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Pritish Nandy: Will diversification pay? - Views on News from Equitymaster

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Pritish Nandy: Will diversification pay?

Nov 28, 2001

Pritish Nandy Communication (PNC), a media company promoted by leading journalist Mr. Pritish Nandy, made its debut in the capital market last year. The company raised Rs 400 m from its IPO primarily to fund its theme centers, creation of events for telecast on television channels and pump money into its core business of content production for the small screen. The company’s financial projections went haywire in FY01. As against a projected net profit of Rs 98 m for FY01, actual net profit was to the tune of Rs 46 m, a shortfall of 53%. The performance took a turn for the worse in 1QFY02 which showed a drop of 40% in net profit over the corresponding quarter last year. The drop in performance of the company compared to its projected profit was mainly due to non-materialisation of marketing contract for Sydney Olympics. The company was relying heavily on this contract. Besides, unviable economics with state owned Doordarshan (DD), the preferred broadcaster of the company, also added to its woes. Following this, the company tried to diversify its operations and get its act right, which is partly reflected in the half yearly performance.

(Rs m) 1HFY01 1HFY02 % change FY01 FY01 % Change
        (Actual) (Projected)  
Sales 49 45 -7.9% 134 493 -72.8%
Other Income 6 15 NA 22 16 39.3%
Expenditure 40 45 13.3% 102 386 -73.6%
Operating Profit (EBDIT) 9 0 -101.1% 32 107 -69.9%
Operating Profit Margin (%) 18.5% -0.2%   24.0% 21.7%  
Interest (net) 1 0 -91.1% 3 0  
Depreciation 1 1 75.8% 1 5 -71.8%
Profit before Tax 13 14 6.8% 50 118 -57.3%
Tax 0 0 NA 4 20 -80.1%
Profit after Tax/(Loss) 13 14 6.8% 46 98 -52.6%
Net profit margin (%) 26.8% 31.1%   34.6% 19.8%  
No. of Shares 7.9 10.5   10.5 10.5  
Diluted Earnings per share* 6.7 5.4   4.4 9.3  
P/E Ratio   5.6        
(*annualised)            

Following severe pressure on its business model, the company diversified into film production business. The company’s first Hindi production ‘Kuch Khatti Kuch Meethi’ didn’t perform too well on the box office. Two International films have already been completed and are scheduled for launch shortly. A film directed by Nagesh Kukunoor, 'Bollywood Calling' has already been released and has met with good initial response. On the cards is a series of films, to be directed by first time filmmakers in association with Mahesh Bhatt and Vishesh Films. The company's wellness place "Moksh" has became operational and that should contribute to the company's revenues in the coming quaters.

At the current market price of Rs 30, the stock is trading at a steep discount of more than 81% to its IPO market price of Rs 155 per share i.e. an erosion of Rs 1.3 bn in market capitalisation. The company’s balance sheet for FY01 is qualified by the auditor's on several important issues. Further, the performance of the company is expected to be volatile given its increasing presence in the film production business. All the businesses in which the company has ventured into are relatively new and attach comparatively high degree of risk to it. Whether the company is able to turnaround and live up to shareholder's expectations would depend on the success of these ventures. The company currently quotes at around 6x its 1HFY02 annualised earnings.


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