What Lies Beneath Media & Entertainment Sector: Optimism

The media and entertainment sector in India has come a long way. Listed media companies like Zee Entertainment, Balaji Telefilms, PVR, Jagran and DB Corp have handsomely rewarded their investors in the last few years. The gradual recovery in the economic activity is leading to an increase in the disposable income of the people and keep the growth buoyant for the sector in the years to come. Innovation in technology and favourable regulations has also paved way for the growth of this sector. The recent cabinet approval of the 7th Pay Commission’s recommendations, which is likely to boost consumption, has created a positive impact on many of the stocks in this sector.

According to PricewaterhouseCoopers (PwC)’s Global Entertainment and Media Outlook 2016-20, the Indian media and entertainment sector grew 12 percent to reach $25.13 billion in 2015 and the industry is expected to exceed $40 billion by 2020, while growing at an average annual rate of 10.3 percent between 2016 and 2020.

“Given India’s overall growth in GDP and per capita income), it is not surprising that India is amongst the top 10 markets for growth in the sector. Although, in India, traditional media like newspaper publishing and cinema has always shown strong growth, we expect that even in terms of absolute total spend, it should get into the top ten in the early part of the next decade,” Frank D’Souza, partner and leader, entertainment and media, PwC India said.

With different segments under its folds such as television, print, and films, and smaller segments like radio, music, animation, gaming and visual effects (VFX) and internet advertising, the media and entertainment industry in India has registered an explosive growth in last two decades making it one of the fastest growing industries in India. Economic conditions in 2010 too played a major role in a rebound in customer spend.

In a bid to give a boost to the sector, the Government recently further liberalised the FDI caps in print media and radio. Entry restrictions for foreign companies have also been relaxed for most segments of the industry.

Share prices of companies like Balaji Telefilms Ltd (BTL) have grown substantially from Rs 67 per piece, same time last year, to Rs 106 per share today. At the same time, stocks of PVR have jumped from Rs 665 per share, last year to Rs 1,028 per share, today. Shares of DB Corp or the Dainik Bhaskar Group jumped from Rs 330 per share, same time last year, to Rs 380 per share today.

Stock analyst, Swarn Saklecha notes, PVR, a top multiplex company of this sector has truly turned out to be a multi bagger for many early investors. The stock price rose from Rs 152- in July 2012, and is currently trading around Rs 1020, resulting in a gain of 580 percent in four years.

“TV Today Network - A major news channel broadcaster holding brands like Aaj Tak, India Today television touched a 52-week low of Rs 177 and a high of Rs 350 resulting in 97 percent return in a year while Zee entertainment Enterprises touched a 52-week low of Rs 347 and a high of Rs 466, resulting in gains of 34 percent in a year,” said Swarn.

Points out Rishabh Parakh, Chief Gardener & Founder at Money Plant Consultancy, a leading Tax & Investment Planning Advisory Service Provider, “Media and entertainment is an evergreen sector of every economy. In the recent bull run, media stocks showed stellar performance and most of the investors added these stocks to their portfolio. The main reason for this performance of media stocks is the ongoing digitization process, which is benefitting the sector.”

Says Abhimanyu Sofat, Co-Founder, Advisesure, an investment advisory, “With the elections coming up in UP and later in Gujarat, in 2017, we are quite bullish on the newspaper segment. Generally, during elections, bulk of the advertising revenue is shared by the vernacular media. Within the space we prefer companies which are debt free and have a decent ROIC.”
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Today, India is the biggest cinema market in the world. In 2015, admissions were at an estimated 2.04 billion, and in 2020 are predicted to be at 2.80 billion, rising at a 6.6 per cent CAGR. Box office revenue in India stood at an estimated $1.64 billion in 2015 and will rise to $2.74 billion in 2020, at a 10.9 per cent CAGR, according to the PWC report.

For instance, BTL began its journey with the revolutionary show, Hum Paanch, which enjoyed wider viewer acceptability in the late 1990s and 2000s. The prospects of Hindi General Entertainment Channels across India were first capitalized by Balaji, with its blockbuster shows, such as Kyunki Saas Bhi Kabhi Bahu Thi and Kahaani Ghar Ghar Ki.

