Operating margins of print media companies could decline by more than 400 basis points this fiscal due to a rise in the cost of newsprint, which accounts for 35-45% of their total cost.
In the first quarter of this fiscal, newsprint prices shot up ~30% on-year, and are hovering 20% above the average prices of fiscal 2018. They are expected to remain elevated over Rs 45,000/tonne through this fiscal. Further, players dependent on imported newsprints will also be impacted due to depreciating rupee. However, companies that locked in prices through long-term newsprint supply contracts would avert the pressure on profitability till the expiry of such agreements.
The impact on profitability is despite an expected bump-up in advertising revenues during the second half of fiscal 2019 because of general elections. Advertising revenues had risen ~7% during the 2014 general elections.
Says Sachin Gupta, Senior Director, CRISIL Ratings, “The rise in newsprint prices could slash the profitability of print media companies by as much as 800 bps this fiscal. But an expected rise in advertising revenues in the second half should reduce the overall impact to ~400 bps.”
A pick-up in fast-moving consumer goods and automobiles sectors following another spell of normal monsoon, and increase in advertising rates will further support the growth in advertising revenues, after two years of sluggishness because of demonetisation, the implementation of the Goods and Services Tax, and the Real Estate (Regulation and Development) Act, 2016 (RERA).
Consequently, ad revenue growth was muted in fiscals 2017 and 2018. This fiscal, CRISIL expects ad revenues to grow 5-7%.
Revenue from circulation is expected to remain flattish this fiscal despite the cover price hike already effected. Companies have initiated cost-control measures such as curtailing circulation of less remunerative copies and optimising pagination to reduce the newsprint consumption. These efforts will partly contain the impact of rising newsprint prices.
Says Nitesh Jain, Director, CRISIL Ratings, “The dip in profitability due to higher newsprint prices is imminent since the growth in advertising revenues this fiscal will not completely offset the impact of increased costs. And given the high competitive intensity, newspaper companies may not be able to hike the cover price by the Rs 1.25 per copy required to completely offset the impact.”
CRISIL-rated print media companies account for around half of the total readership, including 2 of the top 3 players in both the English and vernacular newspaper segments.
Credit profiles of the large and diversified print media companies will be resilient owing to strong balance sheets with average gearing of 0.3 time as on March 31, 2018. CRISIL-rated players also had liquid surplus of over Rs 7,000 crore on that date.