It would appear that the primary objective of this group is definitely not directed at enhancing shareholder value among its non management shareholders
Spinning a web of companies
In the 15 short years of its corporate existence, initially under the nomenclature of SGA Finance and Management Services Pvt. Ltd, it subsequently subsumed two name changes to arrive at its present avatar. In this interim period, the most unique achievement of the founder, editor, and managing director, Mr Raghav Bahl, is in his ability to spin an ever growing and complex web of companies that form a part of the ever evolving media empire that he is striving to create. A cornucopia of companies which are willy-nilly being created, divested, merged and demerged - all of it in a probable attempt to bring about some synergy of sorts, hopefully. (During the year it iced 9 subsidiaries and set in motion a demerger scheme hiving off group companies from one set into another set). Quite obviously, he also enjoys wearing three hats simultaneously, given the titles that he has bestowed on himself.
And boy oh boy is Mr Bahl well remunerated for his troubles! According to the figures culled from the report his payout of Rs 10.9 m accounted for some 10.5% of all employee payouts for the year made by the parent. (This payment has to also been seen in conjunction to the severe dunking that its performance results had to contend with). This pagaar is in excess of the limits prescribed under schedule X111 of the Companies Act, though the government has partially approved the application made by the company to regularise the full payment.
The promoter holding
The Indian promoters also hold a very impressive 57.6% of the outstanding equity of Rs 594 m of the parent. Significantly the foreign holding in the capital base (consisting of NRIs/OCBs/FIIs/Foreign body corporate) is at a very respectable 25.5%. Separately, the company also boasts a capital base consisting of non convertible cumulative redeemable preference shares amounting to Rs 1.5 bn. It is not known whether the promoters have a finger in this pie too. Very thoughtfully however, this well manicured structuring of the base capital helps the promoters to keep a firm grip of the voting stock.
A taxing report
The latest very bulky annual report of Network 18 Media runs into 179 printed pages of fine print (thanks in part to the multitude of siblings) which can tax the mindset of even a very determined annual report pusher seeking to get a look see of the vitals of its annual report and accounts. But before we get into the nitty gritty of the group's financial being, I wish to point out a few odd points that came to mind. Well for starters the company could do with a with a minor name change from its present calling to Network 18 Investments and Media. And this has basically to do with its revenue earnings in conjunction with its asset structuring. As the figures show, the parent is basically the investment holding arm of the media group. Take a look at the figures.
It ponied up piddling revenues of Rs 672 m in 2010-11, and here again over 40% of the revenue accretion was through other income. This achievement was on a paid up capital of Rs 2.1 bn, and reserves and surplus of Rs 9.5 bn (excluding accumulated losses of Rs 1.2 bn that is) , borrowings of Rs 4.8 bn, an investment bank of Rs 12.8 bn, loans and advances of Rs 1.6 bn, and miniscule fixed assets of Rs 60 m to boot - it qualifies primarily as an investment vehicle.
Another stark revelation is that the management appears to have a fetish for the number 18. I have yet to come across another Indian corporate group which adorns itself with numerals the way this group has done. Almost every other group company has an eighteen in letters or numerals attached to it. There does not appear to be any particular pattern though on the usage of numerals or lettering. The other oddity is that the group companies can have names with lettering which are all in upper casing, all lower casing, or a deft mix of the two!
The third is its claim that its English business channel CNBC-TV 18 has a continuing leadership in English business news with 56% market share in a pie chart presentation, with ET Now in joint second place and quoting the findings of media market research companies. But ET Now is also liberally splashing advertising claims in the mainline media saying that they are the market leaders, with CNBC-TV 18 in second spot and quoting the findings of media research companies too. What then is the efficacy or otherwise of the television rating points (TRP) findings please?
The fourth pertinent point is that the parent as a standalone entity is a mere pygmy compared to the consolidated group. The consolidated group racked up gross revenues of Rs 16.9 bn, including Rs 2.2 bn in other income. Juxtapose this with the gross revenues that the parent managed to rustle up. Just the 'other income' of the consolidated entity is several times more than the gross revenues of the parent! It becomes even starker when one compares the balance sheet parameters of the two. A gross block of Rs 6 bn as compared to the Rs 60 m of the parent for starters. It is another matter that both the parent and the consolidated entity are out of pocket. Obviously there is a game plan here.
The many group companies
How many companies constitute the group depends on which schedule one looks at and which statutory requirement the parent is complying with. Holding companies are required to give the details of their shareholding pattern and the losses/profits in its subsidiary companies. In this schedule the parent has furnished the details of 32 companies where the shareholding pattern ranges from a low of 47.8% as in the case of Infomedia 18 Ltd (but it is deemed a subsidiary given the management control) to 100% ownership in 20 companies. But, significantly, ten of these companies are registered in such exotica as Mauritius, Cayman Islands, and Cyprus. Barring the fact that these countries are internationally known 'tax havens', what other benefits do they have on offer please? The parent may like to explain the need to base siblings out of such oddball lands.
