TV Today: Competition blues

Performance summary

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TV Today, an India Today Group company, continued to disappoint on its financial performance front. The company declared its 3QFY05 results yesterday wherein it has registered a sharp decline in operating margins and net profits. The company's topline has also declined in the quarter. However, the only silver lining in this December quarter result is the fact that the company has bounced back from its losses in the previous quarter (2QFY05).

(Rs m)	3QFY04	3QFY05	Change	9mFY04	9mFY05	Change
Net Sales	415	385	-7.2%	974	997	2.4%
Expenditure	231	278	20.6%	538	780	45.1%
Operating Profit (EBDITA)	184	107	-42.0%	437	217	-50.2%
EBITDA margin (%)	44.4%	27.8%		44.8%	21.8%
Other income	1	13	892.3%	5	58	1142.6%
Interest	1	0	-80.0%	12	1	-94.1%
Depreciation	28	41	46.0%	77	117	51.6%
Profit before tax	157	79	-49.7%	352	158	-55.2%
Tax	56	31	-44.3%	126	60	-52.4%
Profit after Tax/(Loss)	101	48	-52.7%	227	98	-56.7%
Net profit margin (%)	24.4%	12.4%		23.3%	9.8%
No. of Shares (m)	48.0	58.0		48.0	58.0
Diluted earnings per share*	8.4	3.3		6.3	2.3
Price to earnings ratio (x)		26.7			39.0
(* annualised)

Hindi news genre leader

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TV Today, the owner of the two news channels, 'Aaj Tak' (Hindi) and 'Headlines Today' (English), is a leading news broadcaster in India. 'Aaj Tak' (launched over 4 years back) continues to remain amongst the most popular news channel in the country and there is little doubt in the company's claim that it has changed the way news is delivered to Indian audiences. While 'Aaj Tak' delivers news in Hindi, reaching out to the large Hindi belt constituting approximately 52% of India's urban population as per National Readership Study 2002, the English news channel, 'Headlines Today', is primarily targeted at the urban audience.

What has driven performance in 3QFY05?

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Net sales disappoint: Considering the fact that the company has a large and diversified base of advertisers on its channels and has long-term contracts with many of these, the fall in topline (down 7% YoY) during the quarter continues to baffle us. It must be noted here that advertisements are the primary source of revenues for the company's two channels and as such, competition from the plethora of news channels, which have been launched in recent times, seems to have affected the bargaining power of the company. Further, its English news channel, which has failed to make its mark in the industry as yet, also seemingly continues to affect the overall financial performance of the company.

On the subscriptions front, while both the news channels of TV Today are free-to-air currently, the company had expressed its intentions earlier of becoming a pay channel once CAS is in place. However, as yet, there has been no progress on either front – pay channels and CAS. Also, the company had expressed intentions of venturing into international markets like the US and the UK, in an effort to tap the huge Indian population residing in these countries. However, as yet, there has been no further announcement by the company in this regard.

Operating profits tumble: The total expenditure during the quarter has witnessed a YoY rise of 21% despite the fall in topline thus denting the operating margins severely. These have fallen from over 44% to under 28%, which has consequently led to a 42% fall in operating profits. While the transmission & production costs and promotional expenses have been under check, employee costs continue to surge as they increased by 35% during 3QFY05 over the corresponding quarter last year. Other expenses have also increased by 46% and this includes expenses incurred by the company on account of implementation and stabilization of new look of its Hindi channel – Aaj Tak, seemingly a step in response to the increasing competition.

Net profits halve: On the back of the dismal topline and operating level performance of the company, the bottomline has witnessed a 53% fall. The near 900% rise in other income (on a very small base) has negated the impact of a 46% rise in depreciation charges.

What to expect?

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At Rs 88, the stock is trading at a price to earnings multiple of 39.0 times 9mFY05 annualised earnings. TV Today is primarily a news broadcasting company with ad revenues forming almost its entire topline. While 'Aaj Tak' has managed to clinch the Best News Channel award in the last 3 consecutive years, the channel has been consistently under pressure from the launch of competing channels.

It must be noted that significant competition has cropped up in the news segment with the entry of Hindi news channels like Sahara Samay and NDTV India. Even DD News has undergone a revamp and is now a stronger contender in the Hindi news genre. All this has forced TV Today to compete harder and spend more in order to maintain its already deteriorating market share. Just to put things in perspective, 'Aaj Tak' has lost its clear dominance, which can be gauged from the fact that its market share has nearly halved over the last couple of years from near 55% levels in terms of Hindi news viewership.

Though competition is likely to intensify going forward, we feel that in the medium term, the company is relatively well placed to face the competition in the Hindi news genre on the back of its strong brand value and its style of delivering news and its market share should stabilise at around the current levels. However, investors should keep in mind the relatively higher risk profile of the stock owing to lack of diversification, as well as the company's reliance on only one channel (Aaj Tak) for revenues, until Headlines Today starts to contribute effectively to the company's overall performance.