MUMBAI: India’s low ad-spend-to-GDP ratio makes it one of the most promising ad markets globally, says IIFL’s Institutional Equities. In  a Media sector report titled “India: Ad-vert > Ad-word – Digital yet to come of age,” IIFL states that digital media is eating ad space with the other traditional forms of media like the print and television media and has been the fastest growing advertising media. This trend is likely to continue as the Internet user base expands at a brisk pace.

India’s digital ad market grew at 43% CAGR over the past decade to ~Rs25bn, far in excess of the overall ad-spend growth of 13% during this period. Digital now accounts for 7% of the total ad spend, compared with 1% in CY03. A multi-fold rise in the Internet user base over CY03-13 (from 5m to 169m) and increasing acceptance of the digital platform among advertisers drove this growth. The supernormal growth in Internet penetration is likely to continue, driven by the Internet on mobile, the report states.

However, India still is behind developed markets in terms of mobile technology and internet connectivity, hence there is no immediate threat to Print and Television advertising from the digital media ad spends, the report adds.

Emergence of digital would materially harm the print industry in the medium to long term. English print is at a higher risk compared with regional print. Moreover, given the limited reach of the Internet, certain India-specific factors would help print to face competition from digital media. Ad spend on Indian print is expected to continue to increase in the medium term.

“However, a larger audience base and diversified viewer profile make television advertising indispensable. Additionally television is a better-suited medium for certain types of ads such as new product launches or brand building. Hence, the impact of the Internet on television would be lower as compared with print. An analysis of ad spends for the past ten years reveals that print ad spend is more sensitive to economic growth. These factors make television ad spend more resilient,” says Bijal Shah and Jaykumar Doshi of IIFL Institutional Equities, authors of the report.

Print media ad spends growth decelerated sharply from 16% CAGR during CY03-07 to a meagre 4.5% CAGR in the past three years. The slowdown in English was more pronounced than in vernacular languages. Vernacular papers benefited from continued strength in smaller towns and villages. A drop in ad spend from large national categories such as BFSI, telecom, and consumer durables, partly explains the weaker growth for print. Additionally, education and real estate, the two big categories, witnessed a sharp deceleration. Local advertisers maintained their higher spends, riding on the buoyancy in consumption.

FMCG, Consumer durables and Auto constitutes to 65% of overall ad spends on television. Both FMCG and Auto ad spends have shown signs of slowing down, where as the Consumer durable companies are witnessing sluggishness in sales volumes, impacting the Television ad spend going forward and we can witness marginal growth in this segment. However Mobile handsets and e-commerce ad spends have supplemented in the overall as spends on television and have emerged as new categories. The television ad spend growth is expected to soften to high single digits.

A sustained 6%+ GDP growth could accelerate ad-spend growth to 15%+, compared with 9% CAGR over CY10-13, as per IIFL’s Institutional Equities research report on media industry. The report further states that in medium term, TV and print should dominate ad budgets whereas digital would play a complementary role. Digital advertising is gaining traction, but limited reach and minimal fresh and vernacular content are limitations.

Following the general elections, government ad spend, a key tailwind for print media in FY14, would taper. Thus, print media ad-spend growth could remain lacklustre in FY15 unless GDP growth picks up.

Some key highlights from the report are:

· India's low ad-spend-to-GDP ratio and rising consumerism make it one of the most promising ad markets

· A sustained 6%+ GDP growth could accelerate ad-spend growth to 15%+ compared with 9% Cagr over CY10-13.

· Given its miniscule reach and slow Internet speed in India, digital is unlikely to emerge as a key advertising vehicle in the short-to-medium term

· However driven by rising Internet penetration digital ad spends will continue to grow by 2-3 times the total ad spends  

· TV would continue to be the mainstay for advertisers, given limited fresh content and absence of certain key target audience group such adult females on digital

· Television ad spend is double that of digital in the US

Few stocks recommended in the media industry:

Zee Entertainment

Zee Entertainment (Zee) is the best play on structural improvement in India’s pay television market and resilient consumption. Zee’s distribution joint venture with Star network, coupled with digitisation, would help secure its rightful share of subscription revenue. Furthermore, a diversified bouquet of channels and improving network market share would translate into above-industry ad-revenue growth. Meanwhile, Zee is investing in new channels and markets, which we believe lays the foundation for long-term growth.

Call: ADD

SUN TV Network

Sun TV Network (Sun) is a strong player in the Rs36bn southern ad market with a leadership position in three of the four markets. Its diversified revenue stream and bouquet of channels, large movie library, and low-cost operations are advantages that are difficult to replicate. Subscription revenue is growing at a brisk pace and the momentum is likely to sustain. We expect ad revenue growth to resume following a drop for two consecutive quarters. At PER of 16x FY16ii, Sun is trading at ~15% its median multiple and at 33% discount to Zee. We believe the risk-reward is favourable.

Call: ADD

DB Corp

DB Corp, through its flagship brands Dainik Bhaskar, Divya Bhaskar, and Divya Marathi, enjoys a well-entrenched franchise in several print media markets. Over the past two decades, it has evolved from a single-city newspaper to a strong player in several regional markets. DB Corp delivered double-digit ad-revenue growth even during periods of subdued ad spend. It has built a strong readership base and it is poised for gains in revenue market share. Healthy ad-revenue growth along with margin expansion would drive 20% EPS CAGR over FY14-16ii. At 16.4x FY15ii, scope for re-rating is limited; we expect returns in line with earnings growth.

Call: BUY

Jagran Prakashan

Jagran Prakashan (Jagran), publisher of Dainik Jagran, India’s most read Hindi daily, enjoys a strong brand franchise in the key Hindi markets of Uttar Pradesh (UP), and Bihar and Jharkhand (BJH). Competitive intensity is on the rise in UP and BJH, which together contribute ~75% to Jagran’s ad revenue. DB Corp’s entry in Bihar and Hindustan’s readership gains in UP as per IRS 2013 are medium-term risks. In the interim, lower losses at subsidiaries would help margins. At 12.3x FY15ii P/E, Jagran is valued attractively and it is trading at ~35% discount to its three-year median multiple despite 17% EPS CAGR FY14ii-16ii.

Call: ADD

HT Media

HT Media is one of the largest print media players in India with a well-entrenched franchise in the English and Hindi markets. We believe the long investment phase in new businesses is nearing an end. Two key properties, HT Mumbai and Hindustan UP, are at inflection points and should boost ad-revenue growth in a weak environment. Losses in digital would continue but will likely remain stable. At PER of 9.8x/7.9X FY15ii/FY16ii, valuations are compelling, given upside risks to our forecast of 20% EPS CAGR.

Call: BUY

Disclaimer: The views expressed in the research report accurately reflect such research analyst's personal views about the subject securities and companies; and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in the research report.`