Time to channel surf

Shares of television broadcasters have been on a roll, thanks to a flurry of favourable news reports on the media sector. It may be time to take a break before the next round of run-up.

Last month, the government allowed foreign investors to buy into publishing and electronic media companies provided the combined investments, by FII and FDI investors, do not cross 26 per cent. That was reason enough for media stocks, which did not have any FII investments, to see an upmove.

After underperforming the market for over a year, prominent media stocks have seen a fantastic run over the past one month -- NDTV (27.40 per cent), TV 18 (21.50 per cent), Zee (10.79 per cent) and TV Today (8.10 per cent).

Will the dream run continue? Analysts say that while the growth potential for media companies is immense, its may be time to take a break as valuations are getting stretched.

With estimated revenues of Rs 22,000 crore in 2004 and tipped to grow at 18 per cent annually to touch Rs 58,000 crore by 2010, the entertainment industry's growth is not in doubt.

And more so television, which commands the lion's share of revenues - 63 per cent or Rs 13,900 crore (source: KPMG).

While general entertainment still remains the biggest draw on television followed by films, Haresh Chawla, chief executive officer, TV18 group, observes that higher literacy levels and a general improvement in the economic well being, have meant an increasing viewership for other genres such as news.

Television's share, say consultants, could go upto Rs 37,000 crore by 2020, driven by better distribution, regulatory changes and technology. Thus the sector is set to see explosive growth though how individual players are going to face the competition remains to be seen.

Deepak Kapoor, executive director, PriceWaterhouse Coopers (PWC), cautions that as with any other industry, consolidation and a shake-out are inevitable.

"When this will happen is difficult to say, but surely not in the immediate future." That must make the television fraternity feel better. Here's what will drive the growth:

Consumerism: The average Indian is getting richer and spending more on entertainment. Compared with 29 million households in 1994-95, 75 million households are estimated to earn between $970 and $4600 in 2005-06 (source: KPMG).

Also, a third of the population is below the age of 14. That can only mean more purchasing power in the years to come, with a good part of the money being spent on non-essentials.

Advertising spend: Total ad spend across media in 2004 was Rs 11,800 crore, up 13.4 per cent over 2003. India's ad spend-GDP ratio, however, is just 0.5 per cent compared with 1.3 per cent for the US or even 0.8 per cent for South Korea.

Interestingly the growth came from sectors largely unorganised and localised. Ad spend on television is tipped to grow at 12-14 per cent to touch Rs 9,400 crore by 2009, according to PWC, though it should be remembered that advertising budgets are correlated to the growth of the economy and tend to fall in bad times.

Also the proliferation of channels and the consequent fragmentation have made life more difficult for broadcasters.

According to PWC, regional channels are eating into the viewership of national channels, compelling broadcasters to expand their bouquet to capture the spends across genres.

Distribution: The country already has nearly 50 million C&S households but the penetration, at just over 42 per cent of around 119 million homes with television, is low (source: PWC). 
 

Small screen, big gains
March 05 (Rs cr)	Zee TV	NDTV	TV18	TV Today
Net revenues	1395.4	176.1	93.4	139.07
EBITDA	436.1	52.7	48.6	34.07
EBITDA margin  (%)	31.2	29.9	52	24.5
Net profit	309.6	35.3	31.4	16.43
EPS FY05 Rs)	7.8	5.9	18.6	2.83
EPS FY06E  (Rs)	8.9	9	20.2	4.2
EPS FY07E  (Rs)	10.5	10.5	22	4.8
P/E (X) FY06	17.4	25	16	19.2
P/E (X) FY07	14.7	21.6	14.72	16.8
Price (Rs)	155	227	324	81
Market-cap  (Rs cr)	6418.5	1380.77	547.9	474.67

Though subscription revenues continue to have the larger share, estimated at 58 per cent, under-reporting has resulted in the operator-broadcaster split of revenues remaining skewed in favour of the former.

As Rajesh Jain, director (ICE), KPMG, observes, "In India, only 10 per cent of pay revenues accrue to the broadcaster, whereas overseas it's closer to 40 per cent."

Although the DTH space has two incumbents - Zee's Dish TV and DD's Direct TV - subscription numbers remain low. For instance, Zee's subscriber base as of March FY05 was less than 300,000. The emerging competition should shake up the market as technology obviates the need for the last mile and convergence becomes a reality.

With more players coming up with DTH and perhaps subsidising set top boxes, subscriptions are likely to grow faster from now on with greater affordability, driving volumes. For the record, the government also cleared the DTH (direct to home) applications of Space TV (an 80:20 JV between Tata and Star) and Sun TV last week.

Content: According to Jain, the quality of content is key to the success of a broadcaster and good content will always command premium advertising rates. With DTH and IP-TV coming into vogue, the demand for differentiated content will increase and should lead to the growth of new genres.

With the population becoming younger there is good potential for business, sports and lifestyle channels.

Pricing: Indian consumers are an extremely price-sensitive market, but the potential to tap large volumes makes it an attractive one.

Prices today are significantly lower in India than in other parts of the world, but the limited distribution makes it difficult to garner volumes. With DTH, companies may be willing to subsidise set-top boxes, making it more affordable. 
 

How the media business will grow Segment-wise composition of the entertainment industry           ( Rs cr)
Segment-wise breakup	2004	2005E	2006E	2007E	2008E	2009E	2010E
Television	13900	16400	18900	22800	26600	32500	37100
Film	5900	6900	8300	9900	11400	12900	14300
Music	1000	1000	1100	1100	1100	1200	1300
Radio	200	300	400	500	600	700	800
Others	1100	1600	2300	3000	3900	4800	6000
Gross unadjusted revenues	22100	26200	31000	37300	43600	52100	59500
Source: KPMG Research

TV18
TV18 is a leading business news broadcaster and also a content provider - it has an agreement with CNBC to provide content to the latter till 2015.

