Initiating Coverage September 3, 2013 Rating Matrix TV18 Broadcast (GLOBRO) Rating : Hold Target : | 18 | 18 Target Period : 12-15 months Potential Upside : 0% Growth in sight; execution remains the key TV18, the undisputed market leader in business news and dominant YoY Growth (%) player in the Hindi GEC space, has further cemented its position in the (YoY Growth) FY12 FY13 FY14E FY15E Indian broadcasting landscape with the recent acquisition of regional Net Sales 74.2 19.9 9.5 11.4 channels of ETV, which augments its portfolio of channels to 26. The EBITDA NA NA 81.9 47.7 formation of distribution company Indiacast has significantly increased its Net Profit NA NA NA 74.8 bargaining power, which has started to reflect in the turnaround EPS (Rs) NA NA NA 74.8 witnessed in net distribution income. Led by the digitisation drive and Valuation Summary bouquet distribution strategy through Indiacast, we expect the net FY12 FY13 FY14E FY15E distribution income to grow from | 15.7 crore in FY13 to | 236 crore in P/E - - 42.3 24.2 FY15. Consolidated revenue and EBITDA are expected to post 10.4% and Target P/E - - 41.2 23.6 63.9% CAGR over FY13-15E, respectively. The company is trading at a EV / EBITDA (63.6) 30.0 16.4 10.8 significant discount to its peers Zee Entertainment and Sun TV on the P/BV 1.0 1.0 0.9 0.9 sales multiples owing to a significantly lower margin profile. The benefits RoNW (10.8) (0.8) 2.2 3.7 that would accrue to TV18 from digitization would be partly diluted if the RoCE (6.0) 1.9 4.2 6.3 twelve minute ad cap regulation gets implemented in the near term. Any Stock Data relaxation on the said ruling remains an upside risk to our valuations. We Market Capitalization | 3149.5 Crore have valued the stock using DCF methodology to arrive at a target price Total Debt (FY13) | 481 Crore of | 18. We initiate coverage on TV18 with a HOLD rating Cash and Investments (FY13) | 269.4 Crore Net distribution income to provide boost… EV | 3361.1 Crore 52 week H/L 38 / 16 The lack of a bouquet approach to market its channels and lower Equity capital | 342.3 Crore advertisement revenue for news channels has plagued TV18’s revenue, Face value | 2 which considerably lags that of its peers. However, the net distribution MF Holding (%) 2.2 income is expected to jump from | 15.7 crore in FY13 to | 236 crore in FII Holding (%) 8.5 FY15E owing to (1) Acquisition of ETV’s regional channels and formation Comparative return matrix (%) of Indiacast, which would bundle TV18’s flagship channels with ETV’s regional channels along with UTV Disney channels, (2) Digitisation drive, 1M 3M 6M 12M which would enable its flagship channels to command higher TV18 2.7 -33.8 -29.3 -7.4 subscription revenue owing to their leadership and brand equity. Sun TV 4.4 -7.4 -5.1 32.0 ZEEL -4.8 -1.5 6.2 40.3 Profitability to witness massive turnaround… NDTV -3.8 -1.5 34.8 83.7 TV Today 27.3 -4.8 3.2 20.1 The EBITDA is expected to more than double to | 300.9 crore by FY15E, led by higher net distribution revenue. Moreover, the overall interest Price movement burden would decline from | 143.2 crore in FY13 to | 96.2 crore by FY15 due to debt repayment post the recent rights issue. 6,400 40 6,200 35 Margins to expand significantly! So will MCap/sales!!! 6,000 30 As compared to ZEEL, TV18 is trading at a premium in terms of PE (60%) 5,800 25 and a discount in terms of MCap/sales (154%) owing to its low margin 5,600 20 profile. The benefits that would accrue to TV18 from digitization would be 5,400 15 partly diluted if the twelve minute ad cap regulation gets implemented in 5,200 10 the near term. Any relaxation on the ruling remains an upside risk to our 5,000 5 valuations. We have valued the stock using DCF methodology to arrive at 4,800 0 a target price of | 18. We initiate coverage on TV18 with a HOLD rating. Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Exhibit 1: Key Financials Price (R.H.S) Nifty (L.H.S) (Year-end March) FY11 FY12 FY13 FY14E FY15E Net Sales (| crore) 809.2 1,409.9 1,690.7 1,851.1 2,061.5 EBITDA (| crore) 41.9 (62.3) 112.0 203.8 300.9 Analyst’s name Net Profit (| crore) (17.4) (73.8) (25.4) 74.5 130.2 Karan Mittal EPS (|) - (2.0) (0.1) 0.4 0.8 [email protected] RoCE (%) 2.0 (6.0) 1.9 4.2 6.3 RoE (%) (2.5) (10.8) (0.8) 2.2 3.7 Sneha Agarwal [email protected] Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Shareholding pattern (Q1FY14) Company background Shareholder Holding (%) TV18 Broadcast Ltd is a subsidiary of Network 18 Media & Investments Promoter 57.0 DII 2.2 Ltd, which is promoted by Raghav Behl. Network 18 is a media & FII 8.5 entertainment firm with interests in television, internet, filmed entertainment, digital commerce, magazines, mobile content and allied Others 32.3 businesses. Network 18 holds a 57% stake in TV18 Broadcast Ltd, which FII & DII holding trend (%) is a leading broadcaster in India predominantly known for its news channel CNBC TV18 and Hindi General Entertainment channel Colors. 