TV18 Broadcast (GLOBRO)

Transcription

1 Initiating Coverage Rating Matrix Rating : Hold Target : 18 Target Period : months Potential Upside : 0% YoY Growth (%) (YoY Growth) FY12 FY13 FY14E FY15E Net Sales EBITDA NA NA Net Profit NA NA NA 74.8 EPS (Rs) NA NA NA 74.8 Valuation Summary FY12 FY13 FY14E FY15E P/E Target P/E EV / EBITDA (63.6) P/BV RoNW (10.8) (0.8) RoCE (6.0) Stock Data Market Capitalization Crore Total Debt (FY13) 481 Crore Cash and Investments (FY13) Crore EV Crore 52 week H/L 38 / 16 Equity capital Crore Face value 2 MF Holding (%) 2.2 FII Holding (%) 8.5 Comparative return matrix (%) 1M 3M 6M 12M TV Sun TV ZEEL NDTV TV Today Price movement 6,400 6,200 6,000 5,800 5,600 5,400 5,200 5,000 4,800 Sep-12 Analyst s name Dec-12 Price (R.H.S) Mar-13 Karan Mittal karan.mittal@icicisecurities.com Sneha Agarwal Sneha.agarwal@icicisecurities.com Jun-13 Nifty (L.H.S) Sep-13 September 3, 2013 TV18 Broadcast (GLOBRO) Growth in sight; execution remains the key 18 TV18, the undisputed market leader in business news and dominant player in the Hindi GEC space, has further cemented its position in the Indian broadcasting landscape with the recent acquisition of regional channels of ETV, which augments its portfolio of channels to 26. The formation of distribution company Indiacast has significantly increased its bargaining power, which has started to reflect in the turnaround witnessed in net distribution income. Led by the digitisation drive and bouquet distribution strategy through Indiacast, we expect the net distribution income to grow from 15.7 crore in FY13 to 236 crore in FY15. Consolidated revenue and EBITDA are expected to post 10.4% and 63.9% CAGR over FY13-15E, respectively. The company is trading at a significant discount to its peers Zee Entertainment and Sun TV on the sales multiples owing to a significantly lower margin profile. The benefits that would accrue to TV18 from digitization would be partly diluted if the twelve minute ad cap regulation gets implemented in the near term. Any relaxation on the said ruling remains an upside risk to our valuations. We have valued the stock using DCF methodology to arrive at a target price of 18. We initiate coverage on TV18 with a HOLD rating Net distribution income to provide boost The lack of a bouquet approach to market its channels and lower advertisement revenue for news channels has plagued TV18 s revenue, which considerably lags that of its peers. However, the net distribution income is expected to jump from 15.7 crore in FY13 to 236 crore in FY15E owing to (1) Acquisition of ETV s regional channels and formation of Indiacast, which would bundle TV18 s flagship channels with ETV s regional channels along with UTV Disney channels, (2) Digitisation drive, which would enable its flagship channels to command higher subscription revenue owing to their leadership and brand equity. Profitability to witness massive turnaround The EBITDA is expected to more than double to crore by FY15E, led by higher net distribution revenue. Moreover, the overall interest burden would decline from crore in FY13 to 96.2 crore by FY15 due to debt repayment post the recent rights issue. Margins to expand significantly! So will MCap/sales!!! As compared to ZEEL, TV18 is trading at a premium in terms of PE (60%) and a discount in terms of MCap/sales (154%) owing to its low margin profile. The benefits that would accrue to TV18 from digitization would be partly diluted if the twelve minute ad cap regulation gets implemented in the near term. Any relaxation on the ruling remains an upside risk to our valuations. We have valued the stock using DCF methodology to arrive at a target price of 18. We initiate coverage on TV18 with a HOLD rating. Exhibit 1: Key Financials (Year-end March) FY11 FY12 FY13 FY14E FY15E Net Sales ( crore) , , , ,061.5 EBITDA ( crore) 41.9 (62.3) Net Profit ( crore) (17.4) (73.8) (25.4) EPS ( ) - (2.0) (0.1) RoCE (%) 2.0 (6.0) RoE (%) (2.5) (10.8) (0.8)

