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NDTV: Means business!

Jan 18, 2005

Performance summary
NDTV has continued to tread along smoothly on its path to profitability. The company announced its 3QFY05 results late yesterday wherein it posted a positive bottomline as compared to losses in the corresponding quarter of the previous year. Strong topline growth along with significant improvement in operating margins has helped the company deliver this performance.

Financial performance (Consolidated): A snapshot…
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net Sales 238 524 120.3% 412 1,273 208.7%
Expenditure 276 324 17.7% 790 894 13.2%
Operating Profit (EBDITA) (38) 200 (377) 379
EBITDA margin (%) -15.9% 38.1% -91.6% 29.7%
Other income 5 8 46.0% 20 29 45.1%
Interest 3 0 -96.0% 4 6 36.8%
Depreciation 26 31 21.5% 87 92 5.7%
Profit before tax (61) 176 (448) 310
Tax 12 23 93.7% 33 48 48.9%
Profit after Tax/(Loss) before minority interest (73) 153 (481) 262
Minority Interest - 4 - 8
Profit after Tax/(Loss) after minority interest (73) 149 (481) 253
Net profit margin (%) -30.6% 29.1% -116.7% 20.6%
No. of Shares (m) 42.1 60.8 42.1 60.8
Diluted earnings per share* (6.9) 9.8 (15.2) 5.7
Price to earnings ratio (x) 14.3 24.4
(* annualised)

What is the company's business?
NDTV is one of India's leading broadcasters and producers of news and current affairs programmes. Since its inception in 1988, NDTV produced television news and current affairs programmes for various channels. However, in April 2003, the company simultaneously launched two news channels - NDTV 24X7 (English) and NDTV India (Hindi). Further, the company has launched its business news channel – NDTV Profit – on January 17, 2005. Thus, the company's primary business has changed from production of television software for other broadcasters a couple of years ago to television news broadcasting through its own channels.

What has driven performance in 3QFY05?
Advertisement revenues drive topline: NDTV's topline has surged YoY by over 120% in the quarter ending December 2004. Strong growth in advertisement revenues is the key factor in propping up the topline, as this remains the primary source of revenue for the company. It must be noted that the company has consistently managed to ramp up its advertiser base over the last few quarters, which is aiding it in garnering a significant pie of the incremental advertising spending. While the latest count on the number of advertisers on its channels is not available as yet, it must be noted that this had increased from a mere 63 during 1QFY04 to over 500 at the end of 2QFY05. This feat has been possible as its English channel (NDTV 24X7) continues to remain the market leader in the English news segment and its Hindi news channel (NDTV India) has been providing stiff competition to the market leader, Aaj Tak, in the Hindi news segment.

Lower transmission and production costs aid margins: Margins have witnessed a sharp turnaround in 3QFY05 to over 38% as compared to negative operating margins (-16%) in the corresponding quarter of the previous year. A substantial fall in transmission and production costs (as a % of net sales) and a significant reduction in employee expenses helped the company at the operating level. It must be noted that these two expenditure heads account for nearly three-quarters of the company's total operating expenditure.

Improving bottomline: NDTV has continued its profitable journey into 3QFY05 and has declared a profit of Rs 149 m compared to Rs 73 m loss in the corresponding quarter last year. With this, the company's PAT for 9mFY05 is at Rs 253 m and the company is all set to report profits on a full year basis for FY05. It must be noted that for FY04, the company had registered a loss of Rs 500 m. Improved viewership and higher ad revenues has helped the company achieve this turnaround.

What to expect?
At Rs 140, the stock is trading at a price to earnings multiple of 24.4 times its 9mFY05 annualised earnings. With advertisements forming the primary source of revenue for the company, the consistent increase in advertisers' base (since the company turned broadcaster) is a heartening sign. Further, now with the company having launched its 24-hour business news channel, it will have a foothold in the business news segment where CNBC-TV18 has enjoyed a virtual monopoly since the last many years. This move by the company, which is targeted at an altogether different class of viewers, should help it in widening the advertiser base. The track record of the company in competing in the English and Hindi news segments supports this optimism.

However, apart from the current valuations, which look rich from the near-term perspective, the relatively higher risk profile of NDTV has to be kept in mind owing to its lack of diversification. Though competition is likely to keep the company on its toes, in the medium term, it seems well placed to face the competition in the industry on the back of its strong brand value and its style of delivering news through its well known team of journalists/anchors. Further, a couple of triggers that could work in favour of the stock are any changes at the policy level, which entail a hike in FII investment limit in news broadcasting companies, and the company opting to provide its channels on a subscription basis, which could open another significant stream of revenue for the company.

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