If one were to gauge the kind of appetite that exists among broadcasters for a slice of the Indian market, you would not have to look too far. A cursory glance at the information and broadcasting ministry’s website lists around 143 channels awaiting permission to beam into the country’s 130 million TV households. The numbers appear overwhelming, considering that 426 channels are already on air in the world’s third-largest television market. But what has caught the industry’s fancy is the rapid pace of digitisation, which is increasing the subscriber base, and that every year an additional 14-15 million TV sets are being bought in the country. So much so, that even as the economy is groping to a recovery, the industry has scurried ahead by launching 36 channels in the current year.

In fact, over the last couple of years, NDTV has launched close to seven channels, and Network 18 launched IBN 18, CNN-IBN and Colors. The Essel group-owned Zee News also launched three regional news channels. Southern major, Sun TV, which launched the first regional language channel for kids (Chutti TV in Tamil) last year, extended the offering in Telugu and Kannada in April this year.

But the aggression is paying off differently for each player. Prannoy Roy-owned NDTV is seeing more pain than gain as it continues to incur losses with operating expenses mounting. For Network 18, debt has nearly become an albatross. Consolidated debt increased to Rs 1,385 crore last fiscal. Subhash Chandra-owned Zee News’ consolidated debt also zoomed by Rs 190 crore to Rs 202 crore last fiscal. But Sun TV, despite launching five channels in the current year, has maintained a healthy cash balance of Rs 371 crore, with just Rs 70 crore of debt on a consolidated basis. In contrast to the expansionist streak of its peers, New Delhi-based TV Today Network (TVTN) hasn’t moved out of its news business with Aaj Tak and Headlines Today, apart from radio that is. The net result: the zero-debt company is sitting pretty on a cash pile of Rs 150 crore or Rs 26 a share on its books.

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Colour of money

Despite rapid expansion, Sun TV and ZEEL have managed positive operating cash flows

in Rs cr	Price (Rs)	M-cap	Net sales		PAT		Operating cash flow
			Mar-09	Jun-09	Mar-09	Jun-09	FY07	FY08	FY09
IBN 18	102	1,820	48	107	-35	6	-	-	-15
NDTV	170	1,063	123	131	-143	-83	-1	-171	200
Sun TV*	330	12,985	276	288	114	120	126	335	561
TV Today*	100	576	54	71	8	17	37	27	6
TV18	99	1,780	137	107	-106	-41	36	102	-
ZEEL	234	10,167	514	476	96	91	195	301	100
Zee News	47	1,130	138	137	9	12	-46	-1	-75

Source: CMIE; *Standalone financial performance; Data as on September 29, 2009

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While being conservative may be seen as a virtue in times of economic turbulence, analysts believe it cannot come at the expense of growth. The Street believes established players that can contain costs through better programming mix, and increase subscriber base, will be the ones to ride out the storm.

Subscription is the key

While advertising and subscription have been key revenue drivers, the latter has been a challenge owing to gross under-reporting by MSO/cable operators. For most TV networks in India, the ratio of advertising to subscription is 70:30. Analogue cable TV accounted for 89 per cent of all pay-TV homes in 2008 with the switch-over to digital proceeding at a slow pace. However, media research firm, Screen Digest, expects pay-TV will increase its subscriber base from 80 million to 113 million by 2013.

Zee, Star Plus and Colors have demonstrated their ability to deliver top quality content on a regular basis and have backed it up with significant investments

More importantly, according to the research firm, the sudden drop in advertising revenues owing to the recession is a wake-up call for the media industry. Ram Patnaik, analyst, Religare Capital Markets, says, “Unless the revenue model is skewed in favour of subscription, the industry will be in trouble, as advertising revenues tend to be cyclical. On the other hand, subscription revenues are relatively stable.” Globally, most broadcasters follow a subscription revenue model, but analysts believe India will take some time to move to that model.

But some players such as Zee have already made rapid strides. Zee Entertainment Enterprises (ZEEL) has seen its subscription revenues from domestic DTH rise 88 per cent in the June quarter, even as advertising revenues fell 29 per cent. Over the next three years, the company expects subscription to account for 70 per cent of its revenues.