Elaborating on the company’s performance and opportunity of the key businesses, Sanjay Dwivedi, Group Chief Financial Officer at BTL says, “Capital markets and other external audiences have begun to recognize and appreciate Balaji’s performance, capabilities and potential. Over the last couple of years we have been improving our presence across all the leading GEC’s leading to higher number of hours. We have also expanded our programming across genres and have entered the youth, non-fiction and reality to name a few. These initiatives have enabled us increase and maintain our number of show on quarterly basis leading to a stable and sustainable profitability.”

He adds, “For FY16, our average realisation per hour was at Rs 2.47 million as against Rs 2.09 million in FY15, translating to a growth of 15 percent. Hours for commissioned programs stood at 1,002 hours as against 962 hours in FY15.”

Some of the company’s successful releases include ‘Shor In the City’, ‘Once upon a time in Mumbai’, ‘Shootout at Lokhandwala’, ‘Hum’ and ‘The Dirty Picture’, ‘Shootout at Wadala’, ‘Lootera’, ‘Once Upon a Time in Mumbai Dobaara’, ‘Shaadi Ke Side Effects’, ‘Main Tera Hero’, ‘Ek Villian’, ‘Azhar’ and ‘Udta Punjab’ with ‘EK Villian’ crossing the Rs 100 crore mark in terms of collections.

Company                               Price on 02/07/2015                     Price on 02/07/2016              
TV18 Broadcast                          36.50                                                    45.50
Balaji Telefilms Ltd                     67                                                        106
PVR                                             665                                                      1,028

With the increased penetration of smartphones, more and more consumers are getting habituated to view content beyond the television screen, thereby paving the way for digital dedicated content and innovative monetisation models.

According to a report by Edelweiss Research, digital advertising constituted 12.6 percent of the total advertising market in 2015, and is expected to grow to 26 percent of the total advertising market by 2020, driven by growing mobile internet and device penetration and technology innovations.

Notes Parakh, “Digitisation is the biggest trigger for the media sector in India. This will help media companies to better monetise their reach to smaller towns. In the years to come, we will see phenomenal growth for media sector in tier III and IV cities along with rural areas.”

BTL is foraying into the B2C digital content business segment, which is the next growth driver of the company, through its wholly owned subsidiary ALT Digital Media for which they have successfully completed a fund raise of Rs 1,500.8 million through preferential Issue for ALT Digital Media. Says Dwivedi, “It is backed by best-in-class technology. ALT Digital Media will operate as subscription video on demand (SVOD) based over the top (OTT) platform targeted towards urban Indians and Indian diaspora.”

He further notes, “Leveraging the Group’s unmatched position and creative abilities in both television and film content, ALT Digital Media will create highly differentiated, original digital content for the entire connected ecosystem spanning mobile devices, web, smart and game stations. ALT Digital Media is reflective of the Company’s strategic intent to build a consumer facing brand by creating enjoyable, engaging content for digital audience globally and monetising the incredible potential of original TV on-demand entertainment.”

Swarn points out that digitisation will help in reducing carriage cost and improving subscription revenue. “Carriage cost is a substantial part of revenue of media companies, say about 35 percent. Sooner or later, this will come down and result in healthy EBITDA margins.”
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Says Ritwik Rai, Analyst at Kotak Securities, “Over the longer-term, the inevitable transition from unorganized or unbranded products to branded products is likely to ensure that advertising expenses (adex) to GDP ratio will expand, which implies that advertising revenues of media companies are likely to grow at a faster pace than GDP growth.”

He notes that in the recent past, lower commodity prices (higher scope for advertising and marketing spends) and emergence of e-commerce as a significant advertising category have benefited the media sector. “These factors are likely to remain constructive, although likely to diminish in growth contribution, in the next few quarters, while improving consumption trends like monsoon and pay commission benefits shall likely emerge as new positive macro drivers. As such, we think the outlook for the media sector revenue remains strong in the near term as well,” adds Rai.”

He further adds, “Further to benefits from advertising expenses, there continue to be opportunities in terms of higher subscription revenues for television broadcasting companies. About 75 percent of the country is still to see complete addressability (Phase -3 & 4 of DAS are yet to be implemented), and the government has shown positive intent in the execution of the same. Media companies tend to have high operating leverage (high fixed costs as a percentage of total); therefore revenue growth leads to amplified EBITDA growth.”

