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

An equity index that tracks India’s biggest cinema operators and the nation’s top television broadcaster has lost about 6 per cent since reaching a 17-month high in early September. Still, this quarter’s 31 per cent gain is the best since 2009 while a weighted average gauge of 14 Asian peers including China Film and South Korea’s Hybe has lost more than 4 per cent.

Optimists are focusing on the coming pipeline of films featuring India’s biggest filmstars, and a potential boost to advertisement spending as the nation prepares to host the most iconic cricket tournament next month. Naysayers raise caution as valuation reached 26 times its one-year forward estimated earnings, versus a five-year average 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.

The Cricket World Cup is an important variable. In India, cricket enjoys a cult-like following, with its massive entertainment appeal rivalled only by Bollywood, as Mumbai’s film industry is known. India will host the 10-nation tournament from October 5 over 45 days, which will be live-streamed for free for half a billion smartphone users.

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 rate of 9.7 per cent every year to reach US$73.56 billion by 2027, according to a report by PwC in July.

India’s crackdown on Xiaomi just the first step in its economic strategy

The Cricket World Cup, held once every four years, coincides with the local festive season and hold promise for media-related stocks. They have historically delivered their best performance in the fourth quarter, notching 5.7 per cent gain on average over the past decade, according to the Nifty Media Index.

Ad spending by Indian firms is expected to rise to as much as 10 per cent for the year, thanks to the festivities and coming matches, according to Karan Taurani, an analyst at Elara Securities. That is up from about 6 to 7 per cent in the first half of 2023. Companies are expected to spend a total of 20 billion rupees (US$241 million) on promotions 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 added.

The media sector has drawn more investor since last month’s merger between Sony’s South Asian unit and broadcaster Zee Entertainment last month created a US$10 billion behemoth. Zee’s shares, which command a third of the sector gauge’s weighting, have risen 50 per cent this quarter.

Smaller peer Sun TV Network has surged about 35 per cent, 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.

Meanwhile, investors will be keen to watch if the coming films – from Tiger 3 starring Salman Khan to Dunki featuring Shah Rukh Khan – can live up to their hype. 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.