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UTV SOFTWARE
RECOMMENDATION: REDUCE
TARGET PRICE: RS.463
FY12E P/E: 12.8X
q UTV reported a strong set of results for 3QFY11. Revenues and PAT were
ahead of our estimates by 11.7% and 40.4% respectively. Key surprises of
the results were improved profitability in both the television and the
games segments.
q As expected, the company has reported weaker margins for its movies
business (y/y, q/q), on account of poor performance (combined) of the
company's two major releases - Guzaarish and Tees Maar Khan.
q Games segment's profitability has been helped by the recognition of
$5mn of revenues, from the $10mn minimum guarantee deals that the
company has signed for its console game "El Shaddai", while the growth
in television appears to have come in, in our understanding, on the back
of cost savings as well, even as revenues have grown 15.2% y/y.
q We revise our estimates for UTV Software on the following counts: 1/
lower margins for movies (FY11), 2/ higher margins for television segment,
and 3/ lower revenues, and higher margins for the games segment.
As El Shaddai would be released in April 2011, a large part of the
revenues that we had factored into our model for FY11 shall not be
achieved, and shall be rolled forward toFY12E.
q Further to these, we make adjustments in the tax provisioning for the
company, and interest expenses. Net-net, these changes result in following
changes in FY11E/ FY12E estimates: revenues change by -7%/-0%,
EBITDA: +14%/-4%%, PAT - +19%/-0%. We estimate UTV's FY11E/ FY12E
EPS at Rs 40.9/ Rs40.4.
q While the earnings, and the revisions we make (FY11E), point to a positive
picture, there are two key qualitative negatives we take note of: 1/
The quarter's movie releases have placed a question mark on the degree
to which "de-risking" big movies is possible, as also the extent to which
creative efforts can be managed by studios co-producing movies. 2/ We
believe the company could have obtained better valuations for its IPs had
it been able to secure a larger minimum guarantee deal with a publisher.
q Even as we raise our estimates substantially for the company (FY11E), we
remain concerned about: 1/ the sustenance of margins the movies business
when excessive competition in the Hindi GEC space wears off (likely
post FY12) , 2/ poor visibility in the games segment of the company, following
UTV's decision to publish El Shaddai itself, rather than sell the IP
and book a larger minimum guarantee. Overall, we see a fair amount of
execution risks in the business and a lack of visibility in key earnings
drivers, due to which we value UTV Software conservatively.
q We continue to value UTV on an EV/EBITDA basis, and apply a multiple
of 11x FY12E EBITDA to arrive at value of Rs 463/ share. We rate UTV Software
REDUCE. Performance of the company's games division remains a
large risk to our estimates and price target.
n Margins in the movie segment declined sharply as a result of weaker performance
of the company's releases in this quarter, which included two big movies
- namely Guzaarish and Tees Maar Khan. The company has booked revenues for
both the movies' theatrical revenues, although Tees Maar Khan's satellite rights'
revenues were not booked in the quarter.
n Profitability in the television segment improved substantially. The improvement,
as per management, is a combined result of improved revenue traction in its
broadcasting vertical and cost control affected by the company. Strong performance
in the television segment is one of the important factors that has led to
UTV's performance being ahead of our estimates.
n Revenues in the games segment benefited from $5mn revenues booked for the
company's El Shaddai IP - which is set to be launched in Japan on April 28th.
The company shall be publishing the game itself, and would, beginning 1QFY12,
book revenues from actual sales of the game.
Our investment thesis on UTV may be summarized as follows:
n Three of UTV's business segments lie in three separate states of monetization -
a/ the movie business is monetized, and is a strong profitability driver for the
company, b/ the television business, consisting of content production and broadcasting
is, in our view, yet to achieve stability, c/ The games and interactive segment
of the company is under-monetized, and the largest consumer of capital
employed.
n The company is committed to growing the three segments together, and sees
synergies in the running of these businesses. As such, it is not useful to seek a
sum-of-parts valuation for the company.
n There is, even now, a significant amount of uncertainty on the revenues that the
games segment can bring in. While television segment has brought in substantial
margins in the quarter, we remain unclear about the drivers of the change as
well as sustainability - we note that 3Q is a strong quarter for broadcasters. On
games, we note that the company had initially guided for FY11 revenues of Rs
4Bn , which it has had to revise downward on account of deferral of revenues
from El Shaddai. As of now, the company is publishing the game itself. Other
key IPs of the company - three in number and accounting for about $25mn each
in development expenses - are yet to provide any visibility in terms of revenues.
