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TV18: Positive signals

Jan 20, 2005

Performance summary
TV18, India's premier news broadcaster and a leading media content provider, reported strong 3QFY05 numbers yesterday after market hours. The company has continued its good performance into the December quarter by registering an impressive topline and bottomline growth. The company also managed to sustain its operating margins at over 50% during the quarter.

Consolidated snapshot...
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net Sales 152 246 62.0% 349 615 76.0%
Expenditure 78 111 41.8% 203 292 43.4%
Operating Profit (EBDITA) 74 135 83.3% 146 323 121.6%
EBITDA margin (%) 48.6% 55.0%   41.7% 52.5%  
Other income - -   - -  
Interest 6 7 30.0% 10 14 35.3%
Depreciation 10 29 206.2% 27 58 120.0%
Profit before tax 59 99 68.3% 109 251 130.0%
Extraordinary items (8) (12)   (28) (26)  
Tax - 5   - 10  
Profit after Tax/(Loss) 51 82 59.7% 81 214 164.8%
Net profit margin (%) 33.6% 33.1%   23.2% 34.9%  
No. of Shares (m) 14.5 16.8   14.5 16.8  
Diluted earnings per share* 14.1 19.4   7.4 17.0  
Price to earnings ratio (x)   11.9     13.5  
(* annualised)            

The business news leader
Television Eighteen (TV18) is India's premier business news broadcaster and a leading media content provider to the jointly branded channel - CNBC-TV 18. TV 18 holds a 90% stake in the channel with the balance with CNBC Asia, which is equally owned by NBC (owned by GE) and Dow Jones. TV 18 provides a variety of content for television programming with its primary focus on delivering capital market and financial news. It's tie-up with CNBC Asia led to the launch of CNBC India, a 24-hour business news and information channel. Further, the company launched India's first ever Hindi language consumer channel – Awaaz – on January 13, 2005. The company also owns a premier business news portal, moneycontrol.com.

What has driven performance in 3QFY05?
Favourable market environment aids topline:  TV18 derives its revenues primarily from its news broadcasting operations (98%) with the balance chipped in by its entertainment and Internet operations. Further, the former consists of advertising and subscriptions revenues. While there is no segregation available of this break-up, as per an agreement with Zee, CNBC would be broadcasted as part of the Zee-Turner bouquet for which the former receives a pre-decided sum as ‘Minimum Guarantee'. This agreement would stay in effect till FY06. Thus, the growth in advertising revenues has seemingly given the prop to the company's topline during the quarter (up 62% YoY) on the back of strong stock market performance. It must be noted here that CNBC-TV18 commands a virtual monopoly in the business news segment, which helps it reap the advantages of favourable industry/market fortunes.

Marked improvement at operating level:  While the topline has registered impressive growth during the December quarter, the company has managed to keep its operating expenditure under control, which has, in absolute terms, increased by 42%. This rise in operating expenditure is seemingly owing to the expenditure incurred pertaining to the launch of its new channel – Awaaz, which commenced operations recently. However, with topline growth outpacing expenses, the operating margins registered an increase of 640 basis points to 55% in 3QFY05. It must be noted that the company has managed to improve his operating performance considerably over the last few quarters (see chart below).

Bottomline follows topline:  On the back of strong topline growth, coupled with a marked improvement in operating margins, the company managed a 60% YoY growth at the PAT level. The relatively slower growth in bottomline as compared to the topline could be attributed to the over 200% rise in depreciation expenses. Further, it must be noted that the company has to share a certain percentage of its revenues with CNBC, which is reflected in the extra-ordinary items table in the results table above.

What to expect?
The company has consistently managed to improve upon its operating margins over the last few quarters, which, we believe would largely be maintained. Further, while currently the company is assured of subscription revenues under minimum guarantee from Zee-Turner until FY06, the company is now contemplating to becoming a pay channel. We reckon this move, when finalised, would provide a big boost to the company's revenues considering the rapid growth of the cable & satellite industry in the country. It must be noted that the channel - CNBC-TV18 - is the most watched business news channel in the country. Further, other moves by the company like the commencement of supply of content to a channel (South Asia World) focused on the NRI community in the US and the launch of a new Hindi channel create optimism regarding the company's performance going forward.

However, while the scenario seems favourable for the company going forward, it is always advisable to consider the flip side also. It must be noted that until recently, CNBC-TV18 enjoyed a major market share (45%) in the business news-broadcasting segment. However, while it is too early to comment on the success of the 24-hour business news channel launched by NDTV recently, it could pose a threat to the current supremacy of CNBC-TV18 consequently affecting the latter's operational performance. Further, while the performance of the company over the last few quarters has to be looked at in the backdrop of a booming stock market scenario, lacklustre activity on this front could prove to be a hitch for the company.

At Rs 230, the stock is trading at a P/E multiple of 13.5 times annualised 9mFY05 earnings, which leaves some room for upside considering our sell limit of 15 times earnings. We had given a BUY call on the stock in June 2004 at Rs 145 with a target of Rs 220, which was breached during December 2004. However, considering the performance/initiatives of the company during the December quarter, the future earnings of the company warrant an upgrade.

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