Fitch Ratings, in a comment published on July 11, 2011, stated that increasing newsprint prices are likely to have a negative impact on profitability of the Indian print media industry in the short to medium term.
“Newsprint cost is the largest operating cost for newspaper publishers, and typically accounts for 40-50 per cent of total operating costs. Further, high competitive intensity in the industry is likely to prevent newspaper publishers from raising cover prices significantly,” said Sahil Aggarwal, analyst in Fitch’s Telecom, Media and Technology team.
In May 2011, domestic newsprint prices had increased by 13.4 per cent, as compared to average prices in 2010. On the same basis, international newsprint prices (US) were up 7.2 per cent. Newsprint cost is the largest operating cost for newspaper publishers and typically accounts for 40-50 per cent of total operating costs. At the same time, Fitch Ratings notes that competition is likely to prohibit newspaper publishers from raising cover prices significantly (and thus passing on incremental costs to the consumers).
Fitch Ratings expects that an increase in advertising revenues may partly offset the rising cost of newsprint. Newspaper publishers generate about 70 per cent of revenues from advertising, with the remainder coming predominantly from circulations. It should be noted, however, that expectations of moderate economic growth will negatively affect advertising revenue growth. In its ‘Global Economic Outlook’, dated March 2011, Fitch Ratings marginally revised its expectations for India’s GDP in FY12 to 8.3 per cent from 8.5 per cent; this was further reduced to 7.7 per cent in its report ‘Global Economic Outlook’, dated June 2011.
Consequences of Fluctuating Newsprint Prices
Domestic newsprint prices were above Rs 35,000 per tonne for a 13-month period starting April 2008 to May 2009. High newsprint prices resulted in a significant erosion in EBITDA margins across the print media industry. EBITDA margins troughed at 18.3 per cent in Q4 FY09, registering a decline of 12.5 per cent from Q1 FY09 (30.8 per cent). However, the agency notes that along with high newsprint prices, advertising spending was also under pressure during this period. As newsprint prices declined and economic activity – and consequently advertising – started to pick up, EBITDA margins improved from Q1 FY10.
In contrast to FY10, FY11 was a mixed year for newspaper publishers, when moderate revenue growth was offset by steadily increasing newsprint prices. Consequently, industry EBITDA margins declined to 20.6 per cent in Q4 FY11 from 35.5 per cent in Q1 FY11.
Fitch’s analysis of eight leading national and regional newspaper publishers shows that raw material costs, as a percentage of operating revenues, increased to 40.4 per cent in FY09 from 34.3 per cent in FY08. As newsprint prices fell in FY10, this ratio improved back to 33.0 per cent.
Managing Profitability by Changing Suppliers
Newspaper publishers use a mix of domestic and international newsprint and companies vary this proportion to better manage costs and the quality of newsprint. Since both domestic and international rates are moving in tandem, Fitch Ratings believes publishers may not be able to reduce costs significantly, even by changing this mix.