Buy Network18 Media & Investments - Elara Capital

• Rating : Buy
• Target Price : INR195
• Upside : 44%
• CMP : INR135 (as on 13 July 2010)

Network18 - Restructured

Restructuring favors Network18

Network18 recently announced a group-wide restructuring exercise in which TV18's non-TV assets would be shifted to Netowrk18 and TV assets to IBN18. We see the resultant value transfer, as indicated by swap ratio, to favor Network18 as it gets valuable assets of TV18 at 1/3rd of their fair market value. We believe that the restructuring benefits Network18 in cleaning up the holding structure of the group and unlocking suppressed value in non-TV assets of TV18.

Liquidation of Capital18 to provide upside triggers

Post the restructuring; Network18 would house Capital18, the investment fund at present under TV18. Capital18 runs a venture capital fund having a book value of INR2.7bn, the fair value of which crosses INR4bn. The management has indicated that Capital18 would be liquidated in the next 12-15 months, starting with the sale of a 7.5% stake in DEN Networks, worth over INR2bn currently. We believe that this move would create value for Network18 thus providing upside triggers in the near term.

A profitable IBN18 to narrow holding company discount

Network18, being the holding company of TV18 and IBN18, gets the holding company discount in its valuation. However, as these companies were in the investment mode hence making losses, the discount was very high in the past. Going forward, the channel distribution initiative through Sun18 is expected to turnaround the financials of IBN18, helping it reach a PAT of INR1.9bn for FY12E. We believe that the continued rise in profitability in IBN18 would narrow the holding company discount for Network18.

Valuation – Upgrade to Buy

We believe that as core assets of the company - Web18, Newswire18, Infomedia18 and Homeshop18 - stage a turnaround going forward, the stock would start capturing the fair value of these entities. Further, the liquidation of Capital18 has the potential to provide further triggers to the stock. Finally, a steady rise in the operational performance of IBN18 would support the stock price going forward. Network18 stock fell sharply post the restructuring announcement, which in our view, provides a very attractive entry point into India's fastest growing media conglomerate. Taking into account the value transfer through restructuring, valuation upgrade in key subsidiary i.e. IBN18 post the distribution move, and current market price, we upgrade our rating to 'Buy' with a one year forward target price of INR195.

Source : Equity Bulls

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