TV Today: Failing to make ‘headlines’! - Views on News from Equitymaster

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TV Today: Failing to make ‘headlines’!

Jun 17, 2005

Performance Summary
TV Today, an India Today Group company, declared its 4QFY05 results yesterday. The performance continues to disappoint us. The company reported a 30% fall in bottomline on the back of an 8% decline in revenues and a sharp 770 basis points reduction in operating profit margins. The company ended the full year (FY05) on a much more disheartening note. While its topline was lower by 1% YoY in FY05, a sharp 19% fall in operating margins from 43.5% to 24.5% did the biggest damage. The bottomline was lower by 49% for FY05 over that of FY04. The company has declared a dividend of 15% (i.e. Rs 0.75 on face value of Rs 5 per share and dividend yield of 0.8%).

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 428 393 -8.0% 1,402 1,391 -0.8%
Expenditure 260 270 3.7% 792 1,050 32.5%
Operating Profit (EBDITA) 167 124 -26.2% 609 341 -44.1%
EBITDA margin (%) 39.1% 31.4%   43.5% 24.5%  
Other income 19 15 -18.1% 24 74 214.0%
Interest 0 0   12 1 -92.4%
Depreciation 39 42 6.9% 122 159 30.4%
Profit before tax 147 97 -34.0% 499 255 -48.9%
Tax 53 31 -41.8% 178 91 -49.2%
Profit after Tax/(Loss) 94 66 -29.7% 321 164 -48.8%
Net profit margin (%) 22.0% 16.8%   22.9% 11.8%  
No. of Shares (m) 58.0 58.0   58.0 58.0  
Diluted earnings per share* 6.5 4.6   5.5 2.8  
Price to earnings ratio (x)   18.4     29.7  
(* annualised)            

Hindi news genre leader
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 FY05?
Net sales register de-growth: The company continued to disappoint by registering an 8% YoY de-growth in revenues, thus making it the third consecutive month of negative growth for the company. Advertisements are the primary source of revenues for the company as both its news channels are as yet free-to-air (FTA). Further, ‘Aaj Tak’ remains the largest contributor to the company’s revenues as its English news channel has yet failed to make its mark in the industry. We believe that the company’s ad rates could have come under severe pressure in wake of the increasing competition from other Hindi news channels like those of NDTV, DD, Sahara, etc., which have gained market share at the expense of the leader (Aaj Tak).

However, for the full year, the topline growth has been lower by a mere 1%, which could be attributed to the strong 22% YoY growth in 1QFY05 revenues on the back of the election mania in the country (April-May 2004). This is the period when broadcasters reaped windfall gains on their advertising slots, as advertisers competed for slots on news channels to showcase their products to the millions of television viewers who remained glued to their television sets as the election drama unfolded.

(as % of net sales) 4QFY04 4QFY05 FY04 FY05
Employee cost 15.5% 15.9% 14.4% 18.1%
Transmission & production cost 11.8% 13.3% 9.0% 15.2%
Advt. & promotional expenses 6.5% 6.5% 9.8% 10.1%
Other expenses 27.2% 32.9% 23.4% 32.1%

Operating profits tumble: While the topline was lower during the quarter, operating expenses rose by 4% YoY. This impacted the operating margins of the company during the quarter, which fell by 770 basis points. For the full year, the performance was much more disheartening considering that operating margins nearly halved in FY05 over that of FY04! If we delve deeper into the break-up of operating expenses, it can be seen that costs have increased on every front as can be seen in the table above. However, the biggest contributor to the 33% rise in expenditure in FY05 has been the other (administrative) expenses component, which contributed nearly half of the total increase in operating expenses. Transmission & production costs contributed another 33% to the rise in expenditure.

Net profits halve: On the back of the dismal topline and operating level performance of the company, the bottomline witnessed a 30% and 49% YoY fall in 4QFY05 and FY05 respectively. The over 200% rise in other income (though on a small base) negated the impact of a 30% rise in depreciation charges in FY05.

What to expect?
At Rs 84, the stock is trading at a price to earnings multiple of 29.7 times FY05 earnings, which is rather expensive considering the company’s FY05 performance. 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 like NDTV India, the revamped DD News and Sahara Samay. This is further vindicated by the fact that ‘Aaj Tak’ has lost its dominance, as its market share has nearly halved over the last couple of years from near 55% levels in Hindi news.

Though competition is likely to keep TV Today on its toes over the next couple of years, we feel that, despite the loss of market share, in the medium term the company is relatively well placed to face the onslaught of competition in the Hindi news genre on the back of its strong brand value. Its market share should stabilise at around the current levels of about 28% to 30%. Further, if we consider the topline performance of the company over the last couple of quarters, there are clear signs of revenues and operating margins stabilising (see chart above).

Also, considering the growth potential of the television industry and a faster growth of the cable and satellite industry, it wouldn’t be wise to write off the company currently. With India on a strong path, increasing television penetration and growing consumer spending are all pointers to a sustainable strong growth of the Indian advertisement industry. Further, several rapidly growing industries like banking, automobiles, insurance, telecom and pharmaceuticals would increasingly adopt mass advertising medium like television to promote their products and services. It must be noted that television (including C&S) has one of the highest reach amongst the primary media delivery channels.

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.

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