Ad Factor: TV to Remain Lord of the Ring
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India Equity Research Media September 21, 2020 Media SECTOR UPDATE Ad factor: TV to remain lord of the ring We maintain that Q1FY21 was a peak pain quarter for the TV ad industry and our prognosis is of gradual recovery (QoQ) throughout FY21. TV ad revenues are envisaged to gain significant traction riding: 1) resumption of consumer goods sales; 2) GEC channels recapturing eyeballs & commencement of fresh programming; and 3) advertisers leveraging the upcoming festival season to drive consumption. Though we remain confident of ad recovery, it is unlikely to be broad- based given the disruption during the post-covid era. We expect the television industry in general and broadcasters in particular to be key beneficiaries of this recovery. Pay TV to retain its crown While burgeoning digital advertising is undoubtedly taking a toll on the idiot box, we argue that TV is not likely to go out of vogue soon. Reasons being: i) Spurt in tactical digital consumers (pay TV + 1 OTT service) is way higher than digital only consumers. ii) Strong traction in bundled digital consumers (pay TV + telco-bundled content). iii) Daily average time spent on TV viewing has remained constant since the past three years at 220-225minutes. iv) Mere ~62-65% TV penetration in India implies enough headroom for subscriber growth over the long term. Channel checks resonate with our view To gauge the changing ad industry dynamics and the state of TV advertising in particular we conducted channel checks with a leading media buying agency. Our key findings resonate with our view that: i) TV as a medium will not die for the next 10-15 years at least as mass marketing will continue to be key. ii) 65% rural population in India, wherein TV penetration is less than 50%. iii) Big categories like FMCG will be dependent on TV as for them rural is a key growth theme. iv) Overall advertising pie will increase, but ad spends will not migrate fully from TV to digital. Hence, TV will continue to have a big share. Re-rating on cards for leading broadcasters With fresh programming returning to GEC channels and other traditional mediums struggling, we expect ZEE and SUN TV to benefit over the near-to-medium term given their strong market positions in respective markets. Additionally, improvement in the working capital, cash position and corporate governance bode well for ZEE, in our view. Given the multiple positive triggers and stronger visibility on robust cash generation over the short as well as long term, we revise up our target multiple from 12x to 16x FY22E EPS, leading to revision in our target price to INR305 (INR230 earlier). We maintain ‘BUY/SO’. We also revise up SUN TV’s target multiple from 12x to 16x FY22E EPS, leading to revision in target price to INR640 (INR484 earlier). Loss of market share remains the key risk to our call. We maintain ‘BUY/SO’. Abneesh Roy Prateek Barsagade +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson FirstCall, Reuters and Factset Edelweiss Securities Limited Media Robust recovery in sight Tailwind to broadcasting revenues As mentioned in our earlier report (Covid pain; ZEE 4.0 brings positive changes), we continue to maintain that with the worst behind in Q1FY21, the ad industry’s overall health is slated to recover sequentially through FY21. We foresee reasonable triggers to deliver higher-than-expected advertising revenue growth : Robust recovery in consumer goods sales: Contribute ~50% to the ad industry; rural likely to be the key theme for consumer goods companies over the coming days wherein TV is the predominant medium of reach. Telcos turning on the heat and launching new bundles: Contributes 12% to the ad industry; Vi is expected to spend ~INR8bn on branding over the coming year. Pent-up demand, particularly in discretionary consumption: Low-ticket product/service sellers to continue to focus on mass marketing. Businesses looking at festive season as an attractive opportunity: e-Commerce players expected to be aggressive given the strong opportunity for heavy online sales in the upcoming festive season. New product launches by consumer goods companies: HUL has launched over 50 health, hygiene and sanitisation products during the lockdown period. BCCI’s nod for IPL tournament: Viewership anticipated to remain strong as first sporting tournament for Indian audience this year; advertisers are likely to chase eyeballs. While we do remain confident of ad recovery, it is not likely to be broad-based given the disruption transpired in the post-covid era. We expect the TV industry, and