In complying with the requirements of the Monopolies and Restrictive Trade Practices Act, (MRTP Act) 1969, it has furnished a list of 70 group companies. Under the related party disclosure requirement we are informed that there are 3 direct subsidiaries by virtue of their shareholding, 2 direct subsidiaries by virtue of control, 31 step down subsidiaries and three joint ventures of subsidiaries, or a total of 39 siblings. Then there is the list of entities over which key management personnel exercise significant influence and this list runs into a round house figure of 50. To cap it all, the parent has appended the brief financial details of 41 subsidiaries.
Besides the parent, there appear to be three other listed companies within the group.TV 18 is one such, another is ibn 18, and the third is Infomedia 18, according to the group structure overview. Besides, in this concoction, the parent has four directly owned subsidiaries and they are HomeShop 18, Setpro 18, TV 18 and ibn 18. But the investment schedule of the parent shows that it has equity investments in two quoted subsidiaries -and two unquoted subsidiaries. The quoted ones are Television Eighteen India Ltd with an equity investment of Rs 5.5 bn of the face value of Rs 5 each acquired at Rs 65.5 per share, and an equity investment of Rs 1.8 bn in ibn 18 Broadcast Ltd of the face value of Rs 2 each, acquired at Rs 28 per share. (In the preceding year it had a stake in another listed company sporting the name of The Indian Film Company Ltd located in another tax haven, Guernsey. It has since ceased to be a subsidiary-after considerable restructuring it was finally sold to Roptonal a subsidiary of Viacom during the year. Guernsey may be some sort of a tax haven located in the English Channel. This subsidiary was apparently sold for Rs 811 m and the company may have realised a profit of Rs 3.2 m from this exercise). The unquoted ones are Network 18 Holdings Ltd, Cayman Islands, valued at Rs 68 m and in Setpro 18 Distribution Ltd valued at Rs 50 m. Separately the parent also holds non convertible preference shares in Network 18 India Holdings Pvt. Ltd cumulatively valued at Rs 2.4 bn. The preference shares have been acquired at a fabulous premium to the face value of Rs 10. Further, the names on the two lists do not necessarily correspond. At least this is my understanding of the data culled from the annual report.
Adding to the confusion
To add to the intricacies, the parent has yet another investment in a company styled BK Media Pvt. Ltd. Its holding in this offspring comprises entirely of non convertible preference shares valued at Rs 250 m but issued at par. We are informed that this company is an entity owned and controlled by the managing director of Network 18 Media and Investments (the name is Raghav Bahl) . One must add here that inspite of the low revenue generation there was a fast and furious flow of funds during the year, with net investments in subsidiaries and mutual funds alone amounting to Rs 2bn. Inspite of the sale of the subsidiary fetching a cool Rs 811 m, the parent still had to resort to the additional issue of equity (including a hefty premium) amounting in all to of Rs 489 m, and resort to a sharp decrease in 'other advances' by Rs 1.5 bn, along with receipts from subsidiaries of Rs 452 m, to balance its books.
The operational figures
As stated earlier the company produced revenues of Rs 672 m for the year ended 2010-11 but this was followed up with a loss before tax of Rs 710 m. The figures for the preceding year were Rs 561 m and a negative Rs 454 m respectively. (The auditors in their report to the shareholders state that the accumulated losses of the company do not exceed 50% of its net worth) . There are two culprits here for the lacklustre showing. One obviously is the lack of adequate revenue streams, and on the expenditure side it is the ballooning interest costs. The company for the present is purely in the business of event management, sports events and a euphemistically named concoction called Other Services. But event management despite its glitz and glamour is not a very profitable line, judging from the expenses that it has toted up to host the events. As the segment reporting figures show, on combined revenues of Rs 368 m on Events Management and on Sports Management, the company lost money to the tune of Rs 60 m, but it turned out a spectacular show in the third category. That is to say on revenues of Rs 303 m in this category, it showed segment profits of Rs 203 m. What in heaven's name is this business all about which generates such stupendous profits? And if this line is so profitable why does it not then close down the other two lines and concentrate only on this line?
Even the generous helping of other income could not provide much succour to the bottom-line. With debt running into the billions, the interest cost of Rs 774 m, excluding other bank charges, debited to the P&L account would have worked out to a percentage payment of 15.7% roughly. With so many irons in the fire, the parent hard put to make good on the investments, and loans and advances that it has made to its many siblings. So much so that even the auditors were moved to state in their report as regards the non provision for other than temporary impairment in the value of its investments of Rs 2.6 bn, and the non recoverability of advances of Rs 1.3 bn. Fortunately, since this company is fixed assets shy there is no depreciation provision to be made which could have further added to its bottom-line woes.
