Media likely to see steady ad growth in FY14E: Emkay

Emkay Global Financial Services has come out with its report on media sector. The research firm maintains buy rating on Zee, DB Corp and Jagran.

• Robust ad growth in 3Q for broadcasters was driven by strong A&P spend by FMCG cos. (contributes ~52% & ~9% to TV & Print ad rev.), who are now facing challenges of volume deceleration and inability to drive price led sales growth 
• Our analysis indicate direct co-relation between volume deceleration, market share erosion and increase in A&P (advertisement and promotion) spend of FMCG companies
• In our view, volume growth acceleration is still 2-3 quarters away and to counterbalance the intensifying competitive pressure we foresee increased A&P spend by FMCG cos. 
• Maintain BUY on Zee, DB Corp and Jagran

Expect A&P spends by major sectors like FMCG, Real Estate and Auto to accelerate going forward: 
We expect advertisement growth for media companies to remain steady in FY14E on the back of continued A&P spends by FMCG companies. FMCG companies contribute ~52% of TV ad and ~9% of print ad revenues. We attribute the continued increase in A&P spends by companies to: 1) Slowing volume growth to sustain current level of growth, 2) Inability to increase prices to support revenue growth given the declining volume trend, 3) Margin expansion on account of downtrend in raw material cost and 4) increase in competition from small companies with declining raw material cost.

??Our analysis indicate that increase in ad spends by companies are a direct repose to deceleration in volume growth. Our consumer analyst believes that volume growth acceleration is still 2-3 quarters away and to sustain current volumes, companies would continue to spend more on A&P.

??The rate sensitive real estate sector (contributes ~3% of TV and 8% of print ad revenue) is likely to witness higher number of launches in FY14E after a muted FY13E. Softening of interest rates and signs of improving macro environment are likely to drive demand for the real estate sector. As per our real estate analyst, all the major companies have lined up new project launches in FY14E (details highlighted in Exhibit 4).

??Auto sector is also currently facing a slowdown. However, we expect pick in demand with softening of interest rate and new launches. Auto industry, which contributes ~8% of TV ad revenues and 8-9% of print ad revenues, is expected to see steady ad spends based on new launches, increase in competition and softening interest rates.
 
We prefer- Zee, DB Corp and Jagran:
 
Broadcasting: We continue to prefer the broadcasting space given the robust subscription revenue growth in coming years due to digitization. Further, continued ad spends by FMCG companies to sustain volume growth is likely to augur well for broadcasting companies in FY14E. Stable content cost (as major investments are being made in FY13E) and robust subscription growth will support margin expansion, as well. Zee is our preferred pick in the broadcasting space with a BUY rating and a target price of Rs275.
 
Print Media- We have turned positive on the print media space due to decent 3Q results. Key arguments for upgrade are 1) Initial signs of improving ad environment, 2) Increase in cover price by companies to have positive impact on EBITDA, 3) General election in Q1FY15E to boost ad revenues in FY14E and 4) Stable newsprint prices to provide operational leverage and better margins, going forward. We remain selective in this space with preference towards DB Corp and Jagran Prakashan. Maintain BUY on DB Corp and Jagran with target price of Rs270 and Rs123, respectively.

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