Starting off as an ad-film maker and later as a television content provider for state-owned Doordarshan in the 1990s, Ronnie Screwvala-owned UTV Software has emerged as an integrated media and entertainment player. With a market capitalisation of over Rs 1,500 crore, UTV is among the few listed media companies to straddle the entire value chain of motion pictures, broadcasting and television content, to the high-growth gaming and new media businesses. The company, in which Walt Disney is a strategic partner with a 60 per cent stake, earns 53 per cent of its revenues from movies and the rest from gaming (25 per cent), broadcast (11 per cent), TV content (10 per cent) and new media (1 per cent).

Traditionally, all the businesses of the company have been highly volatile and uncertain money-spinners. But despite the inherent risks, the Street is bullish on the stock. And why not! Revenues have grown at 37 per cent per annum between 2005 and 2009, while profits have grown at 56 per cent in the same period.

Besides, like Chetan Majithia, head, Crisil Equities, puts it, “The movie business is all about contacts and relationship building. And Ronnie has a very good track record in both.” While analysts expected the company to register a loss in the second quarter, UTV sprang a surprise by clocking a Rs 8.3 crore profit, as the movie and gaming businesses performed well. Operating profits was at an impressive Rs 16.9 crore compared to an operating loss of Rs 34.06 crore in the previous quarter.

Though return ratios are likely to remain muted, over the next one year or so, as UTV pumps investments into new businesses, what’s clicking for the company is the continued traction in its interactive business, specifically gaming. This segment, which has seen an annual growth of over 50 per cent since FY08 when it initiated this business will, in all probability, be UTV’s next big growth engine.

Big screen business

UTV has also emerged as a dominant movie producer in Bollywood, with over 40 films released till date. The company, which also produces Hollywood films on a smaller scale, has listed its movie subsidiary, UTV Motion Pictures, on the London Stock Exchange’s AIM market, raising $70 million through the sale of a 23 per cent stake.

The company follows a studio model concept, wherein its in-house team identifies scripts that have the potential to click with audiences. Based on a feasibility report, the budget is finalised and, accordingly, the director and star cast are selected, in line with the script and market demand.

Cash flows from movies business is expected to bring substantial change in the financial performance in the later part of the yearRonnie Screwvala, Chief executive officer, UTV Software Communications

As a de-risking strategy, the company enters into multi-film deals with directors and actors, to reduce the risk of demand for higher fees over a period of time. While some movies are cash profitable in the year of release, many others are profitable over a longer period, with the company selling the satellite rights to a channel for a year, and having the liberty to sell the rights to another company for the following year. “So, even if a movie is not doing well at the box office, let’s say like What’s your Rashee, the downside is limited,” explains Crisil’s Majithia.

Another key reason for UTV’s success in the movie business is that it also distributes its own movies. According to Majithia, such a model means that UTV need not incur third-party distribution costs. It also makes money from charging a 15 per cent commission on revenues from the distribution of movies produced by other producers in the domestic and international market. “What makes the movie business even more enticing is the margins, gross margins are close to 22 per cent,” points out Karan Mittal, analyst at ICICI Direct.com.

Going forward, the company expects a annual growth of 25 per cent from the movie business. “Going by their track record, what we can make out is that the company is looking at releasing around 15 movies every year. The best part is that these are not just high-budget movies but also small-budget movies ranging between Rs 5 crore to Rs 20 crore,” says Majithia. The key attraction about low-budget movies is that if the company is able to market them well, the returns are very high. Also, due to associate rights, once the movie has relapsed, it can be exploited further as part of a movie library.

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Robust Performance

Analyst expect robust growth in revenues in the coming years

in Rs cr	FY09	FY10E	FY11E
Sales	607	834	1,244
Change (%)	41	37	49
Ebitda	-3	44	160
Change (%)	-105	-1,390	265
Net profit	36	40	92
Change (%)	-38.2	12.3	129.1
EPS (Rs)	10.7	11	24.9
Book value (Rs)	405.7	397.3	426.8
P/E (x)	18.6	41.9	18.5
Source: Bloomberg, Forward P/E at Rs 460

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Suspense in the script

While the biggest risk for the movie business is failure at the box office, last year brought to fore the vulnerability of the producers. The standoff between the industry and multiplex owners over revenue sharing meant that the company could not release a single movie during that period and that had an adverse impact on its first quarter performance.

Then, with sporting events packed through the year, the prospects for sold-out shows are on a decline. As a result, there is bunching-up of movies in a particular period. That then results in a shorter shelf life for movies, feels Kunal Dalal of Nirmal Bang Securities. For example, in the case of UTV, in the first quarter this fiscal there were no releases; in the second quarter only one big launch Kaminey; and in the third quarter two-three big movies are scheduled. The biggest of these, Kurbaan, was released on November 20. That obviously makes revenues lumpy.

Analysts are also concerned about the increasing capital deployed in the movies business. Had it not been for the Rs 43 crore realised from Hollywood film, The Happening, released last year, growth in movie business would have been sharply lower at 39 per cent compared to the 106 per cent growth it actually reported year-on-year. However, during a recent analysts call, Screwvala allayed these fears, saying that the cash flows from its Hollywood movies combined with nearly a dozen movies to be released this year will bring about substantial change in the financial performance. But Citigroup Global Markets analyst Surendra Goyal is not convinced. After a muted first quarter, Goyal expects the film business to post 23 per cent y-o-y growth in the current fiscal.

