UTV Software Communications

Investors can stay invested in UTV Software Communications, an integrated entertainment company that spans movie production, content, airtime sales and gaming, considering the stock’s reasonable valuation levels and bright business prospects in some of its verticals.

At Rs 233, the stock trades at nine times its estimated 2008-09 earnings. Healthy collections from recent movie releases and a good pipeline suggest strong revenues and margins in the key movie production business over the coming quarters.

Strong viewership ratings for UTV’s content in TV production/co-production and airtime sales also suggest bright prospects. Gaming, where the bulk of activity happens in the December quarter, is another high potential business.

The stock has fallen over 70 per cent in the past one year, dogged mainly by concerns about losses in its broadcasting business and the heavy investments that UTV has committed across its verticals. The stock’s status as a mid-cap stock in the media pack, also took its toll.

Broadcasting is one area where UTV and Disney (its partner) have invested considerably, about Rs 360 crore and another Rs 100 crore to be invested over the next 18 months.

This vertical, with recent launches, has five channels in operation and is generating losses and is expected to continue to do so over the next year or so. Its youth channel Bindaas and movie channels such as Bindaas Movies and World Movies and business channel UTVi may see substantial investment. Four of their five channels are ‘pay’ channels, while one is free to air(UTVi).

The total loss from the broadcasting business is estimated at Rs 25 crore for the current year and about Rs 20 crore for the next fiscal.

This is much lower than its earlier projections and lends confidence to a quicker break-even. The increasing penetration of DTH suggests expanding reach for pay channels.

Although the general slowdown in the economy and the possibility of cut in advertising spend by companies, is a cause of concern investors in UTV may draw comfort from its well-diversified revenue stream, with TV content sales and movie syndication (35 per cent), Box Office (18 per cent) and gaming and music content to telecom companies and at gaming outlets being key contributors. Advertising revenue forms only about 18 per cent and a slowdown may not significantly dent its prospects.

Synergies with the Disney group (which holds a near 60 percent stake in UTV) across verticals, especially in broadcasting, tie-up with ABC News for its business channel UTViand in areas of gaming, movie syndication and television content augur well for the company.
Movie production

This has been the best performing vertical for UTV and is well poised to extend it over the next few years. This segment contributes over 50 per cent of its revenues and enjoys a 21 per cent margin. In the past, it has produced/distributed films such as Rang De Basanti, Taare Zameen Par and Jodhaa Akbar that have been runaway hits. Also, its strategy over the last couple of years has been to back low-budget films with a strong storyline, such as Khosla Ka Ghosla.

UTV operates a full studio-model where production, post-production and distribution are done under a single banner.

Movie releases (in the second quarter of FY09) such as A Wednesday, Welcome to Sajjanpur, both low-cost, have done extremely well at the box-office. Its recent release Oye Lucky Lucky Oye has also received good reviews.

Its forthcoming release of Delhi 6, from the director of Rang De Basanti, featuring Abhishek Bachchan, Main Aur Mrs.Khanna featuring Salman Khan, and a slew of low- and high-budget films with the right talent, may set the cash registers ringing at the box-office. In the wake of the Mumbai terror attack, there may be a slowdown in terms of movie goers at multiplexes. This could be partly offset by a more intensive marketing at the international screens and movie syndication to Indian channels.
TV content :

UTV does production/co-production of programmes for TV channels and also sells airtime by buying advertising slots in channels. This segment contributes 23 per cent of the company’s revenues. UTV develops content for channels such as Colors, ZEE and other channels which have the highest viewership in the general entertainment category.

In the airtime sales segment, the company has tied up with key channels in the South. For instance, it handles Kolangal and Arasi, two top rated soaps, currently on Sun TV.

It also buys TV telecast rights and resells movies to channels such as Zee. Given that several channels may be facing the heat of lower ad spends, UTV has rights to sell to channels on a non-exclusive basis. This includes selling it at a lower price for a lower period of time and to multiple channels.

UTV’s own Bindaas Movies, which features several local-language-dubbed version of Hollywood hits, is said to have overtaken Star Movies and HBO in viewership ratings.
Gaming and New Media

With the acquisition of Indiagames, the reach of UTV in mobile and online gaming has widened. It has tied up with nearly 80 operators globally, including players such as Bharti Airtel, Verizon and Vodafone to offer gaming on cell phones. The global gaming industry is estimated to touch $11 billion by 2009 according to a Nasscom report.

However, as with broadcasting, new media is in investment phase and it may take over two years for the company to make any meaningful margins from these ventures.