Weekly Newsletter - Feb 21 2009
Saturday, February 21, 2009
India's inflation, as measured by the wholesale price index (WPI) dropped below 4% in the first week of this month to touch its lowest level in 13 months, putting more pressure on the Reserve Bank of India (RBI) to cut interest rates further. The annual point-to-point inflation declined to 3.92% in the week ended Feb 7 as against 4.39% in the previous week, the Commerce & Industry Ministry said in a statement. Economists had forecast a reading of 4.01%. The annual inflation rate was 4.98% during the corresponding week of the previous year. The current rate of inflation is the lowest since the 3.8% recorded in the week ended December 29, 2007. In ‘Primary Articles’, inflation decreased to 8% in the week under reference, against 9.1% in the previous week. In ‘Food Articles’, inflation declined across-the-board to 10.4% in the current week compared to 11.5% last week. However, it is still in double digits. In ‘Fuel & Power’, inflation rose fractionally to (-) 3% versus (-) 3.5% last week, due to higher inflation rates in aviation turbine fuel and naphtha. In ‘Manufactured Products’, inflation rate decreased to 4.9% in the current week, from 5.5% last week.
Potential buyers of gold in India remained on the sidelines, as the yellow metal continued to scale new peaks, notwithstanding some softening in the international market from a seven-month peak. Record high prices are hurting gold demand and imports. Everybody is just waiting for a correction. There are hardly any buyers and all are sellers. The flow of scrap gold continues as consumers cash in on record high prices. Demand for the yellow metal picked up due to weakness in global equity and currency markets.
Gold's status as a safe haven asset class has also increased its appeal among risk averse global investors as the global economic slump shows no sign of easing. Local gold prices crossed Rs15,000 per 10 gram in Mumbai and was trading close to Rs16,000 in Kolkata and New Delhi. The benchmark April contract was trading 1.2% higher at Rs15,645 per 10 grams at 2:10 p.m. on Friday, after having struck a new record high of Rs15,706 in the previous session.
In the international market, gold futures breached US$1,000 an ounce, as investors sought a store of value and bullion holdings in exchange-traded funds soared to records. Spot prices, heading for a second weekly gain, are up 11% this year, compared with a 15% loss in the MSCI World Index. Bullion reached a record US$1,032.70 in March
It’s been raining losses this week on every Street. The markets are desperately looking for some trigger to fire either way. The F&O expiry will have its own amount of swings. What could cause some added swings would be the way investors adjust to the new market lots which are revised for fresh month contracts.
Global cues continue to dampen the mood. The only safe haven remains gold. But again there seems to be more speculation than actual buying of the precious metal. The little hope that market is expecting is some measure from the RBI. For now it looks like banks will have to take some measures on their own to boost demand. SBI has announced a cut in auto and farm loans. Let’s wait and watch how the rest of the banks react to the same.
The Indian Media and entertainment industry stood at Rs584 bn in 2008, a growth of 12.4% over the previous year. Over the next five years, the industry is projected to grow at a CAGR of 12.5% to reach the size of Rs1052 bn by 2013, says a FICCI & KPMG report on the sector release.
The report however, highlights that the market environment has become increasingly challenging for the sector, on the back of economic slowdown and the consequent slowdown in advertising revenues, especially in the last quarter of 2008. Sectors like TV, Print, Radio and Outdoor which depend on advertising revenues were largely affected and this is estimated to continue into the current year too.
Advertising spends grew at CAGR of 17.1% in the past three years. Going forward, it is expected to exhibit a robust growth rate at CAGR of 12.4% over the next five years. Potential upsides could take this higher.
Growing acceptance of the digital TV distribution technology, entry of DTH players the success of many small budget movies, and the rising competition in the regional market were some of the key highlights of the previous year. However, it was IPL which proved that innovation in traditional formats resulted in runaway success.
Says Dr. Amit Mitra, Secretary General, FICCI, “India is one of the few countries where economic growth will be led by domestic consumption. With a low advertising spend to GDP ratio of 0.47 percent, a growing consumer class and middle class, young population, low media penetration and increasing discretionary spending; India continues to be an attractive market for Media & Entertainment”.
Rajesh Jain, Head Information, Communication & Entertainment, KPMG India said, “Media companies are under pressure to change, innovate and re-examine their existing business models. Players need to draw upon new capabilities to survive in this environment. In the immediate future, media corporates are likely to focus more on operating margins, and assess opportunities for consolidation, while building on core strengths.”
