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NDTV: Breaking news! - Views on News from Equitymaster
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NDTV: Breaking news!
Jul 19, 2005

Introduction
NDTV, one of the leading news broadcasters in the country, announced its results late yesterday, which was breaking news in the true sense! The results have been mixed considering that while the topline has managed to hold ground, the bottomline has collapsed. Pressure at the operating level has led to the company reporting such a dismal performance.

Financial performance (Consolidated): A snapshot…
(Rs m) 1QFY05 1QFY06 Change
Net Sales 399 405 1.5%
Expenditure 280 373 33.4%
Operating Profit (EBDITA) 120 32 -73.0%
EBITDA margin (%) 29.9% 8.0%  
Other income 6 10 66.4%
Interest 5 -  
Depreciation 29 36 23.4%
Profit before tax 92 7 -92.6%
Tax 13 4 -66.0%
Profit after Tax/(Loss) before minority interest 79 2 -97.0%
Minority Interest 3 1 -45.8%
Profit after Tax/(Loss) after minority interest 76 1 -98.9%
Net profit margin (%) 19.8% 0.6%  
No. of Shares (m) 60.8 60.8  
Diluted earnings per share* 5.0 0.1  

What is the company’s business?
NDTV is one of India’s leading broadcasters and producers of news and current affairs programmes. Since its inception in 1988, NDTV produced television news and current affairs programmes for various channels. However, in April 2003, the company simultaneously launched two news channels - NDTV 24X7 (English) and NDTV India (Hindi). Further, the company has launched its business news channel – NDTV Profit – in January 2005. NDTV has also filed an application with the Ministry of Information & Broadcasting (I&B) for permission to uplink its proposed new channel, the details of which are as yet not available. Thus, the company’s primary business has changed from production of television software for other broadcasters a couple of years ago to television news broadcasting through its own channels.

What has driven performance in 1QFY06?
Topline holds: At first look, NDTV’s topline has registered a meager growth of under 2% during the quarter ending June 2005 over the corresponding quarter of the previous year. However, it must be noted that the June quarter of 2004 was a very active one considering that two very key events dominated Indian television households in the period – one was the General Elections and the other was the Indo-Pak cricket series. These are the times when consumers are glued to their television sets, thus helping broadcasters to reap significant advantages in terms of higher ad rates. As per the company, if one were to compare the two quarters (June 2005 over June 2004) on a more like-to-like basis, the growth in advertisement revenues, which remains the primary source of revenue for the company, during 1QFY06 has been a decent 20% YoY.

It must be noted that the company has consistently managed to ramp up its advertiser base over the last few quarters, which is aiding it in garnering a significant pie of the ad spend in the country. While the latest count on the number of advertisers on its channels is not available as yet, it must be noted that as per the company press release, 72 new clients were added during the quarter. This feat has been possible as its English channel (NDTV 24X7) continues to remain the market leader in the English news segment with approximately 40% market share and its Hindi news channel (NDTV India – 20% market share) has been providing stiff competition to the market leader, Aaj Tak, in the Hindi news segment.

(as % of net sales) 1QFY05 1QFY06
Transmission & production cost 19.3% 19.4%
Employee cost 29.8% 43.7%
Advt. & promotional expenses 5.7% 10.6%
Administrative expenses 15.2% 18.3%
Total 70.1% 92.0%

Operational blues: Margins have collapsed in 1QFY06 to 8% from a high of 38% in 3QFY05 and from 30% in the same quarter last year (see chart). The culprit was a sharp 49% YoY increase in employee costs during the quarter, which increased from 30% of net sales to 44% of net sales (see table above). It must be noted that this operating head contributed the biggest chunk to the total operating expenses at 48% in 1QFY06 (43% in 1QFY05). Advertisement and promotional expenses, which contributed to 8% of the total operating expenses of the company in June 2004, increased 90% YoY in June 2005 making a corresponding impact as percentage of net sales (see table above). While the latter seems a factor of increased competition in the television news space, the former is seemingly a repercussion of the need to retain key employees in times of intensifying competition for talent.

Bottomline crashes: A muted topline growth and a dismal performance at the operating level led to the company reporting negligible profits during the quarter, which were lower by 99% YoY. The net profit margins fell to below 1% from 20% in the same quarter last year.

What to expect?
The NDTV stock is currently trading at Rs 242, and considering the 1QFY06 annualised EPS, the price to earnings multiple would not make any sense. However, one thing can certainly be said about the company’s performance during the quarter that it has been way below our expectations and this will definitely make a considerable adverse impact on the financial estimates for the company going forward.

Going forward, while competition would be the biggest threat to NDTV’s prospects, considering that its channels – NDTV 24X7 and NDTV India – have made their mark in the television news genre and NDTV Profit too doing well, we remain positive about the company’s business and its growth prospects over the next 2 to 3 years. Further, with the company having gone paid with two of its channels – NDTV 24X7 and NDTV Profit – contribution from subscriptions can be expected to start contributing to the overall revenues. Further, going forward, while we are certain the margins would revert back to higher levels, the current valuations of the stock do not leave much on the table for an investor.

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