It is tough being in the movie business and it will help if promoters do not skim the cream off.
It is important to practice your values
The latest annual report lists out the vision and values of Balaji Telefilms - which was founded some 19 years ago by the eminent Bollywood personality Jeetendra Kapoor along with his wife Shobha, and co-opted by their two children Ekta and Tusshar Kapoor. Mom, Shobha, holds the executive reins of the company as the managing director. The company is primarily into the making of 'soaps'. And through its wholly owned sibling Balaji Motion Pictures it makes full length films too like the famous one it made recently featuring Vidya Balan as Silky Smitha. It also edits films, and video material content. In the company's own words –it is one of the leading producers of entertainment in India having created a benchmark in television programming and one of the first companies to venture into Hindi and regional general entertainment channels. The films produced are marketed under the ALT brand. Another recently incorporated wholly owned sibling is Bolt Media Ltd. This company will create and produce cutting-edge TV concepts across mainstream and regional television. There are other group companies too and we will come to them later.
The principal promoter family owns 41.6% of the outstanding voting capital of Rs 130 m. What is interesting in the promoter shareholding breakup is that the two ladies Shobha and Ekta control 16.4% and 15.4% each of the outstanding shares while the two gents Jeetendra and Tusshar each control only 6.7% and 3.1% of the voting capital. The other very big shareholder-and a very silent one at that – is Star Middle East FZ LLC which holds the biggest individual chunk at 26%.
One of the five values that the company has listed is Integrity-'we are honest and ethical in all our dealings. The directors' report is dated May 27, 2013. The directors' statement is made post facto to a raid conducted on the offices of Balaji Telefilms and at the residences of the 'Family' in April 2013 by the income tax department on suspected income tax evasion to the tune of Rs 300 m. Amazingly enough, the annexure to the independent auditor's report and the notes to the accounts makes no mention of the IT raid. I am not aware of the latest status in the matter, but the fact also remains that cheating on your taxes does not count for dishonesty in the Indian mindset. Tax evasion any which way is about the biggest national pastime so to speak.
A nattily dressed up annual report
In keeping with the public image of show biz, the company has put on show a very nattily produced annual report on quality paper with four colour printing to boot to add some razzmatazz. The chairman of the board Jeetendra is absolutely gung ho on the company's prospects. Says he –'there is a lot happening within Balaji-new directors and producers are getting signed; new talent is getting identified, and new storylines are being penned. We are scaling higher by expanding our distribution capabilities....by de-risking our business model. We are also ramping up our creative content library through a diversified mix of movies'.
So what do the financials have to tell us in this regard? This is a company that appears to live by its wits so to speak. It has a puny equity share capital of Rs 130 m (Rs 2 paid up) but is backed up by monstrous reserves of Rs 4 bn. The reserves consist of share premium reserves of Rs 1.48 bn, with the balance consisting of free reserves presumably created from post tax profits. The share premium reserves infer that some of the shares were also issued at a handsome premium and in all probability to Star TV. That would make for money for jam. The other important revelation is that it has ZERO debt. This factor becomes more relevant given that it boasts current investments valued at Rs 1.18 bn at year end –though down from Rs 2.1 bn previously –and Rs 1.46 bn in interest free loans to its siblings. Such surplus cash flow generation can only be managed from the operations. It helps also that in a business such as this there is no inventories to really worry about.
So why do I say that it appears to live dangerously? Take a look at the revenue statement. The company generated revenues of Rs 1.4 bn against revenues of Rs 1.29 bn previously, and other income of Rs 182 m against Rs 265 m previously. It also generated a pre-tax profit of Rs 166 m against Rs 123 m previously. The breakup of the revenues is more telling. It consists of sale of services of Rs 1.35 bn (commissioned sales, sponsored sales and internet sales) and other operating revenues of Rs 59 m. The figures for the preceding year were Rs 1.18 bn and Rs 112 m respectively. The point is that other operating revenues are a mishmash of items which are not necessarily of a recurring nature. It includes such entries as profit on sale of land of Rs 12 m to net consideration received from sale of discontinuing operations of Rs 82 m in the preceding year. In the latter year it includes such tricks as write back of provisions of Rs 22 m, to write back of doubtful debts of Rs 8 m. In either year there is a credit entry of 'facilities hire charges' and 'services income'.
Other income is a major factor
Other income too consists of a jumble of entries. The primary entry here in either year is the profit on sale of current investments amounting to Rs 138 m and Rs 171 m respectively. It also accounted for insurance claim of Rs 5 m and Rs 91 m respectively. Such income receipts cannot be referred to as of the recurring variety. It is also the first company that I have analysed which makes generous profits on the purchase/ sale of debt securities. Then there are the trifling sums coming in from interest receipts on bank deposits, from the profit on sale of fixed assets and such like.
