Viacom18 Media Private Limited December 07, 2018 Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action1 (Rs. crore) (Rs. crore) Commercial Paper 500.0 500.0 [ICRA]A1+; Reaffirmed Short-term, Fund-based Bank 200.0 200.0 [ICRA]A1+; Reaffirmed Facilities Long-term / short-term, Fund-based [ICRA]AAA (Stable) / 1,325.0 1,325.0 / Non-fund Based Bank Facilities [ICRA]A1+ Reaffirmed Long-term / Short-term Unallocated [ICRA]AAA (Stable) / 85.7 85.7 [ICRA]A1+ Reaffirmed Total 2,110.7 2,110.7 * Instrument details are provided in Annexure-1 Rationale The ratings reaffirmation of Viacom18 Media Private Limited (Viacom18) favourably factors in the company’s strong parentage and strategic importance of the media businesses (under the umbrella of its parent, TV18 Broadcast Limited, TV18, rated [ICRA]AAA(Stable)/[ICRA]A1+) and TV18’s holding company, Network18 Media & Investments Limited, Network18 (rated [ICRA]AAA (Stable) / [ICRA]A1+) to Reliance Industries Limited (RIL). Independent Media Trust (IMT), of which RIL (rated [ICRA]AAA (Stable) / [ICRA]A1+ and Baa2 Stable by Moody’s Investors Service) is the sole beneficiary, holds a majority stake in Network18. The ratings continue to favourably factor in the company’s comfortable financial position characterised by a comfortable capital structure (0.5 time as on March 31, 2018), healthy profitability of its existing businesses, and adequate liquidity as reflected in considerable undrawn bank limits (almost 41% limits on an average remain unutilised). The ratings also favourably factor in the company’s diversified offerings across genres and the consistent leadership position of its Hindi general entertainment channel (GEC), Colors. The company’s strong and niche positioning in the youth, children’s and English entertainment genres through brands such as MTV, Nickelodeon, Comedy Central and Vh1, and the growing presence in the regional general entertainment (RGECs) space are also positive factors. Among the eight RGECs, it enjoys a dominant position in the Kannada GEC space and is one of the leaders in the Marathi GEC. The company’s flagship channel, Colors, continues to remain the most important revenue and profitability driver for the company. Nevertheless, ICRA draws comfort from the strong brand franchise of the channel coupled with the company’s healthy market share in terms of viewership ratings, which has supported healthy advertisement and subscription revenues. ICRA also takes comfort from the company’s efforts at diversification through scaling up rest of the businesses. The ratings also factor in the risks inherent to the media and entertainment industry in terms of vulnerability of advertising revenue driven business profile to cyclicality in advertising spends by corporates and rising competitive intensity with an increase in the total number of channels in the mass content as well as niche segments. Further, the ratings factor in the inherently working capital-intensive nature of operations and the inherent volatility in the film production and distribution segment. Apart from one-time impact of demonetisation and introduction of the Goods and Services Tax (GST), significant investments in its new business segments such as its over-the-top (OTT) platform, VOOT, and new channel launches, have constrained its profitability over the past two fiscals as well as in H1 FY2018. The investments in the OTT platform are likely to continue, given the significant potential of the digital platform and the 1 For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications 1 potential synergies with Jio. The company’s ability to monetise the platform through a sustainable business model in the medium term, however, will be crucial as the new business remains in gestation. The above investments along with its Tamil GEC launch are likely to maintain pressure on Viacom18’s profitability during the current fiscal. The company’s ability to maintain its market position in genres where it is currently leading and improve its market share in other genres, along with higher subscription revenues through benefits from digitisation, will be crucial. Outlook: Stable ICRA’s Stable outlook factors in the strong financial flexibility enjoyed by the company arising from its strong parentage. ICRA also notes the healthy presence of Viacom18 in the broadcast entertainment space and its strong business potential across the fast-growing digital media segment. The outlook may be revised to Negative in case of lower than envisaged support from the parent, or in case of weaker than expected operating performance, or any debt-funded acquisition or investments leading to material deterioration in cash flow indicators and debt-protection metrics. Key rating