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S. Vaidya Nathan

Mr Raghav Bahl, Managing Director... Advertisement and subscription revenues will be growth drivers.

SHAREHOLDERS of Television Eighteen (TV 18) can stay invested in the stock as it holds potential for upside despite the sharp run-up in its price this year. The company operates the CNBC-TV 18 channel that caters to business news. Factors that support the stock's valuation and also provide upside potential are: A higher degree of clarity in the business structure; an earnings card that now captures the underlying story,; a coat of black on the consolidated earnings card pointing to a turnaround in content and broadcasting business taken together; the imminent sale of a 10 per cent strategic sale to the CNBC; and the lack of competition in the business news space.

As TV 18 is on a turnaround path, the valuation level based on price-earnings multiple, which point to a stiffly valued stock, is misleading. The room for upside may not be as pronounced as in the past 10 months. However, a steady accretion from the present levels is on the cards.

Earnings are likely to scale up in FY 04, and particularly from FY 05 with enhanced levels of advertisement and subscription revenues. Key operational aspects that could help the stock retain a higher valuation level than in the past are:

Cleaner structure: The opaque manner in which TV 18's business was structured is a thing of the past. CNBC India, the broadcasting arm, and whose earnings card was not in the public domain, is now fully-owned by a subsidiary company of TV 18. Even after CNBC picks up a 10 per cent stake, the broadcasting arm would remain a part of TV 18's earnings card. This provides the much-needed clarity on the business model. The new arrangement with CNBC also points to a deeper commitment on the latter's part, with the franchisee terms covering a 15-year period and providing for guaranteed purchase of content inventory from CNBC-TV 18.

Clearer earnings: The complicated revenue-sharing arrangement with CNBC India, the part-funding of its losses and the practice of charging this outgo over a number of years have been done away with. From the July-September quarter, TV 18 has begun to take the broadcasting cost as a charge in the period in which it is incurred.

Even after this shift, there has been an expansion in operating profit margins by about two percentage points. To a large extent, this is due to strategic changes in the distribution and advertisement marketing space.

Guaranteed revenues: TV 18 is now part of the Zee-Turner for distribution to cable and satellite homes. Earlier, it was part of One Alliance, spearheaded by the Sony group. Under the new dispensation, TV 18 gets a minimum guaranteed sum of Rs 3 crore a quarter. The effect of this change will be reflected fully in the earnings of FY 04 and could provide an upside of at least 50 per cent.

Sustainable buoyancy: Subscription revenues now account for about 30 per cent of revenues. If the shift in the revenue models of companies such as Zee Telefilms is a pointer, there is scope for enhanced contribution from subscription revenues to the topline.

A sizeable proportion of any such enhancement will boost the bottomline as incremental costs would only be the commission payable to the Zee-Turner group.

The move to directly market advertisement time over the past 18 months has also gradually bolstered the revenue stream. A growth of about 35 per cent in ad revenues in the latest quarter compared to the April-June quarter gives an idea of the strong performance.

There has been an improvement in the number and, more important, the quality of advertisers. This trend is likely to continue as the channel occupies a niche space without any competition and has dedicated audience during the stock market trading hours and select non-trading hours.

Risk and opportunity: TV 18 would have been a prime beneficiary of a shift to exclusive payment-based delivery models such as Conditional Access System (CAS) and Direct-to-Home (DTH). There is still a question mark over CAS in Chennai and DTH may take time to find a mass market due to the cost factor and limited channel availability as of now. However, over the long term, as such delivery models find acceptance, TV 18 would not only find an opportunity to grow its subscriber revenue, but also move towards pay-per-view programming.

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