Cinevista Communications was one of the hot IPOs in one of the hot sectors viz. media. The company managed to draw an amount of over Rs 750 m in February 1999. The stock however currently quotes at Rs 255, almost 15% below the issue price. Why has this happened?
The company is a content provider and has made soap operas including ‘Katha Sagar’, ‘Zindagi’ and ‘Junoon’. All the serials have been made primarily for the state broadcaster Doordarshan (DD) although all the three serials are having their re–runs on Star TV (‘Katha Sagar’ and ‘Zindagi’) and Sony (‘Junoon’).
Here, it is necessary to understand the fee structure on DD. Unlike the satellite channels, DD commissions time slots to various content producers. The highest bidder for the respective slots gets a certain amount of free commercial time, which in turn can be sold to advertisers. (The producer in turn controls the copyright for the programme.)
So for a producer of soap opera producer such as Cinevista, it will the telecast fee (or ‘minimum guarantee’ as the bid price is known in DD’s parlance) which will be a major head of expenditure apart from the production cost of the serials. In certain serials such as mythological serials, the telecast fee can be almost four times the production costs. For soap operas such as Junoon or Zindagi the telecast fee has to be paid every week in advance before the serial is telecast.
Cinevista however merges both the telecast fees and production costs under one head. These amounted to almost 60% of the company’s revenues in FY2000 and 63% of its revenues in FY99. However, the entire actual telecast plus production costs are not written of in the year in which they are incurred but are deferred and capitalised under the head ‘software’ under Fixed Assets. These costs (which we estimate to be at least 40% higher) are written of over the useful life of the serial, which is estimated by the management.
One indication that the company capitalises its operational expenditure can be had from the effective tax rate. (While a company normally writes off the actual expenditure under the Income tax laws and pays a lower tax, this tax amount is used for accounts made under the company law where the company is allowed to capitalise certain expenses. This inflates the real profit.) In Cinevista’s case the actual tax paid in FY99 amounted to only 12% of the pre–tax profit.
One must understand that the world over, content companies make money on the reruns of their programmes. The profits are never high in the year of production. Hence the 22% operating margin that Cinevista had forecast for FY2000 was unrealistic (It actually achieved an operating margin of 15.1%).
In the current year, Cinevista has been able to achieve its projections primarily because of revenues from its rerun of its serials (mentioned above) and the interest income received from the oversubscription amount (56% of pre–tax profit). Almost 55% of its tax paid is also due to the interest income.
The company has however paid 30% tax on its pre–tax profit if one were to exclude both the other income from the pre–tax profit and the tax paid on other income from the total tax paid. This is indicative that some of the expenses of the past have been written of in the current year. The revenue from the reruns has provided the requisite cushion for the profitability ratios.
Even at current levels, the stock still quotes at an earning multiple of 30 times and at a market capitalisation to sales multiple of over 5.8 times.