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UTV Software Communications Ltd
Games and Television Perking Up; Stay OW with Increased PT of Rs618
What's Changed
Price Target Rs540.00 to Rs618.00
F11, F12, F13 EPS estimates Up 7%, 3%, 8% respectively
Overall, we expect an EBITDA CAGR of 45% for UTV
in F11-F13: This may come as a positive surprise to the
Street. UTV is coming close to delivering on its plan to
nudge up its games business from being a star to a cash
cow. Its other cash cow, films, continues to grow
strongly, maintaining its leadership in India’s movie
business. The television business is emerging as the
other star on the horizon for the company.
We see UTV succeeding in the console games
business: Release of the “AAA” console gaming IP El
Shaddai by April 2010 in Tokyo and healthy profitability
(as seen in 1HF12) should curb Street skepticism. A
major portion of investment in the development of the
other two big-ticket games is also over. So from here, we
think the business is likely to see strong positive cash
flows, and that risks to the games profitability are
shrinking fast with strong progress on achieving
minimum guarantees for them.
Solid movie pipeline for F12: We see a good mix of
high-profile, differentiated movies.
Unsung television business emerging fast as
another growth engine: We project it to contribute
about 34% of UTV’s F12 EBITDA.
3QF11 results overview: UTV announced a 3QF11
PAT of Rs400m, up 5.7% YoY, down -0.5% QoQ.
EBITDA at Rs526m was 6% above our estimate and up
20% QoQ. EBITDA margin strengthened from 18.4% in
2QF11 and 15.3% in 3QF10 to 20.6% in 3QF11.
Investment Thesis
• UTV is successfully straddling niche
as well as mass markets for some of
the fastest growing media segments:
movies, TV and games.
• Launch of three IPs over the next 4-6
quarters should lead the gaming
division to account for 32% of total
F13e EBITDA.
• Attractive slate of more than 10 movies
expected to be released over F12
should result in earnings growth of
34% for the films division over
F10-F13e.
• Broadcasting ventures should be a
solid growth driver too
• P/E of 10.6x based on F12E indicates
good upside from here.
Key Value Drivers
• Timing of launches, pricing and
number of console games sold.
• Success of films measured through
average gross collections per film,
slope of improvement in non-theatrical
revenues.
• Television ad market growth, rate of
improvement in pay TV subscribers.
• Pace of growth in new media
businesses.
Catalysts
• Success in release of films like Saat
Khoon Maaf in 4QF11 and Delhi Belly
and Short term Shaadi in F12
• Release of own IP EI Shaddai, Reich
and Waredevil should be other triggers
• Any announcement related to
pre-sales of Reich and Waredevil
Risks
• Failure of games release
• Slower ad revenue growth
• Cost and time overruns for films.
• New entrants’ aggressive carriage
fees in broadcasting
Investment Case: We Remain Overweight
Investment Thesis
• UTV will likely deliver earnings growth ahead
of general expectations, driven in particular
by its games and television businesses.
• UTV’s films division too continues to grow
healthily. The company maintains its track
record of low cost, good quality, and low risk.
An ttractive slate of movie releases over the
next two years should result in an earnings
CAGR of 45% for the films division over
F11-F13e.
• Launch of three IPs over the next 4-6 quarters
should result in EBITDA of Rs1.5 bn in F13,
39% of total EBITDA.
What’s Changed
We push up our EBITDA estimates for UTV’s Broadcasting
and Games divisions, reflecting better visibility of the revenue
stream after 3QF11 results.
Exhibit 1
We Raise EBITDA Estimates for Broadcasting and
Games
Old New
F11 F12 F13 F11 F12 F13
Sales 10,492 13,345 16,340 9,577 13,344 16,512
EBITDA 1,912 2,804 3,705 1,879 2,919 4,016
EBITDA margin(%) 18 21 23 20 22 24
PAT 1,306 1,995 2,719 1,401 2,053 2,939
Source: Company data, Morgan Stanley Research
Movies Division:
Subdued in 3QF11 – but Outlook Remains Positive
UTV is moving towards a de-risked model: It is recovering
almost 50% of its production costs by selling/pre-selling rights
for satellite, home video, music and audio. That is up from
25% earlier. The company delivered EBIT of Rs270m from the
films division in 3QF11. However proceeds from DTH rights of
Tees Maar Khan will accrue in 4QF11. This would be in
addition to the interesting slate of No One Killed Jessica,
Dhobi Ghat, and Saat Khoon Maaf.
