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How investors looked at the M&E sector in 2013

By: Sadanand Shetty

Sadanand-3The year that started with a lot of optimism and a positive note for the media and entertainment industry ended as a mixed bag for stocks in the equity market.

While 2013 turned out to be a defining year for the film and multiplex sector, cable TV distribution companies failed to meaningfully resolve the issues among stakeholders in the year. Subscriber growth for the DTH folks happened at a snail’s pace. The much awaited Phase III auctions remained elusive for the FM radio industry. Only the general entertainment sector benefited from robust FMCG and e-commerce advertising.

LCOs spoil the party for MSOs

A year that started with great hope for phased digitisation held only disappointment for the stakeholders as they remained stuck in the rigmarole of various issues.

2013 was expected to be a defining year for the broadcast sector with increased average revenue per user (ARPU) and a stronger subscriber base, in addition to the bonanza of digitisation. But this did not materialise for the listed multi-system operators (MSOs).

A consistent standoff between MSOs and local cable operators (LCOs) over revenue share, billing rights and entertainment tax spoilt the meal for the stakeholders.

The evolving digital ecosystem was expected to benefit all stakeholders. Instead, it was left mired with regulatory headwinds, litigation and scores of unresolved issues. The need of the hour is the concerted effort by all stakeholders—MSOs, LCOs, broadcasters, regulators, government and consumer groups—to solve the issues at hand and to avoid nipping the long-term potential of the cable TV sector in the New Year.

sd_msoBlockbuster year for general entertainment broadcasters

2013 turned out to be a blockbuster year for the large listed general entertainment players. A robust increase in advertising revenue, coupled with an enhanced market share, growth propelled by the FMCG sector and new categories like e-commerce, has helped it to sustain above-category growth rates.

The presence on the ground with a strong bouquet of channels through joint venture partners helped broadcasters to garner substantial subscription revenue, even though the benefit of digitisation was yet unrecorded in the books of the MSOs.

The top general entertainment broadcasters demonstrated that a temporary change in the pecking order was rarely disruptive to their earning streams as long as viewership stickiness remained constant. Valuations of the entertainment broadcasters saw significant re-rating in the equity market based on the perception of change in their business models.

The perception of entertainment broadcasters shaping their business into a much more secular model like the FMCG sector gained currency in the market. This was primarily due to non-cyclical subscription revenues and their significant contribution to the overall earnings. Nonetheless, only time will tell to what extent this change will be reflected in the companies’ revenue profiles.

The news channels, on the other hand, continued to grapple with the challenges to sustainable growth. With a weak pricing regime and the steep cost of running their businesses, it was choppy ride for most of the players. 2013 made little difference to most of the players. Since the new regulatory proposal of 12 minute per clock hour ad cap is set to impact the very existence of the weakest players, the industry needs more consolidation and some serious players.

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As of 24 December 2013, the listed aggregate market capitalisation of the media and entertainment industry was not more than $13 billion (Rs 83,000 crore). Besides, domestic institutional participation in the sector was poor. As the sector was still in an evolutionary stage, it could not pride itself on an impressive stock market record for the investor.

The business of broadcasting and distribution remained a large segment of the industry with potential to create considerable wealth in future.

Owing to scale and IPR issues, television content and music companies were non-starters for investors.

Radio waits for Phase III

Advertising growth for the FM radio sector was better than expected vis-à-vis other branches of the entertainment industry. The industry also managed to avoid the customary price fall that accompanies economic slowdowns, through the effective use of inventory.

Kudos to those companies that offered innovative products to sustain growth and safely bypass the economic slowdown unlike that in 2008–09. In some cases, companies were able to bulk up their non-radio revenue to the extent of 20 per cent of their overall revenue.

The wait for Phase III remained a Sisyphean chore in 2013, though the development had been announced nearly 20 months back. One can only hope that the Empowered Group of Ministers (EGoM) starts this in earnest in 2014. An industry that could not boast a lot of profit resulting from the second phase of radio auction waited in vain for a fertile ground resulting from Phase III auction. As things stand now, costs of acquiring new frequencies and renewal of licences will determine the profitability of the industry in the New Year.

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Movie industry scales new heights

In a sense, the Indian motion picture industry owned the year by pushing the envelope and scaling new heights of reach and revenues. It also succeeded in bringing new audiences to the theatres with niche films.

The growing number of films crossing the 100–200-crore (Rs 1-2 billion) mark testified to the Bollywood producers’ ability to package their products with star power and high-octane marketing. The superlative feat of ‘Dhoom 3’ reaching the magic 100-crore (Rs 1 billion) mark in a record short time is sure to prompt research agencies to upgrade their forecasted numbers for the film industry.

The ever-expanding multiplex and digital screens, backed by easy finance by the large organised players, fuelled the growth of the industry. Though revenues from satellite and other non-theatrical properties boosted the morale of the industry to bet on bigger budgets, the same cannot be said of profitability of these projects. Therefore, the industry had better focus on the return on investment (ROI) of each project, going beyond headline-grabbing box office collection numbers.

sd_films

The industry went through an exciting phase driven by star power and high-decibel marketing campaigns and aided by an expanding chain of multiplexes, digital and IMAX screens.

Overseas markets were just as responsible for the financial success of star-studded films. The average yield per ticket was on the rise as was contribution of non-theatrical revenue, thus partially de-risking the business from volatile box-office trends. The systems of video-on-demand and pay per movie could accelerate the demand further following full digitisation and with more ad-free content.

Studios should, however, spend cautiously rather than outbid each other in acquiring movies which have star power.

The film industry had limited presence in the domestic bourses. Scale, transparency, volatility and visibility of earnings had been uppermost on the minds of investors for long. Listing of large Indian film companies in the US market would be a welcome change for the industry.

Recent developments have somewhat revived hopes for the sector. Recent changes have partly addressed the issues of scale, volatility and visibility of earnings. In order to lure investors, the industry should adopt the following business practices:

  • Build a prudent financial reporting matrix to deconstruct the profitability and cash flow for the benefit of institutional investors,
  • Demonstrate a reasonable visibility of future revenue and profits through a strong movie line-up, and
  • De-risking of the business through unpredictable theatrical revenue to cause significant re-rating.

Emerging Indian companies, especially in the service sector, had a similar growth trajectory and created enormous wealth for the stakeholders by adopting the best business practices. Today, the film Industry is on the cusp of that change as it adopts the industry-leading practices.

table_sdMultiplexes benefit from consolidation

The grand merger of the two of the largest players in the multiplex industry, namely PVR and Cinemax, paved the way for real consolidation. The benefit of this consolidation was seen in the market capitalisation of the companies as the merger emerged as one of the biggest creators of wealth for the year.

Growth of the industry remained robust on the back of increased consolidation, screen rollout, flexible ticket pricing and the success of big-star movies. Consolidation and improved market share helped multiplex operators to negotiate with content providers. Operating margins of the companies increased owing to the scale and synergy of operations. Non-ticket revenues included those from food and beverages (F&B), advertising and trailers. This could not have come at a more opportune time as the movie line-up became stronger and more robust, with wider reach helping business to proliferate faster than ever.

Multiplexes have space to grow as theatre penetration is still low. They will also benefit from high ticket prices. The introduction of the Goods and Services Tax (GST) will also prove a big blessing for the sector.

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With low ad-to-GDP ratio, the industry could see a meaningful change on the strength of digitisation, Phase III auction and expanding screen presence. Moreover, increasing movie ticket prices, changing audience appetite and consolidation could drive significant value for stakeholders in the year that is about to come.

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(Author is Vice President and Sr.Fund Manager at Taurus Asset Management. Views expressed are his own.)

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