2 Shareholding pattern (Q1FY14) Shareholder Holding (%) Promoter 57.0 DII 2.2 FII 8.5 Others 32.3 FII & DII holding trend (%) Company background TV18 Broadcast Ltd is a subsidiary of Network 18 Media & Investments Ltd, which is promoted by Raghav Behl. Network 18 is a media & entertainment firm with interests in television, internet, filmed entertainment, digital commerce, magazines, mobile content and allied businesses. Network 18 holds a 57% stake in TV18 Broadcast Ltd, which is a leading broadcaster in India predominantly known for its news channel CNBC TV18 and Hindi General Entertainment channel Colors Q2FY13 Q3FY13 Q4FY13 Q1FY14 FII DII TV18 is a leading broadcaster in India operating over 30 channels with its subsidiaries/jvs. On a standalone basis, it currently operates five news channels viz. CNN IBN and IBN7 in the realm of general news and CNBC- TV18, CNBC Awaaz and CNBC-TV18 Prime HD in the business news category. The company also operates IBN Lokmat, which is a Marathi news channel in partnership with the Lokmat Group. In entertainment, the company has 50:50 joint venture with US-based broadcaster Viacom called Viacom18 through which the company operates the prominent Hindi GEC Colors. Apart from Colors, the company also runs Nick, MTV India, VH1, Sonic and Comedy Central. History TV18 is another entertainment channel in which the company has a 51% stake with the remaining stake being held by AETN networks. TV18 recently acquired the Eenadu group of channels that gives it a regional footprint to put it in the same league as the likes of Zee Entertainment, Star India & MSM. The company owns 100% interest in regional news channels ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan, ETV Bihar & ETV Urdu along with 50% interest in regional GECs including ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya. It also holds 24.5% interest in ETV Telugu & ETV Telugu News. Apart from broadcasting, TV18 is also in the movie production and distribution business through Viacom18 and cable distribution business through Indiacast, which is a 50:50 JV between TV18 and Viacom 18 resulting in 75% economic interest of TV18. The company was reeling under a heavy debt burden with a net debt to equity of 1.2 in FY12. In order to fund the acquisition of ETV and deleverage the balance sheet, the company came up with a rights issue in FY13 to raise 2700 crore. The issue was subscribed 1.3x. Post the rights issue, the net debt to equity of the company fell to 0.1x and is in a comfortable position currently to invest in new programming. Also, Network 18 came up with a rights issue worth 2700 crore at 30 per share along with TV18. The promoters of Network 18 were funded by Independent Media Trust (IMT), a trust set up for the benefit of RIL shareholders. IMT subscribed to optionally convertible debentures issued by promoter entities. Should IMT convert the OCDs, IMT would become the majority shareholder of Network 18. The money raised was used to fund the 1400 crore that Network 18 needed to subscribe to the rights issue of TV18 and deleverage the balance sheet. Page 2

3 In FY13, 43.0% of the total revenue came from the entertainment business while news contributed 32.5%. Indiacast was the other important business accounting for 23.0% of the revenue. Category wise, the company earned 61.7% of its revenue through advertisement. Net distribution income, which forms a significant part of the revenue for other national broadcasters, contributed a mere 7.0% of the revenue. The motion picture business and distribution business accounted for 7.7% and 23.0% of the revenue respectively. Exhibit 2: Business wise revenue break-up Exhibit 3: Category wise revenue break-up Indiacast 23% Others 2% News 32% Distributi on 23% Others 1% Entertain ment 43% News Indiacast Entertainment Others Movie 8% Subscripti on 7% Ad 61% Ad Subscription Movie Distribution Others Exhibit 4: Diversified set of channels TV18 News Entertainment Regional Distribution General CNN IBN IBN7 IBN LOKMAT# Business CNBC TV18 CNBC Awaaz Colors* Nick* MTV India* VH1* Sonic* Comedy Central* Viacom Motion Pictures* History TV18 News ETV Uttar Pradesh ETV Madhya Pradesh ETV Rajasthan ETV Bihar ETV Urdu ETV Telugu News^ GEC ETV Marathi ETV Kannada ETV Bangla ETV Gujrati ETV Oriya ETV Telugu^ Indiacast # - In partnership with Lokmat Group * - Through 50:50 JV with Viacom ^ % Stake 50% stake in ETV s Regional GECs Page 3

4 Investment Rationale Digitally developing media industry India is home to a growing media industry, which is at the cusp of a digital revolution that would bring in further growth potential. The media industry grew at a CAGR of 9.1% in to 820 billion. This growth has been in spite of the economic slowdown seen in 2009 when the industry grew just 1.3%. Also, even in the current slowdown, the industry has posted growth of 12.6% in The year 2012 was marked by significant advancements of digital systems in most of the media sectors. Increasing number of multiplexes (digital screens) along with strong growth in VFX related works in movies, satisfactory completion of Phase I digitisation of cable distribution systems in metros and higher focus on digital advertising are the latest trends in the industry. With increasing focus on digital systems, the media industry is expected to grow at a CAGR of 15.2% in to 1661 billion. Exhibit 5: Snapshot of domestic media industry billion CAGR (08-12) % 2013E 2014E 2015E 2016E 2017E CAGR% (12-17) % Television Print Film Radio Music OOH Animation Gaming Digital Total Source: FICCI-KPMG report 2013, ICICIdirect.com Research Television, including cable distribution companies, has been the dominant contributor to the industry. Its dominance is expected to get further strengthened subsequently as the process of digitisation gathers pace. Digitisation would plug the revenue leakages by local cable operators (LCOs) in the analog system to the benefit of broadcasters as well as multi system operators (MSOs). Exhibit 6: Television share to increase % E 2014E 2015E 2016E 2017E Source: FICCI-KPMG report 2013, ICICIdirect.com Research Page 4