The company is exercising good prudence over costs:
While the slate of movies in F12 is attractive, none of the
movies has exceeded Rs400 m in budget (except Thank
You).
Movie Pipeline for CY11
No One Killed Jessica – already released
Saat-Khoon Maaf – scheduled to be released on 18 February
Thank You – Directed by Aneez Basme and starring Akshay
Kumar, Sonam Kapoor, Irfaan Khan, and Bobby Doel
Delhi Belly – Co-Production with Aamir Khan starring Imran
Khan
My Friend Pinto – UTV’s second film directed by Sanjay Leela
Bhansali
Short Term Shaadi – Directed by Karan Johar starring Imran
Khan and Kareena Kapoor
Joker – Shirish Kunder, Akshay Kumar
Chillar Party – Kids movie
We expect EBIT of Rs1.2 b from the films division, contributing
57% to total F11 EBIT.
Gaming Division:
To Drive the Next Leg of Growth
Management expects 30% of revenues in F12 to be from
Games and Interactive: Out of the US$10m from pre-sales
of Ignition, US$5m was recognised in 3QF11 and US$5m will
come in 4QF11. As per the company, strengthening of the yen
will help sales of El Shaddai, which is scheduled to be
released on 28 April. The company targets 500k unit
sales from El Shaddai.
UTV is also interested in increasing its stake in Indiagames,
which plans development of its own IPs in the mobile gaming
space. Key milestones from Indiagames :a) Launched the first
ad-funded game on DTH with Reliance Big TV; b)
commercially launched Airtel Digital with the first
Bollywood-based game Tees Maar Khan; c) launched the
Australia vs. England cricket game on iPhone and iPad during
the Ashes.
Broadcasting –Strong and Getting Stronger
UTV’s efforts on its broadcasting businesses – UTV
Bindass, UTV Movies, World Movies and Bindass Movies
– have yielded results: In 3QF11 the television segment
achieved Rs1016 m in revenues and management believes
this run rate is achievable in F12 too. This translates into
25-30% growth in F12 for the broadcasting division. The
company is looking to expand into RGEC. Within the Air-time
sub-segment, the pipeline with Star Plus and Sony looks
strong
The company currently has a strong slate: Five new shows
are launching in Q4 including Maa Exchange (Sony), Dor
(Star Plus), and Kadmambari (Zee Marathi), among others
Net debt has come down from Rs9.9b in 2QF11 to Rs8.3b in
3QF11. Investments have also reached a plateau.
3QF11 Results: Key Highlights
Overview: UTV announced 3QF11 PAT of Rs400m, up 5.7%
YoY, down -0.5% QoQ. EBITDA at Rs526m was 6% above
estimates and up 20% QoQ. EBITDA margin strengthened
from 18.4% in 2QF11 and 15.3% in 3QF10 to 20.6% in 3QF11
Television division strong: Television EBIT at Rs207m was
strong, a swing of 322% QoQ vs. Rs49m in 2QF11. EBIT
margin stood at 20.4% vs. 6% in 2QF11. This has been the
best performance by the broadcasting division so far, mainly
contributed by the improvements at UTV Bindass and UTV
Movies, in our view. We think the commissioned programmes
also fetched good advertising revenues.
Films division subdued: Films division performance was
subdued at Rs270m, down 39.6% QoQ. This could be
attributable to lower than expected performance by movies
like Guzzarish and Tees Mark Khan released in 3QF11
Gaming division gearing up: EBIT at Rs106m is up 104%
QoQ from a loss of Rs13m in 3QF10. This would be mainly
due to good performance from Indiagames this quarter. With
the pre-sales of El Shaddai worth US$10m already in its kitty,
UTV looks set for the scheduled release of the game on April
28.
Valuation and Price Target
We value the company on a sum-of-the-parts basis using a
discounted cash flow (DCF) methodology for each of the parts
with an explicit period of six years. Our PT changes from Rs540
to Rs618 as we increase our earnings estimates and valuation
across all three divisions. Note that we have also changed
some of our key assumptions.
Risks to our Price Target
Overruns in cost and time are a risk for the film business.
Aggressive price cutting and carriage fee budgets by new
entrants could hurt UTV’s broadcasting segment posing risk to
our price target.
Possible failure of high-budget films and /or AAA games
remains a key risk.
