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Sunday, April 01, 2007

UTV Software: Buy


Investors with an appetite for high risk can consider exposure in the stock of UTV Software. The company is laying the foundations to become a media conglomerate by 2010, with interests in television, movies, broadcasting and new media, that include gaming and animation. There is potential for strong revenue growth over the next two years with a long pipeline of movies set to hit the market, channel launches and acquisitions into untapped areas such as gaming.

It may not be appropriate to evaluate the company on its current operating metrics. UTV's current market capitalisation is now about three times its sales. But if UTV succeeds in its forays, it may move to a higher growth trajectory. The company is just on the verge of turning around, thanks to its first truly successful film production Rang De Basanti released in early 2006.

New forays

Last year may have, however, been an inflection point for UTV. The company sold its children's channel, Hungama, to Walt Disney for $30 million. Disney also picked up a 14.85 per cent stake in UTV. The company's international tie-ups have further expanded since and its partners in co-production and distribution include the likes of 20th Century Fox and Sony Pictures.

The tie-ups are part of UTV's strategy of choosing films that can crossover to international markets. UTV has co-produced the just-released Mira Nair's The Namesake with Fox Searchlight.

In a short span, the company's plans to foray into new segments have quickly gained ground. The additional cash flows from Disney's investment have helped UTV bankroll acquisitions in the gaming space, providing it access to new media platforms. In December, it acquired a controlling stake in Indiagames, a mobile phone and online gaming operator and a 70 per cent stake in Ignition, a UK-based, console gaming company for the likes of Sony and Nintendo for Rs 128 crore. Ignition is developing a game, WarDevil, exclusively for Sony's Play Station 3, which is likely to be launched in 2009. These businesses had a combined turnover of about Rs 100 crore. UTV plans to double this in the next two-three years.

After the sale of Hungama, UTV has once again returned to its plans of broadcasting, forming a 50-50 joint venture with the Malaysia-based Astro Measat for the launch of the youth channel `Bindaas'. The channel is likely to be launched by the second half of FY-08 and is targeted at those between the age of 15 and 24. The space has, so far, been explored mostly by music channels. UTV's experience in developing content for Hungama is likely to stand it in good stead with Bindaas.

Earnings outlook

With a channel launch and a dozen movies in the pipeline, there is potential for significant revenue growth. UTV's business remains strongly content-driven, be it television or films. Therefore, its attempt to diversify its revenue mix does not necessarily insulate it from the risk of failure.

UTV's choice of scripts and directors appears to have an urban, multiplex-goer- appeal rather than the mass-appeal movies that usually draw in blockbuster revenues.

The quarter-to-quarter performances in the medium term may take on a lumpy profile, depending on the timing of film launches and their success. This may change once film production takes a less significant role in the overall revenue mix.

The company is also in a heavy investment phase. It plans to invest Rs 200 crore over the next two years in broadcasting and gaming. About Rs 135 crore will be invested in animation over the next couple of years, while the outlay in its proposed film projects, some of which will be co-produced, will be Rs 150 crore.

It may take a year or two before the company's investments in broadcasting and gaming and animation, which are in their nascent stages, deliver. Earnings growth may lag that of revenues in the interim. Aggressive investors can consider exposure with a two/three-year perspective. Use market-linked weakness to buy the stock.