per cent, and international newsprint prices by 7.0 per cent as compared to the average prices in 2010, respectively," says the report. The recent depreciation of the Indian rupee has also added to a further increase in the effective price of the international newsprint.

Due to the high newsprint costs and lower revenue growth, margins of the print media industry are likely to fall to the range of 18-22 per cent in Q2'12, a decrease in the revenue growth from the expected 24 per cent in Q4'11.

Broadcasting industry margins are also on a steady decline since Q3'11. The margins for the broadcast industry are expected to fall in the range of 24-28 per cent in Q2'12. The report highlights that lower profitability will lead to the deterioration of the credit metrics of the companies in these two sectors.

The e-auctioning of 839 radio channels though, will lead to the expansion of the medium in the long run. 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.

According to the international rating agency Fitch, the introduction of mandatory cable TV digitisation in India will improve the business profile of multi-system operators over medium-to-long term.

The report also highlights certain parameters that may result in a stable outlook for the Indian M&E industry such as improved corporate revenues and margins that can lead to higher ad spends and lower newsprint costs that help improve the margins for publishers.

For the record, Fitch Ratings maintains coverage of 6,000 financial institutions, including over 3,500 banks, and 1,400 insurance companies. Finance and leasing companies, broker-dealers, asset managers, managed funds, and covered bonds make up the remainder of Fitch Ratings' financial institution coverage universe. It maintains surveillance on over 6,500 US, 1,300 European, and 400 Asian structured finance transactions.