Zee Telefilms: Winning the toss

Zee's cricket telecast deal has got the market thumbs' up

Zee Telefilms will pay approximately Rs 1,400 crore for the Indian cricket telecast rights for the four years. It will spend another Rs 150-200 crore on a separate sports channel.

The investment is huge, and since Zee bid at a higher rate compared with established players, there is a feeling that Zee may have overpaid.

The markets, however, seem to think that Zee would be a net beneficiary from the deal. Zee's stock price has risen by over 20 per cent since the news came out in mid-August that it was the highest bidder.

It's premature to talk numbers, but with a sports channel that will air a big chunk of Indian cricket, Zee's subscription revenues will get a boost.

This is significant, as it looked like its other programming wasn't getting it very far. With the cricket rights in tow, Zee will not only be able to increase market share, but it would also be easier for it roll out its DTH platform.

The DTH rollout itself has a cost of around Rs 450 crore (excluding any subsidy the company may have to offer on set-top boxes), but Zee has already spent over Rs 200 already on it.

Also, the payment for the cricket rights is going to be staggered, which will not strain Zee as it's currently flush with funds worth approximately Rs 750 crore.

Finally, the cricket telecast over a four-year period gives Zee the opportunity to draw eyeballs back to its network. If it's not successful in doing that, at around 20 times FY05 earnings, investors may be paying a bit too much for the stock.

Pegasus ARC

The Supreme Court's upholding of the Securitisation Act has cleared the decks for the entry of Asset Reconstruction Companies into the country. The latest to file for registration has been Pegasus Asset Reconstruction Pvt. Ltd, in which US NPA resolution firm PNL Companies holds a 24.5 per cent equity stake.

MR Sivaraman, former Revenue Secretary of the Government of India, will be the chairman of the ARC. PNL Companies is also planning a $200 million "distressed debt fund" to turn around Indian companies.

One of the main problems for ARCs in India is the question of valuation. While the value of a distressed asset in a bank's books is high because it consists of principal and accrued interest, its real value is much lower. Most public sector banks are reluctant to let go of the asset at less than book value, because they're worried about the vigilance angle. Under the approach proposed by Pegasus, however, the ARC enters into a joint venture with the bank for the management of the asset. It then gets in fresh promoters who can get in new working capital and revive the asset.

Finally, the asset is sold off and the proceeds shared between the bank and the ARC. PNL (which currently handles $18 billion worth NPAs in the US) has pioneered such joint venture models for the Resolution Trust Company in the US which allowed lending institutions to participate in the upside of successful NPA resolutions.

Hiving off distressed assets is becoming more popular, with ICICI Bank having already offloaded large amounts of distressed assets. The new model should make it attractive for PSU banks also to climb aboard the bandwagon.

Pharmaceuticals sector shares

Pharma stocks on Monday shrugged off the announcement by some companies that they would maintain the prices of all medicines at the current levels till March 31, 2005.

In fact, the pharma sector was buoyed by the latest deal in which Unichem Laboratories has entered into an agreement with Lannett Company of USA for the exclusive supply of one or more generic drug products, which reflects once again the strengths of Indian pharma. The Unichem scrip surged 6.86 per cent, while Ranbaxy gained 1.7 per cent and Nicholas Piramal was up 2.3 per cent.

In contrast to the steel sector, where the bottomline of several players is expected to fall due to the agreement reached with the government, the impact on pharma companies in terms of profits is expected to be minimal.

Analysts point out that no major player was planning a price hike over the next few weeks or months. Moreover, during the monsoon season the growth of the industry has shown signs of slowing with month-on-month growth at a mere 5.3 per cent. Hence, many players were already adopting a wait and watch strategy vis-a-vis prices.

In fact this latest development is being viewed as the best possible alternative at a time when the NPPA has decided to probe the wide gap between the retail and wholesale prices of medicines, and as a move to counter the government's desire to widen the scope of the DPCO.

However, the rising input prices of fine chemicals remains a source of concern. Analysts point out that since fine chemicals are petroleum derived, producers have been hiking prices at regular intervals. However, as leading players have entered into long term contracts for this key input, the impact is expected to be minimised.

With contributions by Mobis Philipose and Amriteshwar Mathur