UTV Software Communications Ltd Jaypee Research Desk th 7 March 2011 [email protected] [email protected]
pINITIATING COVERAGE CMP: ` 534 TARGET: ` 629 BUY As on Mar 07, 2011 Market Cap. (`. Mn.) 21699 Gaming fueling the growth trajectory 52 Week High/Low `620/385 UTV Software Communications Ltd (UTV) is India's first integrated global media and entertainment company with businesses spanning across film production and Book Value `198 distribution, gaming, TV content, TV broadcasting and new media (content on Face Value `10 web and mobile). It has a dominant presence in movies production business, with the movies business contributing 49% to UTV’s operating revenues. Its Codes broadcasting business is also growing at a fast pace, with its youth oriented BSE Code 532619 channels garnering higher TRPs. Also, the gaming business is about to generate NSE Symbol UTVSOF returns on the investments made earlier, with 3 IP titles ready for release. UTV’s Bloomberg Code UTV IN strategic partnership with Walt Disney (with a 56.67% stake) gives UTV the access to overseas markets. Reuters Code UTV.BO • Strong movie content pipe line: UTV follows the Studio approach in its movie production and distribution business. It has a strong movie pipeline with Shareholding pattern movies like ‘Thank You’ lined up for release. It has release-locked 8-10 movies
Dec-10 Sep-10 Jun-10 for FY12. It de-risks its movies’ box-office performance by pre-release selling
Promoter 70.2 70.1 70.1 the satellite and music rights, thereby recovering about 50% of its production FII 9.7 8.1 7.0 costs. DII 4.9 5.2 6.3 Others 15.3 16.6 16.6 • Youth oriented TV broadcasting garnering higher TRPs: UTV’s broadcasting business consists of 4 ‘mass specialty’ network of TV channels. These channels target particularly the youth audience. The channels are gaining Share Price Performance popularity with its target audience, which is reflected in its improving TRP 140 numbers. The broadcasting business has achieved break even at EBIDTA level 120 with a 100% YoY growth in revenues during H1FY11. UTV also produces 100 80 television content for several channels and is also a quasi broadcaster for Sun 60 Network.
40 20 • Gaming at inflection point: UTV has developed 3 AAA game titles through 0 UTV Ignition for PS3 and XBOX 360. Its first game El Shaddai won ‘Most
10 10 10 10 10 10 10 10 10 10 11 10 ------Anticipated Future Title’ award on its debut at the Tokyo game show. UTV Jul Jan Jun Oct Apr Feb Sep Dec Aug Nov Mar May has signed a USD 10 mn minimum guarantee contract with two Japanese
UTV Sensex companies as a part of merchandizing agreement. It plans to sell the
publishing rights of El Shaddai by the end of FY11. UTV’s tie up with
international game publishers and success of its console games will be key Share Price Returns (%) positive triggers for the company. We initiate coverage on UTV Software 1M 6M 12M Communications Ltd with a ‘BUY’ rating with one-year price target of ` 629 Absolute -8% -6% 5% on SOTP, return of 18% from current levels. Relative -3% -5% -6% Financial Summary (` Mn)
Year ended FY09 FY10 FY11E FY12E
Priyanka K Jadhav Net sales 6065.5 6640.5 10104.2 14202.2 [email protected] EBIDTA -829.0 473.3 2344.8 3695.2 EBIDTA Margin (%) -13.7% 7.1% 23.2% 26.0% Contact No: +91-22-43542014 PAT 356.3 533.3 1876.7 2267.9 PAT Margin (%) 5.9% 8.0% 18.6% 16.0% EPS 10.4 13.1 46.2 55.8 PER (x) 48.8 38.7 11.0 9.1 ROE (%) -0.3% 3.3% 12.6% 18.4% Source: Company, Jaypee Research
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UTV Software Communications Ltd Jaypee Research Desk th 7 March 2011 www.jaypeeindia.com www.jaypeeusa.com
Investment rationale
Market leader in movies production UTV is the market leader in the movies business this fiscal with twelve films released during Robust movie slate … FY11. Currently, UTV is the only studio with 8-10 movies release-locked for next year 2011- 2012.
Movies slate in FY11
Movies released during first 9 months of FY11 Q1FY11
• Chance Pe dance
• Harishchandrachi factory (Marathi)
Q2FY11
• Rajneeti I Hate Love Storys • Udaan • Peepli Live •
Q3FY11
• We are Family
• Guzaarish
• Tees Maar Khan
Movies released during Q4FY11 Q4FY11
• No One Killed Jessica
• Dhobi Ghat
• Saat Khoon Maaf
Source: Company, Jaypee Research
UTV amortises about 60% of the cost of production of a film in the year of release, followed by 10% of the cost in each of the next 4 years.
De-risking box-office performance of movies
UTV sells the satellite and music rights of movies prior to the release of the movies. These Pre-sales of satellite and revenue streams such as home video rights, cable and satellite rights, music rights, mobile music rights de-risk the box- and internet rights, film advertising and merchandising contribute about 30%-50% of the office performance… total revenues, depending on the type of the film and its performance at the box office. Through such pre-selling UTV recovers the cost of producing the movies, at least partially, thereby de-risking the box office performance of the movie.
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Studio approach reduces dependence on few successful films UTV has adopted the studio approach for movies production wherein it produces and Diverse mix of movies reduces distributes its own films across genres. Thus at a time, it produces a number of projects with dependence on few successful different budgets. The company does not plan to pursue the acquisition-focused model, movies… wherein films made by third-party producers are acquired for distribution by paying a minimum guarantee.