The projected 12.5% growth for the sector will be driven on the back of factors like favorable demographics, strong long term fundamentals of the Indian economy, expected rise in advertising to GDP ratio compared to developed economies and increasing media penetration.
The focus of industry players too is changing; with a strong emphasis on profitable growth in the current scenario. Hence, media companies are increasingly concentrating on strengthening existing operations and assessing options for growth through consolidation, while continuing to innovate. Factors like Narrowcasting, Regionalization, Internationalization, Organized Funding, Digitization and Deregulation have become the ‘buzzwords’ in the industry.
The industry is estimated to have reached a size of INR 241 billion, a growth of 14.2 percent over 2007. The television industry is projected to grow at the rate of 14.5 percent over 2009-13 and reach a size of INR 473 billion.
Some of the growth drivers for the sector would include rapid growth in the number of digitized households, steady increase in ARPUs realized through digital distribution platforms, growth in the number of channels, especially in niche and regional categories and growth in the number of TV and C&S households.
To have addressability and reduce leakages, the report recommends pushing for government regulations for mandatory digitization of all TV distribution, development of alternate audience/viewership measurement systems, and rationalization of content production costs through discussions with stakeholders at all levels actors/technical staff, production houses and broadcasters. There is also need to create content for audiences in the Tier 2 and Tier 3 towns from where the next wave of growth is likely to come.
The filmed entertainment sector is estimated to have grown at a CAGR of 17.7 percent over the past 3 years. The industry is clocked revenues of around INR 109.3 bn in size in 2008, a growth of 13.4% over 2007. Over the next 5 years, the industry is projected to grow at the CAGR of 9.1% and reach the size of Rs168.6 bn by 2013.
Growth drivers for the sector would include expansion of multiplex screens resulting in better realizations, increase in number of digital screens facilitating in wider film prints releases, enhanced penetration of home video segment, primarily in the sell through segment, increase in number of TV channels fuelling demand for film content, and hence resulting in higher C&S acquisition costs, improving collections from the overseas markets.
Going forward the sector should focus on improving consumer connect by investing in new formats and content, more wide spread distribution of Home Video, e.g. at grocery stores etc., to facilitate easy access, take coordinated and proactive action to tackle piracy, promote and experiment with new talent and improve organizational ability to attract and retain talent.
The Indian Print Media industry is estimated to have grown by 7.6% in 2008 and reaching around INR 172.6 billion in size. The industry is projected to grow at a CAGR of 9% over the next five years and reach around INR 266 billion in size by 2013.
Growth in the Print media industry is achievable through sustained growth in advertisement revenues due to increased advertising spends from emerging sectors such as Education, Organized Retail and Telecom, improving literacy levels in the country, optimization of cover prices leading to improved penetration and growth in sales volume, more launches in the niche segment, like newspaper supplements and specialty magazines, by players. The industry needs to invest in quality improvements, especially in regional media to attract advertisers; collective negotiations and bulk purchase of newsprint, constitute forums to encourage and promote regular reading habits among youth, adopting innovative practices like trading media space in publication platforms in return for equity and improve organizational ability to attract and retain talent.
Radio ad spends account for about 4 percent of the total advertising spends in India today, having grown from just 2 percent in 2004. Consequently, the radio industry is estimated to have grown at an impressive CAGR of 19.7 percent over 2006-08. It is estimated to have reached a size of INR 8.4 billion by end of 2008, a growth rate of 13.5 percent over the previous year. It is expected to grow at a CAGR of 14.2 percent over 2009-13 and reach a size of INR 16.3 billion by 2013.
Increase in the number of radio stations – around 700 new licenses expected to be issued to Private FM stations in Phase 3, expected regulatory reforms that are likely to improve profitability and stimulate foreign investments, emergence of robust audience measurement tools which could further catalyze growth in radio ad spends and growth in locally targeted advertising on radio are some of the growth drivers for the radio industry in the country.
The size of the Indian music industry was estimated at around Rs7.3 bn in 2008, down from INR 8.3 billion in 2005, implying a degrowth of 4.8 percent during the period. One of the primary reasons for this degrowth has been the erosion of sales of physical formats, a trend which is expected to continue well into the future. Physical formats such as audio cassettes and compact discs, which accounted for approximately 87 percent of industry revenues in 2005 currently account for just fewer than 60 percent in 2008.