5 While ad revenues completely accrue to the broadcaster, the subscription revenue of the industry is shared among broadcasters and cable distribution companies. The television industry grew at a CAGR of 11.3% in and is expected to witness a considerably better CAGR of 18.0% in to billion. Exhibit 7: Television industry revenue split billion E 2014E 2015E 2016E 2017E Ad revenue Subscription Revenue Source: FICCI-KPMG 2013, ICICIdirect.com Research Digitisation Broadcaster s paradise Traditionally, broadcasters have been significantly dependent on ad revenue in India mainly due to low subscription revenues. With 80-85% of the subscription revenue collected from the subscriber, under declared by the LCO due to lack of addressability in the analog cable regime, the share of MSOs and broadcasters was minimal. However, with the government mandate of digitisation, which calls for complete replacement of analog cable by digital systems, consumers become addressable, thus plugging the revenue leaked by the LCO previously. This bodes well for MSOs as well as broadcasters as they see a jump in their share of the subscription revenue pie. Also, with a huge chunk of the revenue pie going to LCOs in the analog cable, they were content with low ARPUs. The ARPUs of pay TV and multiplexes are comparable in India while in some developed countries cable ARPU is 5-6x that of multiplexes. With digitisation, even the ARPUs would witness an upward pressure. However, DTH companies would be competing with MSOs for grabbing the analog subscriber pie. So far, in metros, which is a strong turf for MSOs, industry estimates suggest ~20% of the analog subscriber base has churned to DTH. DTH share in digitisation is expected to increase in subsequent phases. Broadcasters stand to gain the most from digitisation as irrespective of who gets a higher subscriber share among DTH and MSOs, broadcaster would witness a jump in their subscription revenue share. Also, broadcasters get higher subscription revenue without any capex while MSOs and DTH would have to incur significant capex in terms of procurement of set top boxes. Also, broadcasters stand to witness a reduction in carriage fees the fees paid by broadcaster to the MSO for carrying their channel. With the digital system capable of carrying more than 500 channels in the same bandwidth in which analog could carry 100, the channel carrying capacity of the MSO will increase, thus exerting downward pressure on carriage fees. However, as seen in phase I, carriage fees have been replaced by placement fees the fees broadcasters pay to MSOs for placing their Page 5

6 channel in the desired channel package. However, broadcasters still stand to gain as industry estimates suggest placement fees would be considerably lower than carriage fees. The benefit of digitisation has already started showing in the financials of broadcasters, with the subscription revenue share of broadcasters growing at 43% in CY12 to 70 billion. Going forward, with digitisation in subsequent phases triggering the subscription revenue, the dependence of broadcasters on ad revenue is expected to significantly reduce. The subscription revenue is expected to form 48% of the revenue of broadcasters in 2017 from 36% in Exhibit 8: Digitisation to trigger subscription revenue for broadcasters billion E 2014E 2015E 2016E 2017E % Ad revenue Subscription Revenue Subscription revenue share Source: FICCI KPMG report 2013, ICICIdirect.com Research Exhibit 9: Analog cable (ARPU - 150) Exhibit 10: Digital cable (ARPU - 150) 15, 10% 15, 10% 53, 35% 45, 30% 120, 80% 53, 35% Broadcaster MSO LCO Source: ICICIdirect.com Research Broadcaster MSO LCO Source: ICICIdirect.com Research Consolidation in distributors Another trend seen in the industry to capitalise gains brought about by digitisation is consolidation among distributors to get a better bargaining power with MSOs. Better bargaining power would benefit broadcasters in terms of higher subscription revenue and lower carriage fees. Zee Turner (subsidiary of Zee Enterprise) formed a JV with Star Den to distribute over 80 channels including those of ZEEL and Star India. The bargaining power gained by such an alliance has reflected in the subscription income of ZEEL, which grew 34% in FY13. One Alliance, which distributes channels of MSM and Discovery, is another example. TV18 acquired Eenadu TV in 2012, which adds a group of regional channels to its portfolio. Also, it formed Indiacast, which distributes all its Page 6

7 channels along with UTV Disney. These factors have managed to pull the subscription revenue up and carriage fees down for TV18 recently. The net distribution income of TV18, which is subscription revenue net of carriage, improved from crore in FY12 to 15.7 crore in FY13. The net distribution turned positive in Q3FY13 with the completion of digitisation in phase I and acquisition of the Eenadu TV network. Exhibit 11: TV18 - impact of digitisation, acquisition of ETV and formation of Indiacast FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 FY13 Q1FY News channels to find life News channels will find themselves in a considerably better position due to digitisation. India boasts of 30 plus national news channels, which is one of the highest in the world. Due to the hyper competitive nature in the news genre, news channels were paying very high carriage fees and receiving less subscription income. The net distribution income is currently negative for most news channels. Also, the dependence on ad revenue is very high for news channels. Digitisation would increase the channel carrying capacity of the MSO, thus reducing the carriage fees paid by the broadcaster. Though this is an industry wide phenomenon, news broadcasters stand to gain the most as they are currently paying the highest carriage fees while earning the least subscription income. Ad growth begins turnaround post slowdown The year 2012 was a dull one for companies across the media sector owing to the challenging macroeconomic environment brought about by an economic slowdown. Corporates chose to cut down on their ad spends to protect their margins in difficult times, thus affecting the ad revenues of media companies. The most affected were the national players who had a higher share of national advertisers while regional players were better off with a higher share of retail advertisers, which is relatively insulated from the economic slowdown. The ad growth for the media industry was 9.1% in 2012 while the ad growth for broadcasters was a mere 7.6%. Page 7