A diverse mix of films spanning across various genres, a range of budgets and targeted at different audiences reduces the dependence on few successful films. UTV is also actively involved in films co-produced by other production houses, right from the inception in scripting and production-related activities.
UTV has created a separate sub-brand, UTV Spotboy, which produces small-budget films with unusual storylines targeted at the urban multiplex audiences.
Movie segment - largest contributor to revenues
Movie business contributes The movies business is the largest contributor to revenues with 49% share in the total revenues during 9MFY11. During the first 9 months of FY11, the movies segment reported 49% to topline… an increase of 28% in revenues to 3391 million from 2649 million in the same period of ` ` last fiscal. We expect the percentage contribution to revenues to go down with UTV’s
broadcasting and gaming segments showing a growth in revenues.
Segmental revenue contribution
9MFY11 Q3FY11
Games & Interactive Games & 14% Interactive 20% Movies Movies 40% 49% Television 37% Television 40%
Source: Company, Jaypee Research
In addition to the movie releases during 9MFY11, income was realized from (a) the satellite
revenue for Raajneeti, (b) syndication from the sale of rights of catalogue titles and (c) revenues from the Hollywood slate.
FY11 started strongly with the release of Raajneeti emerging as the fourth biggest blockbuster in the history of Indian cinema, and the positive trend continued with an even stronger second quarter, putting UTV well ahead of the competition both in terms of number of movies released and revenue. UTV is poised for continuing success for the coming fiscal with a strong pipeline of films.
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Key financial indicators for movie segment Year FY08 FY09 FY10 9MFY11 Revenues (` Mn) 2,637.1 2,762.1 3,154.0 3,391.2 EBIT margin (%) 555.7 537.8 951.0 1,239.1 Capital employed (` Mn) 4,465.0 9,079.9 4,821.4 3,514.6 RoCE (%) 12.4 5.9 19.7 35.3 Source: Company, Jaypee Research
Consistent release schedule Going forward, the company plans to produce and release 12-15 movies of varying budgets per year. To avoid lumpiness, UTV has scheduled the release of its movies consistently across across quarters… all quarters and plans to do so in the coming years also. Being the largest player in the industry, we expect UTV to benefit from the growth opportunities in the movies business. Growing number of multiplexes have resulted in wider release of films on the day of theatrical release, thereby increasing the box-office collections phenomenally. Also the, growth in ancillary revenue sources such as sale of Cable & Satellite, home video, music and digital rights would further add to the revenues and profits, particularly since UTV would have a larger number of movies in its kitty to exploit.
Movies Revenues
45% 6000 41% 36% 40% 5000 6069 35% 30% 4668 4000 19% 30%
3000 3154 25% 2762 2000 Movies segment expected to 20% grow at 39% CAGR… 1000 15%
0 10%
FY09 FY10 FY11E FY12E
Movies Revenues (Rs Mn) EBIT Margin (%)
Source: Company, Jaypee Research
Considering the above factors and the robust movie pipeline of UTV we expect the revenues from the movies segment to grow at a CAGR of 30% over the next 3 years to touch ` 6069 mn in FY12E.
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Youth oriented TV channels gaining viewership Constituting 37% of total revenues during 9MFY11, UTV’s television segment includes the
broadcasting business and television content business.
UTV forayed into the television broadcasting business in FY08 through UTV Global Television broadcasting Broadcasting Ltd, in which UTV holds an 85% stake with Walt Disney holding 15%. UTV has business turns profitable at identified the youth as its target audience for its broadcasting segment. All four channels in EBIDTA level its portfolio - UTV Movies, UTV World Movies, Bindass and UTV Action – have a definite
target audience, mainly the youth audience. This strategy has been successful for UTV as its
channels’ viewership has seen a steady improvement, with most of the channels competing closely with leading channels in the respective categories.
Channel Category/Genre Target audience Key competitors Bindass Youth Channel Youth MTV, Masti UTV Action Dubbed Hindi Movies Youth (males) Set max, Zee Cinema (Action) UTV Movies Hindi Movies General movie Set max, Zee Cinema viewers UTV World English movies (Niche Niche upmarket Movies NOW, Lumiere Movies World Cinema) movie viewers (NDTV channel)
Source: Company, Jaypee Research
All four channels have turned profitable in Q1FY11. We expect the broadcasting business to post strong performance during FY11E and FY12E on back of increasing advertising volumes and inventory utilization.
UTV’s channel share - defined as the market share of UTV’s channels in genres where it is present - has been consistently increasing, indicating the growing popularity of its channels. All of UTV’s channels are ranked among the top five in their respective genres.
Viewership of UTV’s flagship channels
Bindass UTV Action 20 9 18 8 16 7 14 12 6 10 5 GRP 8 GRP 4 6 3 4 2 2 1 0 0 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011 2011 2, 5, 8, 1, 4, 12, 14, 16, 26, 28, 30, 32, 42, 44, 46, 20, 24, 34, 36, 38, 40, 18, 22, 11, 14, 17, 20, 23, 26, 29, 32, 35, 38, 41, 44, 47, 50, Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week
Source: TAM Media Reseach, Jaypee Research
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DTH penetration to drive subscription growth The digitisation of TV platforms has given way to more transparent distribution of revenues DTH penetration to curb for stakeholders in the value chain and more bandwidth becoming available to broadcasters, under reporting of giving them the opportunity to provide value add services. This could boost the availability of subscribers, thereby niche content in the future. improving distribution revenues The advantages of DTH as a platform include a user-friendly interface and a large no of channels as compared to the analog platform. It is likely to continue to increase penetration. DTH was one of the biggest contributors to the digitisation story. DTH has displayed rapid growth to reach 20 million gross subscribers by the end of 2009. The number of subscribers excluding the churn stands at 16 million. Going forward, the amount of churn is expected to be at least 3% to 5% of the overall DTH subscriber base per month. By 2014, the DTH subscriber base is expected to reach 43 million.
