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Balaji Tele: Performance TR(i)Ps!

May 23, 2005

Performance summary
Balaji Telefilms continued its disappointing financial performance during the March quarter by reporting a 22% fall in bottomline despite revenues surging by 16% YoY. Operating margins have nose-dived falling by near 15% percentage points! For the full year also, despite a 10% rise in topline, net profits have declined by 26% YoY, which again could be attributed to the poor performance at the operational level. Thus, with this year's performance, the company has recorded two consecutive years of negative growth!

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 468 544 16.2% 1,783 1,967 10.3%
Expenditure 276 401 45.3% 915 1,294 41.4%
Operating Profit (EBDITA) 193 144 -25.5% 868 674 -22.4%
EBITDA margin (%) 41.2% 26.4% 48.7% 34.2%
Other income 22 24 11.3% 62 49 -19.7%
Interest 0 1   0 2  
Depreciation 25 31 23.6% 77 97 25.9%
Profit before tax 189 135 -28.5% 852 624 -26.8%
Tax 66 39 -40.9% 297 211 -29.2%
Profit after Tax/(Loss) 123 96 -21.8% 554 413 -25.5%
Net profit margin (%) 26.3% 17.7%   31.1% 21.0%  
No. of Shares (m) 10.3 65.2   10.3 65.2  
Diluted earnings per share*   5.9     6.3  
Price to earnings ratio (x)   18.1     16.9  
(* annualised)            

The soap opera leader
Balaji Telefilms is one of the leading television software producers in India. It's software production spans across four languages i.e. Hindu, Tamil, Telugu and Kannada. The company's leadership is vindicated by the consistent dominance of the company's programmes on the Television Ratings Points (TRP) charts. This can be gauged from the fact that as on May 7, 2005, the company's programmes dominated the top 12 slots on the TRP charts and 30 of the top 50 programmes amongst Hindi Cable & Satellite (C&S) Channels. Further, Balaji's programmes collectively account for nearly 58% of the total programming points of the entire C&S segment. The company already has a rich content library, which has a high re-run value.

Recently, Star Group picked up a stake in the company thus strengthening their relationship with the television software producer, which we believe is a win-win situation for both the parties concerned. Further, Balaji Telefilms has forayed into the film production arena, seemingly having derived experience from its sister concern, Balaji Films, which has been producing films for sometime now.

What has driven performance in 4QFY05?
Programming hours on the rise…: The company registered a topline growth of 16% YoY during the quarter ended March 2005. This was on the back of a strong 45% YoY growth in programming hours. Both - commissioned (31% YoY) and sponsored (64% YoY) - segments saw impressive growth in terms of programming hours. However, this failed to reflect in its entirety in the revenue growth because the realisations per hour tumbled by 20% during the period, led by the 40% fall in realisations per hour of its sponsored programmes. For the full year, the company has witnessed a 16% YoY growth in total programming hours while its average realisations per hour slipped by 5% YoY.

It must be noted here that commissioned programming (84% of topline in FY05) involves the delivery of content to broadcasters/channels at assured margins, while sponsored revenues involves the purchase of time slots by the company on channels for airing its content and then garnering advertisement revenues by sale of ad slots. As is evident from this, the risk in the latter is much higher compared to the former as ad rates may fluctuate significantly depending not only on the quality of the programming content but also on the macro economic environment.

Production costs play spoilsport: Despite the respectable topline growth, the same did not get reflected in the operating profits as the company was severely hit at the operating level. This was primarily owing to a sharp escalation in its largest operating expenditure - production costs, which formed 92% of total expenses in 4QFY05 compared to 84% in the corresponding period last year. Staff costs also witnessed an unprecedented growth of 78% YoY during the quarter, which saw this cost increasing from 8% of net sales to about 10% in March 2005.

Second consecutive year of de-growth: Led by all of the above, Balaji ended the quarter with a 22% YoY fall and ended the full year with a 26% fall in net profits. It must be noted that this is the second consecutive year in a row that the company has registered de-growth (down 4% in FY04) in bottomline.

What to expect?
At Rs 107, the stock is trading at a price to earnings multiple of 16.9 times its FY05 earnings (about 14 times FY06), which is rather rich for a company like Balaji Telefilms. The full year performance of the company has been below our estimates. While the company's topline growth has been in line with our estimates, it is the high production and telecast costs that have continued to surprise us. Post the results, we would be adopting a more cautious stand on the company going forward. Our cautious approach is also supported by the fact that Balaji Telefilms has ventured into film production, which is a high-risk business. Its previous performance on this front has been rather dismal going by its past releases, albeit through its sister concern, Balaji Films.

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