Hot off the press: Fitch warns rising newsprint prices threaten Indian newspaper industry

Fitch says rising newsprint prices resulted to industry margins falling by 14.9% in Q4FY11.

Fitch Ratings says 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% of total operating costs. Further, high competitive intensity in the industry is likely to prevent newspaper publishers from raising cover prices significantly," says Sahil Aggarwal, Analyst in Fitch's Telecom, Media and Technology team. At end-May 2011, domestic newsprint prices increased by 13.4% and international newsprint prices were up by 7.2% compared to average prices in CY10.

Fitch expects that an increase in advertising revenues may partly offset the rising cost of newsprint. Newspaper publishers generate about 70% of revenues from advertising, with the remainder coming predominantly from circulations. However, the agency's expectation of moderating economic growth in India in FY12 will negatively affect advertising revenue growth.

Fitch notes that earlier in FY09 also, high domestic newsprint prices (above INR35,000 per tonne from April 2008 to May 2009) resulted in significant erosion in EBITDA margins across the print media industry to 18.3% in Q4FY09 from 30.8% in Q1FY09. The agency also notes that along with high newsprint prices, advertising spending was also under pressure during this period. However, EBITDA margins improved from Q1FY10 as newsprint prices declined and advertising levels improved due to improved economic activity.

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% in Q4FY11 from 35.5% in Q1FY11.

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% in FY09 from 34.3% in FY08. As newsprint prices fell in FY10, this ratio improved back to 33.0%.

Newspaper publishers use a mix of domestic and international newsprints, 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 believes publishers may not be able to reduce costs significantly, even by changing this mix.

Picture from Marion Doss