The Hindu Business Line : NDTV: Buy

NEW DELHI Television Ltd (NDTV) is a growth story that investors with a long-term perspective can consider for their portfolio. The NDTV stock (Rs 201) offers the best exposure in the news media space, and we do not expect this status to change for several years to come. Even as its general news channels in English and Hindi continue to rake in the moolah from advertisers, the new kid on the block — NDTV Profit — is likely to offer a booster dose to revenues.

With several States due to go for polls next year, new segments such as financial services, insurance, equity issuers and telecom increasingly opting for the news channels, and the likely thrust to Direct-to-Home over the next couple of years, the macro-environment is favourable for growth in advertisement revenues. A host of initiatives unveiled over the past few months can gradually enhance revenues from sources such as subscription flows in India, expanding distribution abroad and investment in emerging markets.

NDTV will take a sizeable charge for its employee compensation plans over the next three years. We do, however, believe that this is a positive initiative that is likely to help the company retain and attract quality manpower in a highly competitive environment. This charge will not have an impact on cash flows and will also enable the company to temper growth rate in employee cost, as stock options have been granted at attractive prices. The equity expansion due to this exercise will be modest and comfortably compensated by growth in the earnings stream.

We have maintained a bullish stance on the stock since the IPO in 2004, with our latest `buy' at Rs 183 in March last year; we continue to be sanguine about the growth prospects for NDTV. Investors should, however, be prepared to take a long-term view, as only over such a time frame, has this stock the potential to graduate into a higher market cap category. Investors could especially make use of dips in stock price linked to the broad market to accumulate the stock.

There has been a substantial ramp-up of advertising on NDTV 24x7 over the past three months and we expect this momentum to be maintained. The channel has attracted more top-end advertisers at premium rates. Rich programming content — news in the prime-time band on week days and feature programming at week-ends — that enjoys high audience share is likely to ensure that advertisers remain hooked to this channel; they may take exposures in other English news channels at substantially lower rates.

CNN-IBN — the channel that has been promoted by Mr Rajdeep Sardesai (who quit NDTV earlier this year) and Television Eighteen — is the latest entrant into the general news space. It is likely to glean market share from channels such as Headlines Today and, to a lesser extent, from NDTV 24x7. Despite the CNN brand tag, we believe it will take a long time for this channel to make a mark and emerge a challenger to NDTV 24x7.

In India, there is space for at least two prominent news channels in English, and CNN-IBN could be the one that makes the cut from a host of existing players and would-be entrants such as the Times group. In this backdrop, ad rates may remain stable for NDTV 24x7 with a moderate upside bias, though the rest may to have operate at lower tariff levels.

In the Hindi news space, Star News has jostled its way through aggressive coverage to join Aaj Tak (owned by TV Today) and NDTV India at the top of the table. This has, however, not affected ad flows to NDTV India, which enjoys a different positioning as compared to Star News. NDTV 24x7 and NDTV India are well known growth themes for the company. NDTV Profit — the business channel — appears poised to join their ranks sooner than most would have anticipated. In programming quality during market hours, it continues to show improvement, after a good start and is more viewer friendly as compared to CNBC-TV 18.

In less than a year, it has closed the gap on CNBC TV-18. The latter's edge is now confined to getting CEOs a tad early on the small screen to speak on key corporate actions. In this respect, we find several top companies sharing their top management team between the two channels over the past three months. A significant change during this period has also been higher number of slots taken by advertisers across several programmes on NDTV Profit. There is considerable upside potential that augurs well for growth.

When it comes to content in after-market hours, NDTV Profit has a distinct edge with a variety of feature programmes that appeal to a diverse audience, and reflect the quality for which NDTV is renowned. Here too, and especially on weekends, scope for growth of ad revenues is bright. Over a one/two-year period, this channel could well emerge a cash cow a la NDTV 24x7. The business news space is likely to carved up between NDTV Profit and CNBC-TV 18 with other players likely to be on the fringe.

NDTV 24x7 and NDTV Profit have been switched to a pay mode and this is likely to lead to subscription emerging as a new revenue stream. The channels are on a bouquet that is likely to be one of three sought-after platforms and this should further expand the channels' reach. Its recent initiatives to make NDTV 24x7 available in the US and UK (to add its presence in other markets) could augment subscription revenues over a one/two-year period.

In the near term, margins will suffer compared to last year as the effect of higher employee costs get absorbed; the effect is likely to taper offer, as the costs get spread over a larger revenue base. It may not be a surprise if NDTV ends FY-06 with a just marginal level of earnings or even in the red. From FY-07, the position is likely to improve.

The principal risks over the longer term will be loss of key personnel, entry of Star News into English domain and a more-than-expected loss of market share for NDTV 24x7.

The limited leeway available for FIIs to invest in the stock, due to the promoters (Mr Prannoy Roy and Ms Radhika Roy) transferring a 15 per cent stake to their daughter, an NRI, could temper the appreciation of stock price. Buy with a one/two-year perspective.

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