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S. Vaidya Nathan

Dr Prannoy Roy, Chairman — Paul Noronha.

SHAREHOLDERS of New Delhi Television (NDTV) can retain their holdings, as there is scope for appreciation linked to fundamentals and enhanced institutional investor interest. The company's earnings card for the first quarter is to be unveiled on Monday (July 18) and the revenue and earnings numbers are likely to show robust growth.

In its second year as a broadcaster, NDTV managed to generate healthy profits and cash flows, despite a spike in costs. The valuation parameters are bound to get more attractive, as the company is likely to scale up revenues over the next couple of years. We also expect NDTV Profit — the business channel — to gain market share, close in on CNBC TV 18 and contribute to revenues and earnings in a meaningful manner over a two-to-three year period.

We also take a positive view of NDTV's plans to launch a fourth channel in the news and infotainment space. It could serve as a flank against emerging competition in the English news channel space, with Television Eighteen and the Times group set to launch channels.

NDTV is well-placed to ensure that NDTV Profit and the proposed channel are distributed widely with only a modest increase in carriage fee. The other players may have to fork out a hefty sum to ensure that cable distribution networks place their new channels on prime band to ensure a reach that would match those of NDTV 24x7, NDTV India and Aaj Tak of TV Today. NDTV's brand equity is likely to ensure a superior geographical spread in the distribution of its channels; this would be a crucial advantage, as cable-connected homes are now placed at 60 million and set to expand sharply.

NDTV's revenues are likely to get a boost from subscription revenues as two of its channels — NDTV 24x7 and NDTV Profit — are on a pay basis and distributed through the Sony bouquet, which has an attractive set of channels. Subscription revenues would be earnings accretive as incremental costs are bound to be marginal.

NDTV India — the Hindi channel — is likely to remain a free-to-air channel to be on a par with its competitors. It is, however, closing on Aaj Tak — the leader in this space. The channel is likely to make a larger contribution to advertisement revenues over the next few years. NDTV has handled the departure of a few key personnel deftly without any dent on its programming. It has managed to successfully take care of anchoring slots in prime time with a few new faces; the package of feature programmes has also expanded over the past six months. NDTV has suffered limited damage on the employees' front even as there has been a higher degree of attrition in the industry due to the mushrooming of new channels. Over the past month, foreign institutional investors have been allowed to invest in companies in the "news and current affairs'' business. But the holdings of FIIs and other foreign investors as well as FDI (foreign direct investment) cannot exceed 26 per cent. NDTV is likely to emerge as one of the more preferred plays for FIIs, as its long-term prospects are bright and there are few concerns on management quality.

We do not expect NDTV to opt for a strategic partner through the FDI route though foreign media players may covet it. If the promoters decide not to press the transfer of a 15 per cent stake to a family member who is an NRI, the FIIs would have greater leeway. Or, if the government decides that this stake would not be considered for the purpose of the 26 per cent limit, it would be a positive. Till clarity emerges on this aspect, FIIs may adopt a cautious approach.

The NDTV stock trades at a price-earnings multiple of about 20 times its expected FY-07 earnings. The stock is likely to command a premium valuation over its peers due to its dominant position in the news and current affairs space and enhanced FII interest over a period.

We retain our bullish view on the stock, which was last recommended at Rs 180 in March. The possibility of losing key personnel and a spurt in employee cost represent the principal risks to profitability and our recommendation.

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