TV18 BROADCAST FY14E P/E: 12X TARGET PRICE: RS.30 COMPANY UPDATE

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1 COMPANY UPDATE Ritwik Rai TV18 BROADCAST PRICE: RS.20 TARGET PRICE: RS.30 RECOMMENDATION: BUY FY14E P/E: 12X Summary table (Rs mn) FY13(AE) FY14E FY15E Sales 16,704 20,195 22,945 Growth (%) NM EBITDA 1,051 1,281 3,174 EBITDA margin (%) PBT ,631 Net profit ,956 EPS (Rs) Growth (%) NM NM 272 CEPS (Rs) BV (Rs/share) Dividend / share (Rs) ROE (%) ROCE (%) Net cash (debt) -2,117-2, NW Capital (Days) P/E (x) NM P/BV (x) EV/Sales (x) EV/EBITDA (x) Source: Company, Kotak Securities - Private Client Research TV18 Broadcast stock has declined c20% from one-month peak, and currently trades at 17.5x FY15E PER. We continue to believe in the company's distribution revenues - led investment story and re-iterate a BUY on the stock. We highlight, in this note: 1/ completion of ETV (specifically, gaining the necessary approvals for ) stake buy was a pre-requisite to Viacom's investment in the remaining ETV Entertainment channels, which could be a potential positive trigger for the stock, 2/ we think distribution issues relating with Dish TV are likely to be solved in the near future, without significant damage to TV18's subscription revenues, 3/ TV18 is well exposed to LokSabha elections, as well as several state elections afterward, 4/ we expect strong earnings from TV18 Broadcast in 3QFY14, on the back of elections in several states, cost initiatives in standalone operations, and stronger yields in ETV Entertainment operations. BUY, with a price target of Rs 30. Completion of ETV Stake - could lift a long-term overhang on the stock: TV18 Broadcast has completed the purchase of stake in various ETV channels, to the intended extent (i/ 100% stake in ETV News channels, ii/ 50% stake in ETV Entertainment channels, and iii/ 24.5% stake in ETV Telugu and ETV Telugu News channels). We note that the sale had been held up on account of certain regulatory clearances. The completion of the deal may be crucial for TV18 Broadcast stock, and may be a potential positive trigger. This is why: 1/ although TV18 management has maintained that it would not exercise the option to buy the remaining stake in ETV channels, we believe the market remains wary of such a move, 2/ our recent interactions with management of the company (December 2013) suggest that the management of TV18 remains committed to not buying the stake. Management has assured that the option to buy the stake will not be exercised by TV18 and has been (as reiterated several times) passed over to Viacom, 3/ the regulatory clearances that had held up completion of acquisition of ETV channels by TV18 (significantly, transfer of licenses relating with channels) are a pre-requisite to Viacom buying the said stake. As such, the completion of the ETV transaction should be viewed positively, as it could be a pre-cursor to the (remaining) ETV Entertainment stake acquisition by Viacom. We have held the view that Viacom would be holding an incomplete bouquet, largely dependent on Colors, if it were to stay away from buying the ETV stake; as such we remain hopeful that Viacom shall be investing in the remaing stake of ETV Entertainment. Dish - TV / Indiacast tussle - Unlikely to have a significant impact on earnings: Dish TV and Indiacast have been involved in a tussle, over the past few months, on the issue of subscription revenues that may be collected by Indiacast. In Dish TV's 3QFY14 investor update/ conference call, Dish TV management has stated that the a-la-carte deal offered by the company has been successful, and that the company shall derive benefits in terms of lower content expenses going forward. If the commentary on the same has been taken seriously by the markets, we believe that this has been a mistaken reading, for: 1/ in our understanding, the issue has hardly reached a point of a settlement that would assure lower subscription revenues for TV18 Broadcast. As per TV18 management, Dish TV subscribers continue to receive channels of TV18 (irrespective of whether they demanded the same or not) and Dish TV has largely changed the placement of TV18 channels (rather than removing them altogether), 2/ as we have stated earlier, we believe that the amount of concessions that Dish TV can gain are somewhat limited, given the fact that Dish TV's payments to TV18 are some- Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 19

