Investors can give the initial public offer of Raj Television Network (Raj) a miss. At the upper end of the price band, the offer is valued at about 25 times the annualised FY 07 per-share earnings, on an expanded equity base.
The seemingly reasonable valuation notwithstanding, we believe there are other quality exposures in the media space.
Our recommendation does not factor in any gains upon listing. While there could be scope for some revenue growth from subscriptions, advertising revenues are likely to remain under pressure, unless Raj really spruces its act on the content front. Viewership preferences currently seem to be overwhelmingly in favour of the Southern market leader, Sun TV.
Of course, Raj may still manage to pull off one or two hit shows. This might significantly boost advertising revenues, given the small base. Its track record in terms of content till now, however, does not inspire confidence.
Two, there is the possibility of the company being viewed as an acquisition candidate at a later date by players seeking a regional presence.
But launching a new channel may still prove to be a less expensive alternative for such a player. On balance, the prospects of either of these contingencies appear to be too much of a long shot for conservative investors to favour the present offering.
Background
Raj Television operates a Tamil entertainment channel — Raj TV — and a Tamil movie channel — Raj Digital Plus.
The proceeds of this offer will be used mainly to fund the launch of a channel targeting the youth and strengthening production facilities and content.
The youth channel is likely to be multi-lingual with a national flavour and would entail an investment of about Rs 10 crore.
The revenues from this proposed channel are likely to flow in only from the first quarter of FY-09. The channel will be free-to-air in the initial months of its launch.
The company is also looking at new subscription revenues by distributing its channels in the American market.
A part of the proceeds will go towards setting up a studio, acquiring film rights for exports and setting up a distribution network for overseas broadcasting.
Raj is also venturing into the production of short tele-films that will be screened on its own channels, in theatres, as also distributed as VCD/DVDs and put on the web.
However, we do not see overseas broadcasting or video-on-demand being a substantial contributor to revenues in the near term.
Challenging times
The Raj network is not without visibility, having been on air for more than a decade. Raj TV's objective news coverage at one point attracted a fair amount of viewership.
However, it is no longer in a position to offer live news coverage as permission to uplink its channels from India was revoked a couple of years ago.
As a purely entertainment channel minus the live news coverage, Raj TV appears on a significantly weaker footing.
Revenues over the last three years have displayed an uneven trend. That the two channels have been pay(except in the CAS area of Chennai) has been a positive, as increasing subscription revenues have compensated for the limited advertising income.
In the two preceding years, advertising income has dropped. Losing its live news spot, which was a key driver of ad revenue, could explain perhaps the drop in advertising income. Raj's latest nine-month performance shows an uptick in advertising revenues. However, this may have come at the expense of cash flows with the amount due from advertisers and other debtors showing a significant jump.
Overhauling content
For Raj, it does appear to be a long way to the top. Sun TV continues to dominate the serials/soaps space, while Star Vijay appears to be gaining ground by successfully cloning programmes aired on Star's Hindi entertainment channels.
SS Music may be a strong competitor for Raj's youth channel, as it addresses a similar audience profile.
Raj has begun to produce its content in-house in an attempt to cut costs.
The strategy has worked with profits in the first nine months of the fiscal at Rs 9.8 crore against Rs 3.5 crore in FY-06.
However, this cost advantage may be hard to sustain. Given the pressure to improve content, we believe that the company will have to pump in significant sums of money to attract good anchors for its interactive shows.
Investors may be better off waiting for signs of an improvement in content before considering exposure to the stock.
Offer details: About 35 lakh shares are on offer, which includes an offer for sale of about 13 lakh.
The offer will raise about Rs 60 crore at the upper end of the price band.
The promoter's stake, post offer, will be 72 per cent. The offer closes on February 23.
The lead manager is Vivro Financial Services.