Media stocks languish as weak recovery, tariff concerns remain

The media sector has been the worst performer among sectoral indices shedding over 11 per cent since the start of August as compared to the benchmarks which have gained 10.9 per cent during this period. The sharp underperformance has largely been due to the broadcasters, Zee Entertainment and Sun TV Network which have shed in the 11-15 per cent range during this period. Even over a one year period, the sector lags behind all sectoral indices with the underperformance at over 20 per cent.

Slow recovery of advertisement revenues, uncertainty on subscription revenues due to the New Tariff Order 2.0 and ongoing investments in the digital segment is weighing on the broadcasters revenues and profits. Near term uncertainty on account of the above has led the two key listed broadcasters Zee Entertainment and Sun TV to either scale down or refrain from giving guidance for FY22.

Muted advertising growth has been a key concern for the sector with June quarter results reflecting the same. While the impact has not been as severe as the First Wave with ad revenue growth doubling over the year ago quarter for Zee Entertainment, it is down 17.5 per cent on a sequential basis. With companies cautious on the launch of new products and concerns related to new wave of infections has impacted advertising spends.

While companies in the fast moving consumer goods space have not cut spends barring those in the personal care space, Sanjesh Jain of ICICI Securities believes key advertisers would remain cautious on advertising spends given the large input cost inflation. What is worsening the situation is the viewership share which has been declining and causing additional pressure on ad revenues, says Jain. Zee’s all India share of the network slipped by 190 basis points on a sequential basis to 17 per cent in the June quarter.

The impact on advertising revenues was similar for Sun TV Network with sales in the quarter up 93 per cent y-o-y but down 23 per cent on a sequential basis. Ad revenues declined sharply especially in May and June given the lockdown in various states. Given the gradual opening in its key market of Tamil Nadu, spends from local advertisers and retailers has been impacted and is expected to delay a recovery in spends. Sun too has lost market share in its key Tamil market from 55 per cent few years ago to just over 40 per cent now. After gaining in May and June, the company has lost share in July in the Tamil maket. Bhupendra Tiwary of ICICI Direct Research, believes that continued market share improvement in Tamil and planned big ticket launches in Telugu and Malayalam will be key for advertisement recovery traction ahead.

Though there has been a recovery from lows last year, advertising revenues for both broadcasters are 23-36 per cent lower than in the pre-Covid period (Q1FY20).

The other dampener for the stocks has been the uncertainty related to subscription revenues. Sun, for example, reported a 6 per cent y-o-y decline in domestic subscription revenues as there was a delay in renewals of content deals due to uncertainty on New Tariff Order 2.0. The matter is being heard in the Supreme Court as broadcasters argue against the regulator’s (TRAI) move to bring down the maximum price companies can charge per channel to Rs 12 as compared to Rs 19 earlier. The regulator’s order restricts a differential pricing to bouquets/channels and will impact their revenues per user. While the Sun management does not expect a major revenue impact, the company refrained from giving subscription revenue guidance. While the company expects a growth in FY22, Balaji Subramanian and G V Giri of IIFL Securities say it is a climb-down from the double-digit growth guidance shared on the 4Q call by the company.

While Zee’s subscription growth was 8 per cent higher y-o-y, the management indicated that the weak recovery trends (Covid impact and NTO 2 implementation) will make it difficult to achieve double-digit growth guidance given in the last quarter, highlight analysts at Motilal Oswal Financial Services. The company has revised its margin guidance twice from 32-34 per cent a couple of quarters ago to 20-25 per cent now. In addition to the core business, the street will also await recovery of dues from Dish TV (expected by the end of FY22) as well as progress on investments in ZEE5 its over the top application given that it is making losses at the operating profit level.

The uncertainty is telling on the returns and valuations. At 11-12 times their one year forward earnings estimates, valuations are at a 32-46 per cent discount to five year averages. While these are attractive levels, investors should await some recovery in advertising trends (pricing and volumes) and clarity on the subscription tariffs before considering the listed broadcasters. Business Standard