UTV Software: Long-term story

It could take a while before the broadcasting business stabilises

Walt Disney's combined investment of Rs 925 crore into UTV Software and UTV Global Broadcasting is good news for the company. However, it will be a while before the investments start showing up in the earnings.

That's because the equity capital will be diluted by as much as 60 per cent with both Disney and the promoters subscribing to fresh shares.

The stock, after running up sharply last week and on Monday, however closed down 3.3 per cent at Rs 828. That is below the open offer price of 860.79, which is at a 5 per cent premium to the Sebi formula.

Even without the dilution, the stock was trading at an expensive 28 times FY09; post the dilution, the multiple becomes 40 times higher, even though the company will earn through other income from the cash inflows.

While revenues could grow at 45-50 per cent over the next year touching Rs 650 crore plus in FY09, the pace of earnings growth will be slower.

In FY07,UTV's operating margin was 8.5 per cent but is expected to average 20 per cent over the next few years as the business scales up. A sum of parts calculation puts the stock value at Rs 850-900, which means there is limited upside from the present levels.

UTV has a track record of creating good quality content and has collaborated with big directors to come up with hit films. It has shown aggression while making acquisitions for its gaming business.

However, the film business does involve risks even if UTV is de-risking the model by procuring a variety of rights and even though a portfolio approach could cushion losses.

Besides, the broadcasting business has a long way to go with 10 channels to be launched and could keep profitability under pressure for some time.

Abbott India: The dose is not working

Abbott India, which derives its revenues exclusively from the domestic market, has benefited from the strong demand conditions in the marketplace.

In the year to November 2007, its basket of products, which includes medicines for gastroenterology, anaesthesia and diabetes, saw reasonably good growth.

While net sales rose 16.5 per cent to Rs 594.3 crore, rising operational costs put pressure on operating margins, which fell 30 basis points y-o-y to 13.7 per cent.

The fall in margins was due to a rise in the cost of traded goods purchased, which as a percentage of net sales rose 190 basis points y-o-y to 70.8 per cent.

As a result, the operating profit grew 14.1 per cent y-o-y to Rs 81.6 crore. Other players in the domestic market such as Ranbaxy grew sales at a comparatively slower place "" they improved by 11 per cent y-o-y for the year ended December 2007 to about Rs 1,200 crore.

Abbott has been a big underperformer over the past year. The company plans a buyback of shares at a price not exceeding Rs 650, for a total consideration of Rs 51.8 crore, amounting to 5.7 per cent of the outstanding shares.

At this price, the stock is discounted 14 times its 12-months earnings ended November, 2007.

Other MNC stocks such as GlaxoSmithKline Pharma trade at 19.3 times estimated earnings for the year ended December 2007.

However, Glaxo enjoys higher operating profit margins as compared to Abbott "" in the first nine months of CY07 they were 35.6 per cent.

With the promoters holding 65.14 per cent, the stock is already illiquid, a buyback could make it more illiquid. The stock is trading at Rs 535 and since nothing very exceptional is expected over the next few years, shareholders may as well tender their shares when the offer opens.