Analysts see more fall in newspaper shrs on rising newsprint costs

Monday, Jun 16

   MUMBAI - Spiralling newsprint costs and increasing competition amid volatile market conditions are keeping investors away from shares of newspaper companies, analysts said.

   Newspaper shares have shed over 52% since January, and the correction is likely to continue until end of 2008, analysts said.

   "Newsprint prices have been in the up trend since the past eight to nine months on account of capacity shutdown by global players, and rising energy costs...," ICICI Securities said in a research note to clients. 

   Newsprint prices have gone up 40-50% to $900 (38,655 rupees) per 1 tn since January, and it is all set to touch $1,000 (42,950 rupees) by the end of this financial year, an analyst at a domestic brokerage said.

   Newsprint constitutes 50% of raw material costs for publications.  "Though we expect a 15-18% growth in top line, rising newsprint costs will offset revenue growth and will impact margins badly," the analyst said.
   Analysts said although newsprint costs have been rising since the last quarter of 2007-08 (Apr-Mar), companies like HT Media and Jagran Prakashan have maintained margins due to higher inventory levels.

   However, their margins are likely to come under pressure by second quarter of the current financial year, once inventory levels have gone down, they said. 

   Analysts see a correction in newsprint prices in 2009-10 (Apr-Mar), as they expect increase in production capacity in China will pull prices down.

   "Post Olympics, we expect decline in newsprint prices, as China would turn exporter once again. Also, increased capacity in China is likely to further pressurise prices in FY10," ICICI Securities said. 

   Some analysts were of the view moderation in newsprint prices in FY10 will not help newspaper companies much as prices are likely to remain high.

   "We expect newsprint prices to be at $750 (32,213 rupees) in FY10, but it may not come down to $600 (25,770 rupees) as was the case in FY08. So no respite for these companies unless they retrain their newsprint usage," the analyst said.

   Companies like HT Media are venturing into other business like radio and Internet to offset losses from newspaper business but experts said the new ventures will continue to remain in the ramp-up phase over the next 18 months.
 

RISING COMPETITION
 

   As newsprints costs are already looking to eat into their margins, rising competition is also adding pressure, especially to small and regional players, analysts said.

   The Hindi belt is already witnessing a cover-price war where cover prices of popular dailies have been reduced to 2 rupees a copy from 3 rupees, ICICI Securities said.

   With rising competition, the newspapers are not able to increase its advertising rates, as it would result in falling ad revenues, analyst said.

   Advertisements contribute almost 90% of newspaper revenues.

 

 

VALUATIONS
 

   There is no near-term triggers that can pull the shares up, analysts said.
   "Any spike in newsprint prices would pull the stocks down sharply and these stocks are likely to touch new 52-week lows frequently," a senior dealer at a domestic brokerage said.

   "The stocks have been showing downward trend and further weakness is expected in the counters, if the markets turn volatile," said Milind Vasudev, technical analyst, Angel Broking.

   Shares of HT Media ended marginally up at 121.85 rupees on the National Stock Exchange, while Jagran Prakashan ended flat at 72.05 rupees, down 0.6%, and Deccan Chronicle ended 4.5% lower at 118.85 rupees.