Also, many DTH subscribers are coming from states with class 2 and 3 towns and not just metros. For example, in Rajasthan and Maharashtra, the platform has found acceptability in DTH also to improve TV a lot of small towns and cities. In a state like Assam, where cable is difficult to install due to penetration in regional the mountainous terrain, DTH is gaining strong ground and reached a growth rate of ~25%. markets Pay TV subscriber base
No of Pay TV subscribers
90 16 80 10 70 2 4 60 50
Mns 40 70 69 30 20 10 0 2008 2009
Analog Digital DTH IPTV
Source: FICCI-KPMG Indian Media and Entertainment Industry report 2010, Jaypee Research
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Steady growth seen in TV content UTV is one of the largest players in the television content space. The TV content business TV content production costs comprises production of content for channels across the GEC (General Entertainment to remain stable… Channels) space and sale of airtime on channels.
The television content segment is a steady growth business with relatively low margins and low costs, which lends stability to UTV’s operations. The TV content business model does not require high upfront capital expenditure. This, coupled with maturity of the business itself, enables UTV to enjoy high return on investment as compared to its other business segments. The TV content division saw a total investment of ` 322 mn as of March 2010, which is 1.85% of total capital employed. ROCE in this segment stood at 10% in FY10.
Shows currently on air
Name of the Show Channel Frequency in a week Genre
Ratha Saptami Udaya TV 5 Daily Soap
Rakt Sambhandh Imagine 5 Daily Soap Rakta Sambandham Gemini 5 Daily Soap Maaylek ETV Marathi 6 Daily Soap
Big Switch 2 Bindass 1 Reality
Emotional Atyachar 2 Bindass 1 Reality Rakhi Ka Insaaf Imagine 1 Reality Prerana Udaya TV 5 Daily Soap
Spell Champ Chutti TV 1 Reality
Veera Marthanda Varma Surya TV 2 Daily Soap
Deala Na Deala Surya TV 2 Reality Deala Na Deala Sun TV 2 Reality The Assignment Bloomberg UTV 1 Reality
Date Trap Bindass 1 Reality
Source: Company, Jaypee Research
The Company currently has strong slate of shows on air with 5 new shows launching in Q4 including Maa Exchange (Sony) (on air), Dor (Star Plus), Kadmambari (Zee Marathi), among others.
Quasi broadcaster to Sun TV In the airtime sales, UTV generates advertising revenues by selling airtime on various
Airs No 1 shows on SunTV and channels on Sun Network by showcasing programmes created and aggregated by UTV. On an Surya TV on Sun network… average UTV sells 125 hours per month of air time on Sun Network. Currently, its shows enjoy the number one position on Sun TV and Surya TV. Its association with Sun Network gives UTV the access to regional markets which are the fastest growing advertising markets. Currently the Air Time Sales business division has 12 shows running across the South channels with 8 of the 12 shows among the Top 5 programs its respective genre and channel.
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Gaming and interactive business set to surge UTV has made significant investment in gaming (market size of USD 60 bn) by taking stakes in Ignition (console gaming), True Games (internet gaming), and Indiagames (mobile gaming). We expect the gaming business to report strong growth once the AAA titles
developed by Ignition for PS3 and XBOX 360 are released during FY12 along with new launches which have been lined up by True Games. While Indiagames has turned 3 AAA titles to be released in profitable in Q2FY11, True Games is expected to break even by the end of FY11E. The FY12… gaming division posted revenue of ` 950 mn in FY10. We expect a significant boost to the segment’s performance during FY12.
Gaming pipeline
UTV Ignition UTV Truegames El Sheddai – Due to be released in April 2011 Faxion Reich Planet crashers War Devil Sky Legends Source: Company, Jaypee Research
El Sheddai to be released in April 2011 El Shaddai, a third person action adventure game developed out of UTV Ignition Japan’s studio received an award for the “Best Future Game” at the Tokyo game show. UTV is actively negotiating for a multiple of merchandising/ licensing / co-branding / co-marketing deals - where the commercials include (a) Minimum Guarantees, (b) Revenue Share, and (c) Advertising & Marketing Support. UTV has finalized two such arrangements with, viz;
1. “EDWIN” - the number 1 Jeans company in Japan 2. “Bandai Toys” - the number 1 Toy company in Japan In addition the game has potential to generate ancillary revenues from ‘motion picture’ rights. The Game has 50-60 minutes of graphics - backed by a strong storyline for a motion picture.
Superior graphics enable premium pricing over competitors Most AAA games retail for around USD 60 per unit, but due to (a) the highest quality of graphics, plus (b) the pre buzz in Japan and (c) supported by Sony and Microsoft, and (d) a strong Yen - El Shaddai will retail in Japan as close to USD 81 per unit, giving boost to UTV’s overall commercials albeit for the Japan market, which is an important market for a game like El Shaddai.
El-Sheddai’s distribution strategy to optimize sales in Japan The company has decided to break its Publishing and Distribution Strategy in four key geographies (a) Japan, (b) North America, (c) Europe (including UK), and (d) Rest of the World. In Japan, backed by a healthy retail price and a strong support from the platform owners, UTV Ignition has concluded partnership with Sony and Microsoft jointly. In Japan, Sony has 3 times more PS3 installed than Microsoft’s Xbox 360. Microsoft is also aggressively growing their presence in Japan. UTV’s partnership with Sony will give it (a) Maximum retail support, (b) Strong marketing spend, (c) Highest share per unit compared to any other Publisher it would have gone with and they will push on their PS3 platform. Similarly, the same arrangements and benefits with Microsoft, and they will push on their Xbox 360. With this strong support and marketing push from these platforms, the combined sales are expected to cross 500,000 units in Japan alone.
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Supplementary revenue streams in UTV TrueGames Truegames, UTV’s online gaming subsidiary, is expected to generate additional revenues
from the expansion packs for its existing games. Expansion packs increase a game’s longevity True games’ ancillary streams and momentum. In addition Truegames is also planning to incorporate supplementary to improve revenues… revenue streams through In-Game advertising and licensing/merchandising deals. It has recently signed a million dollar licensing deal for South East Asia territories with Yamaia Limited. Its last online game released was ‘Mytheon’.
UTV Indiagames - Market leader in mobile games in India
Indiagames, UTV’s mobile gaming developer is a market leader in the mobile gaming market
in India. It has expanded its footprint in games to DTH, Online and iPad/iPhone ++.
Indiagames has signed a deal with Reliance Big TV, the Direct-To-Home (DTH) arm of Indiagames is one of the Reliance Communications, wherein it will offer gaming services on Reliance Big TV’s DTH three firms from India to have platform in India. Indiagames will make available eight games on BIG TV DTH, for a logged a million downloads subscription fee of ` 30 per month. on Nokia’s Ovi store
Innovative offerings made by Interactive & new media
UTV provides various innovative media offerings through its Interactive and new media segment. It is a pioneer in ‘made for mobile content’. UTV Audio Cinema already has 3.5 million subscribers and earns consumer spending over ` 5 Cr/month. UTV Powered Vodafone Mobile Box Office is one of the fastest growing subscription services in Vodafone VAS (value added services). UTV launched celebrity live interactive voice chat service through Airtel’s Talk To Me (TTM) product. It has also launched the celebrity voice blog UTV Audio Cinema has 3.5 service and has acquired digital rights of leading Bollywood and Southern Cinema celebrities million subscribers and earns for 2 to 5 years e.g. Priyanka Chopra, John Abraham, Lara Dutta, Ileana D'Cruz and continually adding more to its repertoire. It has established itself as key player in the short consumer spending over ` 5 Cr/month format video content and has entered into long term partnerships with leading Telcos to provide consumers ‘Made for Mobile’ content. Being a pioneer in the business, UTV is in the best position to exploit the opportunities presented by the changes in consumption pattern due to the advent of 3G and 4G.
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Company background
UTV is an integrated entertainment company with three distinct business verticals - Television, (includes broadcasting and content), Gaming & Interactive and Films.
Spanning presence over Movies production and distribution various media segments UTV’s Movies business includes production, marketing, distribution, merchandising and syndication worldwide. It has Hindi movies, animation films, international productions and co productions across genres in its large portfolio. UTV is associated with renowned film makers, directors and actors who have proven their mettle at the box office.
Television content UTV was one of the earliest players in the television content space, and over the years has produced a number of shows on a commission basis across various genres. UTV’s content segment produces shows across channels like Star Plus, NDTV, Zee Network, Sahara Network and Sun TV offering a host of genres such as drama, comedy, regional themes, fantasy, action, horror, mythology and children’s shows. UTV is a quasi broadcaster in South India for channels across the Sun TV Network. In the airtime sale business, the company acquires
airtime (mostly on South Indian channels) and sells commercial slots to advertisers.UTV has clocked over 10,000 hours of air time sales across diverse genres on various channels. It’s dubbing division has provided dubbing services for channels across genre.
Television broadcasting UTV entered the broadcasting business in Sept 2007 with a clearly differentiated strategy of having a strong targeted audience for each of its four channels. It is also clear about not entering the GEC (General Entertainment Channel) space. It also plans to enter the Indian regional languages space through its brands ‘Bindass’ and ‘Action’.
UTV Ignition UTV Ignition is a developer & publisher of handheld and console games. Having a wide customer base across UK, Europe, Japan and North America, Ignition develops, publishes and distributes console games across multiple platforms like Sony's Playstation, Microsoft's X Box and the Nintendo range of consoles. It currently has three AAA Titles under production - El
Shaddai, Project Kane and Reich.
UTV IndiaGames UTV in 2006 had invested ` 68 crore to acquire 51% stake in Indiagames, which it further increased to 58%. Indiagames is one of the major players in the Indian online and mobile gaming segment and has a market share of around 50%. The company’s Games on Demand subscription model has a base of 60,000 users. It is one of the three firms from India to have logged a million downloads on Nokia’s Ovi store. It also has an exclusive Games channel on DTH Reliance Big. Its game ‘Bruce Lee’ is amongst the top10 games on iPad / iPhone – across USA, UK, Japan and EU.
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UTV Truegames
UTV True Games Interactive Limited based in California is a massively multiplayer online (MMO) games company with free-to-play micro transaction based model. It has three games in pipeline - Faxion, Sky Legends and Planet Crashers.
New media and Interactive The Interactive segment contains various products and services including portals such as techtree.com and services such as distribution of movies and music based products on mobile such as RBT/ CRBT, Wallpapers, Audio Cinema, Celebrity voice blogs, etc.
Walt Disney’s strategic stake Walt Disney Company SE Asia has a 56.67% strategic shareholding in the company. However, as per the agreement between Walt Disney and the promoters, Walt Disney’s voting rights are capped at 32.1% for a period of 4 years from the date of completion of the open offer
(November 2008). Walt Disney has 3 nominee directors on UTV’s board. The association with Walt Disney benefits the company, as it targets international markets in the gaming and films segments.
