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UBS Investment Research
IBN18 Broadcast
Growing Colors
Initiate coverage with a Buy rating
IBN18 Broadcast (IBN18) operates several TV channels in different genres in
India. IBN18’s joint venture, Viacom18, operates four TV channels: Colors (the
second largest Hindi entertainment channel), MTV, Nickelodean, and VH1. We
initiate coverage with a Buy rating, as we expect IBN18’s subscription revenue to
increase from 12% of total revenue in FY10 to 25% by 2015. Viacom18 plans to
launch a Hindi movie channel in FY12 that should help increase subscription and
advertising revenue. In July 2010, IBN18 acquired business news channels CNBC
TV18 and CNBC Awaaz from TV18.
We forecast a subscription revenue CAGR of 51% for 2010-14
We expect subscription revenue to grow from an estimated Rs724m in FY10 to
Rs5.7bn by FY15, led by: 1) a rapidly expanding digital subscriber base that
should increase subscription revenue; 2) the establishing of Sun18, a distribution
company in partnership with Sun Network that will provide improved distribution;
and 3) expansion into international markets contributing to revenue from Q3 FY11.
Catalysts: quarterly results; weekly GRP trend; mandatory digitisation
We expect the following share price catalysts for IBN18: 1) quarterly data points
on revenue growth and margin expansion led by high growth in subscription
revenue; 2) weekly viewership data from TAM Media, especially for Colors; and
3) mandatory digitisation, as this will further reduce or even eliminate subscription
revenue leakages in the long term.
Valuation: DCF-based price target of Rs130.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume 13.00% WACC.
Investment Thesis
We initiate coverage of IBN18 with a Buy rating and 12 month price target of
Rs130.00. IBN18 operates, or has stakes, in seven television channels in
various genres: news (English, Hindi and Marathi), a Hindi general
entertainment channel (Hindi GEC), and kids and music and youth
entertainment. In addition to these seven channels, IBN18 will acquire two
business new channels (English and Hindi) from TV18, as part of a group
restructuring announced in July 2010. The restructured entity will be referred to
as New TV18. Our forecasts and valuation for IBN18 incorporate the impact of
the restructuring from FY11.
Our Buy rating is premised on the following:
We expect subscription revenue to grow from an estimated Rs724m in FY10
to Rs5.7bn by FY15, implying a 51% CAGR. This would be led by: 1) a
rapidly expanding digital subscriber base, which would help increase the
number of declared subscribers; 2) formation of a distribution company
(Sun18) in partnership with Sun Network, to provide an improved
distribution platform; 3) expansion into international markets; for example,
it has launched Colors in the UK and the US, and is likely to be launched in
the Southeast Asia. Current domestic subscription revenue constitutes 12%
of total IBN18 revenue (compared with 25% for Zee Entertainment), and we
expect this to ramp up to 25% by FY15.
Viacom18 (IBN18’s 50:50 JV with Viacom) plans to launch a Hindi movie
channel, which we believe is a positive step as it will complement its
existing channel portfolio and deliver revenue and cost synergies.
IBN18 management has demonstrated superior execution ability with the
successful launch of its Hindi GEC (Colors) which gained the highest
viewership share in the highly competitive Hindi GEC segment within nine
months of launch. IBN18 has created strong brands such as Colors and IBN.
We believe the key risks for IBN18 are: 1) excessive competition; and 2)
regulatory intervention.
Key catalysts
Quarterly results. We believe the following quarterly data points are likely
to act as catalysts for IBN18’s share price performance:
— Revenue growth led by rising subscription revenue, the result of a rapidly
expanding digital subscriber base and better distribution capabilities with
the formation of distribution company Sun18 in partnership with Sun
Network. Sun18 currently distributes a bouquet of 33 channels, including
three Disney channels, 10 New TV18 channels (including Homeshop18)
and 20 Sun Network channels.
— EBITDA margin expansion led by high growth in subscription revenue.
— IBN18 (restructured) achieving net profit and FCF breakeven.
Weekly data on channel viewership share. We believe Viacom18’s Hindi
GEC (Colors) is the key channel in IBN18’s portfolio, as we estimate it will
constitute 35-40% of IBN18’s (restructured) revenue in FY11. Weekly data
points from TAM Media on Colors either gaining or maintaining its
viewership share is likely to act as a catalyst, as viewership share impacts
advertising rates.
Mandatory digitisation: In August 2010, TRAI (Telecom Regulatory
Authority of India) recommended complete digitisation of analogue cable in
four phases by December 2013. If implemented, we believe this will help
reduce subscription revenue leakage and improve IBN18’s (restructured)
profitability, as there is significant under-reporting of the analogue
subscriber base by local cable operators (LCOs).
