Initiating Coverage on Balaji Telefilms - BP Wealth

Television Industry is set to grow rapidly post digitization

Television segment the highest contributor (~43%) to the Media & Entertainment industry is expected to grow at a FY12-16E CAGR of 14.7% to Rs 674 bn primarily boosted by digitization, increase in ARPU's due to increased consumer spending, rise in subscription revenues (CAGR of 19.2% over FY12-16E) and rise in advertisement spending (CAGR of 15% over FY12-16E). We believe this will provide immense opportunities for all media participants, specially for content providers like Balaji who are at the top of the value chain. The company is all set to reap the benefits of increased demand for quality content, higher spending by broadcasters with rise in total number of channels.

Turnaround in core television production business

Television production business (58.8% of total revenues) which was making losses on EBITDA level till FY12, is expected to turn profitable going forward due to exit from its loss making sponsored program business (low realization of Rs 0.34 mn/hour in FY12), rise in production hours for Hindi GEC's (~4 serial launches in pipeline for FY14E) and stable and healthy realizations for commissioned programs (Rs 2.2 mn/hour in FY14E as compared to Rs 1.99 mn/hour for FY12).

Movies Business to overtake television production business in FY14E

Movies business is expected to overtake the television production business and will become the future growth driver for the company. The company usually releases 1-2 films in a year but has now turned aggressive and will release 6 movie titles in CY13 (4 co-production and 2 self production). The company has decided to distribute all its films to be released in CY13 across the Mumbai and Delhi territories which account for ~50% of theatrical revenues. In FY14, the company will produce these 6 Hindi movies at a total cost of ~Rs 1.5-2.0 bn and expects a minimum 15-20% returns on this portfolio. We have assumed revenues of Rs 2.3 bn with PAT at Rs 30.8 mn for Balaji Motion pictures for FY14E.

Outlook and Valuation- Initiate coverage with target price of Rs 60

In view of robust growth in the media and entertainment industry supported by digitization, we expect Balaji to post a CAGR of 45.4% in sales between FY12-FY14E. We expect EBITDA margin to stand at 8-9% for television business (against loss in FY12) and 18-20% for films business in FY14E. The stock is currently available at FY14 PE of 6.7x which we believe is available at a steep discount to its peers considering turnaround in the television production business and strong traction in the movie business going forward. We have given a target PE of ~9x to our FY14 EPS of Rs 6.5 and arrived at a target price of Rs 60 per share (potential upside of 37%) for the investment horizon of 12 -18 months. We initiate our coverage on the company with a "BUY" rating.

Source : Equity Bulls

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