NDTV: ESOP costs ail bottomline! - Views on News from Equitymaster

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NDTV: ESOP costs ail bottomline!

Jul 19, 2006

Performance summary
NDTV, one of the leading news broadcasters in the country, announced its results yesterday, yet again reporting a poor bottomline performance on the back of high expenses of stock options. However, while consolidated topline has witnessed a strong growth, operating margins have expanded by 4.2%, due mainly to lower employee and administration expenses.

Financial performance (Consolidated): A snapshot…
(Rs m) 1QFY06 1QFY07 Change
Net Sales 405 637 57.1%
Expenditure 373 559 49.9%
Operating Profit (EBDITA) 32 78 140.5%
EBITDA margin (%) 8.0% 12.2%
Other income 10 4 -61.4%
Interest - 1
Depreciation 36 41 14.9%
Profit before tax 7 40 485.4%
Extraordinary income/(expenses) - (110)
Tax 4 13 178.8%
Profit after tax/(loss) before minority interest 2 (82)
Minority Interest 1 4 189.2%
Profit after tax/(loss) after minority interest 1 (87)
Net profit margin (%) 0.2% -13.6%
No. of shares (m) 60.8 60.8
Diluted earnings per share (incl. ESOP cost)* (1.8)
Diluted earnings per share (excl. ESOP cost)* 4.9
Price to earnings ratio (excl. ESOP cost)* 29.9
* On a trailing 12 months basis

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 1QFY07?
Advertising led growth: NDTV's strong topline growth during 1QFY07 can mainly be attributed to strong advertising revenues, wherein the company has roped in 75 first-time advertisers and 175 new brands during the quarter. While the company has not given any specific details, we believe that apart from strong volumes (ad space sales), higher relations have also affected the strong growth in topline during the quarter. Further, the quarter also saw NDTV launch a 24-hour news channel in Indonesia, in partnership with Astro, a leading media group in the Southeast Asian region. As indicated, the company will be launching a similar channel in Malaysia by 3QFY07, thus spreading its reach across the region, which has a vast Indian population.

Lower employee costs aid margins: Apart from the strong growth in topline, lower employee and administrative costs have helped NDTV improve its operating margins from 8% in 1QFY06 to over 12% in 1QFY07. Employee costs declined from 43.5% of sales in 1QFY06 to 36.4% of 1QFY07 sales (see table above). It is important to note that NDTV has given huge salary hikes to its employees during the previous fiscal, as a retention measure to counter poaching from competitors. The reduction in employee costs in 1QFY07 is thus only a return to 'normalcy'.

(as % of net sales) 1QFY06 1QFY07
Transmission & production cost 19.0% 20.5%
Employee cost 43.5% 36.4%
Advt. & promotional expenses 10.6% 14.1%
Administrative expenses 19.0% 16.9%
Total 92.0% 87.8%

Bottomline crashes: Despite the sharp expansion in operating margins, NDTV has yet again reported a quarterly loss. This has been on the back of Rs 110 m costs of stock options that have been expensed in this quarter.

What to expect?
At the current price of Rs 148, the stock is trading at 29.9 times its trailing 12-months earnings (excluding ESOP costs). The strong topline growth and margin expansion has not comes as a surprise to us, as we have already factored in the same in our estimates for the company.

We had recommended a 'Sell' on the stock in December 2005. The stock has declined around 24% since then. Going forward, competition would be the biggest threat to NDTV's prospects. However, 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 on the company's growth prospects. On a balance, however, while we are certain that margins would revert back to higher levels in the future, current valuations still do not leave much on the table for investors.

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