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Suresh Krishnamurthy

FRESH investments in the stock of Balaji Telefilms need not be considered now. However, this is also not the time to sell. The stock can be considered for acquisition in the event of a decline in valuations.

The stock's woes are mainly due to the poor earnings visibility beyond the next two quarters. In this backdrop, a key development for the stock is the review of rates scheduled for next April. However, the recent decline in the television rating points for its programmes (they still continue at the top of the charts) and the increase in competitive activity have clouded the prospects for a rise in rates in April 2003. This has affected the stock's valuation in the past month.

If the coming rate review results in a decline in earnings growth, the share price may still not be unduly affected. This seeming paradox is because of the current valuation.

Over the next two quarters, the profit growth will continue to be impressive. The per share earnings for the year ended March 2003 is expected to be around Rs 10 per share. This pegs the price-to-earnings multiple (PEM) at a reasonable eight times. This indicates that the stock price has already factored in a substantial decline in earnings growth in the next financial year.

The risk for investors, though, is that earnings will decline in the financial year 2003-04 because of insufficient increase in rates offered by major channels such as STAR Plus and Sony. Indeed, the impact of any increase in the volume of hours programmed need to be considered. In addition, the company has a number of programmes on air. The changes in rates will not be uniform for all the programmes. However, if the net impact is a decline in earnings, the implications will be adverse for the stock's future performance.

Suitability: Volatility in earnings will be a factor to reckon with in the case of this stock. This will be reflected in the relatively higher stock price volatility. The challenge for investors will be to decipher whether price movements are occasioned by flow of fresh information regarding earnings growth.

In terms of business fundamentals, the company continues to be the premier television programming company in India. Its revenue model of focussing more on commissioned programmes is appealing, given that the size of the company is still small. A higher share for sponsored programmes in its revenue pie can be accommodated only when its capital base is larger, since the risks involved are quite high. The company's performance over the last couple of years is impressive.

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