Are media stocks a big deal?

After lying low for a long time, the media sector has crept back to the limelight in the last few weeks amid a slew of tieups and near tieups. There have been two merger discussions between broadcasters and content providers in the past two months.

While one has borne fruit, the other has not made much progress. Besides, media major Zee has been hitting peaks and troughs amidst much hullabaloo regarding the award of TV rights for cricket matches played in India by the Board of Control for Cricket in India (BCCI) over the next four years.

While the fortunes of Zee may be related to how the tussle for TV rights ends - the courts may well have the final say - media analysts have no doubts that the sector as a whole will see an exciting time. New entrants in the broadcasting space have added to the smattering of activity, bringing the sector back into market focus.

Act I: The first whiff of activity came in the form of Balaji Telefilms' announcement that it had struck a deal with a Star Group affiliate, Asian Broadcasting FZ-LLC, for a preferential allotment.

Not that the two parties concerned were strangers - Balaji Telefilms and the Rupert Murdoch-controlled Star TV have been doing business with each other for about four years.

The Rs 155 crore deal at Rs 90 per share will eventually see the Star Group holding around 26 per cent in the Jeetendra Kapoor-controlled television software producer.

Analysts say the move would result in Balaji being consequently valued in the range of Rs 600 crore. The deal was passed by Balaji shareholders at an extraordinary general meeting on September 17.

The Balaji stock had surged spectacularly in the run-up to the deal. It did average volumes of 88,000 shares between July 1 and July 15. This increased to a whopping 16.6 lakh shares between July 16 and August 19. The rise in price was also not small. The stock shot up by 49 per cent between July 16 and August 18, the day the deal was announced. The buoyancy in the scrip continues and it was hovering around the Rs 93.35 levels last Friday.

Act II: In another development, Sony Entertainment Television (SET) India was looking set to acquire majority control in the television channel of Sri Adhikari Brothers Television Network (SABTN). SET has been examining the proposal of picking up 51 per cent equity in the comedy channel. There were reports that SABTN's attempt to sell the broadcasting business followed the company's plan to concentrate on its content business, which is regarded as its core area of operations.

The acquisition would have made sense for SET as it would enrich its bouquet of channels. However, reports denying the development have clouded the scenario.

Act III: Another rather muddy puddle has been Zee bagging the BCCI rights. Zee emerged as the highest bidder with a bid price of $308 million, beating the nearest competitor ESPN-Star Sports' bid of $230 million by nearly 12 per cent.

Besides paying for the rights, Zee Tele has also committed to invest nearly Rs 95 crore towards development of domestic cricket. The total number of days available for telecast is around 144 days, which includes 64 one-day matches and 16 test matches.

The miffed ESPN-Star Sports has challenged Zee's qualification for the BCCI rights saying it did not have the experience of broadcasting or producing live international cricket events as specified in the tender. Zee's contention has been that it has been relaying sporting events in its international network since the last eight years. Since then there have been various salvos fired between Zee, BCCI and ESPN-Star Sports with BCCI cancelling the tender.

When last heard, Zee has moved the Supreme Court challenging the BCCI's decision to cancel the telecast rights that had been awarded to it. Zee requested the court to set aside the BCCI's decision to cancel the contract, and the matter is expected to come up for a hearing on September 27.

Zee requested the court to ensure that the board didn't grant the telecast rights to any other channel before a final decision was taken. It also added that it was fully equipped to cover the series between India and Australia, beginning on October 6.

Even if Zee manages to somehow win the rights, the question of profitability of the venture elicits mixed reviews with three brokerages coming out with conflicting recommendations on the scrip. While SSKI Securities has put an underperformer tag on the scrip, the other two - ABN Amro Securities and Merrill Lynch - have put out a buy call with the assumption that Zee will manage to get the telecast rights.

Act IV: UTV's kids channel, Hungama TV was supposed to be off the starting block in the first week of September. However, the launch was postponed by a few weeks, enabling Bennett, Coleman & Co to pip it at the post with the launch of its non-fiction entertainment channel, Zoom (Bennett, Coleman also plans to launch a spirituality channel soon).

Hungama TV has signed a pact with Star India wherein Star will distribute Hungama TV for five years as part of its network. Meanwhile, New Delhi Television (NDTV) has already filed an application with the ministry of information and broadcasting, seeking approval for a 24-hour business news channel.

The new channel, which will be predominantly in English, may be on air by the end of 2004. Come 2005 and Walt Disney is planning to set up three television channels in India and is known to be in talks with an Indian company over a possible joint venture.

The grand finale
Looking at the tieups in the sector, the media sector seems to be caught in a consolidation mood. Is this a fleeting moment or is the media sector poised for a rapid expansion?

M&A isn't hot
"The sector has the right things going its way for the moment," says an analyst. "The health of the industry can be gauged by the good performance of small entrants - as is the case presently," says Atul Rastogi, media analyst at Motilal Oswal Securities.

