Komfortably ahead

PENNY WISE

Balaji Telefilms' foray in broadcasting with Star is waiting to galore.

For several years prime time entertainment on television has been defined by daily soaps, which run for about four-five days a week logging hundreds of episodes of never ending stories.

All major broadcasters, across languages have tried their hand at various formulas and have settled for this proven prime-time breadwinner, extending it to afternoon slots too.

Cooking up these stories on air are companies like Balaji Telefilms, United Television (UTV), BAG Films, Cinevistaas and Miditech. Balaji Telefilms rules the roost among all the players with top-rated programmes on Star Plus and Zee TV currently.

For almost a decade, the company has dished out successful programming in Hindi for various channels. It is now expanding into production of content in other languages such as Tamil and Kannada, as well as in Urdu essentially targeting audiences in the Middle East.

Big picture
According to a recent FICCI-Pricewaterhouse Coopers report - Frames 2007 - the Rs 19,100 crore Indian television industry is estimated to grow at a compounded annual rate of 22 per cent, over the next five years. This translates into a three-fold growth, to Rs 51,900 crore from its present base.

In line with this, television subscription and advertising revenues too are expected to grow at an annual rate of 26 and 13 per cent respectively, until 2011. This pegs the value of subscriptions market at Rs 37,800 crore in 2011, while that of the advertising market at Rs 12,300 crore for the same period.

However, currently the penetration of television is just 56 per cent, which is expected to grow significantly. Of the approximately 112 million television households, pay television households constitute an estimated 70 million.

This number is expected to touch 113 million by the year 2011, with the gradual introduction of conditional access system (CAS) and direct-to-home (DTH). 
 

SERIAL NUMBERS
Rs crore	FY08E	FY09E
Revenues	391	477
Net profit	86	104.9
EPS (Rs)	13.2	16.1
P/E (x)	12.7	10.4

Leading the pack
Balaji Telefilms has established itself as a leading content provider to all major broadcasters in the Hindi general entertainment segment. It has produced a number of blockbuster series, running over 1,500 episodes, such as Kyonki Saas Bhi Kabhi Bahu Thi, Kahaani Ghar Ghar Kii, Kasautii Zindagi Kay and Kussum to name a few.

The company now provides content to channels such as Sun TV, Doordarshan Chandana, in Tamil and Kannada respectively. The company derives its revenues from mainly two sources: commissioned content and sponsored content.

Almost all of Balaji's Hindi content is sold on a commissioned basis, under which the company sells all the rights over its content to the broadcaster for a fixed amount, and a marginal share of the revenues earned from advertising during the slots of its programmes. The revenue share varies according to the show's popularity. Balaji only incurs the cost of production of the show or series, while the marketing for the same is carried out by the broadcaster.

On the other hand, for airing its sponsored content the company has to secure a telecast slot on a particular channel by paying the broadcaster a fixed sum while carrying out production as well as marketing of advertising airtime for the shows on its own.

Although the company does not have to share any part of its revenue from advertising with the broadcaster, the cost of marketing airtime for its shows is fairly high, which depresses margins. Balaji provides content to Sun TV and Chandana on a sponsored basis.

Due to the lucrative realisations from its commissioned content business, the company is increasing efforts to gain more business from this front. This year, the revenues from commissioned content are expected to increase by over 20 per cent, while the share of revenues from sponsored content to total revenues is going to drop from around 12 per cent last year to nearly seven per cent. 
 

MORE SOAPS
Revenue distribution Rs crore	FY06	FY07E
Commissioned	235	295.5
Sponsored	34.6	24.6
Others	10.82	-
Total	280.4	320.4

Do more
Balaji has so far been focusing largely on the family soap genre. It has plans to experiment with other genres like reality and lifestyle shows. After capturing Indian eyeballs, it is now looking to make its mark in the international markets too.

The company has recently entered into a deal with ARY, a popular Pakistani network which broadcasts satellite channels mainly in the United Arab Emirates and Pakistan, and elsewhere in the world.

The company has sold the rights to its content for broadcasting in the Middle East and Pakistan, holding the rest with itself. These programmes will be on air from the second week of May. ARY is a popular Pakistani television network with ARY Digital as its flagship channel and boasts of considerable viewership among Asian communities abroad.

On April 19, Balaji announced its newest initiative, a joint venture with STAR Group to create a television network of regional language general entertainment channels.

The joint venture will be 51 per cent owned by STAR and 49 per cent by Balaji, and will be headquartered in Chennai. This initiative will first target the south Indian markets, as the two companies will combine resources to infuse Vijay channel with Balaji's content.

A Telugu channel too, is on cards, most likely be launched by the last quarter of FY07. This will be followed by channels in Kannada, Malayalam and other regional languages.

Filmy foray
Balaji Telefilms has a marginal foray in production of films too, via its subsidiary Balaji Films. Although the company has not seen much success on this front, "we have not lost money in this business either," says Sandeep Jain, chief financial officer, Balaji Telefilms.

Last year, it produced Kya Kool Hain Hum, which was a hit. This year, it plans to roll-out about four-five films as a producer or co-producer with other famous banners. The first one to release in May is Shootout at Lokhandwala with a mega-starcast, co-produced with Sanjay Gupta.

"We have already recovered our cost of production for the film from sale of its music rights and distribution rights," Jain claims confidently, adding that Balaji plans to invest Rs 30-35 crore in production of films this year.

Other films include Woodstock Villa, releasing in June, and Dus Kahaaniyan, a film with ten short stories, to be released in the second half of 2007.

Valuation
Operating margins have been steadily improving and are expected to increase from 33.4 per cent for FY06 to about 36 per cent, given that it maintains its nine-month numbers, FY07.

"Although there remains a faint chance of improving margins hereon, we shall maintain the current levels of profitability going further," says Jain.

The stock has underperformed the broader markets over the whole of the past year. New initiatives, better operational performance as well as overall growth of markets are likely to bring a reversal of trend in its stock price.

"There is a significant amount of cash on books, to the tune of Rs 35 per share," says Hitesh Agrawal, senior analyst, Angel Broking. It may thus be able to pay good dividends or even go for further expansion.

Considering all these factors, the stock appears to have a good upside potential, as it is currently trading at about 13 and 10 times its expected FY08 and FY09 earnings, respectively.

With increasing number of channels, the demand for quality content will continue to be high allowing sufficient room for growth. However, to some, Star's 26 per cent stake in the company is a cause for concern, giving it a first right of refusal to the content produced by Balaji.

Angel's Agrawal counters this by saying that "Star has a limited number of slots, a majority of which are already occupied by Balaji, as against the amount of content produced by the company."

While investors are looking for healthy avenues in volatile markets, this counter appears shining with a clearly visible pipeline of earnings.