Last week, I met the top brass of companies in two sectors that are widely perceived to be recession-proof: electronic media and retail. However, I came back disappointed and confused.-April2-1.jpg "Dipen Sheth")
Dipen Sheth
My friend from the media sector was gung-ho about the big picture- 70-80 million cable TV households to be added soon, plus an emerging market of 20-30 million mobile users who will use 3G services for entertainment. But he was reticent to discuss the current advertising revenues, which I suspect are falling daily. This means that consumer spend is not enough to encourage FMCG firms to buy sufficient primetime minutes and keep the media industry ticking. The cycle of consumer spend, ad revenues and broadcast profitability is slowing down, even if it has not stumbled.
Moreover, technology is making content free and shareable. So, while entertainment content keeps growing, it's getting difficult to price it. Remember, how downloadable MP3 files killed the music industry? Music as an entertainment genre has grown, evolved and indeed prospered in the wake of the MP3 threat, but the music industry is long dead.
| Consumer spend is not enough to encourage FMCG firms to buy sufficient primetime minutes to keep the media industry ticking. A similar story has emerged in retail, where value retailing is keeping the fires going, while lifestyle stalled a few quarters ago. |
So, television is unlikely to grow at its recent frenetic pace once the serials and news are available on your mobile. How many broadcasters will be able to afford the higher access costs, in addition to the content creation cost demanded by the cable distributors to pump channels to your drawing room?
Also, suddenly there are dozens of wannabes buzzing 'loss leadership' in their desperation to embarrass incumbents. Where does that leave anchor stocks like Zee and TV18? Or specialty stocks like UTV? Not on my favourites list.
A similar story has emerged in retail, where value retailing is keeping the fires going, while lifestyle stalled a few quarters ago. The difficult part about value retailing is that it's a volume business. Margins are much lower (typically 8% gross margins against lifestyle's over 25%), and if sales per square foot do not hit Rs 1,000 a month, it's difficult to sustain even a half-decent RoI in the business.
The good part is that, unlike media, all critical input costs in retail have crashed. From real estate rentals to fittings and interiors to merchandise prices, there's a basement bargain available. This, coupled with static manpower and other fixed overheads, implies that break-evens are now likely at lower sales. But these reduced thresholds are also tall orders as private consumption is seeing a serious cutback. There is enough reason now to dissect companies like Vishal Retail (97% down from peak price), Pantaloon (80% down) and Shoppers' Stop (80% down).
The industry that might benefit from a slowdown is healthcare. We'll save this one for the next issue.
- V-P, Institutional Equities, BRICS Securities Ltd. He can be reached at dipen.sheth@bricssecurities.com . (Previously he was working at Wealth Management Advisory Services.)
