Clear reception some time away for TV18

While rights issue will reduce debt, gains from digitisation & benefits of an expanded network after ETV acquisition will flow through gradually

The TV18 scrip has made smart gains from early September and at Rs 24.70 is quoting above its rights issue price of Rs 20. But gains for investors over the medium term, given the high price paid for acquiring the ETV regional bouquet will depend on flawless execution and a jump in subscription revenues. Given that the track record has not been exciting, investors need to be a bit cautious. For instance, while the company has premium properties both in the business news and entertainment space and is a leading player in most segments it operates in, it has not been able to convert its market leadership into profits.

Ambareesh Baliga, chief operating officer, Way2Wealth, says that while the company is unmatched in the breadth of its offerings in the media space, it has not been able to convert its strength into improving cash-flows. Not surprisingly, its stock has underperformed markets in the last four to five years. Since January 2012, when the rights issue as well as the deal between TV18 promoters and Reliance Industries were announced, the stock has underperformed. Then the management had said that the rights offer price would not exceed Rs 40 per share (when the stock was at Rs 30-31). But weak sentiments therafter have seen the stock slip to Rs 25 levels.

On the flip side, the rights issue (which seeks to bring down debt), the ETV acquisition (which will expand the company’s presence) and implementation of digitisation could be the game changers. Kotak Securities analyst Ritwik Rai believes the negatives (in terms of expensive acquisition) are in the price and that the company is headed towards profitability in the medium term, on account of growth in subscription revenues, improvements in margin and reduction in interest payments. He pegs TV18’s sum-of-parts valuation at Rs 26. However, some experts believe the gains may not come in fast.

NO PROFITS YET
In Rs crore	FY11	FY12	Q1’FY12	Q1’FY13
Revenues	809.0	1,410.0	264.0	347.0
Operating profit/loss	41.9	-62.3	22.1	15.0
Other income	13.5	85.8	36.7	9.0
Interest costs	51.0	120.0	28.3	38.6
Net profit/loss	-17.4	-73.8	21.1	-23.0
Consolidated financials; Latest figures not comparable due to restructuring of business last year Source: Company

Says Arun Kejriwal of Kejriwal Research and Investment Services, “Despite the perceived benefits (debt reduction, lower interest costs and network growth) the high valuations of the ETV deal, steep dilution in equity and the additional bandwidth the management (to run ETV) requires will make it tough to engineer a turnaround anytime soon.”

In this backdrop, investors with an appetite for risk and longer-term horizon should only subscribe to the rights offer.

Digitisation gains
In addition to growth in its existing businesses, the TV18 management believes that it is well positioned to benefit from the impending digitisation. In this context, one of the areas the management has been highlighting is the disparity in subscriber revenues of other broadcasters and TV18. While broadcasters get 40-45 per cent of their revenues from subscription, for TV18 it is 20 per cent. Thus, while Zee gets Rs 1,400 crore in subscriptions, TV18’s number is Rs 450 crore. With most channels from the TV18 bouquet being recent additions (Colors is four-year old), the lack of bargaining power meant higher costs for new players like TV18.

With the implementation of digital addressable system and formation of its distribution venture IndiaCast (TV18, Viacom), which will have a total of 49 channels, the management hopes to bring down the high carriage cost (currently Rs 350 crore) and benefit from the increase in subscriber declarations. Carriage fees are high due to narrow bandwidth available with cable operators forcing players such as TV18 to shell out more for carrying its signals. With digitisation, the number of channels an operator can carry will rise (three to four times) as will declarations. Subscription revenues thus could grow at 15 per cent over the next few years.

Though most analysts agree on the growth potential of the TV18 properties, they are sceptical about the operations turnaround given the slowdown in the advertising market and the pace of gains from the improvement in subscriptions. Any delay in rolling out of the digitisation process could also hurt the company. Says Rahul Kundnani, analyst at SBICap Securities, “While the company has prime properties and will be one of the biggest beneficiaries of digitisation, gains from swing in carriage fee and subscription income, which are inevitable, might take a little longer than estimated due to any delay or postponement in the digitisation deadline.”

RIGHTS ISSUE DETAILS
Size (Rs crore)	2,700
Opened on	Sept 25
Closes on	Oct 15
Price (Rs/ share)	20
Ratio	41 for 11 shares held

Premium acquisition
One of the key reasons for the current rights issue and the deal between TV18 group and Independent Media Trust (a trust controlled by Reliance Industries) is the acquisition of the regional channels of Eenadu at a cost of Rs 1,920 crore. While most analysts believe that the acquisition comes at a steep price (over five times EV/sales versus a fifth for existing listed players), the management has pinned its hopes on the potential the ETV bouquet holds. In addition to the gains of a 22-channel combined portfolio, in terms of reach and bargaining power, the group can participate in the fast growing regional markets, especially if they can improve the position of the regional channels, which are currently lagging behind competition.

Moreover, the deal involving acquisition and funding of the ETV entities will help the company bring down its debt. Rai of Kotak Securities says that while the valuation paid by the company is excessive, the transaction will increase TV18’s clout and the group could emerge as one of the stronger broadcasters. However, a vice president of equity research at a domestic broking firm says that a lot will depend on execution and given the muted advertising market, a high valuation for struggling regional channels is not justified.

Lower debt, high dilution
Meanwhile, TV18 has debt of Rs 709 crore and forks out annual interest of Rs 120 crore. The plan to pay off Rs 420 crore of debt will bring down the interest outgo by half. However, the rights issues will lead to an equity dilution of 373 per cent for the company.