8 Exhibit 12: Ad revenue for media industry billion CAGR (08-12) % 2013E 2014E 2015E 2016E 2017E CAGR% (12-17) % Television Print Radio OOH Digital Total Source: FICCI-KPMG report 2013, ICICIdirect.com Research The media industry, however, has started witnessing a turnaround in the ad trend starting from the fag end of Industry participants suggest that corporates (especially FMCG companies) witnessed a slump in their sales when they cut down on their ad spends. Hence, they are returning to spend big on ads, which has led to a turnaround in the industry. Ad revenues for the media sector and television are expected to grow at a CAGR of 14.0% to 630 billion and 240 billion, respectively, in FY Moreover, companies under our media universe have reported a robust ~18% YoY ad revenue growth in Q1FY14. Though such a high growth trend may be unsustainable in the current environment, we expect ad growth to remain in double digits for the rest of the fiscal. Dominant genres The most watched genre in India is the general entertainment channel (GEC), which command over half of the total viewership. Hindi GECs command a viewership share of 30% with regional GEC at 20%. Exhibit 13: Genre wise viewership share Genre % Share in 2012 English Entertainment 0.14 English News 0.23 English Movies 0.88 Hindi GEC 31 Hindi News 3.18 Hindi Movies Regional GEC Regional News 2.78 Regional Movies 3.65 Kids 6.47 Music 3.09 Infotainment 1.08 Others Source: FICCI-KPMG report 2013, ICICIdirect.com Research The Hindi GEC market is largely dominated by four players including Star TV, Zee TV, Sony and Colors with dynamic channel rankings each week. With a huge chunk of ad revenues accruing to GECs, channels have been aggressive in replacing non performing content with new ones, increasing the fresh programming hours and acquisition of movies. The GECs are followed by Hindi movies in terms of viewership (12%). All national broadcasters have multiple movie channels of their own. TV18 is the only exception with no dedicated movie channel. However, TV18 does telecast movies on its GEC channel Colors. While Star spent ~ 300 crore to acquire movies in 2012, Zee TV is reported to have spent 200 crore. After syndicating its library of over 500 films to Star, Viacom 18 has signed a deal with Eros International to acquire the satellite rights of nine movies for ~ 100 crore, which it would telecast on its GEC Colors. Page 8

9 Growing importance of regional channels National broadcasters have also strengthened their channel portfolio by adding regional channels. Regional channels hold immense potential as local advertisers are willing to pay a premium to reach their target audience. Currently, regional channels have an advertisement share, which is proportional to the viewership share. While Star TV and Zee TV have their own set of regional channels, Sony acquired Maa TV in 2012 while TV18 recently acquired the Eenadu group of channels to set foot in the southern territory. Exhibit 14: Regional market size (million in home state) (millions) (millions) crore Tamil Telugu Bangla Kannada Malayalam Marathi Bhojpuri Punjab Oriya Gujarati Source: FICCI-KPMG report 2013, ICICIdirect.com Research Trai recommendation on ad limits According to the latest regulations by Trai, a broadcaster would not be allowed to show ads for more than 10 minutes with two minutes of promotional activity in an hour. Currently, prominent channels are telecasting ads for minutes in an hour. With lower inventory available to broadcasters for telecast of ads, the dominant GECs including Star TV, Zee TV, Colors, etc. have already been reported to have hiked ad tariffs for advertisers. We believe advertisers would agree to pay a premium to the previously existing rates as the new Trai regulation would reduce channel surfing by consumers. Hence, advertisers would be more assured of catching eyeballs when they are advertising on popular TV channels. However, the lesser popular channels may be unable to increase ad tariffs, which could be a blow to the news and movie channels and smaller GECs. Nonetheless, as per a recent development, I&B Minister Manish Tewari has asked Trai to reconsider the issue of imposing the twelve minute advertisement cap on news channels. Moreover, Indian news channels have contested this Trai ruling in TDSAT to halt the implementation of the same. TDSAT has stayed the ruling till further hearing in November TV18 King of news; COLORful entertainer TV18, on a standalone basis, currently operates five news channels viz. CNN IBN and IBN7 in the realm of general news and CNBC-TV18, CNBC Awaaz and CNBC-TV18 Prime HD as business news. The company runs IBN Lokmat, which is a Marathi news channel. In entertainment, the company has 50:50 joint venture with Viacom called Viacom18 through which it operates the leading GEC Colors. Apart from Colors, the company also runs Nick, MTV India, VH1, Sonic and Comedy Central. History TV18 is another entertainment channels in which the company has a 51% stake with the remaining stake being held by AETN networks. Page 9

