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Balaji Tele: Good show
Oct 28, 2005

Introduction to results
Balaji Telefilms continued to improve upon its performance during the September quarter by registering the strongest topline growth in recent times. It must be noted that after four consecutive quarters of registering a YoY decline in profits in FY05, Balaji Telefilms had reported a positive growth in the quarter ending June 2005. Coming back to the September quarter, while there was some easing of pressure witnessed on the operating margins front, the bottomline grew at a tad slower pace than the topline owing to significantly higher depreciation charges.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 452 701 55.0% 906 1,335 47.3%
Expenditure 275 419 52.0% 543 845 55.7%
Operating Profit (EBDITA) 177 283 59.7% 363 490 34.8%
EBITDA margin (%) 39.1% 40.3%   40.1% 36.7%  
Other income 15 13 -16.1% 22 25 14.5%
Interest 0 0 -37.3% 0 0 -28.2%
Depreciation 22 37 66.2% 43 71 64.8%
Profit before tax 170 259 52.2% 342 443 29.8%
Tax 57 89 54.8% 119 148 25.0%
Profit after Tax/(Loss) 113 170 50.8% 223 295 32.4%
Net profit margin (%) 24.9% 24.3%   24.6% 22.1%  
No. of Shares (m) 10.3 65.2   10.3 65.2  
Diluted earnings per share*   10.4     9.1  
Price to earnings ratio (x)         13.8  
(* annualised)            

What is the company’s business?
Balaji Telefilms is one of the leading television software producers in India. Its software production spans across four languages i.e. Hindi, Tamil, Telugu and Kannada. The company’s leadership is vindicated by the consistent dominance of its programmes on the Television Ratings Points (TRP) charts. This can be gauged from the fact that as on October 15, 2005, the company’s programmes dominated 16 of the top 20 programmes amongst Hindi Cable & Satellite (C&S) Channels. Further, Balaji’s programmes collectively accounted for nearly 52% of the total programming points of the entire C&S segment! The company already has a rich content library, which has a high re-run value.

Recently, Star Group picked up a stake in the company, thus strengthening their relationship with the television software producer, which we believe is a win-win situation for both the parties concerned. Further, Balaji Telefilms has forayed into the film production arena, seemingly having derived experience from its sister concern, Balaji Films, which has been producing films for sometime now.

What has driven performance in 2QFY06?
Strong topline: As mentioned above, Balaji continued its strong performance by reporting a YoY topline growth of 55% during 2QFY06. This was on the back of a 37% and 13% YoY growth in programming hours and average realisations per hour during the quarter. Both the commissioned and the sponsored programming hours registered strong growth of 27% and 48% respectively during the quarter. However, while realisations per hour improved by 25% YoY for commissioned programming, the same were lower by 10% in the case of the latter. The rise in commissioned realisations per hour was because during the quarter, the company has hiked the rates of some of its serials on Star Plus based on their Television Ratings Points (TRPs).

It must be noted that while commissioned programmes contributed 87% of the revenues during 2QFY06, the scenario is a little different when one considers the 1HFY06 picture. This is because Balaji Telefilms had produced a film, which has contributed about 6% to the company’s topline in 1HFY06, thus lowering the share of commissioned programming in total revenues to 81%.

Up tick in operating margins: Apart from the strong topline growth, a 120 basis points improvement in operating margins helped the company notch a 60% YoY growth in operating profits. It must be noted that since the cost of production and telecast fees is the single largest operating head in case of Balaji Telefilms, it is this operating head that plays the deciding factor for Balaji’s operational performance (see table below).

Over the last few quarters
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Net sales (% YoY growth) 1.7% 5.8% 17.4% 16.2% 39.6% 55.0%
Operating margins (%) 41.0% 39.1% 32.3% 26.4% 32.6% 40.3%
Production costs (as % of sales) 52.4% 60.7% 67.7% 67.4% 51.7% 49.9%
Net profit (% YoY growth) -22.1% -20.7% -36.4% -21.8% 13.6% 50.8%
Net profit margins (%) 24.3% 24.9% 18.1% 17.7% 19.8% 24.3%

Bottomline gallops: The effect of all the positive developments above led to the 51% YoY jump in bottomline during the quarter. The slower growth in profits vis-ŕ-vis its topline could be attributed to a significant 66% YoY increase in depreciation charges, as the company continues to invest in production/post-production equipments and construction of state-of-the-art studios in order to meet the increased programming requirements and further improve the quality of programming. The tax incidence remained largely unchanged.

What to expect?
The company’s 1HFY06 performance has been largely in-line with our estimates across parameters i.e. topline, operating margins and net profits and thus we will not be making any significant changes to our full year estimates. At Rs 125, the stock is trading at a price to earnings multiple of 11.2 times our estimated FY08 earnings, which we believe is a fair valuation for a company like Balaji Telefilms, whose track record has not been too impressive and has been mired with volatility.

Further, considering the fact that Balaji Telefilms has ventured into film production, which is a high-risk business, makes us all the more wary of the company at the current valuations. To put things in perspective, though Balaji Telefilms has tasted success with the launch of its firm film, the second launch during 2QFY06 seemingly has not gone down well with the audience. Further, with other programmes on Star, which are not from the Balaji stable making their presence felt, the programming environment would only get tougher from hereon.

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