Poor Monsoon May Have Disproportionate Impact On Media Stocks: Report

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Deficient rainfall this monsoon season and the resultant slump in demand in sectors that are key advertisers will adversely impact earnings of media firms and may have a disproportionately negative impact on media stocks, Kotak Institutional Equities said in a report today.

India’s meteorological department yesterday lowered its rainfall estimates for a second time, saying that during June-September, monsoon rains will only be 87% of the average. Following this, a number of banks and think tanks have lowered their forecasts of economic growth. Nearly a fifth of India’s GDP is dependant on agriculture, and farmers’ fortunes are tied closely with the vagaries of monsoons.

A good monsoon means higher spending power to some 25% of Indians who derive their livelihood from agriculture and allied activities and this typically means high sales for sectors such as auto, FMCG, electronics and consumer durables etc. Companies in these sectors advertise heavily during the festival season that falls in the October-December quarter in a bid to corner the higher demand. Poor rains means companies anticipate lower sales and proportionately shrink their ad budgets.

“We expect deficient rainfall in large parts of India and likely contraction in agricultural output to have a moderate impact on earnings of media stocks; the adverse impact on consumption of goods and services may result in reduced advertising spends from key advertisers (FMCG, Autos-2W and Durables). The impact on stocks may be disproportionate given a robust recovery in advertising spends was factored into valuations. The recovery may be less robust than earlier envisaged,” Kotak analyst Amit Kumar wrote in the report.

The Hindi-speaking states will be more affected by poor rains and hence Hindi publishers and broadcasters will be relatively more hit. Overall, broadcasters will be more hit than publishers as they have large viewership in rural agrarian areas. Key advertising sectors such as FMCG, auto, telecom and consumer durables, which derive growth from rural and semi-urban areas, spend more ad dollars in broadcast. Hence the relative hit to broadcasters will be more.

The report forecasts significant impact on Zee Entertainment Enterprises Ltd; moderate impact on Jagran Prakashan and HT Media Ltd and marginal impact on Sun TV Network Ltd and Zee News Ltd.