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Balaji Telefilms: The dominance continues
May 10, 2006

Introduction to results
Balaji Telefilms, the leading television content provider in the country, reported strong March quarter numbers late yesterday, wherein the bottomline growth outpaced the topline growth by a considerable margin, on the back of margin expansion. Thus, considering the good show put up in all the four quarters during the year, Balaji has ended FY06 with a topline and bottomline growth of 43% and 44% YoY respectively. The company has announced a 150% dividend (Rs 3 per share on face value of Rs 2) for FY06, which translates into a dividend yield of 0.9%.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net Sales 544 769 41.3% 1,967 2,804 42.5%
Expenditure 401 522 30.2% 1,294 1,867 44.3%
Operating Profit (EBDITA) 144 248 72.5% 674 937 39.1%
EBITDA margin (%) 26.4% 32.2%   34.2% 33.4%  
Other income 24 12 -49.4% 49 87 75.9%
Interest 1 0 -81.7% 2 0 -74.8%
Depreciation 31 30 -3.8% 97 143 47.1%
Profit before tax 135 230 69.7% 624 880 41.1%
Tax 39 75 91.8% 211 283 34.5%
Profit after Tax/(Loss) 96 155 60.7% 413 596 44.4%
Net profit margin (%) 17.7% 20.2%   21.0% 21.3%  
No. of Shares (m) 10.3 65.2   10.3 65.2  
Diluted earnings per share         9.1  
Price to earnings ratio (x)         19.1  

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 April 29, 2006, the company’s programmes dominated 18 of the top 20 programmes amongst Hindi Cable & Satellite (C&S) Channels. Further, Balaji’s programmes collectively account for nearly 56% 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 4QFY06?
Programming hours – the up-tick continues: Balaji continued its strong performance during the quarter by reporting a YoY topline growth of over 41%. This could be attributed solely to the strong 51% YoY growth witnessed on the commissioned revenues front, as sponsored programming revenues registered a de-growth of 15% YoY. While the former was achieved on the back of 7% higher programming hours coupled with a 42% rise in realisations per hour, a 21% fall in realisations per hour for sponsored serials did the damage in for the latter. Sponsored hours during the quarter were higher by 8% YoY.

It must be noted that while commissioned programmes contributed 90% of the revenues during 4QFY06, the scenario is a little different when one considers the full-year (FY06) picture. This is because Balaji Telefilms had produced a film, which contributed about 4% to the company’s topline, thus lowering the share of commissioned programming in total revenues to 84%, with the balance share belonging to sponsored programming. On the profitability front also, commissioned programmes score over sponsored serials, with the former’s EBIT margins being 47% compared to about 20% for the latter.

Operating margins perk up: Apart from the strong topline growth, a 580 basis points improvement in operating margins from 26% in 4QFY05 to 32% in 4QFY06 helped the company notch a 73% YoY growth in operating profits. It must be noted that since the cost of production and telecast fees is the single largest operating head in case of Balaji Telefilms (73% of total operating expenses in 4QFY06 and 49% of operating sales), it is this operating head that plays the deciding factor for Balaji’s operational performance. However, while the quarter witnessed considerable improvement, the full year saw a marginal (80 basis points) reduction in operating margins.

A good year comes to an end: The effect of all the above filtered down to the bottomline, which grew by 61% YoY during the quarter. This growth was curtailed to the extent that other income was down by 49% during the quarter and the tax incidence was also higher. Nonetheless, it was a good show put up by the company during the quarter and the full year ending March 2006.

Performance over the last few quarters…
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Net sales (% YoY growth) 1.7% 5.8% 17.4% 16.2% 39.6% 55.0% 35.3% 41.3%
Operating margins (%) 41.0% 39.1% 32.3% 26.4% 32.6% 40.3% 28.5% 32.2%
Production costs (as % of sales) 52.4% 60.7% 67.7% 67.4% 51.7% 49.9% 55.5% 48.8%
Net profit (% YoY growth) -22.1% -20.7% -36.4% -21.8% 13.6% 50.8% 56.3% 60.7%
Net profit margins (%) 24.3% 24.9% 18.1% 17.7% 19.8% 24.3% 20.9% 20.2%

What to expect?
The company’s reported FY06 numbers have been exactly in line with our estimates and as such, we would not be making any significant changes to our forward estimates for the company’s earnings. At Rs 175, the stock is trading at a price-to-earnings multiple of 19.1 times its FY06 earnings. Considering that Balaji Telefilms has ventured into film production, which is a high-risk business, this makes us wary of the company at current valuations. It must be noted that while the first release of the company during the year did well, the second one proved to be a drag on the company’s financials. Further, with other programmes on Star and on the TRP charts, which are not from the Balaji stable, making their presence felt, the programming environment would continue to remain challenging.

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 rankings in the Top 50 category over the last few quarters, the company continues to command a lion’s share (56%) of the total TRPs in the top 150 programmes in the C&S segment. Nonetheless, at the current juncture, valuations remain a question mark.

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