10 TV18 recently acquired the Eenadu group of channels, which gives it a regional footprint to put it in the same league as the likes of ZEEL, Star India and MSM. The company owns 100% interest in regional news channels ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan, ETV Bihar and ETV Urdu along with a 50% interest in regional GECs including ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya. It also holds 24.5% interest in ETV Telugu and ETV Telugu News. Most watched news channel TV18 boasts of the most watched English and Hindi business news channels in CNBC TV18 and CNBC Awaaz. Along with that, its general news channel CNN IBN and IBN 7 also command a significant share of the general news category. CNBC TV18 commanded a market share of 49.6% from 2012-Week 26, 2013 (three months of data missing due to non-availability of TAM data) with a numero uno position. CNBC Awaaz was also the No. 1 in its Hindi business news genre, which primarily includes only two channels with a market share of 55.1% from 2012-Week 26, Exhibit 15: CNBC TV18 - Dominant No 1 in English news genre Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Week 29 Week 33 Week 37 Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Bloomberg TV CNBC TV18 ET Now NDTV Profit Source: TAM 2012 Week 1 to 40 and 2013 Week 1 to 26, CS AB Males 25+, All India Exhibit 16: CNBC Awaaz - Numero uno in Hindi business news genre % Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Week 29 Week 33 Week 37 Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 CNBC AWAAZ Z Business Source: TAM 2012 Week 1 to 40 and 2013 Week 1 to 26, CS AB Males 25+, HSM The company also has channels in the Hindi and English general news and current affairs genre viz. IBN 7 and CNN IBN. With these markets being very competitive and with heterogeneous offerings, there is no dominant player in any of the genres. Though CNN IBN enjoys a Page 10

11 comfortable No. 2 position in the English news space, the Hindi news channel IBN7 lags at No. 6/7. The slowdown in the economy has hit broadcasters hard in terms of ad revenue, with news broadcasters feeling the heat the most as a significant part of the revenue comes from national advertisers. Even TV18, in spite of commanding a leadership position in news channels, witnessed a de growth in its revenue. We believe, though non news broadcasters like ZEEL and Sun TV have already started seeing a turnaround, a turnaround in news broadcasters would come with a lag. We have factored in an ad growth of 5.5% and 6.0%, respectively, for business news channels and 4.1% and 4.0% for general news channels in FY14 and FY15, respectively. Though the turnaround in the ad situation for news channels would lag GEC channels and may remain in single digits subsequently as well, news channels would see a sharp turnaround in their net distribution income owing to digitisation. While its business news segment is one of the few news companies that have a positive net distribution income, the general news segment is on the breakeven stage in terms of net distribution income. Digitisation is expected to be a welcome sign for news broadcasters who are currently paying huge carriage fees while getting very low subscription revenue. Being the market leader among news channels, we expect digitisation to benefit TV18 strongly and expect net distribution income to grow from 15.7 crore in FY13 to 236 crore in FY15. Overall, on a standalone basis, we expect revenues to grow at a CAGR of 6.3% to crore, largely driven by net distribution income. Also, the EBITDA margin is expected to expand from 19.7% in FY13 to 24.3% in FY15 for the news business with incremental net distribution income kicking in operating leverage. Exhibit 17: TV18 Standalone - Revenue & EBITDA margin crore FY12 FY13 FY14E FY15E % Revenue EBITDA Margin COLORful entertainment; The company forayed into entertainment channels by forming a 50:50 JV with Viacom called Viacom 18. The most popular channel of Viacom18 is Colors, which has consistently been in the No. 2/3 position in the Hindi GEC genre. Also, for a brief period of time, Colors also led the genre in spite of being a late entrant. Colors competes with Zee TV, Star TV and Sony TV in the most watched Hindi GEC genre. Apart from Colors it also operates channels like MTv, India, VH1, Nick, Sonic and Comedy Central. Colors is the leading revenue generator for Viacom18 as it competes in the most watched Hindi GEC space. The space is highly competitive with Colors having just one out of the top 10 fictional programmes in 2012, Page 11

12 while having four out of the top 10 non-fiction programmes in Colors had average GRPs of 207 in 2012/13 corresponding to a market share of 18.5% among the top 6 GEC broadcasters with a very close No. 3 position. Exhibit 18: Colors - Weekly GRPs for Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Week 29 Week 33 Week 37 Week 1 Week 5 Week 9 Week 13 Week 17 Week 21 Week 25 Colors Viacom18 Life OK SONY ENTERTAINMENT TV SONY SAB Star Plus Z Zee TV Source: TAM, ICICIdirect.com Research Exhibit 19: Top shows in 2012 Fiction Non Fiction Show Channel % Share Show Channel % Share Bade Acche Lagte Hain Sony 24.7 Kaun Banega Crorepati Sony 42.0 Balika Vadhu Colors 18.1 Big Boss 6 Colors 39.8 Tarak Mehta Ka Ulta Chashma SAB TV 14.6 MTV Roadies MTV 33.1 Diya Aur Baati Hum Star Plus 12.3 Dance India Dance Zee TV 25.0 Saath Nibhana Saathiya Star Plus 10.1 Styamev Jayate Star Plus 22.7 Is Pyaar Ko Kya Naam Doon Star Plus 8.7 Jhalak Dikhla Jaa Colors 20.3 Yeh Rishta Kya Kehlata Hai Star Plus 7.4 Comedy Circus Sony 12.3 Pavitra Rishta Zee TV 7.2 Indian Idol 6 Colors 10.4 Pratigya Star Plus 7.0 India s Got Talent 4 Colors 7.0 CID Sony 6.9 Sa Re Ga Ma Pa 2012 Zee TV 4.6 Source: FICCI-KPMG report 2013, ICICIdirect.com Research We expect ad revenues of Viacom 18 to be in line with that of ZEEL as it comprises similar group of channels except that ZEEL owns movie channels, which Viacom 18 does not. We expect ad revenues to grow 8.0% and 7.4% in FY14 and FY15, respectively. However, as in the case of news channels, entertainment channels would also see growth in their net distribution income due to digitisation. Viacom 18 turned net distribution income positive only in Q3FY13. Even the formation of Indiacast, which would distribute channels from UTV Disney as well, would help Viacom 18 compete with the likes of Media Pro, One Alliance, etc. We expect the net distribution income of Viacom 18 to grow from an estimated 6.0 crore in FY13 to crore in FY15. However, with Viacom 18 being a 50:50 JV of TV18 only 50% of the financials of Viacom 18 would be consolidated into TV18 financials. Apart from broadcasting, Viacom 18 also has a movie production and distribution business under the banner Viacom 18 motion pictures. The company has produced/co produced movies like Son of Sardaar, Oh My God, Special Chabbis, Gangs of Wasseypur part I/II, Kahaani, Aiyaa, Bhaag Milkha Bhaag, Madras Café etc. It has movies like Boss (Akshay Kumar, Aditi Rao Hydari) and Gabbar (Akshay Kumar, Katrina Kaif) in the pipeline. The management indicated Page 12

