Media stocks reel under weak advertising revenue recovery

Valuations of listed firms at steep discount, but underperformance may continue

The media sector has been the worst performer among sectoral indices, shedding over 11 per cent since the beginning of August, against gains of 10.9 per cent for the benchmarks.

This sharp underperformance has largely been because of broadcasters Zee Entertainment and Sun TV Network, whose shares have declined 11-15 per cent in the period. Even over a one-year period, the sector has lagged behind all peers by a margin of over 20 per cent.

Slow recovery of advertisement revenues, uncertainty on subscription revenues due to the New Tariff Order 2.0, and current investments in the digital segment are weighing down on the broadcasters’ revenues and profits. Near-term uncertainty has led Zee Entertainment and Sun TV to either temper or refrain from giving guidance for FY22.

Muted advertising growth has been a key concern for the sector and June quarter results reflect this. Though the impact was not as severe as in the first wave of Covid-19, with ad revenue growth doubling over the year-ago quarter for Zee Entertainment, it was down 17.5 per cent sequentially. Companies have been cautious on launching new products and concerns on a third wave has impacted advertising spends.

Companies in the fast-moving consumer goods space have not cut spends, barring those in the personal care space. However, Sanjesh Jain of ICICI Securities believes key advertisers would remain cautious on advertising spends given the large input cost inflation.

The impact on advertising revenues was similar for Sun TV Network, with sales up 93 per cent YOY in Q1, but down 23 per cent sequentially. Ad revenues declined sharply especially in May and June because of lockdowns. Given the gradual opening in its key market of Tamil Nadu, spends from local advertisers and retailers have been impacted.

Bhupendra Tiwary of ICICI Direct Research believes that continued market share improvement in Tamil and planned big-ticket launches in Telugu and Malayalam will be key for advertisement recovery.

Though there has been a recovery from the lows last year, advertising revenues for both broadcasters are 23-36 per cent lower than in the pre-covid period (Q1FY20).

The other dampener has been the uncertainty related to subscription revenues. Sun, for example, reported a 6 per cent YOY decline in domestic subscription revenues as there was a delay in renewals of content deals because of the uncertainty on New Tariff Order 2.0. The matter is being heard in the Supreme Court.

The Sun management does not expect a major revenue impact, but it refrained from providing subscription revenue guidance. While the company expects a growth in FY22, Balaji Subramanian and G V Giri of IIFL Securities say it is a climb down from the double-digit growth guidance shared after Q4 results.

In comparison, subscriptions grew 8 per cent YOY for Zee, but the management indicated that the weak recovery trends will make it difficult to achieve double-digit growth guidance given in the last quarter, highlight analysts at Motilal Oswal Financial Services.

The company has revised its margin guidance twice from 32-34 per cent a couple of quarters ago to 20-25 per cent now. In addition to the core business, the Street will also await recovery of dues from Dish TV (expected by the end of FY22) as well as progress on investments in ZEE5, its over-the-top application, given that it is making losses at the operational level.

The uncertainty is telling on the returns and valuations of the two players. At 11-12 times their oneyear forward earnings estimates, valuations are at a 32-46 per cent discount to their five-year averages. Though these are attractive, investors should await some recovery in advertising trends (pricing and volumes) and clarity on subscription tariffs before considering the listed broadcasters.