Ditto is the case with Sun TV, the biggest player in south India with a 50 per cent market in the general entertainment channel (GEC) space. Over the last three years, the Maran family-owned channel’s consolidated revenues have grown 48 per cent CAGR to Rs 1,039 crore in the last fiscal. Hitesh Kuvelkar, associate director (research), First Global, believes that the company’s next phase of growth will come from subscription revenues due to an increase in its DTH subscribers. However, the roadmap for growth is tough as broadcasters look to increase their subscriber base, get the content mix right and keep costs under check.

Content is king, but costs ring

While digitisation and going pay have been big growth drivers at ZEEL, the broadcast major has also been tweaking its programming mix. “While choosing content, we make sure that we understand the viewers’ changing mindset. What may have been hot content a few years back, may not be so today,” explains Atul Das, executive vice-president (corporate strategy and business development) at ZEEL. Zee has done just that. After the hugely successful issue-based programmes like Balika Badhu on Colors, Zee went on air with serials such as Tumahari Antara and Saat Phere.

Importantly, it has managed to bring down the costs on new programmes. Usually, each programme costs anywhere between Rs 5 lakh and Rs 20 lakh per episode. “When you create a new programme, besides an hour of extra programming per week, you are talking about additional costs of about Rs 10-20 lakh per week. It makes sense to add this only if you can recover this cost,” Das points out.

While rivals have gone in for expensive reality shows or high-cost game shows based on international formats, Zee has Indianised the genre with programmes such as Sa Re Ga Ma. Besides, the broadcaster has also increased its bouquet of offerings. Zee Movies has four movie channels Zee Cinema, Zee Premiere, Zee Action and Zee Classic with a library of over 3,000 movies. Besides, there is Zee Sports and Ten Sports which account for 48 per cent average market share (YTD) in the sports genre. As a result, Zee TV’s market share has improved from 18 per cent in the fourth quarter of the last fiscal to 21 per cent.

Further, the channel has been able to monetise its properties well. Zee Entertainment is highly profitable compared with Viacom18, the owner of Colors, or NDTV, which owns NDTV Imagine in the GEC genre. Analysts, however, argue, that unlike NDTV and IBN18, Zee has a proven network of channels across genres. But a section of the industry points to the fact that unlike NDTV’s GEC, NDTV Imagine, whose performance has been dismal, Zee was quick to close down Zee Next, after its unsuccessful launch in 2007, and saved close to Rs 45 crore in the process.

If Zee has managed to keep its content cost lower through a judicious mix of programming, Sun TV has done it differently. The southern major has brought down its cost by selling advertisement time slots to its content providers instead of buying the content outright. Not just that, Sun TV also reserves the right to remove the programme at any time if it fails to draw viewer interest. However, according to analysts, this is a model that will work only in the south where Sun TV is the biggest player unlike the fragmented GEC market in the north.

According to Ritesh Chandra, executive director, Avendus Capital, channels such as Zee, Star Plus and Colors have demonstrated their ability to deliver top quality content on a regular basis and have backed it up with significant investments. “This ability to continuously deliver high quality content, backed by a willingness to invest significantly in distribution and branding is the key to success,” says Chandra. According to analysts, the programming mix too has to be backed by adequate TAM ratings or TRPs as the broadcasting business’s advertising revenues hinge on viewership ratings.

Ratings watch

Good ratings, even for a brief period of time, have worked wonders for broadcasters, but sustaining the ratings is proving to be a tall order. NDTV’s general entertainment channel, NDTV Imagine, saw its gross rating points (GRPs) shoot up on the back of its reality show Rakhi Ka Swayamwar. The improved ratings saw its revenues boost 30 per cent to Rs 50 crore in the entertainment genre, even as its news business grew just 15 per cent to Rs 80 crore driven by election and budget-related spending in the June quarter. But post finale of the reality show, its GRP dipped below 100 to 93 in week 35 after 13 weeks of continuous 100 GRPs.

