newspaper industry 0502

8/11/2019 Newspaper Industry 0502

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INDIAN NEWSPAPER INDUSTRY: IMPROVED EDITION AHEAD

Crashing stock markets, tottering economies, terrorist attacksThings couldnt havegot any worse than they did in 2001. As in any economic downturn, advertising became

the first casualty as companies cut corners in a bid to stay afloat. Naturally, this hitmedia businesses, including the newspaper industry.

After all, profitability in the newspaper industry is largely driven by advertising revenueswith circulation levels and readership profile all being virtual proxies for advertisingeffectiveness. The business is, in fact, highly dependent on economic cycles apart from other factors like newsprint prices and a publishing houses relative competitiveness vis--vis other media.

So after recording healthy advertising revenue growth rates in CY1999 and CY2000,CY2001 saw Indian newspaper players being hit by slowing ad revenues and high newsprint

prices. This impacted their financial performance as evident from the heightened pressure onrevenue growth, margins and profitability.

CRISIL does not expect any significant deterioration in the overall credit profile of newspaper companies, however, given that this has been supported by healthy cash flows,conservative financial policies with low dependence on debt and strong liquidity in the past.Further, the healthy cash accruals of past years are likely to be utilised for modernisation andexpansion of facilities now, especially colour printing, which will help players to improvetheir competitive position against other media. Even so, the optimum funding structure for any company implementing large expansion projects will be critical in determining creditquality.

Besides, with newsprint prices softening since the second half of 2001, the pressure onmargins should ease up in CY2002, believes CRISIL. But an economic revival would becritical for triggering any recovery in the domestic advertising market. Going forward, thenewspaper industry is expected to face increased competitive pressures from other mediums.However, in the near to medium term, CRISIL expects the newspaper industry to retain itsleadership position in the domestic advertising revenue market.

Structure of the Industry- Skewed towar ds adver ti sing r evenues

The Indian newspaper industrys high dependence on advertising is evident from its revenuecomposition. Advertising revenues comprise between 55% and 80% of total revenues for theindustry with the balance coming from circulation revenues. The ratio is further skewed for the English language newspapers, which account for a chunk of the total ad revenues comingto the newspaper industry. The vernacular, especially the Hindi language papers are moredependent on circulation revenues, on the other hand. Hence their cover prices are higher than that of the English dailies in spite of the fact that they offer fewer pages.

As mentioned earlier, ad spends and consequently, ad revenues are highly cyclical, dependent

as they are on economic peaks and trough. Hence the newspaper industrys prospects areclosely linked to that of the economy. Besides, with television and other media posing stiff


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competition in the last decade and given the high susceptibility of circulation levels to cover price trends in the past, these cover prices, especially of the English papers, have been kept atvery low levels compared to their production costs. This strategy has, in fact, limited the

players pricing flexibility in spite of the fact that newsprint prices are extremely volatile.Also, since around 70% of the countrys newsprint requirement is met through imports,

players are exposed to foreign exchange risk.

Television cannibalising Newspaper Readership- however conti nued cir culation growth

Worldwide, the newspaper industry is facing declining readerships as other media and a fast- paced lifestyle make demands on the consumers mindshare. Consumers in the western worldespecially face an explosion of information choices. It is estimated that newspaper circulation in USA has been declining by almost a percentage point a year, on an average,since the early 1990s while Canada and UK have recorded higher circulation drops. In theIndian context, however, although television has grown significantly in the 1980s and 1990s,newspaper circulation has not really dipped.

True, ever since satellite television opened a new world to Indian consumers, the medium hasgarnered significant audiences in the urban and rural areas apart from increasing its share inthe total ad revenue pie. But Indian newspapers have been able to hold on to their circulationfigures. In fact, the regional newspapers have even recorded good circulation growth.

CRISIL expects newspapers to continue increasing their readership base in the near tomedium term. Growth will come on account of the increasing population vis--vis stagnantor declining population levels in the west, rising literacy levels over the last two decades andthe low cover price of newspapers. Further, increased competition amongst newspapers hasresulted in innovations, aggressive pricing and marketing, which has also boosted thecirculation levels. For instance, newspapers, especially the English dailies, have introducednew supplements targeted at particular areas, demographic profiles, special interest groupsand the like, which has renewed the readers interest. They are also consciously targetingchildren and youth so as to develop potential readers.

Advertising Trends- Newspapers to maintai n l eadershi p over the medium term

In terms of ad revenues too, the print medium has held onto its lead over television.Although over the last two decades the segment has lost its share in the total ad revenue pie totelevision, print still accounts for around 50-55% of the total ad spend in the country.

Besides, with the emergence of satellite television in the 1990s, the countrys overall adrevenue pie has grown in the last decade and other media, including newspapers, have benefited from this overall increase.

Advertising revenues flowing into the newspaper industry have recorded a healthy growthrate of around 10% during the last six-eight years. The segment is likely to lose market shareto television in the long term but it should still retain its leadership position in the near tomedium term. Thats because with proliferating channels, increased fragmentation of viewership within the television industry has reduced the effectiveness of televisionadvertising. Also, the low cost and strong local presence of newspapers is expected todiminish televisions advantage over newspapers in the medium term. Local supplements

are not only more attractive to marketers on account of their affordability and lower


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spillage, but also increase the potential customer base for newspapers since local advertisersmay not always be able to afford advertising in the main edition.

