Television Eighteen: Buy

From being the operator of a monopoly business news channel, the Television Eighteen (TV 18) group has, in less than two years, expanded its share in the exploding news channel space and now operates four channels in the general and business news genres. It is better placed now than before to command higher advertising rates. It is likely to benefit from the imminent changes in the distribution set up, which could translate into higher subscription revenues.

The restructuring of group holdings that commenced last year will be completed with the listing of Network 18, the holding company that has resulted from the restructuring process.

Our last recommendation on the stock (October 30, 2005) dealt extensively with the restructuring process and the benefits that were likely to accrue. Gains from the initiative have been partly priced in. The proposed listing of Global Broadcast News (GBN), subsidiary of TV 18 and Network 18, however, offers potential for further value unlocking. TV 18 holds a 21-per cent stake in GBN, while Network 18 has a 46-per cent stake.

The stock now trades at around 22 times its likely FY-07 per-share earnings. An investment can be considered from a two- to three-year perspective.

Higher share from subscription

The implementation of the conditional access system by the year end and the emerging distribution platforms of direct-to-home (DTH) and IPTV (Internet Protocol Television) is likely to scale up contribution from subscription to total revenues, which now accounts for just about 15 per cent of operational income. The practice of under-reporting of subscriber bases by local cable operators has resulted in broadcasters getting a lower share of overall subscription revenues. While a cap of Rs 5 has been fixed on channel prices, the new regulations propose that broadcasters receive 45 per cent of the subscription revenues. This augurs well for TV 18, as both its business news channel, CNBC TV 18, and Awaaz, its Hindi consumer-oriented channel, are pay channels. Its strong presence in the business news space is likely to ensure that it remains in the choice set for most investors.

Higher contribution from subscription will reduce the influence of a slowdown in advertising revenues over the long term. However, a buoyant trend in advertising remains a critical revenue driver in the medium term.

Greater clout in advertising

Through CNBC TV18 and Awaaz, TV 18 reaches affluent viewers in the investing community, which makes it a target for advertisers. With interests in CNN IBN and IBN7 (Channel 7, re-christened by GBN post acquisition), it is well placed to command better rates from advertisers by offering them package deals. CNN IBN has also made a mark in the general news space; NDTV, however, remains the dominant player.

TV 18 reaches a large community of viewers through its web initiatives, which has the potential to offer attractive solutions to advertisers.

A slowdown in advertising spends is a high risk to earnings performance and, therefore, our recommendation.

New forays

TV 18 appears to be sold on the idea of convergence of television, the Internet and the mobile media. Internet portals now account for about 10 per cent of revenues. Its contribution to revenues and profits is likely to increase, given its aggressive expansion in this space.

In recent months, TV 18 has acquired stakes in a number of Internet portals, such as JobStreet.com and Cricketnext.com and recently announced a new subscription based portal — Indiaearnings.com, which would offer results updates, management interviews and conference calls to members. Such websites have the potential to lock- in viewers to its channels.

TV18 intends to transfer all its portals to Web18, a subsidiary. That it has raised $10 million from a private equity firm to fund investments in this business reflects its seriousness in expanding in this space.

Other new initiatives include a foray into film production and a possible launch of a Home Shopping channel, which suggests that the company is broadening its interests in the media business. The success of these forays is uncertain, but they are unlikely to make much of a contribution to revenues in the medium term.