The big difference in the GEC space came about with the launch of Network 18’s Colors. According to analysts, fragmentation in the Hindi GEC space has come to a halt in the past year after the successful launch of Colors, with many planned channel launches delayed or scrapped. Since inception, Colors has been a strong contender for the number one spot in the GEC space owing to its strong content. Colors and Star Plus have maintained the number one spot alternatively in August 2009. The channel’s top-rated show Balika Badhu, continues to give it the edge in rankings. So how does that help the channel? “We expect revenues to see a CAGR of 64 per cent over FY09-11, driven by ad and subscription revenues in Colors,” points out Vikas Mantri of ICICI Securities. But going forward, how much will IBN 18 be able to monitise Colors is to be seen. That’s important, given that Network 18’s flagship and only cash generating property, the business news channel CNBC, is facing tough competition from new, unlisted rivals such as ET Now and UTV Bloomberg.

While Colours has managed to up the ante in the GEC space, old war-horse Zee TV too is holding fort. The channel has consistently improved its GRPs over the past six months — up from 192 to 265 and has four shows in the Top 10 (Chhoti Bahu, Pavitra Rishta, Agle Janam Mohe Bitiya Hi Kijo, and SaReGaMaPa Lil Champs-09). “Zee TV’s market share in both weekdays’ and weekends’ prime-time slots has improved steadily, and the channel currently occupies the top position. This should enable the company to command better advertising rates in an environment where ad spends are likely to improve,” explains Bijal Shah of India Infoline.

Regional bet

Interestingly, though Hindi general entertainment channels have been in the thick of action for long, it is only after a gap of four years that the all-India viewership share of Hindi GECs has expanded from 22 per cent to 25.7 per cent for January-July 2009 compared with 26 per cent in southern regional channels. According to analysts, channel launches and the shift of content to reality shows have in part pulled in new audiences to the Hindi GEC space.

Last year’s slowdown forced all broadcasters to focus on survival and profitabilityRitesh Chandra, Executive director, Avendus Capital

However, the biggest difference in the GEC space is the presence of just one key player in the south, Sun TV, vis-a-vis a fractured GEC market in the north. The net result: operating margins for the market leader are almost double that by any player in the Hindi GEC space owing to the higher concentration of viewers. Over the last three years, Sun TV’s consolidated revenues have seen a CAGR of 48 per cent. What Sun has also done is it has built a strong movies library and acquired the telecast rights for about 8,500 titles, which constitute about 82-85 per cent of the movies released in the south across all the four main languages. “The company’s strong library of movies acts as a major content contributor for its broadcasting business,” points out Kuvelkar of First Global. Sun TV has also started a movie production division and the company plans to produce about 10-12 movies every year with an investment of Rs 70-80 crore with expected returns of 20-25 per cent. “We believe the move will help Sun increase its revenues, as the company will also hold the rights for theatrical distribution, apart from other rights until perpetuity,” adds Kuvelkar. And this might just be the saving strategy for Sun TV since competition in the south is set to intensify with the entry of Zee Group with its Tamil, Kannada and Telugu channels and the launch of Asianet in other southern languages other than Malayalam.

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Driven by ads

Advertising continues to be the biggest driver of revenues for broadcasters

FY09 (Rs cr)	Total revenue	Ad revenue	Subscription
ZNL	520	409	97
ZEEL	2,177	1,059	904
NDTV	492	388	37
IBN 18	180	NA	NA
TV 18	489	NA	NA
SUN TV	1,039	606	200

Source: Company

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In fact, Zee News (ZNL) is already reaping the benefits of a regional flavour with its three key channels, Zee Marathi, Zee Bangla and Zee News. In FY09, overall revenues of Zee News grew 42 per cent on the back of gaining momentum in new markets (Telugu and Kannada) as also sustaining lead in existing markets (Bangla and Marathi). But analysts believe that since the regional segment itself is small, intense competition will make it very difficult for newer players to survive. But while broadcasting players are looking to scale up their presence across markets, they face a big challenge on the financials front.

