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S. Vaidya Nathan

SHAREHOLDERS of Balaji Telefilms may reject the open offer made by the STAR group, as the pricing appears unattractive.

There appears scope for scaling up of earnings driven by revenue expansion, even if profit margins remain under stress.

The open offer at Rs 90 per share is for a 20 per cent stake. The STAR group picking up a strategic stake in the company earlier this year has triggered the open offer.

Balaji Telefilms derives about 85 per cent of its revenues through programming content provided to STAR Plus. Balaji Telefilms' programmes dominate the prime time slot in the evenings and the afternoon bands. Serials from Balaji such as Kyunki Saas Bhi Kabhi Bahu Thi, Kahaani Ghar Ghar Ki and Kasaauti Zindagi Kay dominate the top 25 programmes in terms of audience share.

The first two have remained unchallenged for over four years now, and the last for over two years. Over the past few months, STAR Plus has also tried to expand the evening prime time band by an hour with two other serials from the Balaji stable. These as well as new serials for MTV, Zoom and Sony have the potential to drive programming hours and revenue growth. With its well-equipped studios and roster of actors and actresses, Balaji Telefilms appears well-placed to handle the demands of greater number of programming hours.

This assumes importance in the wake of sluggish growth in revenues and decline in earnings over the past year. The latter has been due to a sharp rise in production costs and telecast fees.

A revision in the rates offered by STAR Plus has not been adequate to cover the rise in input costs. Yet, Balaji has managed to generate cash profits of about Rs 60 crore in FY-04 and is likely to do an encore this year. This should lead to attractive dividend payouts besides financing growth without recourse to debt.The offer price is at a price-earnings multiple of about nine times. The stock trades at Rs 96 and over a one/two-year period has the potential to deliver appreciation.

The risk to our recommendation is the possible emergence of a lack of arms-length relationship in pricing of content to STAR Plus and the possibility of pressures to cater exclusively to the STAR group at a time when the market is expanding rapidly.

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Balaji Telefilms: Reject

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