Cash and tango

PENNY WISE

The reckoning of the Indian entertainment industry as an attractive investment avenue has been long since established. In the next stage, businesses and investors are discovering those models and strategies, which could provide stable returns in an otherwise unpredictable industry.

We therefore have companies, which either focus on dominating one segment of the industry, or those who put their eggs in many nests, with an aim to diversify risks.

UTV Software Communications, a pioneer in television content production, has attempted the latter strategy to grow into an integrated media company with presence across segments like television and film content production, gaming and animation, and broadcasting.

Last week, UTV's board approved the allotment of shares to The Walt Disney Company, so far a 14.85 per cent stakeholder in UTV, allowing it to raise its stake in the company to 32.1 per cent at an investment of Rs 805 crore (subject to all approvals).

Besides, Disney will also buy a 15 per cent stake in UTV's broadcasting arm, UTV Global Broadcasting for Rs 118.98 crore, thus valuing UTV's broadcasting business at Rs 793 crore. At the same time, the promoter group of Ronnie Screwvala will bring in an investment of Rs 390 crore, through a preferential issue, helping it maintain its stake in UTV Software at 32.1 per cent.

This will take the total amount infused into the company to Rs 1,314 crore, and UTV's equity capital base will increase from Rs 22.9 crore to Rs 39.7 crore. The move of Disney to raise its stake in the company has also triggered an open offer for 20 per cent stake at a price of Rs 860.79 a share. This offer however, is being jointly made by Disney and the promoters. 
 

VERTICAL STRENGTH
Television	Films	Interactive  (Gaming and animation)	Broadcasting
* UTV Television	* UMP Plc (formerly UTV Motion Pictures), UTV Spotboy	* Ignition, Indiagames, UTV Toons, Digi-guys	* Bindass, Bindass Movies, UTV Movies and World Movies
* 5 new shows in Q3	* Jodhaa Akbar, Race and Wednesday  releasing in Q3, 9 more to release by September, including The Happening directed by M Night Shyamalan	* Published Mercury Wii in the US last November	* 5 more channels in pipeline, including business news channel UTVi
* Aiming for 25 per cent growth y-o-y in advertising and subscription revenues	* Presence in Hindi, Regional and Hollywood films	* Console games Wardevil, Reich and Angelic under development	* New investments in broadcasting amounting to Rs 360 crore by Disney and promoters
* Clients: Bindass, Gemini, Hungama, National Geographic, Star Plus	* To produce 24-30 movies over next 3 years at an investment of Rs 750 crore	* Launched an online 'games on demand' portal of Indiagames and achieved 10,000 paid subscribers so far	* Strategy of launching a bouquet of channels across genres to tackle intense competition

Fund flow

Of the entire amount of Rs 1,314 crore, UTV's broadcasting business will take away the largest share of Rs 360 crore, movies and interactive divisions will see an investment of Rs 200 crore and the rest will be used to repay debt, to launch new initiatives and for acquisitions. In its broadcasting venture, UTV plans to launch around five new channels across genres, including a business news channel.

This month, it launched its World Movies and UTV Movies channels, showcasing international (except Hollywood films) and Hindi movies, respectively.

Growth engines

In the broadcasting business so far, UTV's youth channels Bindass and Bindass Movies too, are doing well, boasting a viewership of 49 million in all Hindi speaking markets and popularity ratings almost at par with other channels like MTV and Zoom, according to TAM Peoplemeter.

UTV's movies business, which contributes over 60 per cent of its revenues, released its mega-budget Jodhaa Akbar this month. Going forward, it has eleven releases lined up through March to September 2008. It is also scouting for opportunities to make regional movies, on the lines of its prior releases like Atidhi in Telugu and Kennamoochi Yennada in Tamil.

The gaming business too, is maturing, with the acquisition of Indiagames and Ignition. Development of console games for Sony PlayStation 3 and Microsoft Xbox 360 like Angelic, Reich and Wardevil is underway. "UTV will hold the intellectual property to these games and market them worldwide, the benefits of which would be reflected in its financials FY10 onward, since the production slates for these properties are fairly long, and costs, high," claims Ronnie Screwvala, managing director, UTV.

In addition, UTV has also launched a games-on-demand portal "� Indiagames.com, which has about 10,000 paid subscribers so far. As a logical extension, it has also ventured into mobile gaming by signing partnerships with Glu mobile and Nokia.

On the television content front, although the business has been stagnant for some time now, UTV aims to focus on improving profitability of the business by outsourcing line production of content through joint ventures. Apart from these four verticals (including broadcasting), UTV has launched its music and video publishing label UTV Music, which will cater to the home video markets and exploit the rights to its content.

Investment rationale

Given the various initiatives lined up by UTV, along with its stable performance in the mature verticals, UTV's top line growth is likely to remain high in the coming years. However, the new investments "� in interactive and broadcasting "� are likely to weigh on its profitability for the next couple of years as they undergo their respective gestation periods to breakeven. But once the business model evolves into a full-fledged integrated media house, the company is likely to command rich valuations owing to high growth and a diverse, de-risked business portfolio. The chances of uncertain blips in its financials are hedged for, using innovative marketing of its films whereby it sells various rights to its content well before the release - a move that should relieve investors from the worries of volatile nature of the business. 
 

HATCHING NUMBERS
Rs crore	FY07	FY08E	FY09E
Revenue	175.00	500.00	700.00
Operating profit	32.30	96.40	140.00
OPM (%)	18.50	19.30	20.00
Net profit	29.00	71.00	106.00
NPM (%)	16.50	14.20	15.10
EPS (Rs)	21.60	17.8*	26.5*
P/E (x)	-	45.60	30.50
*post equity dilution

At Rs 809, the stock trades at 31 times estimated FY09 earnings which is slightly expensive. However, considering the long-term prospects, existing investors may not want to exit the counter at the open offer price. On the other hand, steep declines could prove to be buying opportunities.