10.0 8.5 TV18 is a leading broadcaster in India operating over 30 channels with its 8.0 6.6 6.5 6.7 subsidiaries/JVs. On a standalone basis, it currently operates five news 5.5 6.0 channels viz. CNN IBN and IBN7 in the realm of general news and CNBC- 3.7 3.5 TV18, CNBC Awaaz and CNBC-TV18 Prime HD in the business news 4.0 2.2 category. The company also operates IBN Lokmat, which is a Marathi 2.0 news channel in partnership with the Lokmat Group. In entertainment, the 0.0 company has 50:50 joint venture with US-based broadcaster Viacom Q2FY13 Q3FY13 Q4FY13 Q1FY14 called Viacom18 through which the company operates the prominent Hindi GEC Colors. Apart from Colors, the company also runs Nick, MTV FII DII India, VH1, Sonic and Comedy Central. History TV18 is another entertainment channel in which the company has a 51% stake with the remaining stake being held by AETN networks. TV18 recently acquired the Eenadu group of channels that gives it a regional footprint to put it in the same league as the likes of Zee Entertainment, Star India & MSM. The company owns 100% interest in regional news channels ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan, ETV Bihar & ETV Urdu along with 50% interest in regional GECs including ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya. It also holds 24.5% interest in ETV Telugu & ETV Telugu News. Apart from broadcasting, TV18 is also in the movie production and distribution business through Viacom18 and cable distribution business through Indiacast, which is a 50:50 JV between TV18 and Viacom 18 resulting in 75% economic interest of TV18. The company was reeling under a heavy debt burden with a net debt to equity of 1.2 in FY12. In order to fund the acquisition of ETV and de- leverage the balance sheet, the company came up with a rights issue in FY13 to raise | 2700 crore. The issue was subscribed 1.3x. Post the rights issue, the net debt to equity of the company fell to 0.1x and is in a comfortable position currently to invest in new programming. Also, Network 18 came up with a rights issue worth | 2700 crore at | 30 per share along with TV18. The promoters of Network 18 were funded by Independent Media Trust (IMT), a trust set up for the benefit of RIL shareholders. IMT subscribed to optionally convertible debentures issued by promoter entities. Should IMT convert the OCDs, IMT would become the majority shareholder of Network 18. The money raised was used to fund the | 1400 crore that Network 18 needed to subscribe to the rights issue of TV18 and deleverage the balance sheet. ICICI Securities Ltd | Retail Equity Research Page 2 In FY13, 43.0% of the total revenue came from the entertainment business while news contributed 32.5%. Indiacast was the other important business accounting for 23.0% of the revenue. Category wise, the company earned 61.7% of its revenue through advertisement. Net distribution income, which forms a significant part of the revenue for other national broadcasters, contributed a mere 7.0% of the revenue. The motion picture business and distribution business accounted for 7.7% and 23.0% of the revenue respectively. Exhibit 2: Business wise revenue break-up Exhibit 3: Category wise revenue break-up Indiacast Others Distributi Others 23% 2% News on 1% 32% 23% Movie 8% Entertain Ad Subscripti ment 61% on 43% 7% News Entertainment Ad Subscription Movie Indiacast Others Distribution Others Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research Exhibit 4: Diversified set of channels TV18 News Entertainment Regional Distribution General Business News GEC Colors* Nick* MTV India* VH1* ETV Uttar Pradesh ETV Marathi Sonic* ETV Madhya Pradesh ETV Kannada Indiacast CNN IBN Comedy Central* CNBC TV18 ETV Rajasthan ETV Bangla IBN7 Viacom Motion CNBC Awaaz ETV Bihar ETV Gujrati IBN LOKMAT# Pictures* ETV Urdu ETV Oriya History TV18 ETV Telugu News^ ETV Telugu^ # - In partnership with Lokmat Group * - Through 50:50 JV with Viacom ^ - 24.5% Stake 50% stake in ETV’s Regional GECs Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Investment Rationale “Digitally” developing media industry India is home to a growing media industry, which is at the cusp of a digital revolution that would bring in further growth potential.