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Balaji Telefilms: On the launch-pad?

Oct 18, 2004

Performance Summary
Balaji Telefilms announced its 2QFY05 results during the weekend. While the company has posted a 6% growth in revenues in 2QFY05, margins have tumbled owing to higher costs incurred towards producing new serials. The company, in its management discussion and analysis, has said that these serials are off-air now. The Board has proposed a dividend of Rs 16 per share.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net Sales 428 452 5.8% 874 906 3.7%
Expenditure 202 275 36.5% 436 543 24.6%
Operating Profit (EBDITA) 226 177 -21.6% 438 363 -17.1%
EBITDA margin (%)52.8%39.1% 50.1%40.1% 
Other income 7 15 106.5% 32 22 -32.8%
Interest 0 0 - 0 0 -
Depreciation 17 22 28.2% 32 43 32.2%
Profit before tax216170-21.3%438342-22.0%
Tax 74 57 -22.4% 154 119 -23.0%
Profit after Tax/(Loss) 142 113 -20.7% 284 223 -21.4%
Net profit margin (%)33.3%24.9% 32.5%24.6% 
No. of Shares (m) 10.3 51.5   10.3 51.5  
Diluted earnings per share* 8.8  8.7 
Price to earnings ratio (x) 11.5  11.7 
(* annualised)      

The soap opera leader

Balaji Telefilms is one of the leading television software producers in India. It’s software production spans across four languages i.e. Hindu, Tamil, Telugu and Kannada. The company’s leadership is vindicated by the consistent dominance of the company’s programmes on the Television Ratings Points (TRP) charts. The company already has a rich content library, which has a high re-run value.

What has driven performance in 2QFY05?

Programming hours - On the revival: Balaji’s revenue model comprises basically of two streams – commissioned and sponsored. While the commissioned revenues (approx. 85% of total) involves the delivery of content to broadcasters/channels at assured margins, the sponsored revenues involves the purchasing of time slots by the company on channels for airing its content and then garnering advertisement revenues by sale of ad slots. As is evident from this that the risk in the latter is much higher compared to the former as ad rates may fluctuate significantly depending not only on the quality of the programming content but also on the prevailing macro economic environment.

Revenue mix
 2QFY04% share2QFY05% shareChange
Commissioned programs32876.7%38384.5%16.6%
Sponsored programs10023.3%7015.5%-29.8%

Balaji has managed a 6% improvement in topline on the back increased programming hours – both commissioned (up 8% YoY) and sponsored (up 7% YoY). This coupled with the over 8% YoY improvement in realisations per hour on commissioned programming helped the company improve sales. However, the topline would have had been much better but for the realisations per hour on the sponsored programming front, which registered a decline of 34%, thus adversely affecting the blended realisations for the company during the quarter (down 1%). Here, we would like to point out that while the realisations on the commissioned programming front has been as per our estimates, the fall in realisations for sponsored programmes has been in absolute contrast to our expectations.

Cost of production spoils the operating picture: Operating margins during the quarter fell by nearly 14%, which could be attributed to the sharp escalation in the cost of production of serials and telecast fees owing to the launch of 5 new serials (from 40% of sales to nearly 61%). Also, the cost of production of some of the other serials was on the higher side. This was the primary reason for the fall in operating margins the effect of which trickled down to the bottomline.

… and the bottomline follows: The pressure at the operating level is reflected in the bottomline as well (21% YoY). Further, while the company is virtually debt-free, the depreciation was higher by 28%. This could be attributed to the company’s continued expenditure in the construction of sets/studios and equipments in order to improve production values. The other income for the company more than doubled during the quarter seemingly on the back of higher investments.

What to expect?
It must be noted that Balaji’s programmes continue to dominate the TRP charts. As on October 9, 2004, the company’s programmes dominated the top 15 slots on the TRP charts and 32 of the top 50 programmes in Hindi Cable & Satellite Channels. Further, the company’s programmes together account for over 55% of the programming points of the entire C&S segment. Such high level of success puts Balaji in a comfortable position while negotiating with broadcasters.

At Rs 101, the stock is trading at a P/E multiple of 11.7x annualised 1HFY05 earnings, which implies that the stocks current valuation is at the upper band of our valuation spectrum. However, going forward, with the company having taken various efforts at diversifying into programming for channels other than Star, Sony and Zee (approx. 85% of revenues), we believe that the company should improve upon its performance, with programming hours likely to sustain with an upward bias along with continued strong realisations. Further, we believe that the synergies between Star and Balaji would start to pan out over the next few quarters.

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