Leverage blues

Except for New Delhi-based TV Today, the listed media players are carrying a significant burden on their books. The net debt of IBN 18 Broadcast, a subsidiary of Network 18, stood at Rs 120 crore in FY09. This is likely to have increased post the completion of a 50 per cent stake purchase in Viacom18 from TV18. IBN 18 had raised Rs 360 crore through warrant conversion and QIP in FY09, resulting in a 34 per cent equity dilution. Besides, the channel will require further capital over FY10-11 to fund its news business and invest in Viacom18 in tranches.

Analysts believe that since the regional segment itself is small, intense competition will make it very difficult for newer players to survive

According to Network 18 group CFO, R D S Bawa, the regulatory restrictions on raising equity in the media sector has resulted in additional debt being raised by the industry. The group has, however, taken steps to deleverage its balance sheet by raising equity through a mix of promoter infusion, QIPs, rights issues, preferential placements. Besides, it is looking at close to Rs 1,200 crore fresh equity infusion. This will help deleverage group balance sheets, and also provide a significant PAT boost given the drop in interest costs, say analysts. According to Bawa, October 2008 to June 2009 was the peak investing period for the group. “From the current quarter onwards, almost all the operations are going to be either EBITDA neutral (or marginally negative) or EBITDA positive,” adds Bawa. However, while it may be easier for Network 18 to raise equity, for rival NDTV, resorting to equity dilution may impact its return on equity. According to an ICICI Securities report, NDTV needs funding for its entertainment business. The channel’s news business has cash of Rs 350 crore, but also has debt of Rs 150 crore, excluding FCCBs worth Rs 399 crore.

Creating a new programme incurs an extra cost of Rs 10-20 lakh a weekAtul Das, Executive VP, Zee Entertainment Enterprises

Even in the case of Zee News, consolidated debt has increased from around Rs 12 crore in FY08 to Rs 202 crore last fiscal. According to Barun Das, CEO of ZNL, the debt was due to three new channel expansions and purchase of some movie rights. “However, the expansion came at lower costs without compromising margins. Besides, our cash flows are also increasing, so the debt will not be that painful for us,” he adds.

Unlike its peers, TV Today has not been aggressive. “The management seems to give us a feeling that they are happy with the cash on the books,” says Ram Patnaik, analyst with Religare. The Hindi news space, where TVTN’s Aaj Tak operates, has seen a multi-fold rise in competition, resulting in a drop in market share for Aaj Tak from 45 per cent in FY05 to 20 per cent. TVTN has been unsuccessful in extending its Hindi news franchise to English news, where its channel Headlines Today continues to languish. “High cash implies the company’s lack of intent to invest in growth initiatives or distribute excess cash to shareholders,” adds ICICI Sec’s Mantri, who has a ‘hold’ rating on the stock with a negative bias.

The winners are…

Analysts are positive on the sector as advertisement revenues are likely to show a revival in the second half of FY10 coupled with a healthy growth in subscription revenues. According to Chandra of Avendus, last year’s slowdown has forced all broadcasters to focus on survival and profitability. “This is a marked change from the earlier approach of continuous investment without concomitant focus on bottom line growth. Given the scale of investments in distribution and branding by these broadcasters, a path to profitability is critical for attracting incremental capital into these businesses,” he adds. Though the listed players are expected to show positive earnings CAGR in the range of 15-22 per cent over FY09-FY11, analysts are, for now, placing their bets on ZEEL, given its robust subscription revenues, and Sun TV, for its dominant regional play.

The upside in revenues led by exponential growth in DTH revenues and increase in the advertisement revenue growth rate will act as catalysts for Sun, says Saurav Anand, analyst at Standard Chartered Capital markets. In the case of ZEEL, what has caught the Street’s fancy is that despite the reduced number of hours of original content on its flagship Zee TV, the channel has been able to maintain GRPs. “We expect the company to maintain its profitability in FY10 and improve its EBITDA margin in FY11 and FY12 with increased contribution from additional DTH subscribers,” says Anand of Stanchart. Sun TV is currently trading at 27.4x one-year forward earnings, while ZEEL is quoting at 22.8x FY10E.