Fitch Rating has come out with its report on Indian print media industry. The agency expects higher newsprint prices to negatively impact the profitability of the Indian print media industry in the short to medium term
Fitch Ratings expects higher newsprint prices to negatively impact the profitability of the Indian print media industry in the short to medium term. At May 2011, domestic newsprint prices had increased by 13.4% compared to average prices in 2010. On the same basis, international newsprint prices (US) were up 7.2%. Newsprint cost is the largest operating cost for newspaper publishers and typically accounts for 40%-50% of total operating costs. At the same time, the agency notes that competition is likely to prohibit newspaper publishers from raising cover prices significantly (and thus passing on incremental costs to the consumers).
However, the agency expects that an increase in advertising revenues may partly offset the rising cost of newsprint. Newspaper publishers generate about 70% of revenues from advertising, with the remainder coming predominantly from circulations. It should be noted however, that expectations of moderate economic growth will negatively affect advertising revenue growth. In its “Global Economic Outlook”, dated March 2011, Fitch Ratings marginally revised its expectations for Indian GDP in FY12, to 8.3% from 8.5%; this was further reduced to 7.7% in its report “Global Economic Outlook”, dated June 2011.
Upward Trend of Newsprint Prices: Newsprint prices peaked at INR43,500 per tonne during June to September 2008 and troughed at INR25,500 per tonne during August 2009 to February 2010. Since then, prices have increased by 21.6%, to INR31,000 per tonne in May 2011 (from the CY10 average of INR27,333 per tonne). Over the same period, international prices have increased at a moderate rate to USD625 per tonne (from the CY10 average of USD583 per tonne). Increasing freight costs — due to high crude oil prices — have also increased the effective cost of international newsprint.
Consequences of Fluctuating Newsprint Prices: Domestic newsprint prices were above INR35,000 per tonne for a 13 month period starting April 2008 to May 2009. As shown in Figure 2, high newsprint prices resulted in a significant erosion in EBITDA margins across the print media industry. EBITDA margins troughed at 18.3% in Q4FY09, registering a decline of 12.5% from Q1FY09 (30.8%). However, the agency notes that along with high newsprint prices, advertising spending was also under pressure during this period. As newsprint prices declined and economic activity — and consequently advertising — started to pick up, EBITDA margins improved from Q1FY10.
In contrast to FY10, FY11 was a mixed year for newspaper publishers. Moderate revenue growth was offset by steadily increasing newsprint prices. The affect of newsprint cost inflation is highlighted in the declining margins in Q3FY11 and Q4FY11. Fitch’s analysis of eight leading national and regional newspaper publishers shows that raw material costs, as a percentage of operating revenues, increased to 40.4% in FY09 (FY08: 34.3%). As newsprint prices fell in FY10, this ratio improved back to 33.0%.
Managing Profitability by Changing Suppliers: Newspaper publishers use a mix of domestic and international newsprint and companies vary this proportion to better manage costs and the quality of newsprint. Since both domestic and international rates are moving in tandem, the agency believes publishers may not be able to reduce costs significantly, even by changing this mix.
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