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Balaji Telefilms: Our updated view - Views on News from Equitymaster
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Balaji Telefilms: Our updated view
Dec 2, 2008

In our earlier research report on Balaji Telefilms, we had mentioned that the rationale for investing in the company was consistency in delivering quality content, domination of the TRP charts, strong realisations and presence of growth opportunities. We had also mentioned that the investment concerns were competition from peers, low de-risked business model and strong legacy pressures. Since that time, many of the investment concerns have transpired. Balaji has had to phase out its K- series soaps with Star Plus and its latest offerings in new genres have not been received well. The quality of the company’s operations has also declined, as reflected in its 2QFY09 results. Operating margins have declined substantially, from over 43% in 2QFY08 to 22% in 2QFY09. It may be noted that the company has historically reported operating margins in excess of 35%.

Unlike many companies, the change in Balaji’s prospects is not due to a difficult macro economic situation. It has more to do with worsening fundamentals at the micro level – entry of many new rival content providers due to the low entry barriers, their success and the bargaining power of broadcasters emerging from changing viewer tastes. For a considerable period, Balaji held a strong grip over the soap format it provided to the leading broadcasters. The advent of new delivery platforms, explosion in the number of channels and emergence of new formats has led to a fragmented viewership and erosion of Balaji’s dominance.

The company’s management will have to engineer a turnaround with a slew of successful programs to regain its competitive advantage against other content providers. Such a turnaround seems uncertain at this point in time. As a result, the earnings visibility of the company has considerably diminished in a short span of time.

As such we are downgrading our estimates for the company. We now estimate the company’s sales to decline at an annual average rate of 9% over the period FY08 to FY11E as compared to our earlier estimates of a 7% average growth. Operating profit margins are now estimated to average 26% during this period, as opposed to our earlier estimates of 36%. Correspondingly, the net profit margins are estimated to decline to an average of 18% over these three years as against our previous estimates of 25%. Kindly click here to view our updated FY11 target for the stock.

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