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Balaji Telefilms: The show continues
Jan 31, 2006

Introduction to results
Balaji Telefilms, a leading television content provider in the country, reported decent results for the third quarter ending December 2005. The company has reported a 35% YoY growth in topline for the quarter. While the operating margins have witnessed some pressure (down 380 basis points), the bottomline growth has outpaced that of the topline owing to significantly higher other income component and lower effective tax outgo as compared to the corresponding quarter of the previous fiscal.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net Sales 517 700 35.3% 1,423 2,035 42.9%
Expenditure 350 500 42.8% 893 1,346 50.6%
Operating Profit (EBDITA) 167 199 19.6% 530 689 30.0%
EBITDA margin (%) 32.3% 28.5%   37.2% 33.9%  
Other income 4 50 1288.6% 25 75 196.9%
Interest 0 0 -81.5% 1 0 -56.4%
Depreciation 24 43 82.1% 66 113 70.9%
Profit before tax 147 207 40.9% 488 650 33.1%
Tax 53 60 13.7% 172 209 21.5%
Profit after Tax/(Loss) 93 146 56.3% 316 441 39.5%
Net profit margin (%) 18.1% 20.9%   22.2% 21.7%  
No. of Shares (m) 10.3 65.2   10.3 65.2  
Diluted earnings per share*         8.3  
Price to earnings ratio (x)         20.9  
(* trailing 12-months)            

What is the company’s business?
Balaji Telefilms is one of the leading television software producers in India. Its software production spans across four languages i.e. Hindi, Tamil, Telugu and Kannada. The company’s leadership is vindicated by the consistent dominance of its programmes on the Television Ratings Points (TRP) charts. This can be gauged from the fact that as on January 21, 2006, the company’s programmes dominated 19 of the top 20 programmes amongst Hindi Cable & Satellite (C&S) Channels. Further, Balaji’s programmes collectively account for nearly 55% of the total programming points of the top 150 programmes in the C&S segment! The company already has a rich content library, which has a high re-run value. Star Group has a 26% stake in the company.

What has driven performance in 3QFY06?
Programming hours – holding on: Continuing to report a healthy topline growth, Balaji Telefilms reported a 35% YoY growth in net revenues for the quarter. This growth was a factor of an increase witnessed not only in the company’s programming hours but also its blended realisations per hour on a YoY basis. In 3QFY06, while sponsored programming hours grew by 23% YoY, that of the commissioned programming segment witnessed a growth of 10% YoY. However, in the case of the former, realisations per hour took a knock and were down by over 17% YoY as compared to those of the commissioned programmes wherein realisations per hour rose 23% YoY.

It must be noted here that though in terms of the number of hours, both these segments are neck-to-neck, as far as their contribution to the total revenues is concerned, commissioned programming plays the deciding role. To put this in perspective, commissioned programming contributes to over 80% of net sales, which is owing to the fact that the realisations per hour in this segment are as high as Rs 2.1 m compared to a mere Rs 0.3 m per hour for sponsored serials.

Operating margins decline: Despite the fact that the various operating heads of the company i.e. production costs, staff costs and other expenditure, all declined as percentage of net sales, and also the fact that the topline growth has been robust, the same did not get reflected in the operating profits owing to a sharp decrease in stocks, which ate into the operating margins.

Other income saves the day: Though the bottomline growth has registered a 56% YoY growth in bottomline, it must be noted that this is a bit inflated. This is because a huge spurt in the other income component (Rs 50 m in 3QFY06 as compared to Rs 4 m in 3QFY05) has come to the rescue of the company in the December quarter. While part of this benefit was nullified by the 82% YoY rise in depreciation charges, part of it flowed through to the bottomline.

Performance over the last few quarters…
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Net sales (% YoY growth) 1.7% 5.8% 17.4% 16.2% 39.6% 55.0% 35.3%
Operating margins (%) 41.0% 39.1% 32.3% 26.4% 32.6% 40.3% 28.5%
Production costs (as % of sales) 52.4% 60.7% 67.7% 67.4% 51.7% 49.9% 55.5%
Net profit (% YoY growth) -22.1% -20.7% -36.4% -21.8% 13.6% 50.8% 56.3%
Net profit margins (%) 24.3% 24.9% 18.1% 17.7% 19.8% 24.3% 20.9%

What to expect?
At Rs 173, the stock is trading at a price to earnings multiple of 15.1 times our estimated FY08 earnings, which we believe is rich. Further, considering the fact that Balaji Telefilms has ventured into film production, which is a high-risk business, makes us all the more wary of the company at the current valuations. Further, with other programmes on Star, which are not from the Balaji stable making their presence felt, the programming environment would only get tougher from hereon.

However, it must be noted that the company has shown some kind of consistency in the recent quarters, which inspires confidence. Moreover, despite losing some prominence in the TRP (television rating points) rankings in the Top 50 category over the last few quarters, the company continues to command a lion’s share (55%) of the total TRPs in the top 150 programmes in the C&S segment. Nonetheless, at the current juncture, valuations do not leave any margin of safety on the table for investors.

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