Is the rebound in media stocks here to sustain?

It was way back in April 2021 when the world was grappling with the third wave of Covid pandemic. This was when the emergence of the Omicron variant had begun to instill fears of renewed fatalities. Localized lockdowns were still a reality, and businesses, especially those reliant on people venturing out, were feeling the pinch. Among the casualties were sectors like print and radio, which bore the brunt of markets’ wrath. It was then, we sounded a bugle on how radio and print stocks were priced to bankruptcy in fears of their extinction. Back then we wrote, “Market in its usual myopic fashion, is attempting to throw a structural spin (of long-term decay) to a pandemic induced cyclical downturn in ad spending. We added that, when the ad cycle turns, favorable narrative will follow which will lead to rerating in the media space. Trigger is likely to come from the turn of the ad cycle”.      

Of course, the full-fledged turn in ad cycle is yet to happen. Now, with the early signs of such a turn, the media could be one of the few undervalued pockets in this otherwise expensive market that offers potential for alpha creation for investors. Let us jump in.

First, a bit of a backdrop on the deep undervaluation in media stocks, especially for print and radio stocks. Markets have singled out stocks in this space with step-motherly treatment by giving them ultra-low multiples. Soft earning patch or delay in turn in ad cycle alone do not explain this unfair treatment. There is more to it than meets the eye. Because there are many other sectors such as specialty chemicals that are going through earning headwinds yet trading at premium valuations. Then, what is the underlying reason for the deep undervaluation in many of the print and radio stocks? It may have to do with how, many of the market participants view them as value traps than value buys. Yes, many of them think they are value traps, because of the fears of their extinction by the onslaught of digital era. Markets fear that newspapers and radio will be dead soon as digital habits increasingly get entrenched. If these fears hold, then they will really turn into dud investments. But, if these fears are unfounded, then they can become potential unlocking opportunities.   

Which camp do we belong to?

We belong to the camp that believes that both print and radio will stay relevant in India taking support from the following supportive arguments.

Skeptics of print-media prospects in the country, cite the structural fall in the readership globally (esp. in developed countries) as the evidence for what is likely to happen in India too. However, they miss a few important metrics that are unique to Indian context. Low-cost door delivery, ultra-low cover price (on high economy of scale), high illiteracy levels esp. in Hindi belts etc. that are unique to India, will ensure that the non-English readership will continue to grow in low to mid-single-digit for a foreseeable time. Needless to say, that the reasonable growth in readership will drive stronger growth in advertising. Evidently, improving growth in circulation reported by print media firms in non-English space in the last few quarters is a pointer to this assertion.

India being a unique market with highly fragmented segments in much of the sectors, there is a huge need for localized reach for many businesses. This is one of the key reasons that will drive the growing relevance of both radio and print in the advertising space.

It doesn’t stop here. The trust factor has come to play a crucial role in the age of deep fakes in social and digital media. Since print is viewed as trustworthy for historical reasons, they tend to score over when it comes to credibility of the content. This coupled with cluttered webpages with crowded advertisements in digital segment are pushing disenchanted viewers to desert digital in favor of print.

For radio, the added advantage comes from the new emerging popularity for audio stories and audiobooks. This gives an immense opportunity for radio firms to spruce up their content to make it more relevant for the new era.

Now, with these basics out of the way, let us look at some of the recent positive cyclical tailwinds in the sector that can trigger the much-awaited rerating.

• Spending boost from the upcoming general election that is expected to push the ad realizations in the print to the pre-covid levels, as guided by the management commentary of one of the leading print media firms.
• This coming on the back of a strong festive quarter, points to a likely strong rebound in earnings for the financial year.
• Recently the Government hiked the ad rates for its spending by a significant percentage of over 43% for radio firms. This hike has come after a long gap of ver eight years. The last hike was in 2015. Similar hike is not ruled out for the print sector ahead of the Lok Sabha elections. The last hike for the print was in 2019 ahead of the previous general election.
• Since the Govt. advertisements are a significant part of the overall ad revenues for both print and radio industry, these events are likely to be a key catalyst for the impending rerating in the sector.
• Likely implementation of TRAI recommendations on rationalization of license fee, permission for news, mandating mobile devices to have FM receivers etc., will add to the prospects for Radio.

In summary, good times may be ahead for radio and print stocks. They belong to one of the few pockets that have been ignored by the markets and hence continue to trade at attractive valuations (even after factoring the recent rally in media stocks) in terms of potential free-cash-flow yield, thus offering investors a rare unlocking opportunity, besides being a safe place to hide in this otherwise expensive market.

Happy Value Investing!

This article of mine was published in the online edition of Economic Times (05/02/2024). Glad to share the link:https://economictimes.indiatimes.com/markets/stocks/news/is-the-rebound-in-media-stocks-here-to-sustain/articleshow/107416468.cms