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UTV Software Communications- Gaming fueling the growth trajectory
UTV Software Communications Ltd (UTV) is India's first integrated global media
and entertainment company with businesses spanning across film production and
distribution, gaming, TV content, TV broadcasting and new media (content on
web and mobile). It has a dominant presence in movies production business, with
the movies business contributing 49% to UTV’s operating revenues. Its
broadcasting business is also growing at a fast pace, with its youth oriented
channels garnering higher TRPs. Also, the gaming business is about to generate
returns on the investments made earlier, with 3 IP titles ready for release. UTV’s
strategic partnership with Walt Disney (with a 56.67% stake) gives UTV the access
to overseas markets.
• Strong movie content pipe line: UTV follows the Studio approach in its movie
production and distribution business. It has a strong movie pipeline with
movies like ‘Thank You’ lined up for release. It has release-locked 8-10 movies
for FY12. It de-risks its movies’ box-office performance by pre-release selling
the satellite and music rights, thereby recovering about 50% of its production
costs.
• Youth oriented TV broadcasting garnering higher TRPs: UTV’s broadcasting
business consists of 4 ‘mass specialty’ network of TV channels. These
channels target particularly the youth audience. The channels are gaining
popularity with its target audience, which is reflected in its improving TRP
numbers. The broadcasting business has achieved break even at EBIDTA level
with a 100% YoY growth in revenues during H1FY11. UTV also produces
television content for several channels and is also a quasi broadcaster for Sun
Network.
• Gaming at inflection point: UTV has developed 3 AAA game titles through
UTV Ignition for PS3 and XBOX 360. Its first game El Shaddai won ‘Most
Anticipated Future Title’ award on its debut at the Tokyo game show. UTV
has signed a USD 10 mn minimum guarantee contract with two Japanese
companies as a part of merchandizing agreement. It plans to sell the
publishing rights of El Shaddai by the end of FY11. UTV’s tie up with
international game publishers and success of its console games will be key
positive triggers for the company. We initiate coverage on UTV Software
Communications Ltd with a ‘BUY’ rating with one-year price target of ` 629
on SOTP, return of 18% from current levels.
Investment rationale
Market leader in movies production
UTV is the market leader in the movies business this fiscal with twelve films released during
FY11. Currently, UTV is the only studio with 8-10 movies release-locked for next year 2011-
2012.
Movies slate in FY11
Movies released during first 9 months of FY11
Q1FY11
• Chance Pe dance
• Harishchandrachi factory (Marathi)
Q2FY11
• Rajneeti
• I Hate Love Storys
• Udaan
• Peepli Live
Q3FY11
• We are Family
• Guzaarish
• Tees Maar Khan
Movies released during Q4FY11
Q4FY11
• No One Killed Jessica
• Dhobi Ghat
• Saat Khoon Maaf
Source: Company, Jaypee Research
UTV amortises about 60% of the cost of production of a film in the year of release, followed
by 10% of the cost in each of the next 4 years.
De-risking box-office performance of movies
UTV sells the satellite and music rights of movies prior to the release of the movies. These
revenue streams such as home video rights, cable and satellite rights, music rights, mobile
and internet rights, film advertising and merchandising contribute about 30%-50% of the
total revenues, depending on the type of the film and its performance at the box office.
Through such pre-selling UTV recovers the cost of producing the movies, at least partially,
thereby de-risking the box office performance of the movie.
Studio approach reduces dependence on few successful films
UTV has adopted the studio approach for movies production wherein it produces and
distributes its own films across genres. Thus at a time, it produces a number of projects with
different budgets. The company does not plan to pursue the acquisition-focused model,
wherein films made by third-party producers are acquired for distribution by paying a
minimum guarantee.
A diverse mix of films spanning across various genres, a range of budgets and targeted at
different audiences reduces the dependence on few successful films. UTV is also actively
involved in films co-produced by other production houses, right from the inception in
scripting and production-related activities.
UTV has created a separate sub-brand, UTV Spotboy, which produces small-budget films
with unusual storylines targeted at the urban multiplex audiences.
Movie segment - largest contributor to revenues
The movies business is the largest contributor to revenues with 49% share in the total
revenues during 9MFY11. During the first 9 months of FY11, the movies segment reported
an increase of 28% in revenues to ` 3391 million from ` 2649 million in the same period of
last fiscal. We expect the percentage contribution to revenues to go down with UTV’s
broadcasting and gaming segments showing a growth in revenues.
In addition to the movie releases during 9MFY11, income was realized from (a) the satellite
revenue for Raajneeti, (b) syndication from the sale of rights of catalogue titles and (c)
revenues from the Hollywood slate.
