S. Vaidya Nathan

Balaji Telefilms is well-placed to remain one of the preferred picks in the entertainment sector. It is set to come out of a three-year period of stagnating revenues and sharply slipping margins.

The company is likely to end FY-06 with robust revenue growth; the worst appears to be over on the margins front. These two factors are likely to propel earnings growth over the next couple of years. We have maintained a positive view on the stock over the past 18 months with our latest buy at about Rs 95 in March last year.

This stock has been one of few that barely participated in the bullish phase since April 2003. This is despite a 73 per cent gain since our last call.

The stock has the attributes to outpace the broad market. The downside risk is also likely to be less in the event of a deep corrective phase in equities and/or a slowdown in economic growth. In the next fiscal, Balaji Telefilms is poised to get a hike in rates for the commissioned programmes that it supplies, especially to the Star network. Star Plus depends on Balaji Telefilms to attract prime-time audience.

The buoyant trend in ad-spends suggests that Star Plus may have to have offer higher rates when they are reset next time. This is likely to go straight to the bottomline.

There has been anecdotal evidence of audience tiring with the themes of the long-running soaps, such as

Kyunki Saas Bhi Kabhi Bahu Thi, Kahaani Ghar Ghar Ki


Kasauti Zindagi Kay

. But no decline in the measured audience share of these programmes has been recorded.

Dramatic twists at right intervals have helped these programmes overcome audience fatigue to a large extent. These twists may strain credulity, as the storylines are pushed forward to encompass different generations.

This has, however, been Ekta Kapoor's the brain behind Balaji Telefilms staple strategy to rejuvenate these serials from time to time.

A couple of serials of more recent vintage such as

Kahin To Hoga



have also stared to consistently figure in the top 30 programmes on prime time. This aspect, too, could strengthen Balaji Telefilms' case for a higher price card for its commissioned programmes.

These fetch a fixed price for the content provider from the television channels. Equally important is the margin story.

A combination of lacklustre revenue growth, a steep rise in production costs and a higher compensation to retain talent have eroded margins at an alarming rate.

Though at 35 per cent, its margins last year were still at levels many a company would have gone a long way to enjoy, Balaji Telefilms' was used to figures 50 per cent-plus.

This explains the magnitude of the effect that the margin-decline story had on earnings.

But the worst appears to be over on this front. A higher degree of stability and a likelihood of margins rising by a few percentage points are positives for the earnings growth.

The company recently started a couple of serials on Sony and Zee. If these programmes gain a higher audience share, they could provide new revenue streams.

The proliferation of channels in the Hindi entertainment as well as in the South Indian language space also creates an opportunity for enhanced content generation.

Though the Star group holds a 25 per cent stake in Balaji Telefilms, it has not restrained the latter from producing content for other channels.

It is, however, the Balaji serials on the Star Network that will hold the key to its performance. There are not many slots available either in the evening or afternoon prime time band on Star Plus; this is a factor that could link growth from Star Plus to hike in prices for commissioned programmes.

Balaji Telefilms has also ventured into film production. Though this has, so far, been a profitable venture, it could enhance risks and make the earnings stream volatile.

This business segment contributes to revenues in a small way; any box-office failure could cut into shareholder earnings. This is a key risk.

The Balaji Telefilms stock trades at a price-earnings multiple of about 15 times its likely profits for FY-07 on a conservative basis. Returns from this stock are likely to be sedate rather than spectacular.

It is sitting on cash resources of about Rs 160 crore, which can be expected to increase by at least 50 per cent over the next 12 months. The quality of deployment of the rich cash resources will be a critical factor influencing the stock valuation.

The company has been a liberal dividend payer. If it deploys a large proportion of cash in films, it will become a cause for concern. Buy with a one-to-two year perspective.

(This article was published in the Business Line print edition dated March 5, 2006)
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