MORNING INSIGHT December 26, 2012 COMPANY UPDATE TV 18 BROADCAST LTD Ritwik Rai [email protected] RICE S ECOMMENDATION +91 22 6621 6310 P : R .33 R : BUY TARGET PRICE: RS.40 FY14E P/E: 38.4X TAM Data Released, Colors at #1 in week 50 Colors has brought in strong GRPs for weeks 41-50, a period when the TAM data was suspended on account of DAS implementation. The channel stands #2 on the average over the period. Over the past two weeks, Colors has been the #1 channel in the Hindi GEC space. In the most recent week (Week 50), Colors stands at #1, with 239 GRPs. It is also heartening that Colors has emerged as the #1 channel in the digital markets, indicating that the channel has strong franchise in the metros. While the leads between top channels are small (the top 4 are separated by merely 48 GRPs), the data reaffirms that Colors carries potential to be the #1 Hindi GECs. We believe that fiction programming contributes significantly to Colors' GRPs, lend- ing sustainability to position in the top bracket. Summary table Colors - #1 in Week 50 (GRP, Hindi GECs, Week 50) (Rs mn) FY12AA FY13E FY14E 300 Sales 13,058 14,470 17,587 Growth (%) 10.8 21.5 250 EBITDA (472) 1,283 2,435 EBITDA margin (%) (3.6) 8.9 13.8 200 PBT (1,274) (385) 1,473 Net profit (1,108) (385) 1,473 150 EPS (Rs) (3.1) (0.2) 0.9 100 Growth (%) NM NM NM CEPS (Rs) (2.1) 0.0 1.4 50 Book value (Rs/share) 19.2 19.6 20.5 Dividend per share (Rs) - - - 0 ROE (%) (16.0) (1.9) 4.3 ROCE (%) (6.1) 1.9 4.7 Colors Star Plus Sony Zee TV SAB TV Life OK Net cash (debt) (8,136) (2,080) (2,400) Source: TAM (compiled from media), HSM, CS4+ NW Capital (Days) -25 -7 4 P/E (x) NM NM 38.4 P/BV (x) 1.7 1.7 1.6 Top Programs on Hindi GECs - Week 50 EV/Sales (x) 1.5 4.0 3.3 EV/EBITDA (x) NM 45.6 24.2 Program Channel TVR Source: Company, Kotak Securities - Private Balika Vadhu Colors 5.8 Client Research Diya Aur Baati Hum Star Plus 4.8 Saathiya Star Plus 4.3 Ye Rishta Kya Kehlata Hai Star Plus 4.3 Sasural Simar Ka Colors 4.1 Madhubala Colors 4 Tarak Mehta Ka Ulta Chashma Sab TV 3.7 Sapne Suhaane Ladakpan Ke Zee TV 3.5 Pyar ka Dard Star Plus 3.4 Pavitra Rishta Zee TV 3.4 Mahadev Life OK 3.4 Qabool Hai Zee TV 2.7 Bade Achhe Lagte Hain Sony Entertainment TV 2.7 Uttaran Colors 2.7 Source: TAM (compiled from media), HSM, CS4+ Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4 MORNING INSIGHT December 26, 2012 Investment Theme Sustains, Strengthens; Reiterate BUY, Raise Price Target Colors forms the centre of the subscription revenue growth story that leads invest- ment thought in the stock. TV18 Broadcast is our favoured stock in the broadcasting space, given digitization, as we believe that the company net subscription revenues (subscription revenues less carriage fees) are due for a larger delta than other broad- casters. TV18 subscription revenues are c.20% of Zee Entertainment, while TV18 broadcasting assets are comparable (although with a 50% economic share in signifi- cant portion of assets, including Hindi GECs) - the key genres that Zee Entertain- ment holds in excess include sports and Hindi movies, while the key assets that TV18 holds in excess include kids genre, movie production and news assets including business news. While Zee Entertainment will remain a broadcaster with the most sustainable model, TV18 is making a significant bid for the #1 spot. The company's strong track record in execution is now unhindered by financial constraints (post the rights issue). With help from the ETV acquisition, the company is on its way to be among the fastest growing, diversified entities in the Indian broadcasting space. If, TV18 is able to head halfway to ZEEL’s current subscription revenues in three years, it will result in a Rs 5 Bn swing in EBITDA. As such, significant delta may be expected in TV18: we believe this will help sustainability and valuations. We believe the market is likely to appreciate the rising sustainability of TV18 business model. In addition to the rising faith in DAS implementation, this will lead to aggressive valuation of TV18, in our opinion. On FY14 estimates, we value TV18 at 4x EV/ Sales (20% discount to Zee Entertain- ment), or Rs 40/ share. We note that our FY14 do not factor in significant benefits from DAS for Zee/ TV18. TV18 continues to be our preferred stock to play the DAS story. Maintain BUY; target price Rs 40. Risks We recommend BUY on TV 18 TV18 is moving towards greater sustainability, but higher competitive intensity in Broadcast with an increased price genres including Hindi GEC (currently diminished as a concern area as colors is #1) is target of Rs.40 a significant risk for the company. Loss of competitive position between now and stable post-DAS regime can have an adverse impact on the company's growth path. We also think that a Hindi movie channel launch (the management has so far main- tained this is not happening in the near future) could be significant drain on (cur- rently) weak cash flows. Apart from these, general industry risks include continued/ intensified advertising slowdown, delays in DAS implementation. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5.