FY11 started strongly with the release of Raajneeti emerging as the fourth biggest
blockbuster in the history of Indian cinema, and the positive trend continued with an even
stronger second quarter, putting UTV well ahead of the competition both in terms of
number of movies released and revenue. UTV is poised for continuing success for the coming
fiscal with a strong pipeline of films.
Going forward, the company plans to produce and release 12-15 movies of varying budgets
per year. To avoid lumpiness, UTV has scheduled the release of its movies consistently across
all quarters and plans to do so in the coming years also. Being the largest player in the
industry, we expect UTV to benefit from the growth opportunities in the movies business.
Growing number of multiplexes have resulted in wider release of films on the day of
theatrical release, thereby increasing the box-office collections phenomenally. Also the,
growth in ancillary revenue sources such as sale of Cable & Satellite, home video, music and
digital rights would further add to the revenues and profits, particularly since UTV would
have a larger number of movies in its kitty to exploit.
Considering the above factors and the robust movie pipeline of UTV we expect the revenues
from the movies segment to grow at a CAGR of 30% over the next 3 years to touch ` 6069
mn in FY12E.
Youth oriented TV channels gaining viewership
Constituting 37% of total revenues during 9MFY11, UTV’s television segment includes the
broadcasting business and television content business.
UTV forayed into the television broadcasting business in FY08 through UTV Global
Broadcasting Ltd, in which UTV holds an 85% stake with Walt Disney holding 15%. UTV has
identified the youth as its target audience for its broadcasting segment. All four channels in
its portfolio - UTV Movies, UTV World Movies, Bindass and UTV Action – have a definite
target audience, mainly the youth audience. This strategy has been successful for UTV as its
channels’ viewership has seen a steady improvement, with most of the channels competing
closely with leading channels in the respective categories
All four channels have turned profitable in Q1FY11. We expect the broadcasting business to
post strong performance during FY11E and FY12E on back of increasing advertising volumes
and inventory utilization.
UTV’s channel share - defined as the market share of UTV’s channels in genres where it is
present - has been consistently increasing, indicating the growing popularity of its channels.
All of UTV’s channels are ranked among the top five in their respective genres.
DTH penetration to drive subscription growth
The digitisation of TV platforms has given way to more transparent distribution of revenues
for stakeholders in the value chain and more bandwidth becoming available to broadcasters,
giving them the opportunity to provide value add services. This could boost the availability of
niche content in the future.
The advantages of DTH as a platform include a user-friendly interface and a large no of
channels as compared to the analog platform. It is likely to continue to increase penetration.
DTH was one of the biggest contributors to the digitisation story. DTH has displayed rapid
growth to reach 20 million gross subscribers by the end of 2009. The number of subscribers
excluding the churn stands at 16 million. Going forward, the amount of churn is expected to
be at least 3% to 5% of the overall DTH subscriber base per month. By 2014, the DTH
subscriber base is expected to reach 43 million.
Also, many DTH subscribers are coming from states with class 2 and 3 towns and not just
metros. For example, in Rajasthan and Maharashtra, the platform has found acceptability in
a lot of small towns and cities. In a state like Assam, where cable is difficult to install due to
the mountainous terrain, DTH is gaining strong ground and reached a growth rate of ~25%.
Steady growth seen in TV content
UTV is one of the largest players in the television content space. The TV content business
comprises production of content for channels across the GEC (General Entertainment
Channels) space and sale of airtime on channels.
The television content segment is a steady growth business with relatively low margins and
low costs, which lends stability to UTV’s operations. The TV content business model does
not require high upfront capital expenditure. This, coupled with maturity of the business
itself, enables UTV to enjoy high return on investment as compared to its other business
segments. The TV content division saw a total investment of ` 322 mn as of March 2010,
which is 1.85% of total capital employed. ROCE in this segment stood at 10% in FY10.
The Company currently has strong slate of shows on air with 5 new shows launching in Q4
including Maa Exchange (Sony) (on air), Dor (Star Plus), Kadmambari (Zee Marathi), among
others.
Quasi broadcaster to Sun TV
In the airtime sales, UTV generates advertising revenues by selling airtime on various
channels on Sun Network by showcasing programmes created and aggregated by UTV. On an
average UTV sells 125 hours per month of air time on Sun Network. Currently, its shows
enjoy the number one position on Sun TV and Surya TV. Its association with Sun Network
gives UTV the access to regional markets which are the fastest growing advertising markets.
