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New Delhi Television Limited (NDTV)

Issue Summary

Type Offer for sale by book building route Shares on offer Between 15.9 m - 14.3 m shares (excluding the reserved portion) based on the lower and upper price of the band respectively.
Size Rs 1.1 bn (including Rs 90 m reserved for allotment to permanent employees and directors of NDTV and its subsidiaries) Face Value Rs 4 per share
Price Rs 63 to Rs 70 per share Promoters post issue holding Post-issue shareholding pattern will be determined after the Book-Building process
Minimum subscription 100 shares Promoters Dr. Prannoy Roy (32.6%) and Ms. Radhika Roy (32.6%)
Listing BSE & NSE Lead Managers JM Morgan Stanley, Kotak Mahindra Capital, ICICI Securities
Bid/Issue opens April 21, 2004 Bid/Issue closes April 28, 2004

ISSUE STRUCTURE

  QIBs Non-Institutional Investor Retail Portion
Number of shares to public* Between 9.5 m - 8.6 m shares Between 2.4 m - 2.1 m shares Between 4.0 m - 3.6 m shares
% offered from Net public offer 60% 15% 25%
Minimum Bid/Application size Rs 50,001 Rs 50,001 100
In multiples of 100 100 100
Maximum Bid/Application size Not exceeding the issue size Not exceeding the issue size Not exceeding Rs 50,000

* The total issue size is at Rs 1,090 m, including Rs 90 m reserved for allotment to permanent employees and directors of NDTV and its subsidiaries. On the basis of the total issue size of Rs 1,000 m (net of reserved for employees), at the lower end of the price band (i.e. Rs 63) fixed by the company for the book-built issue, the issue of equity shares would amount to 15.9 m (including the offer for sale of 5.9 m existing equity shares). Similarly, at the upper end of the price band (i.e. Rs 70), the issue of equity shares would amount to 14.3 m (including the offer for sale of 5.9 m existing equity shares).

Note: Persons resident outside India including FIIs, NRIs and companies in which there is a majority ownership and control of persons resident outside India, are not eligible to apply in this issue.

COMPANY BACKGROUND

NDTV is one of India's leading broadcasters and producers of news and current affairs programmes. Since its inception, the company has been producing television news and current affairs programmes. Further, in April 2003, the company simultaneously launched two news channels - NDTV 24X7 (English) and NDTV India (Hindi). The company has three subsidiaries - NDTV Media Ltd. (85%), NDTV World Ltd. (100%) and NDTV News Ltd. (100%).

NDTV Media is in the business of buying, selling of advertising time/space on radio, television, video and cable etc. in India and abroad and act as advisors, consultants or advertising agents for the group. NDTV World is in the business of production of entertainment and other non-news related programs primarily for other television channels. And, NDTV News is in the business of production and export of programs for television, radio, telecommunication and film industry.

BUSINESS

    NDTV, who until recently was into the production of news and current affairs programmes for other channels, primarily Star, ventured into broadcasting in April 2003 by simultaneously launching two news channels - NDTV 24X7, which caters to the English audience and NDTV India, which is aimed at the Hindi speaking population. Within a year of its launch, NDTV (both the channels combined) has managed to become the leading broadcaster amongst all the news channels in the country on the basis of C&S viewership.

    * Total of NDTV 24X7 and NDTV India
    ** Total of Aaj Tak and Headlines Today
    Source: TAM viewership data for C&S viewership for target group of viewers above 15 years for the 4 weeks ended March 20, 2004

    According to the TAM viewership data for C&S viewership for target group of viewers above 15 years for the 4 weeks ended March 20, 2004, NDTV has a combined reach of 48.7 m viewers, which formed about 23% of the total C&S viewership. NDTV has thus emerged as a distinctive medium for a large number of advertisers. Further, on an individual basis, while NDTV 24X7 leads the English news genre with a 37% markets share, NDTV India (Hindi) is second only to the market leader 'Aaj Tak' with a 17% market share.

    Objects of the Issue

    NDTV proposes to raise Rs 1.09 bn from this offer and intends to use the net proceeds of this issue, after deducting underwriting and management fees, brokerage, fees to various advisors and all other issue related expenses, for meeting its working capital requirements, repayment of loans and general corporate purposes.

    Funds Requirement
    Activity (Rs m) FY05
    Pre-payment of loans 200
    Working Capital 200
    General corporate purposes 150
    Total 550

Promoters

    The two NDTV promoters are Dr. Prannoy Roy and Ms. Radhika Roy. Dr. Prannoy Roy is one of the leading political analysts in India. Including a stint between 1985-87 with the Indian Ministry of Finance as Economic Advisor, Dr. Roy has been involved with the television media since 1980 as a commentator on elections and then from 1984 as one of the premier anchorpersons in India (remember 'The World This Week') in terms of credibility, analytical depth and presentational quality. On the other hand, Ms. Radhika Roy is a print journalist and television producer. In print journalism, she has over ten years of experience with leading publications like "Indian Express" and "India Today".