Big gets bigger- Strong Entry Barr iers

Newspapers are a habit. Hence, any new entrant will require a long gestation period to build brand equity, a loyal customer base and steady readership levels. All these factors act asstrong entry barriers in the newspaper industry. The problem is further confounded since adrevenues are directly proportional to circulation and readership levels. Hence, any newentrant would be at an inherent disadvantage vis--vis existing players given its lowcirculation levels. In addition, the low cover price in no way covers production costs resultingin large losses in the initial period in the absence of adequate ad revenues.

So it is extremely difficult for any new entrant in the newspaper business to overtake themarket leader on ad revenue or paid circulation, be it in a particular region, category or language. Rather, the industrys market leaders have tended to emerge stronger over a periodof time besides being in a relatively better position to withstand periods of stress such aseconomic downturns.

Newsprint price trends- I nherent cycli cali t y

Newsprint costs account for a chunk of the total costs for any newspaper company. Domesticnewsprint prices have followed a cyclical trend in tandem with international newsprint pricesas seen in the chart below.

Domestic Ad Revenue Growth

0

1000

2000

3000

4000

5000

6000

7000

80009000

10000

1995 1996 1997 1998 1999 2000Time Period

R s .

C r o r e

Press

Television

Radio

Total


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An evident, international newsprint prices have softened since the second half of 2001. Thiscan be primarily attributed to the lower global advertising demand, reduced newspaper salesin USA following cover price hikes, web-width reduction and high inventory levels with

publishers.

This is in sharp contrast to the high prices that prevailed during CY2000 and the first half of 2001. International newsprint prices began rising steeply from February 2000, first due tothe increased demand for newspapers (triggered by events like the Olympics and the US

presidential elections) and later, because of cartelisation by major international newsprintmanufacturers. The growing consolidation within the international newsprint industry also

sustained high prices in CY2000. Since ad revenues were buoyant in CY2000, publishersabsorbed this hike without any appreciable effect on their margins. But the slowdown in adrevenues coupled with high newsprint prices has considerably impacted margins in CY2001.

With newsprint prices falling in CY2002, newspaper companies are expected to benefitfrom this trend. Some players will also benefit from higher cost savings as web-widthreduction has resulted in lower newsprint consumption. .

Newsprint pr ice movement

18,000

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

Period

R s / M T

Ex-factory 49 GSM (81.5 cm)

Landed Cost (1)


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The new media

The growth of the internet is a long-term potential threat to the newspaper industry in termsof migration of advertising revenues to this new medium. Current trends in the domesticand international newspaper industry, however, suggest that the growing popularity of the

internet is unlikely to result in any meaningful circulation or advertising revenue erosion for the newspaper industry in the short to medium term. Thats primarily because of the low costand easier accessibility of newspapers.

Globally too, the internet is expected to chiefly threaten classified advertising revenues sinceit helps to provide more focussed and timely information besides giving users the flexibilityto manipulate databases. The response by most newspapers abroad has been to launch their own websites. In the domestic context, classified revenues dont form a large part of totaladvertising revenues hence the potential threat is limited. Moreover, domestic PC penetrationlevels are likely to remain low compared to international levels.

The CRISIL experience

CRISIL has considerable experience in analysing the credit profile of publishing companiesstraddling the world of English and vernacular language dailies and magazines. The ratingmovement of publication companies with outstanding CRISIL ratings is elucidated below.This verifies the stability of credit quality demonstrated by these companies over the last four years.

Rating Movement for Publishing Companies rated by CRISILAs on December Business Segment 2001 2000 1999 1998

Navneet Publications(India) Limited Publication of educational/children books / stationery products

P1+ P1+ P1+ P1+

Hindustan Times Ltd. Newspaper Publication HT &Hindustan

AA/P1+

P1+ P1+

Bennett Coleman andCompany Limited

Newspaper Publication Times of India & Economic Times

P1+ P1+/FAAA

(*)

P1+/FAAA

P1+/FAAA

ABP Pvt Limited Newspaper Publication ABP &Telegraph

P1+ P1 P2+ P2+

Jagran Prakashan Ltd. Newspaper Publication Dainak

Jagran

AA-

*Withdrawn

Conservative Financials - Sustenance of the same to provide credit comf ort

Most established players have managed to sustain relatively low levels of financial risk.This is largely because of their strong cash flow-generating ability and relatively low capitalneeds, which have resulted in conservative capital structures with low reliance on debt andstrong liquidity. Further, the receivables and credit risk is relatively low for this industrysince newspaper companies usually deal with established advertising agencies.

The economic recession and consistent upturn in newsprint prices impacted the margins and profitability of players in CY2001 but established players managed to sustain their overall


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credit profile because of their comfortable gearing levels and coverage indicators. Marginsare expected to improve in future given weakening newsprint prices and an anticipatedeconomic recovery. The overall credit profile of players who are expanding aggressively or enhancing capacities will, however, be determined by the funding structure that they adopt.

While it is true that newspaper companies will face stiffer competition on ad revenues fromother media in the coming years, established players are expected to innovate, develop new

products, target younger readers and in general, counter these threats more aggressively.While all players are expected to remain susceptible to the inherent cyclicality of the

business, established players with strong brand equity should be relatively better placed towithstand the pressures. Hence, CRISIL expects the ratings of domestic newspaper companies to remain stable in the short to medium term in the absence of any large debtfunded projects.

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