drivers Credit strengths Strong parentage of Viacom18 - With acquisition of additional 1% stake from Viacom Inc., Viacom18 became a subsidiary of TV18, holding 51% stake in Viacom18 with effect from March 01, 2018, and gained operational control over the JV. ICRA derives strong comfort from the parentage of Viacom18, with TV18 being a 51.16% subsidiary of Network18. RIL is the sole beneficiary of IMT, which holds a majority stake in Network18. RIL is India’s largest private sector enterprise with presence across the energy value chain apart from presence in retail, oil marketing and telecom segments. Consistent leadership position of its Hindi GEC, Colors – Colors continues to maintain its leadership position as one of the top three players in the Hindi GEC genre, backed by differentiated content in the fiction as well as non-fiction categories. Strong and niche positioning in children’s, youth and English entertainment spaces – The company has iconic brands in its portfolio, such as MTV, Comedy Central, VH1 and Nick, which has helped it carve a strong and niche positioning in the respective segments. Furthermore, the children’s genre has demonstrated healthy financial performance over the past four fiscals on the strength of its owned intellectual property rights (IPRs), maintaining its dominant position during the period. Growing presence in RGECs helped diversify revenue base – The addition of five RGECs with effect from April 01, 2015 post-merger with Prism TV Private Limited has helped diversify the company’s revenues and provided it access to significant growth potential in the RGEC space. The company enjoys a dominant position in the Kannada GEC space and is among the leaders in the Marathi GEC space, which was achieved within a short span of time. Furthermore, the company has launched a Tamil GEC during Q4 FY2018, a market with high potential, along with its first regional movie channel, Colors Kannada Cinema, to expand its presence in the southern regional market. Comfortable financial position – The company had a healthy capital structure (0.5 time) as on March 31, 2018, providing it significant flexibility to take on additional debt to support its investments. Furthermore, the profitability of the company’s existing business segments (more than a year old) remains strong, which has helped it fund its investments in the OTT space and new channel launches without significant incremental capital infusion. 2 Credit weaknesses One-time impact of demonetisation and GST – A sharp pullback in spends by advertisers due to demonetisation and GST, and subsequent slow recovery in advertisement spends adversely impacted revenues of the media and entertainment industry during FY2017 and FY2018. There has been recovery in the advertising spending with broadcasting business (ex-film business) growing at 13% YoY during Q2 FY2019. Further improvement in advertisement spends supported by macro-economic trends will be a critical revenue and profitability driver for the company. Significant investments in OTT platform, new channel launches and RGEC portfolio has constrained performance – The company’s profitability during FY2017 and FY2018 was constrained by significant planned investments in its OTT platform, ‘VOOT’ and new channel launches—Rishtey Cineplex, a Hindi movie channel, and Colors Super, a second Kannada GEC. Further, during Q4 FY2018, the company launched Colors Tamil, and subsequently, Colors Kannada Cinema during Q2 FY2019, which are currently in gestation. Flagship channel, Colors, remains significant driver; nevertheless, comfort derived from strong brand franchise of the channel – Despite diversification provided by the addition of the regional GEC portfolio, Colors continues to remain the most important revenue and profitability driver for the company. ICRA, nevertheless, derives comfort from the strong brand franchise of the channel and the company’s effort at diversification by scaling up the rest of its businesses. Vulnerability of advertising revenues to economic slowdown, viewership trends and competition – The media and entertainment industry remains vulnerable to cyclicality in advertising spends by corporates. ICRA notes the rising competitive intensity with an increase in the total number of channels in the mass content and niche segments, which challenge Viacom18’s ability to retain its market share and by implication, its advertisement revenue share. Liquidity Position The profitability of Viacom18’s broadcasting business was comfortable and its fund flow from operations was positive in FY2018 as higher receivables and inventory were offset by better management of supplier credit. This resulted in lower incremental external borrowings for working