This is amply helped by the buoyancy in advertising revenues and the fact that niche channels are doing well. The consensus is that though the mood is upbeat, barring a couple of mergers, the M&A scene is not looking too hot.

This is despite the impending launch of new channels from the Times group, NDTV, Disney and UTV. While the new channels are expected to ease some of the demand-supply mismatches that exists for content providers, there is not enough fodder for many more deals of the Star-Balaji variety, feel analysts.

"The most likely scenario for M&As lies with the broadcasters themselves," says Salil Pitale of Enam Financial Consultants. With a slew of niche channels in the fray, the laggards may decide to align with other channels or sell out to them, he feels.

Media watchers also feel that alliances can be a good option for content providers, wherein a single entity can align with two or three houses and substantially increase its size. This would have a significant effect on its bargaining power with broadcasters, bringing in more scalability in the process. However, the catch is that most content business houses are the mom-and-pop variety, usually driven by a strong individual.

So, when it comes to an alliance, the equations between two-three strong individuals could throw a spanner in the works. Though consolidation is a crying need in the distribution space, it has come a cropper so far. However, there is hope in the DTH space, feel analysts, once the medium spreads.

Who'll win?
In a scenario where broadcasters, content providers and distributors - who together make up the media sector - compete for gains, broadcasters are likely to win hands down, feel analysts.

The key to gains for broadcasters lies in grabbing a substantial chunk of the Rs 4,000-crore advertising and Rs 10,000-crore subscription markets.

This, along with improved addressability arising from new technologies like DTH and broadband-enabled telephone networks, which may include Satellite TV (as envisioned by Reliance Infocomm), will benefit broadcasters. The fact that only about Rs 1,500 crore of the Rs 10,000 crore chunk of subscription revenues finds its way back to the broadcasters is significant, say analysts.

Advertising spends in India are still pretty low compared to international standards and growth in ad-spend is likely to be higher than GDP growth in the next few years, say analysts.

Notwithstanding threats in the form of new channels from Disney, the Times group and UTV, analysts feel that channels which have the advantage of multiple areas of content to grab a higher share of the advertising pie would have the edge.

Content providers are currently bogged down due to their revenues being capped by what the broadcasters are willing to pay them. This basically arises from the demand-supply mismatch which is skewed towards content buyers (broadcasters).

Basically, for the 200-and-odd production houses, there are only five big broadcasters as buyers. This leads to the smaller content houses being squeezed by the broadcasters in terms of credit. Delayed payments affect content providers adversely as content is a working capital-intensive business.

In this spectrum, only the larger players with a diverse customer base are worth looking out for. Smaller size, limited scalability and disparity in margins (broadcasters have better margins) are among the reasons for the lack of institutional interest in production houses. Even the ones associated with the film industry such as Mukta Arts, Pritish Nandy Communications (PNC) and K Sera Sera may have a turbulent ride. Their fortunes would vary with that of their projects, though experts appreciate the de-risking strategies adopted by them like going in for a different genre of films and focusing on the cost and time factor while completing movies.

On the distribution side, getting organised continues to be one of the biggest challenges. Analysts maintain that till consolidation happens, players in the distribution side would have substantial difficulty in garnering equity interest.

Niche and news will rule
Another positive factor is that broadcasters' revenue addressability is going to improve by way of either DTH or CAS (improved addressability means the broadcasters will get a more realistic picture regarding the number of subscribers, thereby reducing the rampant under-declaration that exists presently).

Niche channels providing superior content would be in demand - as is the case currently. This combined with the expansion phases in various industries like cars, mutual funds, financial services and telecom has resulted in a blitzkrieg of advertisements.

Analysts point to the paradigm shift that has occurred in advertising with the successful male replacing the housewife as FMCG companies' target customer. Not that the channels are complaining, especially news channels which have benefited greatly as males are their target audience.

Not surprisingly, analysts bet on news channels to deliver superior returns going forward. They say that current advertising rates in news channels are still pretty low (a 10-second slot on NDTV 24x7 sells for Rs 7,000).

They also expect addressability and viewership to increase tremendously in the next one-two years. This is also expected to augur well for sports and top-end general entertainment channels.

On the other hand, the touch-me-nots in the sector include Mukta Arts, Cinevista and Creative Eye, which are currently languishing. The fortunes of Mukta Arts and PNC will vary with how their films projects fare in future.

Epilogue
The consensus is that there is not much that can upset the apple-cart except a major slowdown in the economy resulting in lower advertising spends. In the long run, the favourable demographics in India, increasing advertising spends and further penetration in TV and cable households are positives that outweigh the negatives.

Main characters
Zee Telefilms If it finally wins BCCI's cricket rights, Zee will become a complete channel, catering to all segments of the broadcasting space - be it general entertainment, movies, news, sports or business.