Source: Company, Jaypee Research
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Media sector in India
Media & Entertainment industry in India is indicating potential for growth The Indian media & entertainment industry is at a nascent stage and is not as evolved as the
Increasing purchasing power industry in developed nations. Media spend in India as a percent of GDP is 0.41%. This ratio of the Indian consumer to is almost half of the world’s average of 0.80% and is much lower compared to developed narrow the media spending countries like US and Japan. This indicates the potential for growth in spends as the industry gap between India and other in India matures. With the increasing brand‐consciousness and purchasing power of the countries Indian consumer the spending gap between India and other countries is likely to get narrowed.
Media spend as a % of GDP
1.20% 1.08%
1.00% 0.90% 0.78% 0.80% 0.80% 0.75%
0.60% 0.41% 0.40%
0.20%
0.00% India UK US China Japan World
Source: FICCI‐KPMG Indian Media and Entertainment Industry report 2010, Jaypee Research
Ancillary revenue streams reducing risks in movie business Several ancillary revenue streams have been provided by the evolution of digital technology. Filmmakers are delivering film‐based content like music, videos, images and games on Ancillary revenues recover the mobile phones and the internet. Releasing movies on the DTH and cable platforms through cost of production, lowering ‘Pay Per View’ services soon after the theatrical release also helps filmmakers in monetizing the inherent risk of failure at their movie content. Releasing films on the internet is another trend adopted by filmmakers. box office Depending on several factors like the box office performance, direction, production house, cast, etc. such ancillary revenue streams contribute about 30% to 50% of the total revenues, thereby recovering the entire production costs. So the box office revenues entirely add to the profit of the movie.
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Digital screens and increasing number of screens facilitate wider release of movies Digital prints have enabled distributors to release a large number of copies at the same time, thereby allowing producers to capture revenues outside urban areas and recover their Wider release ensures higher investment more quickly. This is expected to have a positive impact on box office revenues, box office collection as the maximum box office collection is earned during the first week of release of the movie. The total number of digital screens in India is currently estimated at over 3,000. Digitization reduces incremental distribution costs as cinemas upload films to computer hard drives, thereby eliminating the need for physical prints to be produced and delivered. Increased
digitisation of single screen theatres is also helping the regional film industry in terms of wider release and the opportunity to capture theatrical revenues within shorter windows.
TV industry to have larger share of ad-revenue pie by 2014 The contribution of Television to the overall revenues of the M&E industry has gone up
considerably in 2009 as compared to 2006 and is expected to continue increasing and achieve almost 48% of the total revenues in 2014. On the other hand, the contribution from sectors like Films, Print, Music and OOH has come down in 2009. Going forward, it is expected that the contribution from Films and Print may come down further in 2014, as the overall size of the M&E industry continues to grow. Television is expected to grow at a higher rate of 15% over next five years compared to an almost 9% growth in both the Films and Print sectors.
Overall the industry grew from 241 billion in 2008 to 257 billion in 2009 recording a ` ` growth rate of 7% compared to 14% last year. It is expected to reach a size of ` 521 billion in the next 5 years i.e. by 2014 at a CAGR of 15.2%. The growth in advertisement revenues is expected at a rate of 15.6% which is marginally higher than the subscription revenues growing at a rate of 15%.
Media & Entertainment Industry (` billion)
2006 2007 2008 2009 CAGR 2010P 2011P 2012P 2013P 2014P CAGR (2006-09) (2009-14) Films 78 93 104 89 5% 96 105 115 125 137 9% Television 183 211 241 257 12% 289 337 382 448 521 15% Print 139 160 172 175 8% 190 206 225 246 269 9% Radio 6 7 8 8 9% 9 10 12 14 16 16% Music 8 7 7 8 2% 9 10 12 14 17 16% Animation & VFX 12 14 17 20 18% 23 28 33 39 47 19% Gaming 3 4 7 8 38% 10 14 20 26 32 32% Internet 2 4 6 8 56% 11 15 18 23 29 30% Outdoor 12 14 16 14 5% 15 17 19 21 24 12% Total Size 443 516 579 587 10% 652 742 835 956 1091 13% Source: FICCI-KPMG Indian Media and Entertainment Industry report 2010, Jaypee Research
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Digitization and increasing number of TV households to spurt subscription revenues
TV penetration is increasing with the growth in the number of TV households. The number of TV households grew at a rate of 5% to reach 129 million in 2009 compared to 123 million in 2008. The penetration of TV in the country grew from 56% in 2008 to 58% in 2009. Currently TV penetration in India is much lower as compared to some of the developed markets which are almost fully penetrated. Hence, the numbers have potential headroom for growth.
Growth in no of TV households in India 250
200
s150 123 129 n io il M 100
50 95 93
0 2008 2009 Non TV HHs Total TV HHs
Source: FICCI‐KPMG Indian Media and Entertainment Industry report 2010, Jaypee Research
The penetration for Cable & Satellite (C&S) households increased from 70% of total TV households in 2008 to 74% in 2009. The overall number of C&S households reached 95 million registering a growth of 10%. A large part of this growth came from the digital homes being added.