2 We re-iterate BUY recommendation on TV18 Broadcast with a price target of Rs.30 what small. In our understanding, if half of Dish TV subscribers ended up demanding Colors (at the a-la-carte price of Rs 9/ subscriber), Dish TV would end up paying TV18 Broadcast 75% of its current total payments!, 3/ Dish TV management has repeatedly said, on the conference call, that this should not be read as an end of the relationship and is to be viewed as a signal. To us, this indicates significant willingness on the part of Dish TV to sit again on the negotiating table. State Elections, improving ratings of ETV Entertainment channels, and lower staff expenses likely to impact 3QFY14 results positively: TV18 Broadcast is likely to report strong financials in the coming quarter. News segment of the company is likely to report advertising revenue growth (greater focus on news) as well as lower employee expenses on account of the restructuring that the company has undertaken (2QFY14). Also, and perhaps more importantly, we expect that the ETV businesses of the company shall perform strongly. The ETV News business is likely to have benefited from the state-dedicated channels it has in MP and Rajasthan. ETV Entertainment is likely to have experienced an improvement in yields (following improvement in ratings in ETV Kannada, and ETV Marathi), which could reduce losses from ETV Entertainment significantly. We note that sharply weakening profitability of ETV Entertainment channels has affected TV18 stock adversely in the past. TV18 Broadcast to be a significant beneficiary in several elections to come: TV18, on account of the xx news channels that the company operates is likely to be a beneficiary of the LokSabha elections as well as Orissa and Maharashtra assembly elections that are to be held post the LokSabha elections. The company shall also be a (minority) beneficiary of elections to be held in the state of Andhra Pradesh. As such, we believe that near-term visibility of news operations of the company is high. Risks remain, but fundamentals strong, and concerns likely to recede, reiterate BUY: TV18 Broadcast remains a stock for an investor with some risk proclivity: the (remaining) ETV stake buy, impending launches of channels and their success, competitive intensity, and delays in DAS rollout with customer billing are some of the risks faced by the company. However, we continue to think: 1/ the risks are well-priced in at CMP, 2/ TV18 Broadcast is well placed to monetize its content significantly, and with what we believe are conservative assumptions (our model implies TV18 (gross subscription revenues, at 100% of all channels) shall, in FY17, gather 60% of the subscription revenues generated in FY13), we see potential for Rs 5 Bn swing in EBITDA over FY13-FY17, 3/ we think that nearterm, earnings could be strong on the back of elections and cost initiatives taken by the company. This could provide for the much - needed 'faith factor' in TV18 Broadcast. Re-iterate BUY, with a price target of Rs 30. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 20

3 Revenue Model TV18 Broadcast (Consolidated) Rs mn, FY ends Mar FY13 (AE) FY14E FY15E FY16E FY17E TV18 Standalone Revenues Advertising revenues Net Subscription Revenues Other Revenues Viacom18 Standalone (50% JV- proportional consol.) Revenues Advertising revenues Net Subscription Revenues Other Revenues AETN18 - Revenues Advertising revenues Net Subscription Revenues ETV Regional (50% stake - ppl. Consol.) (consolidated FY14 onward) - Revenues Advertising revenues Net Subscription Revenues ETV News (100% consol.) (consolidated FY14 onward) - Revenues Advertising revenues Net Subscription Revenues Consolidated Op. Revs. (Broadcasting) Indiacast Revenues (75% from FY2014) Consol. Op. Revenues (TV18, Total) In the above, we note: 1/ Adjustments have been made to TV18 financials for FY13; accordingly AE above refers to analyst-adjusted financials for FY13, 2/ certain break-ups that have been provided above are a result of the judgement of the analyst, and are not provided by the company. We believe our judgment is fairly representative, but do not provide assurance of the same being accurate, 2/ Viacom18 and ETV Entertainment revenues have been consolidated to the extent of 50%; financials under various heads, starting from TV18 standalone and upto Indiacast revenues, represent 100% revenues of these entities. Breakup of Consolidated Revenues (Rs mn) FY13 (AE) FY14E FY15E FY16E FY17E Consol. Op. Revenues (TV18, Total) (i+ii+iii): Consolidated Advertising Revenues (i) Consolidated Gross Subscription Revenues Consolidated Carriage Fees Less: Net Distribution Revenues Add - Indiacast Revenes (75% of full revenues to be added) (ii) Other Operating Revenues (iii) Key Metrics of TV18 Broadcast - Net Distribution Revenues Managed Advertising Revenues Comparable Broadcasting Revenues Managed (gross) subscription revenues Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 21

