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New research report- NDTV Ltd
Nov 28, 2007

Background:
NDTV is a leading news broadcaster promoted by Dr Prannoy Roy, who is among the oldest and the most known faces in TV news broadcasting. It operates the channels ‘NDTV 24x7’, ‘NDTV India’, ‘NDTV Profit’, ‘NDTV Good Times’, ‘NDTV Arabia’, and ‘NDTV Metro Nation’. Its channels enjoy high viewership ratings. Not content with just news broadcasting, the company has embarked upon an aggressive rollout plan where it intends to launch a slew of new channels in the coming months and has tied up with some very high profile names to deliver quality content to the viewers through these new launches

Reasons to buy:
Robust growth of the Indian Entertainment and Media industry: The Indian entertainment and media industry is poised for great times ahead. The industry is expected to grow from Rs 437 billion in 2006 to more than Rs 1 trillion in 2011, implying a CAGR of 18%. Television, which is the largest subsegment of the entertainment and media industry, is expected to grow from the present size of Rs 191 billion in 2006 to Rs 519 billion by 2011, a CAGR of 22% (Source: FICCI PwC report on the Indian entertainment and media industry)

TV advertising market, one of the main growth drivers of TV broadcasting is expected to grow from Rs 66 bn in 2006 to Rs 123 bn by 2011. (Source: Balaji Telefilms Annual Report FY07). The ad spend is a mere 0.4% of the GDP compared to 1.4% in the U S. This is despite the fact India is the second fastest growing economy in the world next only to China and has registered growth rates in excess of 8% in the last two years. Robustness in TV advertising could be gauged from the fact that banks and financial companies, which hitherto sparsely advertised on television, are now even using cricketers and film stars as brand ambassadors. Thus, NDTV by virtue of being one of the leading broadcasters in the country is expected to benefit from such a trend. We expect the standalone entity’s ad revenues to clock a 16% CAGR between FY07 and FY10.

Digitisation- A bonanza in the offing: Digitisation process (rollout of CAS and DTH) would lead to an increase in cable penetration. The average revenue per user (ARPU) in India is very low compared to other developing and developed countries. It is one tenth of that of developed countries and is very low compared to even developing countries. Lifting or an upward revision of price cap on subscription price of a channel by media regulator TRAI and offtake of value added services such as video on demand, gaming would drive the ARPU’s significantly higher.

The share of broadcasters in the total subscription revenue is also low compared to developed nations. However the implementation of CAS will alter this in favour of the broadcasters. The broadcaster’s share in subscription revenues is likely to increase from 15% to 45%.

Impact of CAS on revenue share
  Broadcasters MSOs Local Cable Operator
Pre CAS 15% 5% 80%
Post CAS 45% 30% 25%
Source: Zee Entertainment Enterprises August 2007 presentation

Total television subscription revenues are projected to rise 26% compounded annually to touch Rs. 378 bn in 2011. NDTV could be a major beneficiary of this explosive growth. NDTV’s dependence on advertisement revenues would reduce and would also help it to increase its bottomline.

High quality management: NDTV is the brainchild of Dr Prannoy Roy, (Chairman) who is among the oldest and the most known faces in TV news broadcasting. He has been adjudged the television personality of the millennium by the Indian Express Poll and has also bagged various other prestigious awards. The company has a good team of journalists and editors who have bagged various awards. This talented team is likely to drive the TRP’s of the company, helping it increase its advertisement and subscription revenues. Our confidence stems from the fact that ‘NDTV 24/7’, the group’s flagship channel currently has the highest market share of 23% in the English news segment and ‘NDTV Profit’, a business news channel has a market share of 46% in the 6 key metros.

New initiatives – The menu just got bigger, much bigger: We believe the year 2008 is likely to turn out to be a watershed year in the company’s history as it has a slew of new channel launches up its sleeves. The company is currently offering only news channels. However, the company now plans to offer a slew of channels across genres to capture a larger share of the viewership and advertisement pie. It is launching a Hindi general entertainment as well as niche channels, which would help it to offer a complete bouquet to the viewers and the distributors, thus significantly (MSO’s and the DTH operators) increasing its bargaining power. The ace in the pack is we believe the general entertainment channel (GEC) and the company is leaving no stone unturned in trying to ensure that it turns out to be a huge success.

NDTV has created a separate subsidiary for launching the GEC channel named ‘NDTV Imagine’, expected to be on air by January 2008. The Hindi GEC genre generates annual advertising revenues in the region of Rs 20 bn and the company aims to capture a significant chunk of these revenues. NDTV hopes to capture a market share of 20% within 12-18 months of the launch of the channel. This channel is headed by Samir Nair, the former CEO of Star Entertainment India who is credited with the success of the programme ‘KBC’ and making Star Plus the leading GEC in India. Some other key personnel of Star India have also joined NDTV in key departments of this channel. ‘NDTV Imagine’ has partnered with Karan Johar’s Dharma productions for this venture. Karan Johar has picked up an equity stake in this subsidiary and his company will produce shows for ‘NDTV imagine’. It has tied up with various leading content providers such as Balaji Telefilms for this entertainment channel.

