What is the real purpose here - broadcasting -- or making this company an investment vehicle to nowhere?
A new nameplate
TV 18 Broadcast Ltd is the new nameplate of ibn 18 Broadcast Limited. The results of the financial year of TV 18 Broadcast include the composite results of several group companies which were merged into this company during the year. From my understanding of the muddled printed contents of the annual report, TV 18 Broadcast too apparently had a previous avatar - it was called Television Eighteen India Limited. It is actually a lot muddier than that. This company was originally incorporated as Global Broadcast News Private Limited in 2005. The management most definitely has an unabashed fetish towards nameplate changes. For the matter of record Network 18 Media & Investments Limited is the immediate holding company of TV 18 Broadcast Ltd. This holding company in turn controls 51.24% of the outstanding equity of the company under review. The group shareholding rigmarole does not end here. A further 7.93% of the company stock is held by Network 18 Group Senior Professionals Welfare Trust. Assuming that the beneficial ownership of this piece of stock vests with the management, then the total management holding in this equation amounts to 59.17%.
The companies which underwent the surgeon's scalpel in the reorganisation apparently include Network 18 Media and Investments Ltd, and other Network 18 group companies (how many?) as per the merger documents. Following the merger of the legal entities, channels such as CNBC TV 18, and CNBC Awaaz got merged with the company. The management also has a fetish for mergers and reorganisations. More importantly, TV 18 Broadcast is a part of Network 18 group which is controlled by Raghav Bahl and his family. He is a director of this company-period. Network 18 is a part of the holding pattern of the group. Network 18 in turn has several promoter holding companies. It is a snakes and ladders game out here-that much is for sure. More importantly, why do corporates so wantonly resort to such subterfuge?
The several court cases
Such is the intensity with which reorganisations, and investments and divestments taking place within the group that there was a case filed on behalf of e-Eighteen.com by its minority shareholders against Raghav Bahl, TV 18, and other TV 18 group companies' that agreements entered into by the defendants were counterproductive to the interest of e-Eighteen and claiming damages to the tune of Rs 31.14 bn for causing monetary loss to e-Eighteen! But the claim has been dismissed at two stages including by the High Court. There are other claims too pending against the company. Such as claims on infringement, defamation etc amounting to Rs 3.12 bn and a claim filed by an erstwhile distributor for damages of Rs 2.6 bn for breach of contract. The company on it part has dismissed the claims as not tenable.
From the directors' report it appears that the company is moving ahead at great speed to grab more eyeballs, either by introducing new channels or by acquiring stakes in companies which cater to the Hindi or regional broadcast space. The company on its own has launched five new channels during the year which includes channels launched from the stable of Viacom 18 Media Pvt. Ltd. As for the regional broadcasting space the company has during the year acquired a 100% stake in Equator Trading Private Ltd which runs four regional Hindi news channels and one Urdu news channel. It also acquired a 49.98% stake in Prism TV Private Ltd which owns general entertainment channels in Kannada, Bangla, Marathi, Gujarati and Oriya. Not quite satisfied with this the company also acquired a 24.5% stake in Eenadu Television Pvt. Ltd which owns one entertainment channel in Telugu and one news channel. This acquisition also entitles the company to have control over ETV News and non -Telugu general entertainment channels. Separately, there was another share acquisition exercise during the year; wherein through some creative chess moves the group acquired a further stake holding in yet other another media and entertainment company. It is all very baffling. Why resort to such complex takes in the first place, please? Is there a deliberate game plan here?
The group investments
These investments appear to be more than a large mouthful, and one has to now see what TV 18 Broadcast makes out of its acquisitions. For the present there has been a flurry of share issues to take care of a part of the additional financial burden following these acquisitions. The group was literally in hock or so it would appear. So much so that six promoter companies of Network 18, the controlling arm of the group, had to resort to deft moves to get the rights issue of share offering subscribed to. An arm of Reliance Industries, aptly named as Independent Media Trust, pumped in sufficient funds into the zero coupon bonds which on conversion into equity will ultimately lead to RIL acquiring a 51% in the promoter companies of Network 18. (The guys at RIL are definitely not lacking in a sense of humour when it comes to administering nameplates). This then is about as bizarre as it can get. If RIL is indeed in the process of acquiring a 51% stake in Network 18, it would imply Network 18 will soon enough become a sibling of Independent Media Trust. In the process, the group loses its freedom as an independently owned company, but that appears to be a secondary issue for the promoters. However in the offer letter to its shareholders the management has acknowledged that a change in the control of the companies post issue may significantly influence its business, its policies, and operations. RIL too acknowledges this point. It states that independent Media Trust is a trust set up 'for the benefit of Reliance Industries'.