The leverage emanating from this for its entire bouquet is a positive, say analysts. So if Zee can grow its marketshare and improve its bargaining power, the move would work out in its favour even if the cricket deal itself only breaks even. However, the negatives are not trivial either.

The moot point, analysts say, is that the bidding price may have been aggressive and Zee may stand to lose in the vicinity of $28 million (Rs 133.4 crore) from the deal, resulting in a negative RoI of 7 per cent (see table: Zee's BCCI pay-off).

"The assumption of the cricket rights being a positive for Zee is based on a lot of factors staying favourable in the next four years," says Rastogi. "Advertising rates are at pretty high levels. Cricket viewership has fallen since the Indo-Pak series and Zee can manage a maximum of 140 days of cricket a year.

For the rest of the year, it would have to buy content to keep its sports channel alive and the fact that most other sports are already being telecast by the existing channels only hardens the case against Zee," he feels.

The fact remains that with viewers being spoilt for choice, Zee TV has been steadily slipping on the rating front with Zee Cinema enjoying higher viewership than Zee TV currently.

A swing in advertising revenues in the next two-three years could dent Zee's bottomline. Negative news from the DTH front and less-than-expected gains from cricket rights could drain its cash. On the other hand, Salil Pitale of Enam Financial Consultants feels that the bigger picture looks positive for Zee as the rub-off effect from the increase in viewership would result in better blended rates.

The Zee scrip has been hovering around the Rs 150 mark since the controversy began. Analysts peg an EPS target of Rs 7.09 for FY05.

Balaji Telefilms

Balaji's programmes continue to dominate the TRP charts for Hindi cable and satellite (C&S) channels. This puts Balaji in a comfortable position while negotiating with broadcasters, a fact vindicated by its improving realisations.

Balaji's signing of contracts with Times Channel, MTV and UTV for producing programmes/shows is also a plus. However, its recent preferential allotment to Star has been viewed as a negative.

The grey area, analysts say, lies in the way rival broadcasters of Star who have signed prior agreements with Balaji perceive the company. They say the next six months would be crucial. Analysts peg an EPS target of Rs 8.5 for FY05.

SAB TV

A few months ago, the SAB TV channel was hived off from the older content company Sri Adhikari Brothers (SAB) to a separate holding company called SAB TV Network to facilitate the sale of a substantial stake.

Analysts say the stand-alone channel on offer had little value without the content and library of programmes. While the company's TV content production business remains profitable, its broadcasting operations are believed to be incurring losses of nearly Rs 10 crore a year. SAB TV's promoters in the recent past have been on the lookout for investors or broadcasters to sell a substantial stake in the channel.

TV 18

Besides being a niche provider of business news, a major positive for the company has been the marked improvement in operating margins over the last few quarters.

The company also has assured subscription revenues under minimum guarantee from the Zee-Turner bouquet and a certain revenue stream from the sale of its content to CNBC India.

In the absence of another full-fledged business news broadcaster, the CNBC-TV18 combine has the edge in the market. However, the exclusivity of CNBC is likely to be short-lived as NDTV in coming up with a business channel.

Analysts say CNBC India's viewership ratings may not reflect the real picture as most of its viewing is done outside homes in places of work. However, analysts give a thumbs up to the execution skills of the channel. They peg an EPS target of Rs 16.13 for FY05.

TV Today

TV Today's Hindi news channel, Aaj Tak is still the most popular news channel in the country, despite being launched just four years ago. Analysts say operating margins of the company have come under pressure recently due to a rise in transmission and production costs.

Its English news channel, Headlines Today, is not known to be doing well and is proving to be a drag on the company's profitability. The major worry is that significant competition has cropped up in the news segment with the entry of news channels like Sahara Samay and NDTV India.

This means TV Today has to compete harder and spend more in order to maintain its already deteriorating marketshare. Aaj Tak has been consistently losing marketshare over the last couple of years from near 55 per cent levels to around 30 per cent in terms of Hindi news viewership.

However, the possibility of the company exploring subscription business as a new source of revenue would be a positive, feel analysts. They say in the medium term, the company is relatively well placed to face the competition in the Hindi news space on the back of its brand value. Analysts peg an EPS target of Rs 4.2 for FY05.

NDTV

NDTV is the analysts' favourite and is riding high on its buoyant Q1FY05 results. The company turned around during the quarter, growing its topline handsomely and keeping its operating expenditure in check. Analysts say improved viewership, primarily owing to the coverage of the last general elections, has played a key role in the turnaround. It is the number one player in the English News space while being the second biggest in the Hindi news space. The impending entry of its business channel is also expected to augur well for the company. This is because NDTV 24x7's business news slot already has a very encouraging response and presently rivals CNBC India.

Analysts say the increasing base of advertisers for the company's news channels is a big positive. This, along with its brand value and style of delivering news through its well known anchors is another plus for the company. Analysts peg an EPS target of Rs 5 for FY05.