Raj TV

Raj TV

Raj TV: Avoid

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.

Raj Television Network Ltd.

Company background

• Raj Television Network Ltd. (RTL) was incorporated on 3 rd June, 1994.The company is a regional satellite television broadcaster in Tamil Nadu, running entertainment and media channel ‘Raj TV’ and ‘Raj Digital Plus’. It is regional pay channel network in Tamil Nadu.
• The Raj TV network provides programs like films, serials, game shows, classical concerts, discourses by spiritual gurus and programs related to spiritual tourism.
• The company utilizes its most resources in producing their own serials, films/non-film based programs.
• The revenue stream consists of Advertisement Revenue, Pay Channel Subscription Income, Air Time Sales and Content Syndication.
• Advertisement Income accounted for 47 % and 45 % of total income, export revenues accounted for 2 % and 5% of total income, content syndication accounted for 14 %and 13 % of our total income during the period ended 31 st December 2006 and the Financial Year ended March 2006 respectively.
• Subscription revenues accounted for 37 % of our total income during the period ended 31 st December 2006.
• As there is no published data on viewership numbers, considering the revenues earned from the pay channel subscriptions received in December 2006 the subscription numbers is 10.22 Lakhs as on December 2006.
• Post issue shareholding of the promoters will reduce to 72.5% from 100%.

Objective

• Strengthen production facilities, enhancing content and content acquisition.
• Launching a new television channel.
• Broadcast of existing channels in the international market.
• To produce short-films/tele-films.
• Acquisitions and export of films in international market.
• To construct new studio premises.
• To finance general corporate purposes.
• To meet issue expenses.

Strength

• India is the third largest television market in the world today. There are over 119 million television households, which comprise only about 60 per cent of the total households in the country. Of these 119 million television households, about 50 million receive cable television services, leading to a penetration of only about 42 per cent cable TV households to total TV households and 25 per cent cable TV households to total households in India. As can be seen from these low penetration percentages, there exists a huge untapped potential for growth in this industry.
• Most of the serials and other programmes are produced by RTL, therefore, they also hold the proprietary rights for the most of the content produced by us.
• RTL is able to increase revenues due to their model of producing our own content by way of cost control and higher margins in advertising revenues.
• RTL has predominantly positioned themselves as a regional player. They enjoy good brand value and positioned us as one of the leading Tamil satellite regional television network, primarily due to their focus on the Tamil speaking population.
• Currently the company holds the broadcast rights for spiritual programs of more than 1000 hrs and the rights for approximately 1300 tamil films that are shown in the prime slot.

Weakness

• Revenue from advertisement is a major source for RTL.Being a regional channel in Tami nadu, it may not be able to attract large national & international advertisers.
• RTL holds a small portion of the market in Tamil nadu and has tough competition from Sun TV, which holds major share, K TV and Jaya TV.

Valuations

• The revenue of the company has grown to Rs 33.79 cr at CAGR of 6.9% over the period FY 2002 to FY 2006. The revenue for the nine-months ended December 31, 2006 was Rs 30.72 cr.
• The net profit has grown to Rs 3.56 cr at CAGR of 4.24% over the period of FY 2002 to FY 2006.The net profit for the nine-months ended December 31, 2006 is Rs 9.87 cr.
• The RONW in March 31, 2002 was 15.39% that reduced to 10.27% in March 31, 2006. The RONW in December 31, 2006 was 22.19%.
• Debt-equity ratio of the company stood at 6.96 for FY 2002 that reduced to 0.73 for the nine months ended December 31, 2006 on account of issuance of bonus shares in September 2006 in the ratio of 5:1.
• The book value per share on March 2006 was Rs 194.41 and Rs 41.54 on December 1, 2006 due to issuance of bonus shares in the ratio of 5:1.
• EPS as on March 31, 2006 was Rs 3.33 and on December 31, 2006 was Rs 9.21. Post issue annualized EPS is Rs 10.14.
• Pot issue PE is Rs 21.8 at the lower end of the price and Rs 25.34 at the upper end of the price. Industry average is 45.30.