After a recent corporate restructuring, TV18 now controls broadcasting operations with a 90 per cent stake in the joint venture with CNBC. Its distribution agreement with Zee Turner allows it to get a minimum guarantee of Rs 54 crore between FY06 and FY06, a higher amount than what it was receiving earlier.

The Hindi channel, Awaaz, according Chawla, now has a strong viewership, especially in the smaller towns. Chawla says in a year the company would have three channels, including the new English general news channel being launched in a joint venture.

The diversification, according to analysts, would help mitigate the risk of being over-exposed to the business segment, the viewership of which tends to be correlated to the state of the stock market.

While TV18 has a strong brand franchise, the news channel segment is highly competitive with five business channels already in existence and another one expected from the Times-Reuters group.

However, TV18 should be able to retain its viewership and with the growth of DTH/CAS, analysts believe that the channel should be able to earn good pay revenues.

In FY05, TV18's sales were up 70 per cent while the net profit grew 168 per cent. Analysts say the stock still has some steam.

NDTV
NDTV is the market leader in the English news segment and second behind Aaj Tak in the Hindi news segment. The company launched its business channel NDTV Profit during FY05. The channel has moved to the Sony One Alliance platform with English and business channel distributed for a fee.

Analysts believe that given its experience, credibility and strengths in the new segment, the company should be in a position to move into the infotainment space.

The keen competition in the news segment with 15 channels currently in existence and new channels expected, could put pressure on advertisement revenues.

Moreover, as a JP Morgan report observes: "News channels have the second-highest secondage (number of seconds of advertisements per half an hour of programming). We are witnessing a shift from interruption advertising to engagement advertising like in-programme advertising. This could translate into lower secondages for the news segment overall."

Net sales in FY05 were up 155 per cent with the company turning the corner with a profit of Rs 35.3 crore compared with a loss of Rs 50 crore in the previous year. Analysts say the stock has become a trifle expensive and could be bought on declines.

ZEE TV
The stock has been an underperformer for a number of reasons - the inability to come up with content good enough to push up TRPs, the lack of traction in DTH, the cricket bid controversy and the freeze on cable rates by Trai.

The better-than-expected performance in Q405, in which ad revenues were up 10 per cent y-o-y after eight quarters, and its programmes earned better TRPs, resulted in the stock moving up by 16 per cent in eight days.

According to the management, TRPs and viewing patterns of the three major channels indicate that the viewership of Zee has seen a significant increase. This has been due to a slew of marketing and programming initiatives. Zee appears to be regaining market-share but the competition across genres is increasing. 
 

The Hindi belt
Channel	TVR	Share %
Star Plus	1.68	58.1
Zee TV	0.44	15.2
Sony Entertainment TV	0.53	18.4
SAB TV	0.07	2.3
Sahara One	0.17	6.0
Source: TAM Media Research Target group: Cable & satellite, four years + Markets: Hindi speaking markets Period: Dec 28, 2004 to June 4, 2005

Analysts believe that Zee has been working on its content, but feel that while advertising revenues have picked up, Zee will have to come up with outstanding content to improve its TRPs and grow market-share.

The company has a 20 per cent stake in the DTH venture promoted by the Essel Group. According to the management, it is in talks with both Star and Sony for carrying their programmes on its DTH platform, Dish TV.

The management says Dish TV should break even at a level of one million subscribers, the current number of subscribers being around 300,000. While DTH revenues are picking up, the possible launch of the Star-Tata DTH business, later in the year, say analysts, will mean stiff competition for Zee.

Besides, analysts point out that the overseas markets are now more competitive with Star and Sony present in most of Zee's markets.

The management says all Zee Network channels are market leaders internationally and claims that "any research or data available will indicate that Zee is head and shoulders above the nearest competitor in the overseas market."

However, analysts believe that the international business is likely to grow only in single digits, and with the price freeze on bouquets at home, overall subscriptions are likely to grow by about 6 per cent in FY06. Analysts say the stock could be bought on declines. 
 

Hindi news channels
Channel	TVR	Share %
Aaj Tak	0.17	26.3
NDTV India	0.13	21.2
Zee News	0.1	16.1
Star News	0.11	17.2
DD News	0.05	7.3
Sahara Samay National	0.04	5.8
India TV	0.04	6.2
Source: TAM Media Research Target group: Cable & satellite, 15 years + Markets: Hindi speaking markets Period: Dec 28, 2004 to June 4, 2005

TV Today Network (TVTN)
The company's flagship channel, the Hindi news channel, Aaj Tak, is the market leader in the Hindi news segment but has been losing market-share.

However, the company managed a 15 per cent hike in its advertisement rates in February and the bookings for the current year are believed to be good.

Advertisement revenues are important since the Hindi news segment has many Free-to-Air (FTA) channels and that makes it difficult for Aaj Tak to go pay.

Headlines Today, the company's English channel which is now two years old, is the number two channel and has improved its market-share, thanks to better content and an improved look.

However, its ratings are still far behind those of the market leader NDTV. Though the channel contributed 2 per cent to revenues in FY05, analysts believe it would take a while before it makes money, given the stiff competition.

In FY05, TVTN's net revenues fell marginally by 0.8 per cent, but net profits dropped by 48 per cent due to an increase in production, staff and selling costs. Anlysts say most upsides are captured in the price.