The Hindu Business Line : Sell UTV, Buy NDTV & Balaji Telefilms

INVESTORS could take advantage of the substantial premium that the stock of UTV Software Communications Ltd (UTV) has commanded on listing to cut exposures and switch to a combination of New Delhi Television Ltd (NDTV) and Balaji Telefilms. The UTV stock, which was offered at Rs 130 in the initial public offering, closed last week at about Rs 160.

We had given an `avoid' recommendation in our IPO coverage (refer edition dated February 20, 2005), despite the possibility of gains on listing. We believe that the premium on listing is largely due to the bullish phase in the markets and greater investor interest, following handsome gains that several IPOs have delivered over the past 18 months.

UTV may be an emerging integrated play in the entertainment sector, but it does not, however, have a dominant position in any of its businesses. It has a presence in the generation of television content, marketing of airtime in television programmes, production and distribution of films, animation, dubbing and broadcasting (it has a channel called Hungama aimed at children).

The Hungama channel is likely to soak resources without delivering commensurate earnings for several years; it would also lower the profitability of the television content business. There has been a steady decline in profitability levels over the past five years and even if there is an improvement, it is unlikely to deliver earnings that could support the valuation enjoyed by the stock.

Our view on NDTV and Balaji Telefilms remains positive; their business models are less risky too. NDTV is well placed in the news and current affairs space with channels such as NDTV 24 x 7 in English and NDTV India in Hindi. It has managed to scale up revenues and profitability rapidly in its first two years as a broadcaster.

We are also positive on its foray into the business channel space with NDTV Profit. It could quickly close in on Television Eighteen, which has till this year enjoyed a position of monopoly in this space. In the first couple of months, NDTV Profit has notched up an impressive audience share.

Balaji Telefilms remains the unchallenged numero uno in television content with a dominant share of the most watched programmes and enjoys superior margins and cash flows. Buy these two stocks with a two-to-three year perspective.

The principal risk to our recommendation is the possibility of a higher degree of foreign institutional investors' interest (they cannot invest in NDTV and have a stake of about 20 per cent in Balaji Telefilms) that could lead to a higher price for UTV.

S. Vaidya Nathan

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