n We value UTV Software using an EV/ EBITDA multiple of 11xFY12E, and arrive
at a price target of Rs 463/ share (upgrade from prior price target of Rs 458/
share). We remain REDUCE on the stock at present. We shall revisit our investment
thesis on the company post a detailed discussion with the management.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UTV SOFTWARE
RECOMMENDATION: REDUCE
TARGET PRICE: RS.463
FY12E P/E: 12.8X
q UTV reported a strong set of results for 3QFY11. Revenues and PAT were
ahead of our estimates by 11.7% and 40.4% respectively. Key surprises of
the results were improved profitability in both the television and the
games segments.
q As expected, the company has reported weaker margins for its movies
business (y/y, q/q), on account of poor performance (combined) of the
company's two major releases - Guzaarish and Tees Maar Khan.
q Games segment's profitability has been helped by the recognition of
$5mn of revenues, from the $10mn minimum guarantee deals that the
company has signed for its console game "El Shaddai", while the growth
in television appears to have come in, in our understanding, on the back
of cost savings as well, even as revenues have grown 15.2% y/y.
q We revise our estimates for UTV Software on the following counts: 1/
lower margins for movies (FY11), 2/ higher margins for television segment,
and 3/ lower revenues, and higher margins for the games segment.
As El Shaddai would be released in April 2011, a large part of the
revenues that we had factored into our model for FY11 shall not be
achieved, and shall be rolled forward toFY12E.
q Further to these, we make adjustments in the tax provisioning for the
company, and interest expenses. Net-net, these changes result in following
changes in FY11E/ FY12E estimates: revenues change by -7%/-0%,
EBITDA: +14%/-4%%, PAT - +19%/-0%. We estimate UTV's FY11E/ FY12E
EPS at Rs 40.9/ Rs40.4.
q While the earnings, and the revisions we make (FY11E), point to a positive
picture, there are two key qualitative negatives we take note of: 1/
The quarter's movie releases have placed a question mark on the degree
to which "de-risking" big movies is possible, as also the extent to which
creative efforts can be managed by studios co-producing movies. 2/ We
believe the company could have obtained better valuations for its IPs had
it been able to secure a larger minimum guarantee deal with a publisher.
q Even as we raise our estimates substantially for the company (FY11E), we
remain concerned about: 1/ the sustenance of margins the movies business
when excessive competition in the Hindi GEC space wears off (likely
post FY12) , 2/ poor visibility in the games segment of the company, following
UTV's decision to publish El Shaddai itself, rather than sell the IP
and book a larger minimum guarantee. Overall, we see a fair amount of
execution risks in the business and a lack of visibility in key earnings
drivers, due to which we value UTV Software conservatively.
q We continue to value UTV on an EV/EBITDA basis, and apply a multiple
of 11x FY12E EBITDA to arrive at value of Rs 463/ share. We rate UTV Software
REDUCE. Performance of the company's games division remains a
large risk to our estimates and price target.
n Margins in the movie segment declined sharply as a result of weaker performance
of the company's releases in this quarter, which included two big movies
- namely Guzaarish and Tees Maar Khan. The company has booked revenues for
both the movies' theatrical revenues, although Tees Maar Khan's satellite rights'
revenues were not booked in the quarter.
n Profitability in the television segment improved substantially. The improvement,
as per management, is a combined result of improved revenue traction in its
broadcasting vertical and cost control affected by the company. Strong performance
in the television segment is one of the important factors that has led to
UTV's performance being ahead of our estimates.
n Revenues in the games segment benefited from $5mn revenues booked for the
company's El Shaddai IP - which is set to be launched in Japan on April 28th.
The company shall be publishing the game itself, and would, beginning 1QFY12,
book revenues from actual sales of the game.
Our investment thesis on UTV may be summarized as follows:
n Three of UTV's business segments lie in three separate states of monetization -
a/ the movie business is monetized, and is a strong profitability driver for the
company, b/ the television business, consisting of content production and broadcasting
is, in our view, yet to achieve stability, c/ The games and interactive segment
of the company is under-monetized, and the largest consumer of capital
employed.
n The company is committed to growing the three segments together, and sees
synergies in the running of these businesses. As such, it is not useful to seek a
sum-of-parts valuation for the company.
n There is, even now, a significant amount of uncertainty on the revenues that the
games segment can bring in. While television segment has brought in substantial
margins in the quarter, we remain unclear about the drivers of the change as
well as sustainability - we note that 3Q is a strong quarter for broadcasters. On
games, we note that the company had initially guided for FY11 revenues of Rs
4Bn , which it has had to revise downward on account of deferral of revenues
from El Shaddai. As of now, the company is publishing the game itself. Other
key IPs of the company - three in number and accounting for about $25mn each
in development expenses - are yet to provide any visibility in terms of revenues.
n We value UTV Software using an EV/ EBITDA multiple of 11xFY12E, and arrive
at a price target of Rs 463/ share (upgrade from prior price target of Rs 458/
share). We remain REDUCE on the stock at present. We shall revisit our investment
thesis on the company post a detailed discussion with the management.
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