The investment portfolio
For the matter of record and as reported earlier, the book value of its investments in its siblings at year end was a shade over Rs 10 bn. Separately, there are the advances on share application money to the tune of Rs 1.3 bn. This entire sum represents share application moneys paid to Network 18 India Holdings Pvt. Ltd, a wholly owned subsidiary towards a proposed issue of securities. The parent is also in the habit of dallying large sums as advances to its siblings during the year at a favourable coupon rate, and then recovering it at year end. In this context the auditor's had made a note of the non recoverability of advances, but there appears to be no specific advances to its subsidiaries at year end 2011. So what is this qualification about? Or is this non recoverability of advances linked to the moneys given to Network 18 India Holdings? Then there are the guarantees and collaterals given on behalf of its siblings which run into several billions. The list of beneficiaries includes BK Holdings, (which may well be an intricate part of the earlier mentioned BK Media Pvt. Ltd, the privately held offspring) on whose behalf the guarantees given amounted to Rs 1.9 bn. It is show time folks!
The other income is largely made up of two income streams. One is the profit on sale of current investments and, the other, interest income. Such income streams are specific to each year and cannot be counted on for a repeat performance. At year end it held mutual fund securities valued at Rs 2.8 bn against securities valued at Rs 1.7 bn previously. What exactly is the logic behind this holding pattern is not clear, as also the maintaining of year- end cash and bank balances of Rs 942 m, especially seen in the light of the debt overhang and the resulting interest payout. The company has not booked any dividend incomes from its mutual fund schemes, preferring instead to turn a dime or two betting on the vagaries of the debt market and profiting from it. It is of-course next to impossible to calculate the interest receivable on its liquid investments and thus the return on its surplus funds cannot be calculated.
The many siblings
This in turn brings us to the performance statistics of the 41 siblings, whose very brief financials have been appended to the annual report. (Of the lot, the parent has a direct holding in only 5 companies). The company with the largest capital base by far is Television 18 Media and Investments Ltd, the company with the largest total assets base and revenue base by far is Television 18 India Ltd, and the company with the biggest investment base is ibn 18 Broadcast Ltd. The first mentioned has a capital base of Rs 2.2 bn; the second has total assets of Rs 18 bn and revenues of Rs 3.8 bn, and the last mentioned had an investment portfolio of Rs 7.2 bn. It may interest readers to know that none of the siblings declared any dividends during the year. In the preceding year three companies in this list declared a dividend of Rs 45 m. (The 41 companies between them had investments totalling Rs 14.1 bn and this does not include their investments in subsidiaries or some such!) What do the investments in the subsidiaries add up to please? But the company which produced the most eye popping results was Network 18 Holdings Ltd, Cayman Islands, located in the Western Caribbean. On a capital base of Rs 68 m, reserves of Rs 1 bn and total assets of Rs 1.4 bn, it netted a turnover of Rs 1.1 bn, and logged in a profit before tax of Rs 1 bn. In the preceding year it had made a profit of a mere Rs 147 m. And the fact that it is located in the Cayman Islands means that there is no tax provision to be made. The profits that it has been able to procreate would amount to a fantastic feat, especially considering that this company does not boast of any investments.
Now the rather inappropriately named Television 18 Media and Investments, the company with the largest equity base, has no investments. But on a pipsqueak turnover of Rs 2.4 m it recorded a pre-tax loss of Rs 12.6 m. Talk about return on capital. IBN 18, the company with the largest investments base ran at a substantial loss in either year. Do the investments that this company has made not beget the company even a farthing? Some of the financials of the siblings make for the most bizarre. Television 18 Mauritius on a capital base of Rs 549 m, and negative reserves, and an investment bank of Rs 245 m, could only eke out revenues of Rs 1.3 m, but ratted up a pre-tax loss of Rs 46 m. Going many steps further was another subsidiary ibn 18 (Mauritius) which in the preceding year pulled a rabbit out of the hat by recording a loss of Rs 658 m on zilch revenues, and on a capital base of Rs 5000! Another Mauritius based company BK Holdings on a capital base of Rs 2.2 lakhs and negative reserves of Rs 631 m, appears to badly haemorrhaging. There are several other extreme oddities like this, but then this copy will become a bit too long winded.
It will help if the parent can give a rational explanation for such financials. The group also appears to have become a master user of the insights that it has gleaned over the many years of unearthing the innards of corporates that its business channel CNBC TV 18 keeps getting at.
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.