Sofat believes there will be strong growth in digital advertising spend especially paid search internet advertising revenue. “Decent growth in TV advertising industry and contrary to global trends in newspaper business augur well for the sector. Some players who continue to have low profitability will continue to suffer going forward as we expect more consolidation in the industry.”

Kotak Securities is bullish on TV18 Broadcast with a BUY, price target of Rs 56. TV18 Broadcast owns 100 percent of significant news channels, and 50 percent of entertainment channels under JV Viacom18. Colors, the Hindi GEC of the JV, has emerged as the #1 Hindi GEC in recent weeks. The Hindi GEC genre is the largest genre in terms of overall viewership – a leading position in the genre should enable growth ahead of the industry in advertising revenues as well as subscription revenues.

“TV18 Broadcast is likely to see greater benefits of the above industry tailwinds, as rising viewership share of the company, especially for the flagship Hindi GEC of the company (Colors), would help the company outperform the industry in advertising revenue growth. The company’s subscription revenue stream too is likely to see benefits from rising viewership share (higher bargaining power with platform operators), given that monetization of the company’s content (subscription revenues) is well lower than industry benchmark Zee Entertainment,” notes Rai.

Says Sofat, “Within the sector, we are bullish on Sandesh and Hindustan Media Ventures. Like a large part of the print media sector, the company is growing well and extremely profitable. It stands out on capital efficiency - with ROCE near 100 percent in FY16. The company has accumulated up Rs160 crore cash on the balance sheet despite real estate investments. It did @Rs 372cr revenue with a Rs 80cr PAT which was higher by @35 percent over FY15. It has a real estate business in which it has invested @Rs 300cr through equity and debentures. The real estate project is a 128 acre project near SP Ring Road in Ahmedabad. The project has a combination of both commercial and residential real estate project. At the moment, the project has already begun but hardly begun contributing to the P&L but the upsides could come in the next 2 years. But ignoring the real estate part, the company trades at 3.5x FY17 EBDITA (and 7x FY17 earnings) and 2.5x FY18 EBDITA - highly attractive given the characteristics of the business.”

He adds, “In most developed countries, the digital newspapers are eating into the share of the traditional newspaper. However, HMVL has being compounding revenues by 13% pa for the last 3 years.  Overall print revenues have been growing and the Hindi belt revenues are growing even faster. It’s a very efficient user of capital and producer of free cash - delivering ROCE of around 60% consistently and has @Rs5.4bn of net free cash which could potentially be close to 7bn in FY17. Given its superior performance on growth and capital efficiency and good revenue outlook, there is clear undervaluation – trading at 11x trailing earnings with peers trading @20x or higher. One can play HMVL even through HT Media which own 74% of HMVL.”

Source: Advisesure

Siddharth Deshpande, Senior Research Analyst at HDFC Securities
“Media companies, especially large cap ones, may continue its growth going forward due to the seventh pay commission pay out related spend and the forthcoming State elections. The next phase of digitization will gain momentum in coming months, which will add revenue to broadcasting companies. Last year, large cap media companies had given a return of 30-40 percent to its investors. In the coming year, one can expect a return of 20-30 percent from these stocks”

Ritwik Rai, Analyst at Kotak Securities
“Over the longer-term, the inevitable transition from unorganized or unbranded products to branded products is likely to ensure that advertising expenses (adex) to GDP ratio will expand, which implies that advertising revenues of media companies are likely to grow at a faster pace than GDP growth. In the recent past, lower commodity prices (higher scope for advertising and marketing spends) and emergence of e-commerce as a significant advertising category have benefited the media sector. These factors are likely to remain constructive, although likely to diminish in growth contribution, in the next few quarters, while improving consumption trends like monsoon and pay commission benefits shall likely emerge as new positive macro drivers. As such, we think the outlook for the media sector revenue remains strong in the near term as well”

Sanjay Dwivedi, Group Chief Financial Officer at Balaji Telefilms Ltd
“Capital markets and other external audiences have begun to recognize and appreciate Balaji’s performance, capabilities and potential. Over the last couple of years we have been improving our presence across all the leading GEC’s leading to higher number of hours. We have also expanded our programming across genres and have entered the youth, non-fiction and reality to name a few. These initiatives have enabled us increase and maintain our number of show on quarterly basis leading to a stable and sustainable profitability”