Monday, September 8, 2008

Are the media companies 'defensive'?

With the stock markets in a long-term bear phase, experts and analysts have been suggesting that investors look at 'defensive' sectors like FMCG, pharma and IT. The logic behind such suggestions is that whether the market is in a bull or bear phase soaps, toothpastes, medicines and IT services will get consumed.

By the same logic, people will listen to radio, read newspapers and magazines, watch TV and movies regardless of the gyrations of the Sensex.  So media companies should fall under the 'defensive sector' category.

Why aren't the analysts talking about them? Possibly because the different sub-groups of the media sector have different dynamics. Let us have a closer look.

Movies, books and CD/DVD businesses require upfront investments for every new 'product'. Actors, authors and musicians need to be paid beforehand. There are no guarantees that a particular movie or book or CD will sell.  If it sells well, there will be a lot of cash inflow. If not there will be a loss. One hit product may or may not make up for all the losses. Such uncertainty is what investors are wary about.

Radio and TV businesses are largely dependent on advertising. If a particular channel has national recognition - e.g. Radio Mirchi or Star Plus - it can charge a premium rate and advertisers will have no choice but to pay up. But during a downturn, advertising budgets do get cut. The fringe channels get hurt the most and are sometimes wiped out.

The magazine and newspaper businesses are the real 'defensive' ones. Magazines are subscription based and the money is collected in advance and the product is delivered over several months/years. No wonder magazine subscriptions always come with lots of 'free' offers.

The newspaper business is truly recession-proof. No matter what happens in the stock market or in the economy, no body stops reading a newspaper. With the advent of computers and the Internet, a newspaper can be published simultaneously from several locations. However, newspapers tend to have a monopoly in their particular region/location. Think of Times of India in Mumbai, Hindustan Times in Delhi, The Hindu in Chennai, The Telegraph in Kolkata, Deccan Chronicle in Hyderabad.

My favourite among the newspaper companies is Jagran Prakashan. Why? It's circulation is more than the combined circulation of all the well-known English dailies mentioned. Plus it has great cash flows.

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