Going forward physical revenues are expected to decline at a CAGR of 9 percent between 2008 and 2013. While the actual degrowth of formats such as audio cassettes is expected to be much higher, this is likely to be partially offset by initiatives taken by some leading music companies such as Sony BMG, T-Series and SaReGaMa to release MP3 music on compact discs at price points similar to that of the ubiquitous audio cassette. Overall the music industry is expected to grow at a CAGR of 8% over 2009-13 to reach Rs10.7 bn.
Out of Home (OOH):
OOH media has grown at a CAGR of 17.3 percent over the past 3 years, and is estimated to have reached INR 16 billion in size in 2008, a growth of 14 percent over 2007. The sector’s performance was affected in the second half of the year owing to the overall economic slowdown. It is projected to grow at a compounded rate of 12.8 percent over the next 5 years and reach a size of around INR 29.3 billion by 2013. Currently, the growth is centred largely in Tier 1 towns, with metros accounting for more than half of the total OOH market. Sectors spending the most on this medium include Telecom, Media & Entertainment and Financial Services companies.
One of the biggest challenges that the sector faces today is the lack of a central regulator governing OOH media. Rules and regulations vary from state to state, which inhibits standardizations across locations and leads to unregulated growth. Further the ongoing liquidity crunch has forced many real estate developers to go slow on construction activities, thus affecting the supply of retail space. This is likely to affect the spread of ambient media.
At an estimated size of Rs17.4 bn in 2008, the Indian animation industry is miniscule as compared to the global animation industry with estimated revenues in excess of Rs1530 bn by 2010. However, the Indian animation industry has been growing rapidly with an estimated CAGR of 20.1 percent in 2006-08. It is estimated to reach a size of about Rs39 bn by 2013. Among the different segments of the animation industry, the animation production services segment is estimated to grow the fastest with a CAGR of 17.8 percent in 2009-13.
Console gaming is the largest money churner in the global market and is gaining prominence in India too. In 2008, the Indian console gaming segment registered total revenues of Rs4.1 bn which is expected to go up to INR 9.4 billion in 2013. Plagued by a number of issues such as content discovery and revenue leakages the Indian mobile gaming segment has not lived up to the potential and is estimated at INR 1.4 billion in 2008 in terms of end user revenues. The PC gaming market has however, grown to INR 978.6 million and expected to grow at a CAGR of over 36 percent through 2013. The primary growth drivers for PC games in India are the growing broadband subscriber base, multifunctional nature of PCs, availability and price points of PC game titles.
It was billed as an opportunity for the Congress-led UPA regime to announce further measures for stimulating a sluggish Indian economy. However, it turned out to be more than a damp squib. Acting finance minister Pranab Mukherjee, who was presenting a budget after 25 years, announced no fresh initiatives to accelerate economic growth and quell the financial gloom. The Government merely presented a vote-on-account to enable it to incur expenditure in the months before the new dispensation comes to power and the next budget is passed.
May be the Government was constrained by the constitution, which doesn't permit big-bang measures to be incorporated in an interim budget. Still, the markets were highly disappointed with lack of action on the part of the Congress-led coalition. The Government's assertion that fiscal deficit will overshoot FY09 budget target by a long margin also had a negative impact on the markets. Given the current economic environment, the Centre has abandoned the fiscal responsibility targets for the time being.
It expects FY09 fiscal deficit at 6% of GDP as against the original target of 2.5% of GDP. Including off-budget items and states, the consolidated deficit soars well above the 10% mark. The interim budget for FY10 has projected a fiscal deficit of 5.5% of GDP. This is also likely to be overshot and effectively reverses the headway that the UPA government had made on the fiscal front over the past four years. Though part of the fiscal slippage can be attributed to the unprecedented global financial meltdown, the Centre could have avoided some of the populist measures.
The expectations on revenue are also rather optimistic, with the Government budgeting for a 10% increase in corporate tax and 8.4% in total revenue. This is in the
backdrop of a less than 4% (expected) revenue growth this year with a 7% GDP growth. With expectations of FY10 GDP growth pegged at 5-6%, a revenue growth of 8% looks unlikely. This may further constrain the spending target of the government. Thus, high fiscal deficit looks inevitable in FY10 as well and the 5.5% target for FY10 may be revised upwards.
The focus of the interim budget was to increase allocations on central government sponsored schemes. Accordingly, there were increases in spending on rural employment (NREG) and rural infrastructure (Bharat Nirman). Defense spending was also increased from 2.1% of GDP to 2.4% of GDP. Going forward, the mantle of providing stimulus to the economy will fall disproportionately on the Reserve Bank of India (RBI), as the government cannot take any further measures before a new government is in place. We expect the RBI to cut key policy rates before end-March.