13 that Viacom Motion Pictures would be concentrating on more mid to small budget movies rather than the big starrer movies. Moreover, since the movie business is highly uncertain and lumpy, and in a bid to focus on its core business operations, the company plans to follow a conservative approach and trim down capital allocation to this segment. Overall, we expect Viacom 18 to post revenue growth of 23.5% and 10.5% in FY14 and FY15, respectively. Also, with incremental net distribution income operating leverage is expected to kick in leading to an expansion of EBITDA margins in line with other broadcasters. We expect the EBITDA margin to increase from 4.4% in FY13 to 11.9% in FY15. Exhibit 20: Viacom 18 - Revenue and EBITDA margin trend crore FY12 FY13 FY14E FY15E % Revenue EBITDA Margin Acquisition of ETV to drive net distribution income; TV18 had recently come out with a rights issue at 30/share to raise 2700 crore out of which 1400 crore was pumped in by the promoter company viz. Network 18. This sum was used to de-leverage the then stressed balance sheet of the company and also fund the acquisition of the Eenadu group of channels for 2100 crore. ETV news channels and ETV entertainment generated revenue of crore and crore, respectively, in FY13. TV18 is planning to invest substantially in ETV to be able to compete with the likes of ZEEL and Star India, which have channels with considerable viewership in the southern markets. As a result, we expect ETV s margins to remain pressurised in the near future. We expect ETV to post a revenue of crore and crore in FY14 and FY15, respectively. EBITDA losses are expected to reduce from 98 crore in FY14 to about 48 crore in FY15. However, it may take some time for the ETV channels to turn EBITDA positive. The ETV network gives TV18 the much required footprint in the southern territory. The immediate impact of such an acquisition is better bargaining power when negotiating contracts with cable distribution companies. The net distribution income, which is subscription revenue net of carriage fees, turned positive in Q3FY13. ZEEL earns subscription revenue of 1400 crore. We believe the carriage fees of ZEEL are to the tune of 400 crore implying a net distribution income for ZEEL at ~ 1000 crore. TV18 has a similar portfolio of channels as compared to ZEEL except that ZEEL has sports channels and a dedicated Hindi movie channels (which TV18 does not) and TV18 has news channels (which Zee does not). Assuming a discount of 20% to ZEEL, TV18 s net distribution income has the potential to rise to 800 crore subsequently. Considering TV18 s interest of 50% in Viacom 18, Page 13

14 TV18 s net distribution income has the potential to move up to 400 crore from 15.7 crore in FY13. Also, the formation of Indiacast, which would be distributing channels of TV18 along with that of UTV Disney, would help the subscription revenue. We expect the net distribution income for the company to grow from 15.7 crore in FY13 to crore in FY15. Exhibit 21: Net distribution income trend crore FY12 FY13 FY14E FY15E Indiacast foray into distribution Indiacast was formed in Q2FY13 to distribute the channels of TV18 along with its subsidiaries and joint ventures. Since then, Indiacast has also got to distribute UTV Disney channels and Sun TV s channel in the Hindi speaking markets abroad for distribution. Indiacast currently distributes about 45 channels. Indiacast being a 50:50 JV between TV18 and Viacom18, TV18 s economic interest in Indiacast stands at 75%. The formation of Indiacast is in line with the industry practise of consolidation in the distribution segment. With the likes of Media Pro and One Alliance commanding a dominant subscription revenue share owing to their bargaining power, Indiacast, with the inclusion of UTV Disney and ETV group of channels would be at par with them. The effect of the formation of Indiacast was immediately seen with TV18 turning net distribution income positive in Q3FY13. However, being a distribution company, Indiacast s financials would have wafer thin margins. While inclusion of other channels in Indiacast would help it to get better bargaining power, it would not necessarily contribute significantly to the EBITDA of Indiacast. On a 100% basis, Indiacast generated revenues of crore in the first three quarters of FY13 with an EBITDA loss of 0.5 crore. However, going forward, with digitisation and Indiacast s bargaining power leading to higher subscription revenue and lower carriage fees, we expect Indiacast to post revenue of crore and an EBITDA of 33.6 crore in FY15. Page 14