broadcasters in particular, to be key and limited beneficiaries of this recovery led by: Viewership returning to GEC channels. Resumption of fresh programming on most channels. Improvement in ad demand (volumes) leading to better rates. Ad revenues migrating from radio, print, OOH and in-cinema mediums. TV being the primary entertainment source/common viewing medium for many homes. Given the favourable triggers in place, we expect broadcasters to fare better than most other media segments. While ad migration from other traditional mass media is likely to be a near-term phenomenon, it will definitely benefit in current times. Additionally, reset to cost structures and the imperative to have quick filming/shooting under the prescribed guidelines should hold up profitability of broadcasting businesses. We expect broadcasters with leading market shares in their respective geographies and robust balance sheets to emerge stronger. Our top picks in the media space remain ZEE and SUN TV. 2 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson FirstCall, Reuters and Factset Edelweiss Securities Limited Media Traditional mediums anticipated to underperform Advertising revenues (INR bn) 2017 2018 2019 2020E 2022E CAGR 2019-22 (%) Television 267 305 320 341 389 6.7 Print 216 217 206 210 212 1.0 In-cinema advertising 6 8 8 8 9 4.9 Digital 115 154 192 236 350 22.3 Radio 29 33.6 31.1 32.8 36.1 5.1 OOH 34 37 39.1 41.3 46 5.6 Total 668 754 795 869 1042 9.4 Source: EY-FICCI M&E Report 2019, Edelweiss Research Rapid gains in digital to hurt print, radio and OOH Market share (%) 2017 2018 2019 2020E 2022E Television 40.0 40.4 40.2 39.2 37.3 Print 32.3 28.8 25.9 24.2 20.3 In-cinema advertising 1.0 1.0 1.0 0.9 0.9 Digital 17.2 20.4 24.1 27.2 33.6 Radio 4.3 4.5 3.9 3.8 3.5 OOH 5.1 4.9 4.9 4.8 4.4 Total 100 100 100 100 100 Source: EY-FICCI M&E Report 2019, Edelweiss Research Digital to continue to gain market; traditional media to lose 100 80 17.2 20.4 24.1 27.2 33.6 60 32.3 28.8 25.9 24.2 20.3 40 20 40.0 40.4 40.2 39.2 37.3 0 2017 2018 2019 2020E 2022E Television Print In-cinema advertising Digital Radio OOH Source: EY-FICCI M&E Report 2019; Edelweiss Research In our earlier report, Shades of growth, we had highlighted the downside risks to traditional media growth estimates (print, radio and OOH), primarily due to rising traction of advertisers towards the digital media. While we had not factored in the covid-19 impact, we believe the pandemic has likely exacerbated issues for these mediums. Smaller print companies shut shop and even big players have discontinued a few editions of publications. Radio companies also reported massive dips in Q1FY21 revenues owing to sharp cut in government ads and negligible local ads. Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson FirstCall, Reuters and Factset Edelweiss Securities Limited 3 Media In-cinema advertising too is likely to be impacted severely as advertisers and single screens/multiplexes themselves continue to remain uncertain of the opening of screens along with an added uncertainty on footfalls. Anectodally, several FMCG/apparel companies have talked about diverting their A&P spends towards the digital/TV media, implying a preferential shift from traditional mediums. TV too is likely to be hit by the shift to digital advertising. However, we believe the above estimates carry an upside risk given that most consumers while consuming digital medium continue to remain glued to their TV sets. Our key arguments: Growth in tactical digital consumers (pay TV + at least 1 OTT service) much higher than digital only consumers (only digital/OTT content consumption). Strong traction in bundled digital consumers (pay TV + telco-bundled content). Daily average time spent on TV viewing has remained at similar level since the past three years at 220-225minutes. Despite ad volumes falling 4% in FY19, volumes of a few regional GECs grew as bigger broadcasters continued to enter untapped/high potential markets. While reach was impacted during the year due to NTO, sharp recovery was seen within a month (though at 5-6% lower than normal level). TV penetration in India continues to remain ~62-65%, implying enough headroom for subscriber growth over the long term. Significant overlap in TV and digital consumers Customer Segmentation (mn) 2017 2018 2019 2022E CAGR 2019-22 (%) Digital only 1-1.5 2-2.5 8 14 20.5 Tactical Digital 6 12 34 91 38.8 Bundled Digital 155 218 262 363 11.5 Mass Consumers 464 427 316 176 -17.7 Free Consumers 155 180 190 220 5.0 Source: EY-FICCI M&E Report 2019, Edelweiss Research Chiming in a similar view, we delineate key highlights from Mr.