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Picture This

The company earns more than half of its revenues from films

in Rs cr	Television	Film	Interactive	New media	Broadcasting
FY09	132	276	111	18	89
FY10E	115	368	225	10	112
FY11E	157	503	460	52	130
Source: Company, ICICIDirect.com

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Low-cost broadcast

Since the broadcasting industry has seen an explosion of channels with several new entrants getting aggressive, every general entertainment channels (GEC) has been forced to think of content differentiation to gain its fair share of viewership. UTV has tried to carve a niche for itself by doing something similar with its low-cost structure of four channels, Bindaas, which is targeted at youth in 20 to 30 age group; UTV Movies, its Hindi movies channel; World Movies, the international movies channel; and Bindaas Movies. Bloomberg UTV, the business channel, is not owned by the listed entity.

The company has managed a low-cost structure on account of its content strategy. “Compared with other GEC channels such as Colors, where the cost of content is very high, the cost of content for UTV is largely the purchase of movies. You purchase a movie once and then build your library, you don’t have to get into a commitment structure with the content provider,” says Crisil’s Majithia.

The UTV management believes that the broadcasting business will break even in the next fiscal and it expects 70 per cent growth per annum over three years, beginning FY09. The business reported an over 50 per cent increase in revenues q-o-q at Rs 26.5 crore in the second quarter. However, Ebit loss was higher at Rs 15.3 crore from the Rs 10.40 crore in the first quarter. Though the company increased ad rates across its channels by 30-40 per cent, higher distribution spend and acquisition of two movie titles resulted in a 47 per cent increase in losses q-o-q. In fact, losses in the first half (Rs 26 crore) have already exceeded the guidance given earlier during that year that losses would be contained at Rs 20-25 crore for the whole fiscal.

Though analysts feel that the broadcasting segment will continue to be in an investment mode, UTV’s pay-and-subscribe model means that it can prepone the time it takes to breakeven.

In gaming we believe

But what sets UTV apart from other media channels is its phenomenal success in the nascent gaming business. It has a presence in the console, mobile and online verticals. More importantly, the company has built scale through its acquisition of Ignition Games in the console space, Indiagames in the mobile segment and True Games in the online space.

UTV has close to 60 per cent market share in the domestic mobile gaming business and has seen a growth of 120 per cent in the last fiscal. In the international market, it also has an agreement with I-play for exclusive distribution of its key titles across Europe. And with Ignition, UTV has a big growth driver in the console gaming space in India, North America, Japan and the European Union.

According to Dalal of Nirmal Bang, console prices have fallen from about Rs 25,000 in 2006 to about Rs 7,500 for older hardware, and Rs 13,000 - Rs 20,000 for current hardware. This makes them an attractive buy for new customers which will mean more business for gaming. It’s not surprising that within a span of couple of years, the gaming division has seen increasing traction in revenues. In the second quarter, gaming revenues grew 400 per cent to Rs 58 crore chiefly driven by two games released in the US that brought in Rs 40 crore in revenues and Rs 10 crore in profit.

The company is looking at an annual growth of 125 per cent in the gaming business by FY11. “I believe that the contribution of gaming to overall revenues is expected to go up to 56 per cent within the next two years,” says Mittal.

UTV management believes that the broadcasting business will break even in the next fiscal and it expects a 70 per cent annual growth over the next three years

In the console gaming business, UTV is developing three large titles, which usually take about two years to complete. These will be played on Playstation and Xbox platforms. Of the three titles, two are sequels to earlier releases. Ignition has released two of its highly anticipated video games, The King of Fighters XII (KOF XII) and Muramasa: The Demon Blade, for various platforms. In the second quarter, Ignition sold over three lakh units, which included these two games as well as some of their catalogue titles. During the period, Indiagames launched more than 50 games in the Indian market, which includes titles from its own portfolio as well content from partner companies such as Electronic Arts, Glu Mobile and Digital Chocolate. “Although it is very difficult to predict the profitability of the gaming business, if you look at past releases, they have done very well,” says Majithia. The calculation is simple. At an approximate price of Rs 2,500 a unit, the company needs to sell at least five lakh units to become profitable. UTV was looking at selling 20 lakh units, but a sale of five lakh units is good enough to break even. Some analysts expect the break-even to take longer than that. But Screwvala expects the gaming verticals to start “throwing up cash by the end of 2010, starting from the third quarter.” Consequently, Goyal of Citi feels that the investments in Truegames and Ignition will limit any upside to profits till the second half of the next fiscal.

Animated growth

Like most players in the media business, UTV has a problem of debt amounting to Rs 470 crore (consolidated) on its books. The company’s interest cost skyrocketed to Rs 11 crore in the second quarter, compared with an interest income of Rs 1.30 crore last year. According to Crisil Equities, it will take 12-18 months for the company’s investments to pay off. Consequently, the return ratios are expected to improve significantly only from the next fiscal.

Now, the company is looking at raising $150 million (about Rs 750 crore) through various instruments, to fund its growth plans as well as to retire debt. Plus, profits from its movie and gaming businesses will help pay off its debt and reduce the capital employed from about Rs 2,000 crore to Rs 1,350 crore over the next three quarters. That will prop up its return ratios.

At current levels, the stock is quoting at 24x its FY10E earnings and 18.6x FY11E consolidated earnings. Ram Patnaik of Religare Securities, which has a ‘buy’ on the stock, expects a 56 per cent growth in revenues in the next fiscal to Rs 850 crore. ICICI Direct on the other hand expects a topline of close to Rs 830 crore. Crisil Equities recently assigned ‘3/5’ grade to UTV, indicating that the fundamentals of the company are good relative to other listed equity securities. Goyal of Citigroup believes that the current valuations have priced in about 41 per cent revenue and 28 per cent profit CAGR estimates for FY09-11. UTV has a good growth story but looks expensive at current levels. Wait for a decline to buy.