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UTV software communications: Diversified player! - Views on News from Equitymaster

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UTV software communications: Diversified player!

Sep 1, 2006

Media development in India has taken off in a major way in the past two years with the government showing great interest in the sector by declaring good policies for the sector. The size of E&M (Entertainment & Media) in India is currently estimated at Rs 353 bn and is expected to grow at a CAGR of 19% over the next five years. In this article, we take look at UTV software communication, which is one of the most diversified players in the country. We analyse the company strengths and also its financial performance over the past few years.

Company background
UTV software communications is one of the leading integrated players in the Indian media and entertainment sector. Over the last 16 years, the company has emerged from a TV content producer to an international film co-producer. The company is focused on being an integrated entertainment company with interest in television content production and air-time sales, movie production and distribution, dubbing, ad-film making and post-production services, with a specific thrust on television content and movie production. Beside this the company has an excellent track record of being a leading multi-language, multi-genre media content production house in the country. The company is among the leading corporates of India to have made significant contribution to the corporatisation of various businesses that were previously unorganised, these include motion picture production and distribution, ad-films, airtime sales and syndication.

Key Strengths
Diversified product portfolio: The company is one of the few players to have a diversified product portfolio, which includes television, motion pictures, allied services and broadcasting. This broad portfolio helps the company to spread its risk vertically.

Leader in content production & animation: UTV is India's leading television content player with a library of over 3500 hrs of programming across all genres such as fiction, non-fiction, live events and multi-lingual programming. Its content division has been a pioneer in the content creation. The company is also the largest content provider in South India. Besides this, the company has also made rapid inroads into the marketing of television content through the airtime sales division. Over time, the company has also emerged as India's leading animation player by producing volumes in both traditional and digital format across multiple genres.

The company also ventured into broadcasting with the launch of Hungama TV late in 2004 through United Home Entertainment (UHEL), a company promoted by UTV and its promoters. The channel turned out to be a success with its unique blend of programming. Recently, the company divested its entire shareholding in UHEL to the Walt Disney company at an enterprise valuation of US$ 30.5 m, thus indicating its ability to successfully pull off broadcasting ventures.

Film - Presence across value chain: The company is one of the few in India with a presence across the entire value chain, right from production to distribution and marketing. The distribution network of the company is expanded across the globe. 23% of the total revenues of the company come from international market with a major chunk supposedly contributed by the film division. Its presence across the world helps it bag lucrative distribution rights.

Analysis of the past
If we peep into the past then we will find that in FY03, the total revenues were Rs 949 m, which had increased to Rs 2132 m by FY06, translating into a CAGR of 31%. The company's major revenues came from films, which accounted for 62% of total revenues during FY06. Out of the other, 34% revenues came from the television segment and the remaining 4% from allied services.

On the margins front, higher operating expenses had badly affected the operating margins of the company thereby leading to a shrinkage of 600 basis points during FY06. Net profit margins however did not fall as much owing to an extraordinary income to the tune of Rs 51 m.

FY03 FY04 FY05 FY06
Net sales(Rs m) 949 1125 1768 2084
% growth 19% 57% 18%
PAT 92 47 162 142
%growth -49% 245% -12%
Profitability ratios
EBITDA margins (%) 15% 11% 14% 6%
EBIT margins (%) 11% 8% 13% 6%
Net profit margin(%) 10% 4% 9% 7%

As far as the future plans are concerned, the company is taking steps to increase its revenue base by focusing more on international co-production as well as by capturing regional markets in next six months. Besides this, the company is planning to launch premium 'Home Entertainment' product in Domestic and International markets. Moreover the company is planning to achieve in-organic growth through M&As and JVs

What to expect?
At the current price of Rs 186 the stock is trading at a price to earnings multiple of 25 times its FY06 earnings. The company is making efforts at further diversifying its revenue base by entering into new segments. Building strategic relationships with global players like Walt Disney and News Corp is also a big positive. Having said that, the current valuations seem to be already reflecting those initiatives thus skewing the risk reward ratio towards the former.


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