Currently the Air Time Sales business division has 12 shows running across the South
channels with 8 of the 12 shows among the Top 5 programs its respective genre and
channel.
Gaming and interactive business set to surge
UTV has made significant investment in gaming (market size of USD 60 bn) by taking stakes
in Ignition (console gaming), True Games (internet gaming), and Indiagames (mobile
gaming). We expect the gaming business to report strong growth once the AAA titles
developed by Ignition for PS3 and XBOX 360 are released during FY12 along with new
launches which have been lined up by True Games. While Indiagames has turned
profitable in Q2FY11, True Games is expected to break even by the end of FY11E. The
gaming division posted revenue of ` 950 mn in FY10. We expect a significant boost to the
segment’s performance during FY12.
El Sheddai to be released in April 2011
El Shaddai, a third person action adventure game developed out of UTV Ignition Japan’s
studio received an award for the “Best Future Game” at the Tokyo game show. UTV is
actively negotiating for a multiple of merchandising/ licensing / co-branding / co-marketing
deals - where the commercials include (a) Minimum Guarantees, (b) Revenue Share, and (c)
Advertising & Marketing Support. UTV has finalized two such arrangements with, viz;
1. “EDWIN” - the number 1 Jeans company in Japan
2. “Bandai Toys” - the number 1 Toy company in Japan
In addition the game has potential to generate ancillary revenues from ‘motion picture’
rights. The Game has 50-60 minutes of graphics - backed by a strong storyline for a motion
picture.
Superior graphics enable premium pricing over competitors
Most AAA games retail for around USD 60 per unit, but due to (a) the highest quality of
graphics, plus (b) the pre buzz in Japan and (c) supported by Sony and Microsoft, and (d) a
strong Yen - El Shaddai will retail in Japan as close to USD 81 per unit, giving boost to UTV’s
overall commercials albeit for the Japan market, which is an important market for a game
like El Shaddai.
El-Sheddai’s distribution strategy to optimize sales in Japan
The company has decided to break its Publishing and Distribution Strategy in four key
geographies (a) Japan, (b) North America, (c) Europe (including UK), and (d) Rest of the
World. In Japan, backed by a healthy retail price and a strong support from the platform
owners, UTV Ignition has concluded partnership with Sony and Microsoft jointly. In Japan,
Sony has 3 times more PS3 installed than Microsoft’s Xbox 360. Microsoft is also aggressively
growing their presence in Japan. UTV’s partnership with Sony will give it (a) Maximum retail
support, (b) Strong marketing spend, (c) Highest share per unit compared to any other
Publisher it would have gone with and they will push on their PS3 platform. Similarly, the
same arrangements and benefits with Microsoft, and they will push on their Xbox 360. With
this strong support and marketing push from these platforms, the combined sales are
expected to cross 500,000 units in Japan alone.
Supplementary revenue streams in UTV TrueGames
Truegames, UTV’s online gaming subsidiary, is expected to generate additional revenues
from the expansion packs for its existing games. Expansion packs increase a game’s longevity
and momentum. In addition Truegames is also planning to incorporate supplementary
revenue streams through In-Game advertising and licensing/merchandising deals. It has
recently signed a million dollar licensing deal for South East Asia territories with Yamaia
Limited. Its last online game released was ‘Mytheon’.
UTV Indiagames - Market leader in mobile games in India
Indiagames, UTV’s mobile gaming developer is a market leader in the mobile gaming market
in India. It has expanded its footprint in games to DTH, Online and iPad/iPhone ++.
Indiagames has signed a deal with Reliance Big TV, the Direct-To-Home (DTH) arm of
Reliance Communications, wherein it will offer gaming services on Reliance Big TV’s DTH
platform in India. Indiagames will make available eight games on BIG TV DTH, for a
subscription fee of ` 30 per month.
Innovative offerings made by Interactive & new media
UTV provides various innovative media offerings through its Interactive and new media
segment. It is a pioneer in ‘made for mobile content’. UTV Audio Cinema already has 3.5
million subscribers and earns consumer spending over ` 5 Cr/month. UTV Powered
Vodafone Mobile Box Office is one of the fastest growing subscription services in Vodafone
VAS (value added services). UTV launched celebrity live interactive voice chat service
through Airtel’s Talk To Me (TTM) product. It has also launched the celebrity voice blog
service and has acquired digital rights of leading Bollywood and Southern Cinema celebrities
for 2 to 5 years e.g. Priyanka Chopra, John Abraham, Lara Dutta, Ileana D'Cruz and
continually adding more to its repertoire. It has established itself as key player in the short
format video content and has entered into long term partnerships with leading Telcos to
provide consumers ‘Made for Mobile’ content. Being a pioneer in the business, UTV is in the
best position to exploit the opportunities presented by the changes in consumption pattern
due to the advent of 3G and 4G.