Sector

    The Indian media and entertainment industry, after having evolved over the last few years from the single-channel era to the choice of over 100-channels, has been again undergoing a change since the last 2-3 years. Beginning with its bid to become organized during FY01, consolidation was evident across different segments of the industry. Along with the growth in television and cable & satellite homes in the country, new players and channels have sprung up in niche segments like news, fashion, religion and sports. Television has emerged as the preferred mode of entertainment for the masses.

    The key sources of revenues for the television industry are advertisement and subscription. During 2002, the share of ad revenues in the total revenues of the broadcasting industry was at 73%, which is in sharp contrast to that in the developed world, wherein subscriptions constitute the major chunk of the industry's revenue pie. One of the key reasons why this discrepancy exists in India is due to the under-declaration of connections by cable operators, which ultimately affects the broadcasters revenues. However, to curb this under declaration of subscribers by cable operators to MSO's, the government passed the CAS (Conditional Access System) in the existing Cable Television Regulation Networks Act, 1995.

    Further, ad-revenues of major broadcasters are expected to improve with the economy showing strength and corporates would increasingly look at increasing adspend to garner larger revenues. Another interesting trend, which is expected to continue, is the ad-spend of the FMCG companies, which is increasingly getting concentrated towards rural markets. Moreover, with new sectors opening up like telecom, healthcare and insurance, advertisements by these segments would also aid the adspend growth.

REASONS TO APPLY

  • Dominant player in news broadcasting segment in India: NDTV, which was primarily a content provider and presenter of news and current affairs based programmes, has undergone a change in its business model after the launch of its two news channels. It is now primarily focused on broadcasting news through its two channels. While its English news channel, NDTV 24X7, is already the leader with a 37% market share in this category, NDTV India continues to trail the market leader, 'Aaj Tak' who has a 32% market share in the Hindi news segment. However, it must be noted that NDTV India has successfully managed to garner a significant market share in this segment, which is currently at 17%, seemingly some of this at the cost of 'Aaj Tak', which commanded an over 40% market share a few months back.

  • Experienced promoters and renowned team: Both the promoters of the company have ample experience in the field of content production, news delivery and journalism, which is a key strength for the organisation. Apart from this, the company has a renowned team of quality journalists and some of the best-known faces in the Indian television news industry, which is an important asset for the company. Together, the efforts of the promoters and the team has led to the company winning various accolades, honours and recognitions over the last 15 years, which is a vindication of the strong editorial skills, brand name recognition and a loyal viewership base, which fosters greater confidence amongst the channel's viewers and advertisers.
  • Potential growth in ad revenues: The primary source of revenue for the company is from advertisements on both its news channels. It must be noted that since 1990, the share of ad revenues in television as a percentage of total advertisement spend in India has been on the rise and this has been primarily at the cost of the advertisements in the print media. Just to put things in perspective, in 1990, the ad share of the print media as a percentage of total advertisement spend in India was at 70%, which declined to 51% in 2002, while during the same period, the share of television in total ad spend in India increased from 16% to 41%. Also, on another parameter, India's ad spend, as a percentage of GDP, was a mere 0.4% in 2002. This is very low as compared to some other developing and developed nations where the total ad spends as a percentage of GDP is anything between 0.8% to 1.5%.
  • Extensive reach and market share: Further, considering the fact that cable penetration in the country is expected to increase from the current levels of 42 m C&S homes and NDTV has the widest reach (both the channels combined) at 48.7 m viewers, which formed about 23% of the total C&S viewership amongst news channels in the country, it provides a good platform for advertisers to showcase their products to a wider audience, consequently leading to better ad revenues.
  • Alternative growth opportunities: The NDTV channels are currently free-to-air (FTA) with almost 90% of the company's revenues contributed by advertisement revenues. However, with the implementation of new delivery modes like head-end in the sky (HITS), direct-to-home (DTH) and conditional access system (CAS), the company is likely to explore subscription business as an alternative source of revenue. It must be noted that the two NDTV channels form a part of the 'One Alliance', a distribution bouquet of channels that also includes Sony, SET Max, AXN, discovery, HBO and Animal Planet channels.

    In its presentation, the company gave the example of CNBC-TV18, which charges Rs 5 per subscriber in India and also the possibility of deriving international subscription revenues by catering to the Indian diaspora in various countries. According to FICCI-KPMG Report, the Indian subscription revenue market is expected to grow to approximately Rs 72 bn by 2007 from the current Rs 12 bn and this offers NDTV an attractive alternative stream of revenue. This indicates the potential for subscription revenue business in the country, which the channel could explore.