The point is also that if one were to add up the 'other operating revenues' of and the 'other income' in either year it would amount to a relatively sizeable Rs 240 m in the latest year and to Rs 377 m previously. If one juxtaposes these figures (other income is bereft of any revenue expenses) with the pre-tax profits of Rs 166 m and Rs 123 m respectively that it recorded, then one finds that the company is completely out of pocket on its mainline activities. Helping the company achieve this distinction is the employee payout structure. Between Shobha and Ekta the two ladies gobbled up 32% or Rs 24 m of the total payout package of Rs 75 m. In addition of this Tusshar Kapoor was paid professional fees amounting to Rs 10 m-in the previous year the amount paid was termed remuneration. Where this expense is debited is not known. (The total employee expenses in turn are down sharply from Rs 149 m previously-why this is so is not immediately known). The four promoter directors also make do with other goodies too. They were each paid rent by the company cumulatively amounting to Rs 75 m with Shobha hogging the bulk at Rs 68 m for god knows what reason. And, add to this their entitlement to the dividend that is declared! All in all it must be amounting to a very nice feeling for the family at the end of the day.
The paradox of cash flow
The paradox is that the company also generates positive cash flow from its operations, which is the source of internally generated cash. The company actually generated positive cash of Rs 218 m from operations against Rs 33 m previously. The cash flow has been generously helped by IT refunds in either year to the tune of Rs 121 m and Rs 93 m respectively, and by some deft adjustments in working capital flows in the preceding year. In other words there is no identifiable connection between book profits and cash flow from operations.
O.K. the company had to sell a large part of its holdings (Rs 1 bn) in debt securities to fork out a handsome loan that it made out to its siblings. But at the end of the day it still did not have to go hat in hand for the moneys. Just as the paradox of the cash generation from operations, the company has presented a slick balance sheet. As stated earlier it has zero debt, almost NIL inventories, trade receivables averaging 94 days sales, and a very healthy current assets position buttressed by current investments of Rs 1.19 bn, and loans and advances which includes advances to siblings adding up to Rs 1.46 bn. The companyalso generated its revenues on a gross block of Rs 1 bn. (The land valued at Rs 488 m wasalienated last year for whatever reason). The two biggest items in thisclassification are 'studios and sets' valued at Rs 471 m and 'plant and machinery' valued at Rs 220 m. But the item classified as studios have been written down drastically to Rs 25 m while the P&M is valued at Rs 84m. As a matter of fact the net value of the fixed assets intoto is Rs 259 m. And, the revenues are rising as the gross block gets more emaciated. I find this a remarkable achievement.
And given the amount at stake in its siblings how do they fare? The company has two identifiable wholly owned siblings and one associate company. The latter goes by the name Indus Balaji Investor Trust. The parent has a sizeable capital stake of Rs 271 m in the latter outfit. Balaji Motion Pictures is the bigger of the two siblings. We are informed that this company ranks among the top five film production houses in India. The company appears to be on the mend. It boasts a share capital of Rs 300 m and negative reserves (representing deficit in P&L account) of Rs 138 m at year end. The entire debt-amounting to short term borrowings of Rs 1.46 bn represents interest free loans and comes care-of the parent. (The total asset base amounts to Rs 1.81 bn). This manna from heaven is helping to stabilise its operations. Despite the glitz and chutzpah associated with the biz -movie making appears to be a mug's game or something.
On revenues of Rs 446 m the company earned a pre-tax of Rs 22 m. In the preceding year the corresponding figures were Rs 585 m and Rs 88 m respectively. But if one were to factor in the opportunity cost of borrowed capital then the bottom-line would have been seeped in red ink. There is also 'other income' but the contribution from this corner is not significant as yet. It is a funny biz alright. The inventory of films in closing stock at Rs 1.46 bn at year end towers over the revenues that it generated during the year. In the preceding year the inventory value amounted to Rs 362 m. And amazingly enough for a movie production house it boasts gross fixed assets of only Rs 10 m. How is this possible?
The other sibling goes by the name Bolt Media. It is a non entity as yet and is yet to get off the starting block. For the present it has a paid up capital of Rs 0.5 m and negative reserves of Rs 5 m.
What's with Balaji Investor Trust?
One does not what to make of its other creation Balaji Investor Trust. Despite the significant sums sunk into the venture in terms of share capital, the company has not paid any tithes to the parent. Or is this company a supposed to hold the shares of the parent in some fiduciary capacity for the benefit of the promoters? If so then it is on song.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.