Share price takes a dive
The market was however clearly unimpressed with the many flips and flops that the company initiated during the financial year. The share price which hit a high of Rs 108.50 in April 2011 went steadily downhill month by month during the year to touch its nadir of Rs30.60 at the NSE in March 2012. Why should this have been so? The Indian promoters along with persons acting in concert as on March 31, 2012 hold 59.76% of the outstanding equity base of Rs 724 m against Rs 476 m previously. This shareholding pattern would also mean that the holding of the original proprietors gets reduced to 8.76% when the conversion option takes place. It is impossible to comprehend what exactly is the real deal here.
So what exactly do the financials have to reveal at the end of the day? After perusing the annual report it is not difficult to figure out why the company was so desperate to raise capital from any source and in any which manner. How it got into this unholy mess will make for an interesting case study. But it appears that the management has run riot over its affairs with no proper advance financial planning.
To put matters in perspective consider some of the balance sheet figures at the end of the latest accounting year. It must be noted however, and as stated earlier, that some of the balance sheet figures have acquired a miserable new hue thanks mainly to the re-organisation of the company during the year-and hence the figures on display are strictly not comparable with that of the preceding year. It has a paid up capital of Rs 724 m and bountiful reserves and surplus of Rs 7.04 bn- butthanks to carry forward losses etc it is actually a depleted figure. But the catch here is also that the reserves and surplus figure is almost completely made up of share premium reserves. There are the share premium reserves of Rs 8.5 bn and general reserves of Rs 104 m and sundry other forgettable reserves. But these overall reserves get diluted due to various incomprehensible negative accounting entries. Such as the carry forward loss of Rs2.28 bn which get reduced magically to Rs 1.04 bn with the help of baffling accounting entries. The share premiums reserves which get diluted through another set of entriesetc. The net result is that at the end of the day the reserves together stand at the depleted figure mentioned earlier. Much of the sheen on the bulging reserves gets taken away as the company had to accommodate such exigencies.
The borrowings have risen astronomically to Rs 7.1 bn from Rs 2.9 bn previously. The point to note here is that the bulk of the additional borrowings have germinated under the head of short term unsecured borrowings-public deposits, commercial paper, etc. The book value of its investments has bloated to Rs 10.5 bn from Rs 7.2 bn previously. The bulk of this investment is concentrated in just one company-Viacom 18 Media Pvt. Ltd with an outlay of Rs 8.56 bn. This is followed by an investment of Rs 1.7 bn in a sibling going by the name ibn (Mauritius) Ltd. The catch in this case is that there is a provision for depreciation in the value on this investment amounting to Rs 658 m. The total dividend income from its investment toted up to Rs0.12 m from Rs NIL previously. Any bets that it will be difficult to beat such returns on investment even if one tried it sincerely?
The fixed assets got boosted to Rs 3.18 bn from Rs 1.28 bn previously. This figure includes tangible assets of Rs 2.87 bn and intangible assets of Rs 310 m for the latter year. The tangible assets mainly consist of plant and machinery of Rs 2.10 bn. It also possesses leasehold land to the tune of Rs 339 m, and some freehold land too. Juxtapose these productive assets with the revenue accretals during the year. The total revenues realised during the year excluding other income amounted to Rs 6.2 bn against Rs 2.52 bn previously. Other income roped in Rs 666.5 m of its own against Rs 95 m previously. The breakup of the revenues shows advertisement and subscription income of Rs 5.89 bn against Rs 2.46 bn previously, media and equipment rentals of Rs 140 m, income from equity deals of Rs 171 m, and sale of content of Rs 6.4 m. How equity deals got clubbed with the main body of the revenue beats me hollow, but let that be.
The Other Income
Cut to the other income segment. It basically includes such onetime bloopers as profit on sale of long term investments, net profit on current investments, income from ibn 18 trust on sales of shares, net forex gains, and write-back of provisions. Such receipts amounted to Rs 522 m. These are one time affairs and cannot be depended on for an encore in future. Besides, some of these receipts look like within the group transactions. It is a relief to know that other income also includes bank interest & fixed deposit receipts, and, inter-company balances (whatever the word balances implies) totally amounting to Rs 144 m.
Juxtapose this other income receipt with the pre-tax profit for the year. Other income implies that there are no revenue expenses to be set off against such income. The pre-tax profit for the year amounted to Rs 121 m on which there is a tax provision of Rs 29 m. As one can see the other income is substantially larger than the pre-tax profit for the year-but for which the P&L account would have written in red ink. The situation is a bit more paradoxical in the preceding year. It showed other income of Rs 95 m and a pre-tax loss of Rs 492 m. There was no solace whatsoever in this particular year for the bottom-line.