Growth in no of Cable & Satellite households 140
120
100 s n 80 86 95 io il M 60 40
20 37 34 0 2008 2009 Non C & S C & S
Source: FICCI‐KPMG Indian Media and Entertainment Industry report 2010, Jaypee Research
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Different genres in TV content also garnering TRPs
More than 50% of the viewership share in Hindi speaking markets (HSM) is dominated by Indian gaming industry Hindi GEC and movies combined. However, in the South Regional GEC alone captures close expected to grow at CAGR of to 50%. Given the fatigue factor that had set in with similar serials being aired across 32% between 2009 and 2014 channels, TV producers try to innovate with novel concepts like reality shows, game shows, etc. Reality shows like ‘Emotional atyachar’, ‘MTV Roadies’, etc are gaining popularity among the youth.
Gaming scenario in India and world over According to the Game White Paper 2010 (Ministry of Culture‐Korea), the global gaming market is expected to grow at a CAGR of 7% to reach USD 143bn in 2012 from USD 117bn in 2009. The mobile and online segment is expected to grow at a CAGR of 16% and 17% respectively over the next three years, mainly driven by the growth in Asia‐Pacific region, particularly China and Korea.
Size of Indian Gaming Industry
35 30 6.1 25 s 4.6 n io 20 11.6 il 3.1 B 9.8 s 15 R 2.2 8.3 10 1.2 1.6 1.0 7.1 11.9 14.3 5 4.1 4.9 5.9 8.5 4.8 1.4 1.8 2.4 0 2008 2009 2010P 2011P 2012P 2013P 2014P
Mobile Console PC & Online
Source: FICCI‐KPMG Indian Media and Entertainment Industry report 2010, Jaypee Research
Overall, the Indian gaming industry is expected to grow at a CAGR of 32% between 2009 and 2014 to reach ` 31.9 billion by 2014. Driven by factors such as a young population, rising disposable incomes, increasing PC and wireless users, progressive distribution models gaming companies across the segments are provided with a market opportunity to co‐exist and collectively grow the audience for their respective businesses.
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New media The role of the new media is becoming increasingly important in the distribution portfolio of advertisers. New media is bringing about a revolution by merging the functionalities of Advent of 3G and 4G presents customer end terminal devices like TV, PCs, Mobile phones, etc. For example, IPTV, online more opportunities to newspapers and magazines, podcasts, Wi-Max, new video formats, internet streaming, etc. develop content for New are technological advancements leading to convergence of two or more media into a Media converged communication channel. This creates new and exciting methods of monetising content and attracting new media consumers. The advent of 3G is likely to be a great catalyst to the convergence phenomenon by making the mobile phone a very handy tool for accessing video and audio formats. This has increased the number of entertainment and information delivery choices available to consumers and intensified the challenges posed by audience fragmentation. The launch of I-Pad provides a new delivery platform for news, entertainment, etc. in future. We are likely to see more content being customised for these new portable devices compared to the traditional stay-at-home devices. We are also likely to see emergence of new models for advertisement and subscription revenues.
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Key risks • Movies production is inherently risky business. It is difficult to predict the success of a movie. Poor performance at the box office of UTV’s movies successively would adversely impact the overall movies revenues and margins. It would also exert pressure on working capital and the planned funding of the upcoming film slate. However, with UTV pursuing pre-selling aggressively, there are lesser chances of making losses.
• Movies piracy, including digital and internet piracy which is rampant in India, may decrease the revenues from theatrical exhibition of movies.
• Increased competition in TV broadcasting may lead to UTV paying higher carriage fees for its existing & planned new channels, impacting margins significantly.
• Any decrease in the viewership share of UTV’s existing channels would adversely impact advertising and subscription revenues.
• The lack of transparency and under declaration of subscription revenues in case of analog cable systems has traditionally been a challenge for the broadcasters.
• UTV is a comparatively new player in the gaming business. It faces severe competition from companies across the globe. This may lead to longer break-even period. However, the MG contract for its upcoming game El Sheddai mitigates its risks.
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Q3FY11 – Result Review & key developments during the quarter
• UTV reported Net Revenues of ` 2551 mn, growth of 18% Y-o-Y, with Movies contributing 42%, Television contributing 40% and Games and Interactive contributing 18%.
• The EBIDTA for the quarter at ` 534 mn, has shown a growth of 42% Y-o-Y, with the EBIDTA margin at 21%.
• Net profit after minority interest stood at ` 400 mn, a decline of 6% on Y-o-Y basis on account of deferred tax write back of ` 143 mn in Q3FY10. The PAT margin for the quarter was 16%.
• In Q3FY11, the movies business earned revenues of ` 1076 mn. During the quarter UTV has released two movies - Guzarish and Tees Maar Khan. In addition to box office revenues from movie releases, UTV has earned revenues from sale of satellite and audio rights for Guzarish and We Are Family. UTV has sold the audio and satellite rights of Tees Maar Khan for ` 300 m, which will be booked in Q4FY11. EBIT margin of the movies segment has come down to 25% from 40% in Q3FY10, owing to the losses made in Guzaarish.
• UTV plans to venture in the South Indian languages’ movies production to further expand the UTV brand.
• The television business continues to perform well and earned revenues of ` 1016 mn, growth of 14% Y-o-Y. There is a significant improvement in the profitability of the business with EBIT for the quarter at 20% (5% in Q3FY10) at ` 207 m (` 48 m in Q3FY10).
• With all its brands currently doing well and the flagship brand Bindass having good headroom visa-vis MTV, UTV is looking at increasing its ad-rates for its broadcasting business by 25% to 30%. It also plans to enter the Indian regional language space in the broadcasting business over the next 3-6 months either through the brand name of Bindass or through the brand name of Action.