Laid out below are the other new offerings of the company:

Lifestyle channels: It has launched a lifestyle channel ‘NDTV Good Times’ through its subsidiary ‘NDTV Lifestyle Ltd’. It has bagged advertisements and sponsorships from various jewelry and fitness brands and from Vijay Mallya’s UB group. NDTV plans to launch another channel in the lifestyle genre in the next one year.

News channels in foreign countries: NDTV is launching news channels in partnership with Astro Malaysia, a major DTH player. It has launched news channels in Malaysia and Indonesia and has signed a MOU to launch channels in other South East Asian countries. NDTV provides consultancy services to Astro Malaysia for launching these channels and all its costs are reimbursed. Besides this, NDTV does not have to incur any operating expenses and gets a 20% equity stake in these channels.

City centric news channels: A Delhi centric news channel named ‘Metro Nation’ was launched on 28th September. This channel within the first month of its launch has been able to garner very high viewership ratings and has the fourth highest viewership ratings among English news channels in Delhi. This channel telecasts local news such as civic issues, upcoming rock festivals, good restaurants in the Delhi NCR region. NDTV plans to launch similar channels in Chennai and Mumbai in the coming months

Thus, going forward, we expect these new launches, especially the one in the GEC space to play a significant role in driving the market value of the company. As far as our projections are concerned, we expect the company to garner a market share of 15% by FY09 in the GEC space and maintain it over the long-term.

Other businesses may spring a surprise or two: NDTV has also forayed into other areas such as media process outsourcing, development of technology and software solutions for television broadcasting and launching of Internet portals. None of these businesses contribute significantly currently but could gain a critical mass in the future.

International subscription revenues: International subscription revenues could be a major source of revenue for the company in the future. At present, NDTV does not garner any significant amount from international subscriptions. However, rival Zee Entertainment, which has a complete bouquet of channels received Rs 850m in Q2FY08 alone from 4.9 m international subscribers. If NDTV were able to make a successful foray in the Hindi GEC space, then its international subscription revenues would also receive a big boost.

Reasons to sell:
Slowdown in economy: Advertising expenditure is directly related to the economic growth rate. Besides this, ad spends are discretionary in nature. Any slowdown in India’s economic growth would lead to a cut in the ad budgets of various companies. This would adversely affect the advertisement revenues of NDTV.

Slow rollout of CAS: Subscription revenues are expected to be the major growth driver for the television industry as CAS and DTH services are rolled out throughout the country. The number of cable and satellite households as well as the ARPU is expected to increase. Currently, CAS has been implemented in certain areas of the three metros of Mumbai, Delhi, Calcutta and the whole of Chennai. TRAI aims to rollout CAS in a phased manner in 55 cities by 2011. However CAS may not be rolled out as per schedule due to lack of government will, disagreement between various stakeholders and non-availability of set top boxes. Besides this, the penetration of CAS and DTH services in the CAS notified areas of the three metros of Mumbai, Delhi, Calcutta has been only 50% due to viewer hesitation in adopting these services and piracy of signals. Thus, any delay in the rollout of CAS would adversely affect the subscription revenues of NDTV.

Intense competition in the Hindi GEC space: The Hindi GEC space would become intensely competitive with the entry of UTV, INX Media, and Viacom – 18. Not to forget that competition between the entrenched players viz. Zee, Sony and Star Plus is in itself rather fierce. Hence, there is a strong possibility of an occurrence of fragmentation in advertisement revenues among the various players in the Hindi GEC space.

Increasing operating costs: The pressure on various costs such as content costs, employee costs, marketing costs would increase. Increase in the realizations per hour of the leading content provider Balaji Teleflms is a reflection of the increasing content costs. However, it needs to be noted that Balaji’s realizations per hour have increased not only due to an increase in its bargaining power but also due to a better programming mix. Shortage of quality content providers may lead to the trend of broadcasters tying up with content providers by picking up an equity stake in them and having the first right of refusal on any programmes produced by the content provider. Shortage of quality talent is also leading to an increase in the employee costs. The Hindi GEC genre is also losing viewership and revenue share to regional and niche channels. The operating expenditure in the Hind GEC space would be very high and the company hopes to breakeven in 3 years time.

Attrition: Television broadcasting is a knowledge intensive industry wherein talented personnel are required for the success of any channel. Attrition remains a major concern for the company as it has suffered from it in the past. The exit of Rajdeep Sardesai, managing editor of NDTV led to an increase in employee costs for the company. Special employee bonuses had to be doled out and ESOP’s were also granted leading to an equity dilution and a drop in earnings per share. To make matters worse, Rajdeep Sardesai joined the news channel ‘CNN IBN’ that is providing tough competition to NDTV 24/7. A loss in market share to CNN-IBN has lead to a drop in advertisement revenues and consequently a drop in operating margins.

  FY04 FY05 FY06 FY07
Personnel expenses (Rs m) 437 531 801 972
Salary/employee (Rs 000) 500 521 686 755

For a detailed look at the financials and valuation, please click here.

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