Media Partners Asia Limited

Just a few months ago, Indian media companies were among the highest-flying stocks on the Mumbai exchange, tapping investors' growth expectations for the world's second-largest potential audience of TV viewers after China. Spending on advertising for all media in India grew 23% last year to nearly US$4 billion, according to Mumbai-based TAM Media Research. Ad agencies expect it to grow about 20% this year.

But in recent weeks, new concerns about increased competition, as well as fragmentation of the market and rising costs, have caused Indian media stocks to fall fast. Shares of TV broadcasters, which take in about 40% of Indian ad spending, have absorbed the biggest hit: Zee Entertainment Enterprises, India's biggest home-grown cable-TV operator, closed yesterday at 318.25 rupees ($7.83), down about 8% since its peak in late July. Sun TV Network, the dominant TV network in India's south, has lost 23% during that period.

On average, shares of India's seven leading listed companies in broadcasting, print, movies and pay TV -- with an aggregate market capitalization of $10 billion -- are down about 26% from recent highs, Media Partners Asia, an independent industry analyst based in Hong Kong, estimates.

Media companies around Asia have suffered in recent weeks. From Thailand to Japan, investors spooked by market fluctuations following the global credit crunch have dropped media stocks, which often are seen as a play on an overall consumer economy. But the drop in India media stocks has outpaced the overall market trend there. It's more than just nerves -- some investors appear to be fundamentally re-evaluating the sector.

"Nobody had factored into their valuations the fact that there is growing competition," says Media Partners Executive Director Vivek Couto. "There are questions about whether these companies are able to sustain growth. You really have to wait and see."

That is what Mark Mobius, who oversees $30 billion for Templeton Asset Management, is doing. He says Indian media companies are still quite expensive, even when compared with the industry in other developing markets, such as Mexico. That is why he keeps his investments in Zee, New Delhi Television and Television Eighteen India as part of his Indian funds.

"Yes, there has been a price correction, but they are still a lot higher than in 2004. We are still making good money," Mr. Mobius says.

"We have to get exposure to that sector, which is exciting and fast-growing," he says. "The size of the potential market is a very alluring prospect and an important one."

Within the next year or so, existing and new media companies will launch about 100 TV channels in India. That is great for consumers but worrisome for the existing companies, because the increased competition hits both of their sources of revenue: subscriptions and advertising.

It is proving very hard to boost subscription revenue quickly in India. The problem is that India's pay-TV industry operates in a kind of gray market, in which the "last mile" connection is owned by a third party, so channel operators don't get paid for all of their content. The industry has tried to limit this problem by creating a "conditional-access system" to help keep track of subscriptions and allow consumers to buy exactly the channels they want, but the system's rollout has been repeatedly delayed.

Moreover, the system won't necessarily help broadcasters' subscription revenue. There are caps on the pricing of channels, and "consumers will have the freedom of selecting individual channels," says Pratik Nowlakha, an analyst with Batlivala & Karani Securities India. With more choice, "they may not take up pay channels at all."

To compete for viewer attention, TV companies have started to spend more money on content. But that hasn't been matched by growth in ad revenue, as fragmented audiences cause advertisers to question prices.

Competition is particularly fierce among general-entertainment channels, with new entries coming from New Delhi TV and Viacom-18, a joint venture with TV18 and Viacom, in a space traditionally dominated by Star India and Zee. Even as entertainment channels proliferate, their share of the overall TV-advertising pie has shrunk to 40% from 60% of the market five years ago.

That has hurt even the country's largest cable-TV company, Star India, a unit of News Corp. After years of growth, its profit declined in the current fiscal year and is likely to be flat next year. News Corp. recently agreed to purchase Dow Jones, the publisher of The Wall Street Journal.

Some of the market's biggest concerns are about Sun TV, which faces risks particularly in its key Tamil market, where a new channel is about to be launched by people related to the chief minister of the state of Tamil Nadu.

"We would like to see more clarity on the emerging competitive environment," writes Kotak Institutional Equities analyst Sanjeev Prasad. As of Aug. 22, he maintained his "underweight" rating on the stock, even though its price had fallen below his 12-month target of 310 rupees. If the competition in the Tamil market turns out keener than expected, assumptions about Sun's profitability could be undermined.

Zee may be the best-insulated from the costs of competition in the short term. Thanks in part to good viewership ratings, it recently raised ad rates, which analysts project will help it increase earnings.

But Mr. Prasad continues "to find valuations expensive" for Zee. He has an "underweight" rating on this stock, too, with a 12-month target price of 230 rupees. "We are reluctant to ascribe high multiples to an earnings stream which is volatile," he wrote in the past week. The stock trades at about 32 times its estimated fiscal 2008 earnings.

Still, on the whole, Mr. Couto of Media Partners Asia, like Mr. Mobius, is optimistic about the sector.

"The market has the depth of spend, demographics and distribution to accommodate several new TV channels and genres, though consolidation will invariably occur over the medium term," Mr. Couto says.


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