• The gaming and interactive business revenues for the quarter stood at ` 459 mn and the EBIT stood at ` 106 mn, with the EBIT margin at 23%. With planned release of El Sheddai (AAA IP title) (Ignition) and launch of three new MMOG Games (massively multiplayer online game) (True Games), the current calendar year is critical for UTV’s gaming business.
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• UTV will be releasing El Sheddai on 28 April 2011 in the Japanese market, just before an eight-day week called their golden week which is equivalent of the Chinese New Year in China. UTV has entered into a partnership with Sony and Microsoft for distribution and marketing of the game in Japan. It has locked in a minimum guarantee (MG) of USD 10 mn with two Japanese companies as a part of a merchandizing agreement. Of the MG of USD 10mn, UTV has booked revenues to the tune of USD 5 mn in Q3FY11 and operational costs to the tune of USD 2.5-3 m for the game. The remaining USD 5 mn will be booked in Q4FY11.
• During the quarter the company has merged the entire operations of its online gaming businesses, bringing about location consolidation. So its three different operations for
publishing games on the west coast, a studio on the East Coast and the MMOG play in Austin are now all consolidated in one place in Austin. This has brought about an
annualized cost savings of between USD 3-4 million.
Q3FY11 Financials
` mn Q3FY11 Q3FY10 Y-o-Y % Q2FY11 Q-o-Q % 9MFY11 9MFY10 Growth %
Revenue 2551.4 2161.8 18.0% 2377.9 7.3% 6922.0 5372.1 28.9% Other Operating Income 8.0 45.5 -82.4% 21.1 -61.9% 118.7 133.8 -11.3% Total Income 2559.4 2207.3 16.0% 2399.0 6.7% 7040.7 5505.9 27.9% Total Expenditure 2025.1 1830.0 10.7% 1939.9 4.4% 5562.0 5268.5 5.6% EBITDA 534.4 377.2 41.6% 459.1 16.4% 1478.7 237.4 522.9% Depreciation 21.8 17.6 24.1% 20.7 5.4% 61.1 55.3 10.5% Interest 97.8 103.7 -5.7% 42.8 128.7% 203.8 283.0 -28.0% Other Income 0.0 7.2 -99.3% 15.9 -99.7% 16.3 33.1 -50.8% PBT 414.8 263.1 57.7% 411.6 0.8% 1230.1 -67.8 -1914.1% Tax 0.0 -142.7 -100.0% 0.1 -100.0% 1.3 -259.7 -100.5% PAT 414.8 405.8 2.2% 411.5 0.8% 1228.8 191.9 540.4% Minority interest 15.0 27.6 -45.6% 9.7 54.7% 15.2 -36.1 -142.2% PAT after Minority interest 399.8 378.2 5.7% 401.8 -0.5% 1213.6 227.9 432.4% Equity 406.3 342.0 - 406.3 - 406.3 342.0 - EPS ` 9.8 9.3 5.7% 9.9 -0.5% 29.9 5.6 432.4% EBIDTA Margin % 20.9% 17.1% 22.2 bps 19.1% 9.1 bps 21.0% 4.3% 387.1 bps PAT Margin % 15.6% 17.1% -8.8 bps 16.7% -6.7 bps 17.2% 4.1% 316.4 bps Source: Company, Jaypee Research
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Financial Analysis
Revenue to grow at a CAGR of 46% over FY10‐FY12E We expect revenues to grow at a CAGR of 46% over FY10‐12E to reach ` 14202 mn in FY12E from ` 6641 mn in FY10. We expect the revenue growth to be driven mainly by higher contribution expected from games and interactive segment with the launch 3 AAA games, which will improve contribution of games segment from 16% in FY10 to 21% in FY12E.
16,000 14,202 60% 14,000 52% 50% 12,000 10,104 41% 40% 10,000 40% 8,000 30% 6,066 6,641 6,000 4,342 20% 4,000 10% 2,000 9% ‐ 0% FY08 FY09 FY10 FY11E FY12E
Revenue (Rs mns) Growth %
Source: Company, Jaypee Research
EBITDA margins to improve to 26% in FY12E With the investments in broadcasting and gaming & interactive segments starting to pay off, we expect the EBITDA margins to improve to 26%. We expect the EBIDTA to grow to ` 3695 mn in FY12E from ` 473 mn in FY10.
4,000 30.00% 3,500 26% 25.00% 23% 3,000 20.00% 2,500 15% 15.00% 2,000 10.00% 1,500 7% 5.00% 1,000 0.00% 500 ‐ ‐5.00% ‐10.00% (500) FY08 FY09 FY10 FY11E FY12E ‐14% (1,000) ‐15.00% (1,500) ‐20.00%
EBIDTA (Rs mns) EBIDTA Margin %
Source: Company, Jaypee Research
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PAT set to grow at CAGR of 41% during FY10-FY12E We expect the PAT to grow at a CAGR of 41% in the next three years to ` 1877 mn in FY11E and ` 2268 mn in FY12E.
