The Hindu Business Line : UTV Software: Hold

Substantial equity expansion mutes near-term gains
Movies to lead growth
Well-funded for new ventures
On a heavy investment phase
Presence in highly scalable segments, focus on the global market, ability to strike the right partnerships and improving track record in execution support rich valuations.

Strong pipeline of movies to lead revenue growth.

Shanthi Venkataraman

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UTV Software, which has firmly established itself in the movie production business, is inching faster towards its ambition of becoming a global integrated media player with a presence spanning television content, broadcasting, films, gaming and animation. With The Walt Disney Company (Disney) more than doubling its stake in the company to 32 per cent, the company is well-funded for its aggressive foray into broadcasting and can further build on its other ventures.

But with a substantial equity expansion post the issue of shares to Disney and the promoters, the stock price is likely to remain subdued. At the current market price of Rs 817, the stock trades at expensive valuations of about 35 times its consolidated FY 09 per share earnings, on a fully expanded equity base. Presence in highly scalable segments, a business model focused on the global market, an ability to strike the right partnerships and an improving track record in execution are among the factors that support rich valuations.

With a strong pipeline of movie releases in 2008, movie production will continue to be a key driver of revenue and earnings growth in FY 09. However, the company is yet to consolidate the financials of its broadcasting business, which is just getting off the ground. A higher than anticipated loss in the broadcasting business is a risk to earnings estimates. In the near-term, the open offer at Rs 860 offers some support to the stock. Shareholders can hold on to the stock for now. Long-term investors may, however, be better off using steep declines linked to broad market weakness to accumulate the stock.

Disney hikes stake

Mr Ronnie Screwvala, Chairman and MD.

With an investment of Rs 805 crore, Disney has increased its stake in UTV to 32.1 per cent from about 14 per cent earlier. The promoters will be issued warrants to consolidate their stake at 32.1 per cent as well. Disney’s stake increase has triggered an open offer at Rs 860 for an additional 20 per cent. However, an agreement with the promoters ensures that Disney’s effective stake in the company is limited to 32.1 per cent over the next four years. The promoters have an option to buy out any additional shares that Disney may mobilise through the open offer. Disney’s voting rights too will be limited to 32.1 per cent. Management control continues to rest with the promoters of UTV.

Disney has also invested an additional Rs 119 crore for a 15 per cent stake in UTV Global Broadcasting, valuing the business at close to Rs 800 crore. UTV will have a 75 per cent stake in the business, while the remaining 10 per cent is to be owned by its promoter, Mr Ronnie Screwvala.

For Disney, access to the Indian film and television market is the clear incentive. For UTV, the synergies are considerable. Besides a strong financial partner in Disney, UTV will also be able to leverage Disney’s knowledge in film marketing and distribution. It might also be able to use Disney’s international distribution network for distribution of its home productions. According to the Walt Disney Fact Book, Walt Disney generated $15 billion from its studio business in fiscal 2007, when it distributed 911 full-length live action features and 79 animated feature films under the banner of Walt Disney Pictures, Pixar, Touchstone Pictures and Miramax, to name a few.

Movie pipeline

UTV’s own motion pictures business (UMP) happens to be its most mature vertical. The AIM-listed UMP is a 77 per cent subsidiary of UTV Software. The company has met with early success in its studio model of film production and has successfully tied up with leading Hollywood names. One of the most anticipated movies of the year will be its co-production with Twentieth Century Fox of M Night Shyamalan’s The Happening.

UMP just released a Hindi epic Jodhaa Akbar which has done reasonably well at the box office. With a pipeline of 11 movies this year, the movie business is likely to be the strongest driver of growth in the medium term. UMP accounted for over 50 per cent of the consolidated revenues in the first nine months of FY 08 and enjoyed a margin of 37 per cent.

The company has ensured profitability in this unpredictable business by hedging its risks. This it does by creating a portfolio of diverse movies across languages, striking the right distribution deals and getting its revenues from multiple distribution platforms. For instance, it recovered its production costs by pre-selling its rights for the movie Goal, which had an average performance at the box office. On the other hand, in the case of Jodhaa Akbar, which had a huge production and marketing budget, it has taken on the distribution itself so as to maximise returns. It has also been fairly aggressive on the distribution front and bagged the international distribution rights of Taare Zameen Par. In the last couple of years, UTV has demonstrated a knack of backing the right kind of movies, which inspires confidence.

In investment mode

Barring movie production, which is beginning to deliver on the revenues and earnings front, all other verticals are still in the investment mode and are likely to deliver only from FY 10 onwards.

The Interactive segment, which focuses on Gaming and animation, could turn out to be the most promising after movies. UTV recently completed the acquisition of a 60 per cent stake in Indiagames, which has an over 50 per cent market share of the Indian mobile gaming market.

The Mobile Gaming industry registered a 40 per cent growth in 2007 and is expected to log an accelerated growth pace over the next couple of years. UTV’s UK-based subsidiary Ignition designs console games for multiple platforms. It is currently developing “Wardevil” exclusively for Sony’s PS3.

The project involves an investment amount of $18 million and is expected to release in Q4 FY09. Two other games are expected to be launched in FY 10. The gaming business recorded losses in the latest quarter, as the company largely stays clear of the peak Christmas season where competition tends to be brutal. The gaming business generally has a long investment period and UTV expects it to deliver significantly from FY 10.

Focus on niche broadcasting

Disney’s investment and further infusion from the promoters will pump in Rs 360 crore in the broadcasting venture, ensuring that it is adequately funded to absorb the heavy operational expenses. UTV has launched youth channel “Bindass” and Bindass Movies, which plays dubbed versions of Hollywood movies. It has achieved ratings equivalent to channels such as MTV in its target markets. It has also launched the heavily marketed World Movies channel, which showcases international movies (non-Hollywood) with English sub-titles and also a Hindi movie channel. The Hindi movie channel will clearly address the largest market and will also serve as a launch pad for UMP’s own productions. The company is also set to launch a business news channel, which is dominated by CNBC TV-18. UTV will have a 20 per cent stake in this business.

UTV is betting on an increasingly fragmented viewer market, demand for different content and a high-decibel marketing campaign to carve a market for itself in broadcasting.

Focus on niche channels might enable it to garner targeted advertising spends. The niche focus might also help UTV break through the clutter of new channel launches, as it will serve as an alternative to family drama and the usual song and dance reality shows. All channels will be on pay model, but given its niche focus and the slow progress on digitisation, subscription revenues might not be a significant driver in the near term. The management expects the broadcasting venture to break even in three years. However, this latest venture will have to be closely monitored over the next year, as it will have a crucial bearing on earnings estimates.

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