|Name||Reco Date||Reco price||Target||Prospero Rating||Report Date*|
|Balaji Telefilms||24Apr2013||Rs. 43||Rs. 70 – Rs. 90||7 / 10||24Apr2013|
Our view – Business Fundamentals
Famed for enthralling the entire Indian Diaspora with its K-series of television serials, Balaji Telefilms Limited is a leading entertainment content generating house. From the heydays of its super-hit K-series that included hits like Kyon Ki Saas Bhi Kabhi Bahu Thi and Kahani Ghar Ghar Ki, Balaji’s business has witnessed some turbulent times due increasing competition and a major discord with Star Plus, biggest purchaser of its content.
Commission rates for its hourly content crashed 60% over FY09-12, its sales declined from Rs. 378cr in FY08 to Rs. 188cr in FY12. Realizing opportunities In the midst of these challenges, it has shifted its focus on movies production and distribution and this division has tasted initial success with movies like Dirty Picture, Shoot-out at Lokhandwala & Once Upon a Time in Mumbai.
Along with its existing serial business, Balaji will produce low-to-medium budget films that will help rationalize costs. To optimize the risk-return trade off, Balaji usually recover its costs by pre-selling distribution rights and earns a reputable profit by sale of satellite rights, music rights and ancillary revenues. To reduce the dependence on a single director and to scale up the movie production business, Balaji Telefilms has created an eco-system that will ensure a steady movie pipeline for the next few years however to ensure the quality of each movie, the top management headed by Ekta Kapoor, keeps a close tab on the movie production and marketing plans. Over FY14, Balaji has a pipeline of 6 movies (4 co-productions), of which 3 movies are slated to debut before June 2013. While its serial business will provide small but steady cashflow, its movie foray provides an upside given a strong pipeline of movies.
Our view – Stock Price, Returns Potential and Investment Strategy
Post fallout with Star in 2008 and increasing competitive intensity, the company suffered severe revenue and earnings decline over FY09-12. Its stock price mirrored the fundamentals and declined from around Rs. 200 to a low of Rs. 25 in 2009. Since FY10, the stock has been trading in the range of Rs. 35 to Rs. 65. After nearly three years of turmoil, the company is on the cusp of turnaround and earnings from its movie business could surprise positively. We are also comforted by the huge cash position of Rs. 215cr as in March 2012 that the company is sitting on. This compares favorably to its current market capitalization of ~Rs. 273 cr. The biggest risk for the company is the invocation of its sales & service tax related contingent liability to the tune of Rs. 268 cr; however its resolution can take more than two years.
Balaji Telefilms was incorporated in 1994 as a Media & Entertainment company of India engaged in the production of content for the television industry including television serials and movie production. The movie production and distribution of Hindi feature films is done through its wholly owned subsidiary Balaji Motion Pictures Limited.
Jeetendra Kapoor, a popular movie star throughout the 1970s and 1980s, has been the company’s Chairman since 2000. Mr. Jeetendra starred in more than 200 films in a 45 year film career.
Shobha Kapoor is the MD of the Company. From the inception of the Company she has been has been hands-on in the operational management of the company, controlling on set activity and operational efficiency. She works closely with the Group CEO in helping him discharge his responsibilities.
Ekta Kapoor is the Joint MD and pioneers the television content and movie making division. In the industry she has had a huge success with her out of box thinking and marketing ideas.
B) About Business
The Indian Entertainment & Media industry can be majorly categorized as film entertainment, television, music, radio and print with television being the leading medium. The Indian Film Industry stood at US$ 1.9 billion in 2010 and is expected to grow at a CAGR of 9.6% to reach to US$ 2.6 billion in 2014. Looking at the increasing appetite for entertainment spending by Indian audience, production houses off-late are experimenting with unconventional ideas. Besides being popular among the Indian diaspora, Bollywood’s popularity soared as it entered the consciousness of Western audiences and producers. This coupled with cable digitization, increasing DTH penetration, digitization of film distribution and growing Multiplex chains have created huge demand for Bollywood movies. Total number of movies produced over the years has been fairly stable however there has been steady rise in the number of movies making to the blockbuster category of box office collections above Rs 100 crores. With renewed focus on movie production business and its ability to produce excellent storyline that can connect to the Indian masses, Balaji is set to roll on the red carpet.
Balaji has been pre-dominantly a TV Serial player with a library of over 100 television shows. Its shows have been aired in the prime time slots of many TV channels and have been known for its high TRPs. However, since 2008, increasing competition and a sudden discord with Star TV for commissioned programs, per episode rate for Balaji decreased drastically. In addition to this, the company faced problems with Sun TV and decided to scale down its sponsored programs business. With these adverse developments, the management shifted its focus to movie making and distribution post 2009. Our research and interaction with the management reveal that movie production and distribution is a much better choice given Balaji’s business model.
