Aggregate operating profit of print media companies is likely to increase 500 basis points (bps) in fiscal 2020 after a lacklustre fiscal 2019, riding on two tailwinds: a 25% increase in the card rates for government advertisements recently announced by the Bureau of Outreach and Communication (earlier known as the Directorate of Advertising and Visual Publicity; DAVP), and softening newsprint prices.

And the upcoming general elections are expected to provide an additional lift to advertising revenues.

Says Sachin Gupta, Senior Director, CRISIL Ratings, “Nearly 10% of the advertising revenues of print media companies comes from advertisements linked to DAVP rates. While these rates have been 30-45% below commercial rates earlier, the upward revision will reduce the gap to 10-25% and increase ad revenues of print media companies.”

The advertisement revenue linked to DAVP rates is estimated to be around Rs 1,800-2,000 crore. In fiscal 2018, DAVP directly spent Rs 631 crore, while the balance is estimated to have come from state governments and public sector undertakings (PSUs), which also place advertisements largely at DAVP rates.

Further, the upcoming general elections are likely to increase advertising revenues during the last quarter of fiscal 2019 and the early part of fiscal 2020. Advertising revenues had risen ~7% during the 2014 general elections.

Newsprint prices had increased ~35% from Rs 37,000 per tonne in fiscal 2018 to over Rs 50,000 per tonne this fiscal. They started softening in November 2018 and are expected to hover around Rs 40,000-42,000 per tonne next fiscal on increased supply.

This fiscal, operating profitability of print media companies has remained subdued because of higher newsprint cost and lower advertising revenues in the first three quarters. The impact of increased DAVP rates and general elections-linked advertising will start reflecting from the last quarter. However, the benefit of lower newsprint prices is expected to percolate only from fiscal 2020 because of high-cost inventory with companies and long-term purchase contracts for newsprint.

Consequently, full realisation of the tailwinds is expected to happen next fiscal.

Says Nitesh Jain, Director, CRISIL Ratings, “While the operating profitability of most print media companies has been impacted this fiscal, the credit profiles of large players exhibited resilience because of strong balance sheets and ample liquidity. The recovery next fiscal will restore profitability to 22-24% levels seen through last fiscal. The extent of pick-up in advertising revenues will be a monitorable for medium and smaller players, whose credit profiles had weakened last fiscal.”

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.