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Balaji FY01: Read between the lines

Jun 29, 2001

The net profit growth for Balaji Telefilms in FY01 has been flat compared to 143% growth in revenues. However, this was because the company changed its method of accounting with respect to write off of its serials' production costs. Previously, the company used to write off 60% of its production cost on sponsored programs, while the balance 40% was written off over a period of 3 years. This was viewed negatively by investors and analysts. The company has now changed the method of accounting and has provided for entire production expenses in the year in which it is incurred.

(Rs m)FY00FY01Change
Sales 201 489 143.3%
Other Income 1 81359.4%
Expenditure 134 412 207.6%
Operating Profit (EBDIT) 67 7614.3%
Operating Profit Margin (%)33.3%15.6%
Interest 5 7 37.7%
Depreciation 1 3 230.4%
Profit before Tax 62 7420.7%
Extraordinary Expenses (7) (17)
Tax 12 14 21.7%
Profit after Tax/(Loss) 43 431.0%
Net profit margin (%)21.3%8.9%
No. of Shares (eoy) (m)1.010.3 
Diluted Earnings per share42.94.2 
P/E (at current price)4.949.7 

The profit for the year would have been higher by Rs 53.5 m but for this change in accounting policy, which would have resulted in a net profit growth of 126%. This is marginally above market expectations of 117% growth in net profit.

Balaji Telefilms continues to maintain its niche in providing high quality, multi-lingual content which has helped in creating a strong bargaining power for the company. Balaji has 4 out of the top 10 serials on air, in all C&S (cable and satellite TV) homes. The company's most popular soap 'Kyunki Saas…' tops the TRP chart with a rating of 12.5 in June 2001.

The company's weekly programming output of 31.5 hours across 10 different channels compares favourably with other prominent content providers. The revenue mix of the company is changing in favour of commissioned programs, which are expected to account for around 45-50% of the total revenues. The company earns assured margins of around 35% on commissioned programs but has to part with the IPR of the content. Apart from Hindi, other linguistic soaps of the company also figure in the top TRP list.

The company has been re-negotiating terms with Star TV for a favourable price so as to continue airing its soaps on the channel. Balaji Telefilms has also lined up three prime time shows and an afternoon-band soap. It is in the process of making a soap on behalf of Sony TV which is expected to be aired from August. Balaji already has a rich content library of around 1,800 hours. The company can utilise this library by re-adapting and re-making its successful Hindi serials in other regional languages (where it has a strong presence) with lower extra cost.

In a related development, Balaji Telefilms recently called off its merger with Nine Network Entertainment (NNE). The merger would have enabled Balaji to become a preferred vendor to DD Metro’s Nine Gold, supplying atleast 7 hours of television software every week on prime time slots. However, with Channel Nine finding it difficult to renew its contract with Doordarshan for the prime time slot it didn’t make sense for Balaji to part with 20% stake to NNE. This news was taken positively by the market.

Balaji remains amongst the highest margin mopper in the industry. The operating margins may inch up a bit further, as utilisation of IPO funds is likely to result in cost savings. However, the company's diversification in the past into areas like event management and film production remain a cause for concern. The company needs to maintain its content quality to maintain its leadership position in the industry.

At the current market price of Rs 209, the stock is trading at 50 times its FY01 earnings. The sudden jack up in the P/e multiple is because of the change in accounting policy. Though on one hand the conservative approach adopted is for the better, in the immediate term the stock might see a de-rating.

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