REASONS NOT TO APPLY

  • Lacking diversification: The company is currently primarily dependent on largely advertising as a source of revenue, since its channels are as yet free-to-air and hence they do not have any subscription revenues. Also, the future success of the company depends on the continued dominance of its channels in the 'news broadcasting' industry. Thus, any change in preferences of viewers and advertisers or other related factors such as increased competition, may have an adverse effect on the viewership of the company's channels thus affecting the growth prospects of the company.
  • Present and potential competition: NDTV channels are prone to significant competition from existing news channels and potential entrants to the news broadcasting industry, which have the potential of eating into the market share of the company, especially in the English news space. Things could go the same way as it did for the leader in the Hindi news segment, 'Aaj Tak' over the last couple of years. Just to put things in perspective, in a growing news broadcasting industry, TV Today's market share in the Hindi news genre in terms of viewership declined from approximately 54% in September 2002 to approximately 32% in March 2004, due to increased competition owing to the launch of new Hindi news channels like NDTV India, Star news, Sahara Samay and the government controlled, Doordarshan News. Loss of market share and viewership to competitors may have a negative impact on the profitability of the company as it may reduce the bargaining power of the channel with the advertisers. We expect the competition to increase with the entry of new players into the news broadcasting industry and existing players consolidating their positions.
  • Threat of lack of differentiation: News being non-proprietary and largely non-exclusive results in the content being similar across news channels with key differentiating factors being speed, editorial quality and credibility. As the competition increases and the industry grows, it could be increasingly difficult for the company to adequately differentiate its news channels on a continuous basis. Consequently, this could adversely affect the viewership and thereby the revenues of the company.

FINANCIAL PERFORMANCE

(Rs m) FY01* FY02 FY03 9mFY04
Revenues 802 945 1,085 441
Other Income 81 95 54 19
Total Income 884 1,040 1,139 459
Expenditure 552 653 755 813
EBIDTA 251 292 330 -372
GPM (%) 31% 31% 30% -84%
Depreciation 62 68 104 86
Interest 0 0 1 4
Profit before tax 270 319 279 (443)
Extraordinary item - 0 41 10
Tax 39 55 57 22^
Profit after tax 231 264 181 (475)
Minority Interest - - - -
Net profit 231 264 181 (475)
NPM (%) 29% 28% 7% -108%

*Standalone
^ Includes deffered tax expenses of Rs 21 m

Note: While there has been no specific mention in the IPO draft prospectus for the nine months FY04 loss of the company, according to the published information by the company, the net loss seems a factor of the fall in revenues for the company. Previously, NDTV had entered into a contract during 1997 with STAR/NTVI for producing news content for its 24-hour news channel. This contract expired on March 31, 2003. It must be noted that during FY04, NDTV's primary business has changed from production of television software for other broadcasters to television news broadcasting through its own channels.

Shareholding

Category Pre-Offer Post-Offer
Promoters 65.1% -
Indian Funds/MFs 21.3% -
FIIs 9.6% -
Foreign Investors 4.0% -
Others 0.0% -
Public 0.0% -
Total 100% -

* Post-issue shareholding pattern will be determined after the Book-Building process

Comparative valuations and comments

  NDTV* TVTN TV 18
Price (Rs) 66.5 142.5 230.0
P/E (x) 15.4 17.0 31.1
P/Sales (x) 49.5 5.0 5.8
OPM (%) 30.4% 44.4% 38.8%
NPM (%) 16.7% 24.4% 23.2%

* Assuming an average price of Rs 66.5, i.e., between Rs 63 and Rs 70.
Note: While TVTN numbers have been annualised on the basis of its 3QFY04 results, TV 18 numbers are 9mFY04 annualised.

NDTV is primarily a news broadcasting company with advertisements forming almost 90% of its revenues. Hence, the valuations should be considered keeping in mind the relatively higher risk profile of NDTV owing to lack of diversification and reliance on only one segment - news. Further, though the company enjoys higher margins at the current juncture, pressure on the same cannot be ruled out with increasing competition in the industry.

It must be noted that both the channels of NDTV have not yet achieved break-even having incurred aggregate losses for the nine months ending December 2003. However, for comparison purpose, we have taken the FY03 results into consideration for NDTV and for the companies in the industry with comparable business models - TV Today and TV18 - we have taken the annualised earnings for FY04. At the average (assumed) price of Rs 66.5, the stock is valued at 15x its FY03 earnings. Though the stock seems adequately valued, we feel that in the medium term, the company is well placed to face the competition in the industry on the back of its strong brand value and its style of delivering news though its well known team of journalists/anchors. Also, with News coming second to only entertainment, movies and one off sports events (cricket) channels, there is ample scope for growth. However, investors need to keep in mind the higher risk profile of the stock.

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Disclaimer:
We would like to inform our readers that this IPO note is just a one-time view on the company and in no way implies that there will be regular coverage on the company's performance or any other development. Should we decide to bring the company under research coverage in the future, it will be available exclusively to subscribers of the respective subscription.