Successful launch of Hindi movie channel. Viacom18 plans to launch a
new Hindi movie channel in FY12. Given the company’s strong execution
skills, we believe this channel is likely to rapidly gain viewership share. The
movie channel will also leverage Viacom18’s movie library of around 250
movies, which includes some recent blockbusters, such as Dabangg.
Risks
Excessive competition in the Hindi general entertainment space. Colors
faces significant competition in Hindi GECs, especially from Star Plus and
Zee TV. Colors has been in neck-to-neck competition with Star Plus and has
lost its leadership position to Star Plus in the past eight to nine months (see
Chart 3). We believe Colors is likely to continue to host high-cost reality
shows with Bollywood celebrities to gain and maintain its viewership share,
leading to higher content costs and potentially impacting profitability.
IBN18 (restructured) will also face competition in other genres. The table on
the following page provides a list of competing channels in each genre.
Regulatory risks. The Indian broadcasting industry is regulated by TRAI
and MIB (Ministry of Information and Broadcasting).
— The news segment of the India broadcasting industry is exposed to significant
regulation relating to up-linking guidelines as well as ownership (Indian
shareholders needs to own a minimum 51% stake and FDI cannot exceed
26%).
— TRAI has recommended setting content charges for direct-to-home
(DTH) and digital cable systems at 35% of analogue cable charges
(compared with 50% currently). However, this might not be accepted in
its current form, as some broadcasters have filed a petition against this
recommendation because they believe it could limit upside potential from
subscription revenue in the long term.
Stake in Viacom18 could decline to 49%. MTV Asia Ventures (India) has
an option to buy a 1% stake in Viacom18 in July 2014, if it wishes to
consolidate Viacom18 financials in accordance with US GAAP. If MTV
exercises this option, IBN18’s stake in Viacom18 will decline to 49%.
However, this is unlikely to have a significant impact on financials, as
IBN18 proportionately consolidates 50% of Viacom18 financials.
Heavy reliance on advertising revenue. Advertising constitutes 88% of
IBN18 (restructured) revenue. Thus, maintaining viewership share is
important for the company’s revenue growth. IBN18’s (restructured)
channels face significant competition, and its revenue could be affected if the
viewership share of its key channels comes under pressure.
Currency fluctuations. IBN18 is exposed to Rs-US$ fluctuation as it sells
airtime to foreign advertisers. The royalty to CNN (to use the CNN
trademark in its English news channel) is paid on a quarterly basis in US
dollars.
Key news channel anchors could leave the company. IBN18’s
(restructured) news business constitutes 47% of revenue in FY11E. There is
a risk that some popular news anchors might leave the company to join the
competition, and this could impact viewership share to some extent
Valuation and basis for our price target
Our price target of Rs130.00 is 55% above the current share price. We derive
our price target from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool. Our price target assumes a
WACC of 13.0%. IBN18 is trading at an FY12E EV/EBITDA of 17.0x and
FY13E EV/EBITDA of 10.5x. At our price target, it would trade at 15.9x
FY13E EV/EBITDA.
There are only five brokers that cover IBN18. Hence, consensus numbers might
not be meaningful. We think weakness in the share price because of consensus
earnings downgrades could present an attractive buying opportunity.
Sensitivity analysis
We have conducted a sensitivity analysis of our valuation, using the following
parameters:
WACC: A 1% increase in WACC from 13.00% to 14.00% would lead to a
12.3% decline in our valuation.
Sales growth: A 1% increase in our long-term sales growth assumption
would lead to a 7.7% increase in our valuation.
EBIT margin: A 1% increase in our long-term EBIT margin assumption
would lead to a 3.8% increase in our valuation.
Capex to sales: A 1% increase in long-term capex as a percentage of sales
would lead to a 4.6% decline in our valuation
IBN18 Broadcast
IBN18 was incorporated in June 2005 as Global Broadcast News and started
commercial operations in December 2005. IBN18 operates news channels CNN
IBN and IBN7. It is a subsidiary of Network18 Group, a media conglomerate in
India. IBN18 has a 50:50 JV with Viacom named Viacom18, which operates
Colors, MTV, VH1 and Nickelodeon. IBN18 also operates regional (Marathi)
news channel, IBN Lokmat, under a 50:50 JV with Lokmat Group (IBN
Lokmat). IBN18 acquired the business news channels (CNBC TV18 and CNBC
Awaaz) from TV18 in a group restructuring in July 2010.
Statement of Risk
We believe the key risks are: 1) excessive competition in most of its
broadcasting genres, especially the Hindi GEC; 2) heavy reliance on advertising
revenue; and 3) regulatory, as the news segment of the India broadcasting
industry is exposed to significant regulation on up-linking guidelines and
ownership.
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