Media stocks rebound on low valuations; analysts expect gradual recovery

On Wednesday, after falling the most among the sector indices at the start of the session, losing almost 4%, the Nifty Media index rebounded strongly to close at 3% higher. The sector – including broadcasters, multiplex operators and print media – was among the hardest hit by the COVID-19 epidemic and the ensuing foreclosure, due to the pressure on advertising revenues, uncertainty in the subscription segment and a sharp drop in step noise.

Although larger markets have also recovered, Karan Taurani of Elara Capital says that valuations in the sector are attractive and that a decline from their current levels appears to be limited. He adds that the valuations of some players are lower than the levels observed during the financial crisis of 2008. Zee Entertainment, which has the highest weight in the index, fell by 50% during the month, with a PVR in drop of 32% over the same period.

Although most brokerage firms are positive about the structural growth history of multiplex players vis-à-vis other segments, they will face most of the short-term difficulties. In light of the freeze, brokerages have revised their estimates of attendance growth for fiscal 2018 from 8 to 12% to only 1 to 2%. Although big budget movies should be pushed back, smaller movies could be shot for digital media, which would have an impact on the release schedule.

Analysts, however, estimate that there may be a consolidation of films from the September quarter, which could offset some of the losses. Some relief is expected in terms of costs, especially rentals (which represent 18 to 20% of sales), given the force majeure clause. For broadcast space, a sharp drop in advertising growth should weigh on June quarter sales as well as on fiscal year 21.

While analysts expect subscription revenues to be more stable, uncertainty about the new pricing order could weigh on growth. High digital gestation period, as well as large investments, are expected to hurt short-term profitability.Although brokerage firms expect a recovery in Q2-221, analysts expect no significant rebound as in 2008, when the recovery was ‘V’ shaped.

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