4 TV18 Broadcast Gross Managed Subn Revenues (GMSR) versus broadcasting industry subscription revenues FY13 FY14E FY15E FY16E FY17E TV18 GMSR Broadcasting Industry Subscription Revenues TV18 GMSR as % broadcasting industry 7.4% 7.2% 6.4% 5.6% 5.5% Source: Kotak Securities Private Client Research; FICCI-KPMG Report Profit Model TV18 Broadcast (Consolidated) TV18 Consolidated, FY Ends Mar (RS mn) FY13 (AE) FY14E FY15E FY16E FY17E Revenues EBITDA Margin (%) 6.3% 6.3% 13.8% 17.8% 20.8% Depreciation and Amortization EBIT Interest and Financial Expenses (net) Profit before tax Provision for tax Effective Tax Rate -34.5% 19.6% 25.0% 33.0% 33.0% PAT before MI/ Associate Minority Interest/ Associates Profit after Tax Net Margin -2.9% 1.7% 8.0% 10.6% 13.5% Shares Outstanding EPS Growth (%) NM NM NM 52.5% 46.0% Broadcast & Ent. Model (excl. Indiacast) FY13 (AE) FY14E FY15E FY16E FY17E Revenues EBITDA EBITDA, TV18 Standalone EBITDA, Viacom18 (50% consol.) EBITDA, AETN18 (equity method consol.) EBITDA, ETV News (consolidated FY14 onward) EBITDA, ETV Regional (50% consol.)(consol. FY14 onward) In the above, we note: 1/ Adjustments have been made to TV18 financials for FY13; accordingly AE above refers to analyst-adjusted financials for FY13, 2/ certain break-ups that have been provided above are a result of the judgment of the analyst, and are not provided by the company. We believe our judgment is fairly representative, but do not provide assurance of the same being accurate, 2/ Viacom18 and ETV Entertainment revenues have been consolidated to the extent of 50%; financials under the heads of Viacom18 and ETV Entertainment refer to 100% revenues/ profits of these contributing entities. We note that TV18 Broadcast financials (as reported at broadcasting entity level) are different from other broadcasters in that the company takes the carriage fees out of the marketing and distribution expense line and nets it from the gross subscription revenues, unless it is the case that the carriage fees is higher than gross subscription revenues. For comparison with other broadcasters, the modification required (to the broadcasting and entertainment model is that the carriage fees needs to be placed among expenses. From our broadcasting and entertainment model, and not the consolidated financials above) we need to: 1/ add Indiacast revenues and expenses to the extent of 75%, 2/ reduce net distribution income from expense of Indiacast. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 22

5 Strong trends in net subscription revenues (Rs mn) QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Source: Company report DCF valuation Rs mn, FY Ends Mar FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E Revenues Growth, Revenues NM 14% 15% 15% 15% 14% 13% 12% 11% 10% EBITDA Margin 6% 14% 18% 21% 21% 22% 22% 23% 23% 24% EBIT NOPLAT Add: Depreciation Gross Cash Flow Changes in Net Working Capital Cash Flow From Operations Less: Capex Free Cash Flow Discounted Cash Flow Assumptions for WACC Risk Free Rate 8% Risk Premium 5.50% Beta 1.5 Cost of Equity 16.6% Post-Tax Cost of Debt 7.9% Target Debt-Equity Ratio 1:2 WACC 13.7% NPV Terminal Growth 6.0% Terminal Value PV-Terminal Value Enterprise Value Less: Net Debt 2387 Add: Value of investment (ETV Telugu) 1459 Value of Equity Value of equity per Share (FY14E) 30 Source: Kotak Securities Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 23