In addition, UTV’s theatrical revenues through advertising
expenditure are closely linked to the country’s economic
growth. Therefore, material weakness in the latter would likely
be reflected in the company’s earnings and would put
downward pressure on the stock’s performance.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UTV Software Communications Ltd
Games and Television Perking Up; Stay OW with Increased PT of Rs618
What's Changed
Price Target Rs540.00 to Rs618.00
F11, F12, F13 EPS estimates Up 7%, 3%, 8% respectively
Overall, we expect an EBITDA CAGR of 45% for UTV
in F11-F13: This may come as a positive surprise to the
Street. UTV is coming close to delivering on its plan to
nudge up its games business from being a star to a cash
cow. Its other cash cow, films, continues to grow
strongly, maintaining its leadership in India’s movie
business. The television business is emerging as the
other star on the horizon for the company.
We see UTV succeeding in the console games
business: Release of the “AAA” console gaming IP El
Shaddai by April 2010 in Tokyo and healthy profitability
(as seen in 1HF12) should curb Street skepticism. A
major portion of investment in the development of the
other two big-ticket games is also over. So from here, we
think the business is likely to see strong positive cash
flows, and that risks to the games profitability are
shrinking fast with strong progress on achieving
minimum guarantees for them.
Solid movie pipeline for F12: We see a good mix of
high-profile, differentiated movies.
Unsung television business emerging fast as
another growth engine: We project it to contribute
about 34% of UTV’s F12 EBITDA.
3QF11 results overview: UTV announced a 3QF11
PAT of Rs400m, up 5.7% YoY, down -0.5% QoQ.
EBITDA at Rs526m was 6% above our estimate and up
20% QoQ. EBITDA margin strengthened from 18.4% in
2QF11 and 15.3% in 3QF10 to 20.6% in 3QF11.
Investment Thesis
• UTV is successfully straddling niche
as well as mass markets for some of
the fastest growing media segments:
movies, TV and games.
• Launch of three IPs over the next 4-6
quarters should lead the gaming
division to account for 32% of total
F13e EBITDA.
• Attractive slate of more than 10 movies
expected to be released over F12
should result in earnings growth of
34% for the films division over
F10-F13e.
• Broadcasting ventures should be a
solid growth driver too
• P/E of 10.6x based on F12E indicates
good upside from here.
Key Value Drivers
• Timing of launches, pricing and
number of console games sold.
• Success of films measured through
average gross collections per film,
slope of improvement in non-theatrical
revenues.
• Television ad market growth, rate of
improvement in pay TV subscribers.
• Pace of growth in new media
businesses.
Catalysts
• Success in release of films like Saat
Khoon Maaf in 4QF11 and Delhi Belly
and Short term Shaadi in F12
• Release of own IP EI Shaddai, Reich
and Waredevil should be other triggers
• Any announcement related to
pre-sales of Reich and Waredevil
Risks
• Failure of games release
• Slower ad revenue growth
• Cost and time overruns for films.
• New entrants’ aggressive carriage
fees in broadcasting
Investment Case: We Remain Overweight
Investment Thesis
• UTV will likely deliver earnings growth ahead
of general expectations, driven in particular
by its games and television businesses.
• UTV’s films division too continues to grow
healthily. The company maintains its track
record of low cost, good quality, and low risk.
An ttractive slate of movie releases over the
next two years should result in an earnings
CAGR of 45% for the films division over
F11-F13e.
• Launch of three IPs over the next 4-6 quarters
should result in EBITDA of Rs1.5 bn in F13,
39% of total EBITDA.
What’s Changed
We push up our EBITDA estimates for UTV’s Broadcasting
and Games divisions, reflecting better visibility of the revenue
stream after 3QF11 results.
Exhibit 1
We Raise EBITDA Estimates for Broadcasting and
Games
Old New
F11 F12 F13 F11 F12 F13
Sales 10,492 13,345 16,340 9,577 13,344 16,512
EBITDA 1,912 2,804 3,705 1,879 2,919 4,016
EBITDA margin(%) 18 21 23 20 22 24
PAT 1,306 1,995 2,719 1,401 2,053 2,939
Source: Company data, Morgan Stanley Research
Movies Division:
Subdued in 3QF11 – but Outlook Remains Positive
UTV is moving towards a de-risked model: It is recovering
almost 50% of its production costs by selling/pre-selling rights
for satellite, home video, music and audio. That is up from
25% earlier. The company delivered EBIT of Rs270m from the
films division in 3QF11. However proceeds from DTH rights of
Tees Maar Khan will accrue in 4QF11. This would be in
addition to the interesting slate of No One Killed Jessica,
Dhobi Ghat, and Saat Khoon Maaf.
