Zee Telefilms: Twist in the script

Zee Telefilms revamp to unlock value

Zee Telefilms' restructuring, by which the broadcasting business will be separated from the distribution business should help unlock value. Besides, different entities will allow for greater transparency and focus.

Given that foreign ownership limits for each of the segments are different, Zee can now woo strategic partners for each of the entities, which can bring in funds and expertise, especially in the DTH and cable businesses.

While Zee does have the first-mover advantage in the DTH business, the imminent entry of Sky TV would call for higher investments.

A back of the envelope sum-of-parts calculation puts the value per share of Zee around Rs 220, lower than the current market price.

Zee Telefilms, which will house the general entertainment and sports channels would account for Rs 200, assuming an EPS of Rs 10 in FY07 and a P/E multiple of 20. All of ZTL's channels would be profitable with the exception of the sports channel.

Zee News, which will comprise the business and news channels and all regional channels, is less profitable than its peer TV Today which is the market leader.

Assuming this business, which according to the management will make some profits, commands a 50 per cent market cap of TV Today's Rs 600 crore, it would amount to a value of Rs 7 per share on the existing equity base.

Using the benchmark of Rs 300 per subscriber that Zee paid for RPG's cable business, Wireless and Wire India should amount to another Rs 6 per share on a subscriber base of 6 million subscribers and the growth potential after CAS.

ASC Enterprises, should also account for about Rs 7 per share, given the prospects in the DTH business. Zee's market price has shot up by nearly 40 per cent in the past month to Rs 243, though the stock ha been an under-performer for a year.

While Zee's viewer ratings have picked up in the recent past, with the new content being backed up by spends on promotions, this is unlikely to result in any significant increase in its pricing power. The Zee stock will see a re-rating only if the ratings sustain.

Biocon: A booster buy

Biocon has been focusing on diversifying its revenue base, given the growing competition in its core statins business. Its operating profit margin had slipped 410 basis points to 29.64 per cent in the December 2005 quarter.

As part of its diversification strategy, Biocon has been ramping up its insulin business and has been working with the US-based Nobex Corporation, for developing an oral peptide product for cardiovascular diseases.

As a result, when Nobex went into bankruptcy late last year, it made sense for Biocon to bring this technology in-house via an acquisition. Biocon has paid $5 million (approximately Rs 22.5 crore) for this acquisition.

The American company is privately held and given its poor financial condition before Biocon's purchase, it does not make sense to evaluate this deal via conventional valuation techniques.

Instead, the benefits from this deal is expected to accrue to Biocon in the medium to long term. Prior to this acquisition, Biocon has already launched Insugen (a recombinant insulin) in the domestic market, and, in addition, the company is understand to have filed applications for this product in 40 countries too. This acquisition, however, has not visibly helped to improve investor sentiment for this stock.

The Biocon stock has under-performed the market over the past two markets "" it has fallen about 3.5 per cent during this period compared with 12.5 per cent gain in the broader markets.

Given the company's growth prospects, the stock appears reasonably valued at about 16.6 times estimated FY07 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur