Pricey valuations threaten best Indian media stocks rally in 14 years

By Ashutosh Joshi

Media-related stocks have been all the rage in India, thanks to a mega merger involving a unit of Japan’s Sony Group Corp., and the return of Bollywood blockbusters. Investors are now weighing the sector’s pricey valuations against the potential for future growth.

An equity index that houses India’s biggest operator of cinema screens as well as its top television broadcaster has lost about 6% since reaching a 17-month high in early September. Still, up 31% this quarter through Friday, the gauge is poised for its best performance since 2009. In comparison, a weighted average gauge of 14 Asian media stocks including China Film Co. and South Korea’s Hybe Co. has lost more than 4%.

Optimists are focusing on the upcoming pipeline of movies, two of which feature India’s biggest superstars, and a potential boost to advertisement spending as the cricket-crazy nation prepares to host the sport’s most iconic tournament from next month. Naysayers point to the recent weakness as a sign of caution given that the media gauge is trading at a valuation of almost 26 times its one-year forward estimated earnings, versus a five-year average multiple of 19.6 times.

“I expect to see some consolidation until the next earnings season as valuations remain high compared to their past averages,” said Karthick Jonagadla, a strategist at Quantace Research & Capital Pvt.

The Cricket World Cup is an important variable. In India, cricket enjoys a cult-like following, with its massive entertainment appeal rivaled only by Bollywood — as Mumbai’s film industry is known. Together, their clout is unmatched in the local media and entertainment sector, which is touted as one of the biggest beneficiaries of a consumption boom. The sector is poised to grow at a compounded annual growth rate of 9.7% to reach $73.56 billion by 2027, according to a report by PricewaterhouseCoopers LLP in July.

India will host the 10-nation tournament from Oct. 5. The 45-day event, which is held every four years, will be live-streamed for half a billion smartphone users for free.

The games coincide this time with the local festive season and hold promise for media-related stocks, which have historically delivered their best performance in the fourth quarter. The Nifty Media Index jumped an average 5.7% in the October-December period over the past decade, data compiled by Bloomberg show.

Ad spending by Indian firms is expected to rise to as much as 10% for the year thanks to the festivities and upcoming matches, according to Karan Taurani, an analyst at Elara Securities India Pvt. That’s up from about 6-7% in the first half of the 2023. Companies are expected to spend a total of 20 billion rupees ($241 million) on promotions on television and digital media during the games, he added.

“Advertising cycle in India is expected to remain strong for the next 12 months, not only for television but print mediums as well,” said Amit Kumar Gupta, a fund manager with Fintrekk Capital. National elections in India are scheduled to take place in first half of 2024 and spending from political parties is typically higher in the run up to the vote, he noted.

The media sector has drawn more investor interest following the approval of a merger between Sony’s South Asian unit and TV broadcaster Zee Entertainment Enterprises Ltd. last month. That’s paved the way for the creation of a $10 billion media behemoth and sent Zee’s shares — which command a third of the sector gauge’s weighting — up 50% this quarter.

Smaller peer Sun TV Network Ltd. has surged about 35%, benefiting not only from its movie-production business, but also from the revenue earned by its cricket team that participates in the lucrative Indian Premier League.

Investors will be keen to watch if the upcoming movies — from Tiger 3 starring Salman Khan to Dunki featuring Shah Rukh Khan — can live up to their hype. Shah Rukh Khan has delivered this year’s two biggest bollywood hits.

While there remain doubts over just how much foot traffic movie halls will receive given that many films have been released on more premium platforms, “this quarter has been contrary to that thought process,” said Devang Bhatt, an analyst at IDBI Capital Market Services. However, we need to see if this trend of people visiting theaters continues, he added.

Earnings Due Monday
 

No major earnings expected