Balaji Telefilms has 3 major segments as explained:
a. Commissioned Programs: This is a completely de-risked business model involving Sale of television serials to TV channels. Balaji earns commissions to produce episodes on a specific fee. Usually the fees that Balaji earns are fixed per episode and there are additional incentives based on the TRP ratings. Usually, as the program becomes successful, the rates for next contract on the same program increases. At its peak, Balaji used to earn more than Rs 30 Lakhs per half hour episode.
b. Sponsored Programmes: Balaji recently shut operating under this segment due to huge operational problems in this model. In this structure, Balaji made an upfront payment to broadcasters (like Sun TV) to buy a telecast time band. Balaji Telefilms would later earn the revenues by selling these slots to the advertisers. This model was comparatively riskier for a content provider as the revenues were not fixed and at the same time additional management bandwidth was required for managing the advertisers.
c. Feature films: Balaji Telefilms Limited undertakes production & distribution of movie rights through its wholly owned subsidiary Balaji Motion Pictures Limited (BMPL). This division was started in FY08 and the focus has been slowly shifting towards it. Over the years, share of films segment has increased to around 30% in FY13. The company is expected to release 6 movies in FY14 and another 9 movies in FY15 indicating a large increase in the movie business share. This movie business earns its revenue from selling the distribution rights (theatrical), satellite rights, music rights and DVD rights.
Balaji Telefilms FY14 Movie Schedule
To de-risk the model, the company tries to sell all of these rights before the release of the movie. To reduce the dependence on Ekta Kapoor, the company enters into co-production model with other directors thereby achieving the required scale in the movies. Below is the list of movies lined up in the next 1 year.
TV Serial Business –Problems of the past:
a. Problems with Star TV: In FY2004, Star TV bought a 26% stake in Balaji Telefilms making way for Balaji to sell its content at premium rates and slots. However, post re-organization at Star TV end, the company lost its sweet spot and its serials were stopped from being aired on Star TV network leading to a significant loss of revenues in FY10. Star TV still holds the 26% stake in Balaji Telefims; however, there are no synergetic benefits received by Balaji for this cross holding. It is also said that Star TV wants to sell its existing stake but they are not in a hurry.
b. Sponsored Programs: Company started a division of sponsored programs where Balaji used to buy time slots from the broadcasters (Sun TV) and would sell the advertisement slots to the advertisers. However, this did not provide any added advantage to Balaji and hence the company decided to exit this segment completely in FY13.
c. Decrease in Margins for Balaji: Balaji revenue per episode fell from Rs 30 lakh in FY08 to Rs 10 Lakh in FY13 mainly because of parting away with Star TV and a huge increase in competition in the TV serials. The EBIT / Hour peaked in FY07 and has been consistently decreasing since then.
Motion Pictures Business –New Business Driver:
Balaji Motion Pictures Limited (BMPL) was started in 2007 and within four years of its formal existence, the company has been considered as one of the top 5 Indian motion picture studios. This business is focused on the production and distribution hindi and regional movies and have established a very successful track record. Some of its past movies include The Dirty Picture, Ragini MMS, Once Upon a Time in Mumbai, Super Kool hai Hum series, Shootout at Lokhandwala, among others.
As a part of its strategy, Balaji usually recovers its costs by selling the distribution rights whereas the broadcasting rights & audio rights help the company to gain significant profits. On the distribution side, Balaji plans to keep the distribution rights for Mumbai, Delhi-NCR and Punjab areas and distribute the same themselves.
In FY14, the company plans to produce 6 movies for the budget of Rs 200 crores. We expect the company to make Rs 25-30 crores out of the movie business in FY14. The company has thereafter planned a movie pipeline of 9 movies for FY15 giving substantial visibility.
C) Investments Arguments
1. Focus on Movie Business: Balaji has turned on a new leaf since 2010 and have developed capabilities to produce and distribute movies on a large scale. With 6 movies lined up for FY14 and 15 movies for FY15, We expect the revenue contribution from movie business to rise above 60% by FY15 whereas the profit contribution from movies will be much higher than that of serial business.
2. De-risked Movie business model: Though movie production businesses are considered to be lumpy and risky, Balaji is following a de-risked strategy of covering its movie costs through pre-sale of either of distribution rights in major circle, satellite rights and/or music rights. For instance, Balaji Motion Pictures Limited has already committed a sale of rights for music, overseas and home video for five of its movies to be released in 2013. Further it has sold satellite rights of three of its upcoming films and also in process of pre-selling the distribution rights of all of its movies. The beauty of this strategy is that the company sometimes already knows the exact profit it will make from a particular movie whereas the company may not be able to cash in higher profits incase if their movie becomes big hit.
3. Debt free balance-sheet: Balaji Telefilms has a cash of Rs ~215 crores in FY12 with zero debt on the balance sheet. Additionally, the promoters are quite debt averse and conservative in business functioning.
4. Commission based serials to continue: Balaji will continue to run 6-7 serials at any point in time giving its fuel for sustaining all its operational costs. Further, Balaji has massively reduced its costs structure and is now trying to strike margin accretive deals with content hungry channels.
5. Valuation comfort: At the CMP of Rs 43, Balaji Telefilms commands a market cap of Rs 275 cr. Deduct the cash and cash equivalents of Rs 215 cr and the company is available for Rs 60 cr. Here is India’s one of the best movie production businesses available at Rs 60 cr with a potential to earn Rs 30cr to Rs 60cr per year. We think it is a steal. The biggest risk being the contingent tax liability.
1. Short-life span of TV shows: Increasing competition for the prime-slots of the day on different channels and reduced show lives are major factors leading to faster churning of tv serials. With artist cost on a rise and realizations de-growth (see table below) over the years, margins in the TV serials business is at an all time low for Balaji.
2. Contingent Liabilities: There are contingent liabilities worth Rs 270 crores with various tax departments. Any adverse judgment on the cases of contingent liabilities can put a huge toll on the company. However, we think that it will take atleast take two years before any sort of resolution of this front. The company also says that it has a strong case against the tax authorities.
*Report Date may sometimes be different from Recommended Date as drafting of reports can take time.