The company is exercising good prudence over costs:
While the slate of movies in F12 is attractive, none of the
movies has exceeded Rs400 m in budget (except Thank
You).
Movie Pipeline for CY11
No One Killed Jessica – already released
Saat-Khoon Maaf – scheduled to be released on 18 February
Thank You – Directed by Aneez Basme and starring Akshay
Kumar, Sonam Kapoor, Irfaan Khan, and Bobby Doel
Delhi Belly – Co-Production with Aamir Khan starring Imran
Khan
My Friend Pinto – UTV’s second film directed by Sanjay Leela
Bhansali
Short Term Shaadi – Directed by Karan Johar starring Imran
Khan and Kareena Kapoor
Joker – Shirish Kunder, Akshay Kumar
Chillar Party – Kids movie
We expect EBIT of Rs1.2 b from the films division, contributing
57% to total F11 EBIT.
Gaming Division:
To Drive the Next Leg of Growth
Management expects 30% of revenues in F12 to be from
Games and Interactive: Out of the US$10m from pre-sales
of Ignition, US$5m was recognised in 3QF11 and US$5m will
come in 4QF11. As per the company, strengthening of the yen
will help sales of El Shaddai, which is scheduled to be
released on 28 April. The company targets 500k unit
sales from El Shaddai.
UTV is also interested in increasing its stake in Indiagames,
which plans development of its own IPs in the mobile gaming
space. Key milestones from Indiagames :a) Launched the first
ad-funded game on DTH with Reliance Big TV; b)
commercially launched Airtel Digital with the first
Bollywood-based game Tees Maar Khan; c) launched the
Australia vs. England cricket game on iPhone and iPad during
the Ashes.
Broadcasting –Strong and Getting Stronger
UTV’s efforts on its broadcasting businesses – UTV
Bindass, UTV Movies, World Movies and Bindass Movies
– have yielded results: In 3QF11 the television segment
achieved Rs1016 m in revenues and management believes
this run rate is achievable in F12 too. This translates into
25-30% growth in F12 for the broadcasting division. The
company is looking to expand into RGEC. Within the Air-time
sub-segment, the pipeline with Star Plus and Sony looks
strong
The company currently has a strong slate: Five new shows
are launching in Q4 including Maa Exchange (Sony), Dor
(Star Plus), and Kadmambari (Zee Marathi), among others
Net debt has come down from Rs9.9b in 2QF11 to Rs8.3b in
3QF11. Investments have also reached a plateau.
3QF11 Results: Key Highlights
Overview: UTV announced 3QF11 PAT of Rs400m, up 5.7%
YoY, down -0.5% QoQ. EBITDA at Rs526m was 6% above
estimates and up 20% QoQ. EBITDA margin strengthened
from 18.4% in 2QF11 and 15.3% in 3QF10 to 20.6% in 3QF11
Television division strong: Television EBIT at Rs207m was
strong, a swing of 322% QoQ vs. Rs49m in 2QF11. EBIT
margin stood at 20.4% vs. 6% in 2QF11. This has been the
best performance by the broadcasting division so far, mainly
contributed by the improvements at UTV Bindass and UTV
Movies, in our view. We think the commissioned programmes
also fetched good advertising revenues.
Films division subdued: Films division performance was
subdued at Rs270m, down 39.6% QoQ. This could be
attributable to lower than expected performance by movies
like Guzzarish and Tees Mark Khan released in 3QF11
Gaming division gearing up: EBIT at Rs106m is up 104%
QoQ from a loss of Rs13m in 3QF10. This would be mainly
due to good performance from Indiagames this quarter. With
the pre-sales of El Shaddai worth US$10m already in its kitty,
UTV looks set for the scheduled release of the game on April
28.
Valuation and Price Target
We value the company on a sum-of-the-parts basis using a
discounted cash flow (DCF) methodology for each of the parts
with an explicit period of six years. Our PT changes from Rs540
to Rs618 as we increase our earnings estimates and valuation
across all three divisions. Note that we have also changed
some of our key assumptions.
Risks to our Price Target
Overruns in cost and time are a risk for the film business.
Aggressive price cutting and carriage fee budgets by new
entrants could hurt UTV’s broadcasting segment posing risk to
our price target.
Possible failure of high-budget films and /or AAA games
remains a key risk.
In addition, UTV’s theatrical revenues through advertising
expenditure are closely linked to the country’s economic
growth. Therefore, material weakness in the latter would likely
be reflected in the company’s earnings and would put
downward pressure on the stock’s performance.
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