The Hindu Business Line : Television Eighteen: Buy

AN INVESTMENT can be considered in Television Eighteen (TV 18) stock, as there is scope for gains once the restructuring (see accompanying box) takes effect. In the proposed arrangement, the burden of rolling out new channels will not directly impinge on the earnings of Television Eighteen.

We also take a positive view of the arrangement with CNN for the English news channel. There are risks of a lengthier-than-anticipated payback period in the proposed ventures and of an equity expansion, should the company pursue plans to raise funds in the overseas markets. Any dip in the price linked to broad market weakness can be used to accumulate the stock.

TV 18, along with NDTV and Balaji Telefilms, remains in the shortlist of our preferred exposures in the media sector. The stock trades at a price-earnings multiple of less than 15 times its likely FY-07 earnings and this does cushion the downside risk even if the new ventures impose a drag on earnings growth over the next couple of years; this takes into account the effective cost of the company's investment in the general news channels space. There are three factors that will have a significant bearing on the stock price performance over the next two-three years:

Split businesses: Shareholders will soon own stakes in two companies: TV 18 India and TV 18 Network. The restructuring has been designed to comply with the regulatory norms prescribed by the government, and also impart a cleaner and more transparent ownership structure. Awaaz — a personal finance channel in Hindi — is privately owned. The new arrangement ensures that shareholders have an equitable opportunity to participate in its growth.

Awaaz has made a mark during the short period that it has been in existence and as ad revenues slowly start flowing in, it has the potential to emerge a source of earnings growth. The numbers may become significant only over a two-year period. Leveraging CNBC-TV 18's clout with advertisers to market the two channels as a combined platform is an added positive.

Competition to bite: NDTV Profit has turned out to be a tough competitor for CNBC-TV 18, which had a monopoly in the business news space. This has happened far sooner than was anticipated. In our view, NDTV Profit's content and presentation are superior and more eye-catching, and we believe it will take a significant share of the market. Advertisers are likely to step up their spends on business channels and spread it between these two channels. The latter is likely to hurt CNBC-TV 18, though the effect will be neutralised by the expansion of the market.

If it also does not fine-tune its act quickly, NTDV Profit has the credentials to walk away with the top slot in terms of audience share and advertiser preferences. Though this risk is a key factor, the valuation levels provide cushion. We do not believe the rest of the pack will pose a threat to CNBC-TV 18 and NDTV Profit.

General news space: The foray led by a group of professionals, including Mr Rajdeep Sardesai, who was with NDTV for several years, is likely to be a resource guzzler for at least two/three years. We do not expect it to match the dramatic start made by NDTV Profit. As in the business news domain, there is room for a quality player in the general news space. There will be a few claimants, including the still fledgling, but gradually improving, Headlines Today (owned by TV Today) and the imminent Times-Reuters channel. It will boil down to these three to battle it out for the second slot. The arrangement with CNN to co-brand the channel is likely to give Global Broadcast News an edge. It will, however, be a long haul to close in on NDTV 24x7, though the latter, too, is likely to shed a few percentage points in audience share.

Any foray in the Hindi News space will be even tougher a battle, as Aaj Tak, STAR News and NDTV India have an established presence. The performance of the news channels will be crucial for the valuation of TV 18 Network. The CNN arrangement is likely to fast-track the visibility for the channel and also gives it better clout with the cable distribution network.

For now, we believe that NDTV has a superior bouquet and are also confident of its ability to maintain such a position, especially on content. The general news space requires a far greater investment; its established presence gives it an edge and enabled it roll out a business channel in double quick time and at a modest cost. The TV 18 group is moving in the other direction and this entails risks, accentuated by a more competitive entry environment as compared to NDTV. If you buy with a long-term perspective, the payoffs may, however, be attractive.

The restructuring of the ownership will create two companies:·

TV 18 India will own CNBC-TV 18, www.moneycontrol.com, www.commoditiescontrol.com and Awaaz; it will also own 43 per cent of Global Broadcast News — the launch pad for the foray into the general news space; we will examine its implications later.

TV 18 Network: This will be an investment vehicle, which will own controlling stakes in TV 18 India and Global Broadcast News. The promoter group will have a 51 per cent stake in this company, which is a critical element in the compliance norms. An IPO for 10 per cent of the equity is likely and this will improve the market for the stock. Shareholders of TV 18 India will own 39 per cent. In the proposed arrangement, the stake of non-promoter shareholders in TV 18 India will slip by about ten percentage points. In this respect, there is yet another factor that assumes importance.

They will own shares that entitle them to a 49 per cent stake in TV 18 India and indirectly be entitled to a 20 per cent stake through their holdings in TV 18 Network; now they own 79 per cent of TV 18. There should be no problems in terms of valuation of the direct holdings.

Shareholders will, however, get an indirect stake of about 20 per cent in TV 18 India. Will these holdings fetch a value that is comparable to what they enjoy now? There are risks that could lead to a lower valuation, at least in the near term. Shareholders will benefit only if TV 18 Network trades at a valuation that neutralises the reduction in their direct stake in TV 18 India.

The quality of liquidity in the TV 18 Network stock will also be an area of concern. Its valuation may also be affected by the performance of the general news channels.

The benefits from ownership of Awaaz, a stake in Global Broadcast News and cash flows from the IPO partially compensate for the risks.

In the circumstances, the company has, however, now put in place an arrangement that appears more equitable and transparent to shareholders, even as it ensures compliance with government norms.

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