2,500 20.00% 19% 18.00% 2,000 16% 16.00% 14.00% 13% 1,500 12.00% 10.00% 2,268 1,000 8% 1,877 8.00% 6% 6.00% 500 4.00% 577 533 2.00% 356 - 0.00% FY08 FY09 FY10 FY11E FY12E
PAT (Rs mns) PAT Margin %
Source: Jaypee Research
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Valuation methodology UTV has a unique business model with diversified revenue segments. We have valued UTV
Software by using Sum‐of‐the‐parts valuation (SOTP) method to arrive at the real value of its
individual businesses by trading multiples appropriate for that particular segment. Based on
the individual business segment's growth and profitability vis‐à‐vis its peers we have used relevant multiples for valuation. Outlook and Valuation We assign a value 9x EV/EBITDA for its Movies business, which is at a marginal discount to its domestic peer group average of 9.5x FY12E EBITDA. Considering its niche positioning and focus towards youth segment, we believe that the TV broadcasting business of UTV would be performing better. However, we still assign a sales multiple of 2.5x to the broadcasting business, a small discount to the other Indian broadcasting peers considering that it is not present in general entertainment channel segment and the growth of regional market segment. We value the gaming business at 2.5x EV/EBIDTA, at a discount to its global gaming companies average of 7.4x considering the execution risks involved, UTV being a new entrant. We have valued TV content business at 8x EV/EBITDA, a significant discount to Balaji Telefilms (market leader in TV production segment) EV/EBIDTA multiple of 13.9x. We have valued New media and Interactive business at 2x EV/Sales at a discount to industry average 3.6x EV/Sales multiple.
We initiate coverage on UTV with BUY rating and SOTP based target price of ` 629, implying an upside of 25% from its current price.
SOTP Valuation FY12E Business Segment Valuation basis Multiple assigned Net Sales EBIDTA EV ` Mn Movies EV/EBIDTA 9 6069 2514 22,627 Television Broadcasting EV/Sales 2.5 3019 485 7,548 Television Content EV/EBIDTA 8 2079 161 1,290 Gaming EV/EBIDTA 2.5 3035 490 1,226 New Media EV/Sales 2 188 44 375 Enterprise value 33,065 Net Debt 7,497 Equity value 25,568 Equity capital 406 Face value (`) 10 Target price (`) 629 Current market price (`) 534 Target upside % 18% Jaypee Research
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Financials:
Income Statement Cash Flow Statement (` mn) FY09 FY10 FY11E FY12E (` mn) FY09 FY10 FY11E FY12E Net sales 6,065.5 6,640.5 10,104.2 14,202.2 PBT 31.8 231.5 1,991.4 3,384.9 growth (%) 40% 9% 52% 41% Add: Depreciation 69.5 61.7 76.9 65.6 add: Other non operating Operating expenses 6,894.5 6,167.2 7,759.4 10,507.0 expenses 421.0 0.0 0.0 0.0 Operating profit -829.0 473.3 2,344.8 3,695.2 Interest -76.6 384.5 294.8 264.0 growth (%) -228% -157% 395% 58% Less: Direct tax -628.9 -256.5 -99.6 -1,117.0 Depreciation 69.5 61.7 76.9 65.6 (Inc)/dec Creditors 211.7 -470.4 -397.2 213.8 Other income 853.7 204.3 18.4 19.3 (Inc)/dec Current Assets -7,587.7 -4,411.8 79.9 -2,264.8 EBIT -44.8 615.9 2,286.3 3,648.9 (Inc)/dec Working capital -7,376.0 -4,882.3 -317.3 -2,051.0 Interest paid -76.6 384.5 294.8 264.0 Cash Flow from Operation -7,559.2 -4,461.1 1,946.2 546.5 Pre-tax profit 31.8 231.5 1,991.4 3,384.9 (Inc)/dec Fixed Asset -3,310.9 -201.1 -173.1 -184.4 Tax (current + deferred) -433.4 -270.3 99.6 1117.0 Investment (Net) -282.8 83.5 0.0 0.0 Cash Flow from Net profit 465.2 501.7 1,891.9 2,267.9 Investment -3,593.7 -117.6 -173.1 -184.4 growth (%) -38% 50% 252% 21% (Inc)/dec Equity Capital 907.4 64.4 0.0 0.0 (Inc)/dec Share Premium 7,943.6 0.0 0.0 0.0 Balance Sheet (Inc)/dec Debt 2,002.5 4,926.6 -826.0 0.0 (` mn) FY09 FY10 FY11E FY12E Miscellaneous 445.0 -254.0 -65.0 -68.0 Current assets 17119.7 13991.7 14472.1 16769.3 Less: Interest Paid 76.6 -384.5 -294.8 -264.0 Investments 284.2 200.7 200.7 200.7 Less: Divident paid 0.0 0.0 0.0 0.0 - Fixed assets 4392.3 4593.4 4766.5 4950.9 CF from Financing Activity 11,375.1 4,352.5 1,193.5 -329.6 Total assets 21796.2 18785.8 19439.2 21920.9 (Inc)/dec Cash 222.3 -226.2 560.2 32.5 Add: Opening Balance 714.2 936.7 710.8 1,271.0 Current liabilities 1802.5 1110.1 712.8 926.6 Closing Balance 936.4 710.5 1,271.0 1,303.4 Total Debt 4700.0 9626.5 8800.5 8800.5 Total liabilities 6502.5 10736.6 9513.4 9727.2 Key ratios (` mn) FY09 FY10 FY11E FY12E Share capital 2153.3 732.5 732.6 732.6 EPS (Rs) 10.4 13.1 46.2 55.8 Reserves & surplus 13140.5 7316.6 9193.3 11461.2 EPS growth (%) -55.1% 26.0% 251.9% 20.8% Less: Misc. expenditure 0.0 0.0 0.0 0.0 EBITDA margin (%) -13.7% 7.1% 23.2% 26.0% Shareholders' funds 15293.7 8049.2 9925.9 12193.7 PAT margin (%) 5.9% 8.0% 18.6% 16.0% Minorities interests 0.0 0.0 0.0 0.0 ROCE (%) -0.3% 3.3% 12.6% 18.4% Total equity & liabilities 21796.2 18785.8 19439.2 21920.9 Net debt/Equity (%) 0.3 1.2 0.9 0.7
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