15 Exhibit 22: Indiacast - Revenue & EBITDA on a 100% basis crore FY13 FY14E FY15E % Revenue EBITDA margins Company to undertake cost rationalisation drive TV18 will undergo restructuring in the news segment to improve efficiencies. It intends to rationalise its manpower costs by cutting the workforce by ~220 primarily in the news business. This will help them build a common technology backend, which will be shared across its different news channels, thus reducing duplicity of costs. The management expects this to reduce the news business costs by ~5% on a sustained basis and, hence, improve margins. However, we have not factored these changes in our estimates and will wait for additional clarity on the same. Page 15

16 Financials Net distribution income to drive revenue growth The revenue will be largely driven by a huge jump in the net distribution income, which is expected to jump from 15.7 crore in FY13 to crore in FY15. Considering Zee s net distribution income at ~ 1000 crore, formation of Indiacast to get better bargaining power, similar channel portfolios of ZEEL and TV18 and TV18 s 50% stake in Viacom 18, we believe TV18 s net distribution income has the potential to move up to 400 crore. The ad income, on the other hand, is expected to grow at a steady CAGR (FY13-15E) of 7.7% to crore in FY15. We expect the consolidated revenue of TV18 to grow at a CAGR of 10.1% in FY13-15 to crore. Exhibit 23: Revenue growth to be driven by net distribution income crore FY12 FY13 FY14E FY15E % Revenue Growth Margins to improve significantly EBITDA margins are expected to increase significantly, in line with other broadcasters, driven by incremental subscription revenue/net distribution income brought in by digitisation. Additionally, TV18 would benefit from the bargaining power of Indiacast, the full gains of which are yet to be realised. However, the management intends to invest heavily in rebranding/adding new programmes of ETV that may be a drag on margins. ETV s financials have not been consolidated with the company s financials as yet. Without considering the ETV financials, we expect EBITDA margins of the company to jump from 6.6% in FY13 to 14.6% in FY15. With this expansion, the EBITDA is expected to grow at a CAGR of 63.9% in FY13-15E to crore. Page 16

17 Exhibit 24: Margins to improve crore FY12 FY13 FY14E FY15E % EBITDA EBITDA margin PAT positive in FY14; to double PAT in FY15 Though TV18 turned PAT positive in Q3FY13, on a full year basis, the company reported a loss of 25.4 crore in FY13. With the growth in net distribution income bringing in robust revenue growth and kicking in operating leverage leading to an expansion in EBITDA margins, we expect the company to turn PAT positive in FY14. We expect the company to report a PAT of 74.5 crore in FY14 and then witness 75% growth in PAT in FY15 to crore. Exhibit 25: PAT positive in FY crore FY12 FY13 FY14E FY15E Comfortable levels of debt. With the rights issue in FY13, the company has been able to significantly lower its net debt to crore in FY13 from crore in FY12. Also, the balance sheet has been considerably strengthened with a current net debt to equity of just 0.1 as against 1.2 in FY12. We expect net debt to further go down to crore by FY15. Page 17

18 Exhibit 26: Comfortable debt position crore FY12 FY13 FY14E FY15E x Net Debt Net Debt to Equity Return ratios to start improving. With strong growth in profits, we expect return ratios of the company to get into the positive territory in FY14 and continue improving in FY15. We expect RoE and RoCE to move up to 3.7% and 6.3% in FY15, respectively. Exhibit 27: Improving return ratios % FY12 FY13 FY14E FY15E ROE ROCE Page 18

19 Risks and concerns Future accounting policy unclear The accounting policy of the company may change subsequently with the consolidation of ETV. It remains unclear as to when ETV s financials would be consolidated. We have currently projected the future earnings, following the same accounting method used currently by the company. Any change in the accounting policy can be a risk to our future estimates. Lack of clarity on the twelve minute ad cap ruling The twelve minute ad cap ruling has been stayed with the hearing being postponed till November. The regulation if not implemented remains an upside risk to our valuations Channel portfolio slightly inferior to its peers Though TV18 has a strong bouquet of channels, it lacks a dedicated movie channel while Star and ZEE both have more than two movie channels. Also, TV18 does not have sports channels unlike Star and Zee, and the management indicated it does not plan to launch a sports channel in the near future as all major sports properties have already been booked for the next few years. New investments may not necessarily yield good returns The company intends to invest heavily in ETV to make it as attractive as other regional channels. Also, Colors is known to have strong reality shows, which generally have higher cost of production. The returns on these investments depend on the consumer taste and competition from other channels and, hence, need not necessarily yield good returns. Viacom 18 ownership Viacom Inc. has a Call option on Viacom 18 through which Viacom 18 can purchase the stake of TV18 in Viacom 18 post July 21, However, if Viacom 18 exercises the Call option, TV18 will have a Put option to sell its entire stake in Viacom 18 to Viacom Inc. Also, TV18 has a partial Put option to sell a fifth of its stake in each year for five straight years post July 1, The partial Put option is cumulative i.e. if TV18 decides not to exercise its Put option in any year, it can exercise the same Put option in subsequent years. Should Viacom 18 exercise its Call option or TV18 exercise its partial Put option, TV18 s stake and, hence, control of Viacom 18 would weaken. This would be a risk to our future estimates, which includes 50% of Viacom 18 s financials. Page 19