How did the company land itself in such a wormhole? The company it would appear is just not able to realise a large enough increase in its advertisement and subscription income-its bread and butter-- to keep pace with the higher revenue expenditure on the one side, and the funds required to be plonked down in other media investments in its apparent frantic attempt to stay ahead of the pack. Since the company is unable to generate cash flows from operations it is forced to borrow more and yet more capital. It is a pity indeed that the management did not think of generating more long term capital infusion by the issue of additional share capital during the year. This would have reduced the share holding of the group in the overall sweepstakes. (In hindsight though, the promoters were ultimately forced into such a deal). But on the flip side this would have seriously reduced its debt and thus its repayment obligations of interest and capital.
The revenue expense schedule
The principal large expenses incurred are 'employee benefit expenses' and 'Other expenses'. Then there are the finance costs on the large and looming debt. Revenues from operations rose 146% to Rs 6.2 bn, while other income galloped 600% to Rs 666 m. Employee costs rose 91% to Rs 1.54 bn while other expenses rose 130% to Rs 4.11 bn. The other big ticket item--finance costs -- rose sharply by 113% to Rs 854 m. In other expenses schedule the principal expense item was advertising and business promotion costs at Rs 2.11 bn against Rs 956 m previously. It appears to be an awful sum of money to spend to earn subscription income. But I guess the company knows best. The other large individual expense items under this head were content and franchise costs of Rs 319 m, bad debts provision of Rs 226 m, media professional fees of Rs 277 m, and travelling and conveyance of Rs 316 m. And considering the finance crunch that the company is facing, it is paying out high rates of interest on its additional borrowings. It is a very unenviable situation. This situation is also partly the result of over-extravagance. In these difficult times the company thought nothing of advancing funds to its cronies. The total outstanding on such account at year end to group companies amounted to Rs 858 m.
The resulting decay is staring out in full flow in the cash flow statement. Officially the company raised Rs 2.42 bn from the cash flow arising out of its operating activities. But this cash inflow includes some improper adjustments. It has shown an inflow on account of short term loans and advances of Rs 2.13 bn and an outflow of Rs 115 m on the same account-resulting in a net inflow of funds of Rs 2.02 bn. There are no corresponding entries in the schedules in the asset side of the balance sheet. As a matter of fact the loans and advances schedule actually shows an outflow of cash and not an inflow! In reality the cash flow generation from operations was very miniscule if any at all. This is getting to be taxing to the very extreme.
The related party disclosures statement is another eye popper. There are 37 associate companies which operate either as holding companies, subsidiaries, joint ventures, and fellow subsidiaries. (There are assorted inter-se transactions within the group companies). The joint venture is in the form of IBN Lokmat News Pvt. Ltd in which it has an investment of Rs 433 m in the form of non cumulative redeemable preference shares. There is in all three subsidiaries at year end. The three siblings are ibn 18 Mauritius, RVT Media Pvt. Ltd, and AETN 18 Media Private Limited. Of the three the last named appears unrepresented in the investment portfolio of the company. ibn 18 Mauritius on the other hand is over represented. The company has an equity stake of Rs 5,081 in the latter. It also has a debenture stake of Rs 1.7 bn acquired at a cost of Rs 46.90 per debenture in US dollars of which Rs 659 m is provided for. Jokes apart why does it resort to such a whacko funding pattern please? In the preceding year the company had a debenture issue stake holding of Rs 659 m which was fully provided for. Is it now throwing more good money after bad? There is no info on any investment in AETN 18.
And how do the siblings fare? Take a look. Each one of the three is a class act.RVT Media, incorporated in India operates out of wonderland. It has a capital base of Rs 0.96 m, has reserves of Rs 345 m and total assets of Rs 346 m. It has zilch revenues and generates a marginal loss. AETN Media also incorporated in India goes one better. It has a capital base of Rs 474 m, negative reserves of Rs 310 m, and total assets of Rs 366 m. The company generated revenues of Rs 97 m but ran up a huge loss of Rs 506 m. This takes some doing what? The crown jewel is its dollar incorporated Mauritian sibling. On a capital base of Rs5,075 and negative reserves of Rs 444 m, it boasts of a total asset base of Rs 1.26 bn. (This figure obviously includes the cash infusion through debentures of Rs 1.04 bn during the year). It generated revenues of Rs 76 m and managed to make do with a marginal profit of Rs 1.5 m. What's with this company that the parent wants to pump in such large doses of oxygen?
It would appear that even Sherlock Holmes would find this company a tough act.
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.