Balaji Telefilms 4QFY2008 Result Update BUY Performance Highlights Price Rs181 Programming hours back on track, aids Topline: Balaji Telefilms reported a smart 24.7% yoy growth in Net Sales to Rs96.5cr (Rs77.4cr) for Target Price Rs275 4QFY2008, which was driven primarily by an increase in programming Investment Period 12 months hours. After its programming hours hit a trough in 2QFY2008 at 319 hours, the content produced by the company has been on the rise and the Stock Info programming hours stood at 434 hours at the end of the March quarter, up 19.7% yoy. Balaji has launched three new shows, two on 9X and one on Sector Electronic Media Sony. Balaji’s blended realisations during the quarter stood 4.4% higher on a yoy basis. Market Cap (Rs cr) 1,182 Operating Margins under pressure: Operating Margins for 4QFY2008 Beta 0.4 declined 330bp to 36% (39.3%), which in part could be attributed to the 52 WK High / Low 388 /165 16.1% yoy lower realisations per hour for its commissioned programmes. This segment contributes almost 90% of the company’s Topline and over Avg Daily Volume 25,192 95% of its Operating Profits. Apart from this, a 37.6% yoy increase in Production Costs and Telecast Fees, which constitute 80% of the company’s Face Value (Rs) 2 total operating expenditure, also exerted pressure on Operating Margins. This cost head increased to Rs50.2cr (Rs36.5cr), and as a percentage of BSE Sensex 16,650 Net Sales, increased to 52% (47.2%). Staff Costs also increased 28.1% yoy Nifty 4,947 to Rs3.9cr (Rs3cr). Nonetheless, the strong Topline growth helped the company report a 14.3% yoy growth in Operating Profit to Rs34.8cr BSE Code 532382 (Rs30.4cr). NSE Code BALAJITELE Higher Other Income aids Net Profit growth of 14.7%: A higher Other Reuters Code BLTE.BO Income, up 27.7% yoy to Rs4.7cr (Rs3.7cr), helped negate the 21.4% rise in Depreciation costs for the company during the quarter. Thus, Balaji reported Bloomberg Code BLJT IN a yoy Net Profit growth of 14.7% to Rs24.4 (Rs21.3cr). The company has Shareholding Pattern (%) declared final dividend of Rs3.5 per share (175% of Face Value) for FY2008. Promoters 40.0 Exhibit 1: Key Financials MF/Banks/Indian FIs 11.6 Y/E March (Rs cr) FY2007 FY2008 FY2009E FY2010E FII/ NRIs/ OCBs 39.9 Net Sales 317.5 328.9 417.8 520.1 Indian Public 8.5 % chg 13.2 3.6 27.0 24.5 Net Profit 79.4 87.9 103.1 120.9 % chg 33.7 10.7 17.3 17.2 Abs. 3m 1yr 3yr OPM (%) 37.7 37.7 36.0 34.0 Sensex (%) (4.0) 15.2 156.2 FDEPS (Rs) 12.2 13.5 15.8 18.5 HT Media (%) (17.1) (26.5) 58.8 P/E (x) 14.9 13.4 11.4 9.8 P/BV (x) 28.6 26.3 25.7 25.1 Hitesh Agrawal RoE (%) 42.5 38.4 38.9 38.1 Tel: 022 – 4040 3800 Ext: 341 RoCE (%) 3.9 3.2 2.7 2.3 e-mail: [email protected] EV/Sales (x) 3.1 2.8 2.1 1.6 EV/EBITDA (x) 8.3 7.5 5.9 4.6 Source: Company, Angel Research May 23, 2008 1 Balaji Telefilms Electronic Media Outlook Balaji Telefilms started to witness better times from the December quarter (3QFY2008) with the commencement of three new programmes, two on the newly launched 9X channel and one on Sony, thus re-initiating its relationship with the latter. The company is also scheduled to launch the mythological, Mahabharatha, on 9X. Also in the pipeline are two Reality shows, one on 9X called Kaun Jeetega Bollywood Ka Ticket and the other one on Sony. Overall, with these programmes getting launched, the company would be diversifying its revenue stream to some extent and reduce its dependence on Star. Also, a slew of General Entertainment Channels (GECs) are expected to be launched soon, which would open up further opportunities for Balaji Telefilms to provide prime time content. Further, the company’s joint venture (JV) with Star, though considerably delayed, could potentially see the birth of 3-4 channels over the next few quarters in various South Indian languages, which would augur well for Balaji’s content supply business. However, we have not assumed any contribution from this JV in our projections. The company has also ventured into movie production, co-production and distribution to broad base its revenue stream and further diversify its risks. Notably, Balaji Motion Pictures, a wholly-owned subsidiary of Balaji Telefilms, released three movies during the year, of which two (Shootout at Lokhandwala and Bhool Bhulaiya) had a decent run. For FY2009, the company has four new film projects in the offing including the much-awaited Sarkar Raj. While this film will be distributed by Balaji Motion Pictures, the other films (EMI, C Kkompany and Mission Istanbul) are being co-produced by it. For FY2008, the Motion Pictures Division reported a Topline of Rs36.5cr and Net Profit of Rs5.5cr. We have not factored in any profit/losses that may arise from this business segment. On the realisations front, Balaji Telefilms witnessed pressure on commissioned realisations during the quarter. However, while we do not expect the company to command premium realisations in the wake of stabilised TRPs of its programmes, we believe it would have a marginal upper hand when its contract with Star comes up for re-negotiation in June 2008. This is because Star Plus continues to derive a substantial chunk of its TRPs from Balaji serials. Also, with new GECs likely to get launched, Balaji Telefilms seems to be in a comfortable position. Valuation At current levels of Rs181, the stock is trading at 9.8x FY2010E EPS. The fact that Balaji Telefilms continues to be amongst the most preferred content providers for a GEC and considering that it continues to churn out successful TRP generating programmes, we remain confident of its growth prospects going forward. Nonetheless, the biggest risk to our assumptions is any of the company’s key programmes going off-air without an equally strong substitution. We maintain a Buy on the stock, with a marginally reduced Target Price of Rs275 (Rs285) factoring in a 3% reduction in our FY2010E EPS. Exhibit 2: 4QFY2008 Performance Y/E March (Rs cr) 4QFY2008 4QFY2007 % chg FY2008 FY2007 % chg Net Sales 96.5 77.4 24.7 329.0 317.5 3.6 Total Expenditure 61.7 47.0 31.5 205.1 197.9 3.6 Operating Profit 34.8 30.4 14.3 123.9 119.6 3.6 OPM (%) 36.0 39.3 37.7 37.7 Interest - - - 0.0 Depreciation 3.4 2.8 21.4 12.7 11.2 12.9 Other Income 4.7 3.7 27.7 17.3 9.4 83.6 Profit before Tax 36.1 31.3 15.2 128.5 117.7 9.2 Current Tax 11.7 10.1 16.4 40.6 38.3 5.8 (% of PBT) 32.4 32.1 31.6 32.5 Profit after Tax 24.4 21.3 14.7 87.9 79.4 10.8 (% of Net Sales) 25.3 27.5 26.7 25.0 Equity shares (cr) 6.5 6.5 6.5 6.5 EPS (Rs) 3.7 3.3 13.5 12.2 Source: Company; Angel Research May 23, 2008 2 Balaji Telefilms Electronic Media TM Angel Broking Limited Research Team Tel: 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. 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