20 Valuation Only in Q3FY13 did the company witness a turnaround in its financials and reported a profit largely due to an improvement in net distribution income. We expect the trend to continue and expect the company to post a profit of 74.5 crore from a loss of 25.4 crore in FY13. Post that, we expect a 74.76% jump in profit to crore. The turnaround in its financials was largely brought about by formation of Indiacast and inclusion of ETV channels in its bouquet, which put the company in the league of ZEEL as a national broadcaster. However, we believe only a partial benefit of these moves would be seen till FY15. Even beyond that, the PAT would continue to grow strongly until all benefits of Indiacast and ETV are realised. The net distribution income, which is currently at 15.7 crore, is expected to grow to 236 crore by FY15. Moreover, taking cues from ZEEL, the net distribution income has the potential to go up to at least 400 crore. Hence, currently the stock is currently trading at a premium to other national broadcasters like ZEEL in terms of PE and at a significant discount in terms of MCap/sales. The reason for this anomaly is the low margin profile of TV18. The benefits that would accrue to TV18 from digitization would be partly diluted if the twelve minute ad cap regulation gets implemented in the near term. Any relaxation on the said ruling remains an upside risk to our valuations. Exhibit 28: Valuation anomaly of TV18 FY14 FY15 ( Crore) TV18 ZEEL Sun TV TV18 ZEEL Sun TV Ad Revenue 1, , , , , ,356.1 Subscription* , , EBITDA , , , ,825.2 EBITDA % Valuation Ratios P/E Mcap/Sales EV/EBITDA * Net Distribution Income for TV18 We have valued TV18 using the DCF methodology, with revenue CAGR of 11.8% over FY13-20E and WACC assumption of 14.0% to arrive at a target price of 18. We initiate coverage on TV18 with a HOLD rating. Exhibit 29: DCF assumptions in Crore WACC 14.0% Revenue CAGR over FY13 - FY20E 11.8% PV of Cash Flow Till Terminal Year 1,224.2 Terminal Growth Rate 3.0% Terminal Value 5,829.5 Total Value of Firm 3,548.4 Current Debt Total Present Value of Equity (Excluding Cash) 3,067.4 No. of Equity Shares DCF - Target price ( ) 18 Page 20

21 Financial summary Profit and loss statement ( Crore) (Year-end March) FY12 FY13 FY14E FY15E Total operating Income 1, , , ,061.5 Growth (%) Employee Expenses Administrative Expenses ,019.9 Programming Expenses Total Operating Expenditure 1, , , ,760.5 EBITDA Growth (%) NM NM Depreciation Interest Other Income PBT Exceptional Items Total Tax Minority Interest PAT Growth (%) NM NM NM 74.8 EPS ( ) Cash flow statement ( Crore) (Year-end March) FY12 FY13 FY14E FY15E Profit after Tax Add: Depreciation Interest Paid (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in non current assets ,948.4 (Inc)/dec in Fixed Assets Others CF from investing activities , Issue/(Buy back) of Equity Inc/(dec) in loan funds Inc/(dec) in Sec. premium ,429.2 Interest Paid Others (86.8) - - CF from financing activities , Net Cash flow Opening Cash Closing Cash Balance sheet ( Crore) (Year-end March) FY12 FY13 FY14E FY15E Liabilities Equity Capital Reserve and Surplus , , ,134.9 Total Shareholders funds , , ,477.2 Total Debt Other Non Current Liabilities Total Liabilities 1, , , ,992.5 Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Goodwill on Consolidation Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets 1, , , ,962.8 Creditors Provisions Other Current Liabilities Total Current Liabilities Net Working Capital ,001.7 Other Non Current Assets , , ,284.2 Application of Funds 1, , , ,992.5 Key ratios (Year-end March) FY12 FY13 FY14E FY15E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E NM NM EV / EBITDA NM EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA NM Debt / Equity Current Ratio Quick Ratio Page 21

22 ICICIdirect.com coverage universe (Media) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E DB Corp (DBCORP) Buy 4, DISH TV (DISHTV) Buy 4, NM NM NM NM NM NM NM NM NM ENIL (ENTNET) Buy 1, Eros (EROINT) Buy 1, Hathway Cables (HATCAB) Buy 4, NM NM HT Media (HTMED) Buy 2, PVR (PVRLIM) Hold 1, Sun TV (SUNTV) Buy 19, TV18 (GLOBRO) Hold 3, NM NM ZEE Ent. (ZEETEL) Buy 22, Source: ICICIdirect.com Research Page 22

23 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ANALYST CERTIFICATION We /I, Karan Mittal MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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