UTV's 2QFY11 Operationally In-line says Citi research

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UTV Software Communications (UTVS.BO)
2QFY11 Operationally In-line; Gaming – The Joker in the Pack
 In-line quarter — EBIT growth of ~180% Y/Y to ~Rs420m was largely in line with
our/consensus estimates. Margins for both movies & TV increased Y/Y – a mix of
a) business turnaround and b) partly buoyed by the inventory write-off against the
net worth, which boosted ‘reported’ profits. Revenues at ~Rs2.4bn were flat Y/Y &
headline PAT increased ~4x on last year’s low base to Rs402m.
 Debt equity remains >1x — Increasing leverage is a concern – net debt increased
~Rs1bn QoQ to ~Rs10bn. As per FY10 annual report, net worth declined by
Rs6bn driven by the inventory write-down – mgmt indicates the split between
movies & broadcasting verticals was ~Rs4.5bn & ~Rs1.5bn respectively.
 Gaming – the joker in the pack? — We are currently ~35% below mgmt’s FY11E
Ignition revenue guidance as we build in some delays; however, we have ~18%
EBIT margins in FY12E assuming sale of ~1m units of El Sheddai and Reich.
Visibility on pre-sale agreements, publisher/distribution tie-ups, timelines of the
final launch (will depend on publisher), and status of the other 6-8 planned
publishing titles are important events to watch out for. Mgmt highlighted that
Indiagames has turned to black this quarter & Truegames too is expected to break
even in FY11E; however, Ignition is the key for overall segmental performance.
 Key points to focus on — a) Visibility of gaming launch timing and any indicators
determining financial performance; b) increased gearing and impact on cost of
debt; c) return ratios for movie business given the gradual reduction in business
volatility; and d) margin performance of broadcasting in future.
 Maintain Sell — Despite a marginal cut to our FY11-12E revenues forecasts, we
increase our EBIT estimates by 29-35%; factoring both the inventory write-down &
good movie business performance in 1HFY11. We reiterate Sell/High Risk and
revise our SOTP-based target price to Rs505 as we roll forward to Mar12E from
Sept11E. The stock has underperformed the market by ~115% in the last 2 years;
i t has been flat relatively in the last 6 months.