Print media, broadcasters and movie exhibitors would be the most impacted by the coronavirus (COVID-19)-led lockdown. On the other hand, multiple system operators (MSOs), broadband players and electronic media may remain relatively resilient. Nevertheless, the pandemic and subsequent lockdown could expedite the longer-term structural shifts in the sector, aided by changing consumer preferences, says a research note.
In the report India Ratings and Research (Ind-Ra) says, "Broadcasters and movie exhibitors will get impacted by the absence of fresh content and a weak outlook on advertisement revenue (ad-revenue). the penetration of over-the-top (OTT) platforms (against TV base) and digital platforms (against print media) to gradually rise, albeit not challenging the supremacy of traditional platforms such as TV and print media."
Ind-Ra estimates that about 21% of traditional ad-revenue of TV, print, outdoor advertising comes from the high-risk sectors like automobiles, real estate and construction, travel and tourism and durable goods, with the exposure being highest for outdoor advertising (38%) and lowest for TV advertising (16%). Hence, it expects that recovery will be prolonged for them in FY21 even after the lockdown is lifted.
According to the ratings agency, the transition in consumer preferences to higher speed and higher download limit internet plans will be quick and would benefit broadband players.
Despite having near-term concerns on recovery, multiplexes are likely to benefit in long-term as they gain market share with the closure of financially unviable single screens. Ind-Ra has already opined that Telecom Regulatory Authority of India (TRAI)’s implementation of the new tariff order has significantly de-risked the business model of MSOs.
An analysis of sample set of Ind-Ra rated media and entertainment (M&E) players indicates that either they are not impacted by the current crisis or they have sufficient liquidity buffers available to weather this impact. However, the eventual impact on FY20-21 credit metrics would depend on the issuers’ ability to defer growth capex, ability to undertake cost control programs, pace of recovery in advertisement and subscription revenue and recovery pace for new content creation once the lockdown restrictions are lifted.
Ind-Ra says, for M&E players liquidity and interest coverage are comfortable, but their FY20-21 net leverage may increase.
In Ind-Ra’s M&E coverage (rated BBB- or above), spanning digital and print media, broadcasting, MSOs and movie exhibition sectors, median liquidity at 2.04 times for FY21 and gross interest coverage at 4.8 times for FY20-21 and 5.8 times for FY21-22 are comfortable.
"Both liquidity and interest coverage will also be supported by the regulatory debt moratorium package. Though median net leverage at 0.67 times for FY20-21 is also comfortable for now, it could come under pressure amid tough operating conditions for select sectors, especially if the lock-down extends beyond first quarter (1Q) of FY20-21," the ratings agency says.
Ind-Ra feels that the COVID-19 crisis has set in motion longer-term structural shifts in consumer preferences and demand.
With print media circulation suffering amid the lock-down, Ind-Ra believes some subscribers may shift permanently to digital media for content, which it says will negatively impact circulation revenues that are typically 30% of overall revenues.
It says, "A similar shift may be witnessed for TV audiences, given broadcasters are unable to telecast new content. Consequently, OTT platforms like Netflix, Amazon, Hotstar, and Voot, which till now have been limited primarily to the young urban population, could make inroads into new segments such as higher age-group audiences and audiences in tier-2 and tier-3 cities. Also, some small producers might be incentivised to consider releasing movies directly on OTT platforms, given that footfalls in multiplexes may take a long time to normalise."
"Lastly, while movie exhibitors will suffer in the short term and the pace of recovery will be slowest for them, the crisis can lead to further consolidation in the sector, as single screens would close due to the financial stress and uncertainty and multiplexes would gain market share," Ind-Ra added.
According to the ratings agency, given the ongoing lock-down, new content creation has been put on hold resulting in broadcasters having to telecast old content. While this should not impact subscription revenues in the short-term barring some collection related issues, it says, the impact on advertisement revenues could be significant as recycled content fetches lower viewership and therefore advertisement rates.
Advertisement revenue, which is the major revenue contributor for broadcasters and print and digital media alike, is likely to get impacted substantially by being linked with economic cycles, Ind-Ra says.
The impact on ad revenues can be broadly classified as lower overall ad volumes as companies curtail marketing spend amid lower profitability, pressure on ad rates given lower circulation, viewership and sluggish macroeconomic conditions, and shifting of ad revenues to web-based distribution channels such as YouTube, and OTT.
Ad-revenue on news channels however remains near normal, though it is significantly weaker for general entertainment categories (GEC). However, given that ad-rates on Hindi news channels are a fraction of GEC ad charges, news channels will only partly offset the revenue lost by GEC categories.
Overall, first half (1H) of FY20-21 will be tough for broadcasters, and 2HFY20-21 should be substantially stronger as new content creation resumes and economic activities normalise, the ratings agency says.
Even after the lock-down ends, Ind-Ra says it expects footfalls in multiplexes and single screens to remain weak for much of 1HFY20-21, followed by a gradual recovery in 2HFY20-21.
"The key downside risks to this view come from the subsequent waves of COVID-19 outbreak or lock-down being extended. For now, movie exhibitors have reacted swiftly and declared force majeure – this has helped temporarily suspend rentals and lower the fixed cost base substantially. However, further clarity is needed if rentals will be revised lower, once the lock-down is lifted," the ratings agency added.
The ratings agency does not foresee any major adverse impact on demand for cable and broadband services amid the ongoing crisis, though there could be some collection-related issues which will likely be resolved once the lock-down ends.
Ind-Ra says it expects overall demand for broadband and cable services to remain healthy given average revenue per user (ARPU) for cable and broadband remains low at Rs70 to Rs120 and Rs400 to Rs450, respectively. "Also, social distancing measures have given a fillip to people watching more TV and video on demand services and people working from home. This could even lead to viewers transitioning to higher speed and higher download limit plans which could be supportive of ARPUs," it added.
The ratings agency says it believes print media circulation has been impacted significantly and news-print sourcing could take some time to normalise. As such, it says, volatile news-print cost remains a key source of operating risk and additionally, some consumers may permanently shift to digital content, given the lack of access to print publications amid the lock-down.
"If the total advertising spend in print media in FY19-20, we estimate 25% is attributable to high risk sectors. However, the actual adverse impact on advertising spends might be sharply higher, because of limited circulation in 1HFY20-21," Ind-Ra concludes.