Company background
UTV is an integrated entertainment company with three distinct business verticals -
Television, (includes broadcasting and content), Gaming & Interactive and Films.
Movies production and distribution
UTV’s Movies business includes production, marketing, distribution, merchandising and
syndication worldwide. It has Hindi movies, animation films, international productions and
co productions across genres in its large portfolio. UTV is associated with renowned film
makers, directors and actors who have proven their mettle at the box office.
Television content
UTV was one of the earliest players in the television content space, and over the years has
produced a number of shows on a commission basis across various genres. UTV’s content
segment produces shows across channels like Star Plus, NDTV, Zee Network, Sahara Network
and Sun TV offering a host of genres such as drama, comedy, regional themes, fantasy,
action, horror, mythology and children’s shows. UTV is a quasi broadcaster in South India for
channels across the Sun TV Network. In the airtime sale business, the company acquires
airtime (mostly on South Indian channels) and sells commercial slots to advertisers.UTV has
clocked over 10,000 hours of air time sales across diverse genres on various channels. It’s
dubbing division has provided dubbing services for channels across genre.
Television broadcasting
UTV entered the broadcasting business in Sept 2007 with a clearly differentiated strategy of
having a strong targeted audience for each of its four channels. It is also clear about not
entering the GEC (General Entertainment Channel) space. It also plans to enter the Indian
regional languages space through its brands ‘Bindass’ and ‘Action’.
UTV Ignition
UTV Ignition is a developer & publisher of handheld and console games. Having a wide
customer base across UK, Europe, Japan and North America, Ignition develops, publishes and
distributes console games across multiple platforms like Sony's Playstation, Microsoft's X Box
and the Nintendo range of consoles. It currently has three AAA Titles under production - El
Shaddai, Project Kane and Reich.
UTV IndiaGames
UTV in 2006 had invested ` 68 crore to acquire 51% stake in Indiagames, which it further
increased to 58%. Indiagames is one of the major players in the Indian online and mobile
gaming segment and has a market share of around 50%. The company’s Games on Demand
subscription model has a base of 60,000 users. It is one of the three firms from India to have
logged a million downloads on Nokia’s Ovi store. It also has an exclusive Games channel on
DTH Reliance Big. Its game ‘Bruce Lee’ is amongst the top10 games on iPad / iPhone – across
USA, UK, Japan and EU.
UTV Truegames
UTV True Games Interactive Limited based in California is a massively multiplayer online
(MMO) games company with free-to-play micro transaction based model. It has three games
in pipeline - Faxion, Sky Legends and Planet Crashers.
New media and Interactive
The Interactive segment contains various products and services including portals such as
techtree.com and services such as distribution of movies and music based products on
mobile such as RBT/ CRBT, Wallpapers, Audio Cinema, Celebrity voice blogs, etc.
Walt Disney’s strategic stake
Walt Disney Company SE Asia has a 56.67% strategic shareholding in the company. However,
as per the agreement between Walt Disney and the promoters, Walt Disney’s voting rights
are capped at 32.1% for a period of 4 years from the date of completion of the open offer
(November 2008). Walt Disney has 3 nominee directors on UTV’s board. The association with
Walt Disney benefits the company, as it targets international markets in the gaming and
films segments.
Media sector in India
Media & Entertainment industry in India is indicating potential for growth
The Indian media & entertainment industry is at a nascent stage and is not as evolved as the
industry in developed nations. Media spend in India as a percent of GDP is 0.41%. This ratio
is almost half of the world’s average of 0.80% and is much lower compared to developed
countries like US and Japan. This indicates the potential for growth in spends as the industry
in India matures. With the increasing brand‐consciousness and purchasing power of the
Indian consumer the spending gap between India and other countries is likely to get
narrowed.
Ancillary revenue streams reducing risks in movie business
Several ancillary revenue streams have been provided by the evolution of digital technology.
Filmmakers are delivering film‐based content like music, videos, images and games on
mobile phones and the internet. Releasing movies on the DTH and cable platforms through
‘Pay Per View’ services soon after the theatrical release also helps filmmakers in monetizing
their movie content. Releasing films on the internet is another trend adopted by filmmakers.
Depending on several factors like the box office performance, direction, production house,
cast, etc. such ancillary revenue streams contribute about 30% to 50% of the total revenues,
thereby recovering the entire production costs. So the box office revenues entirely add to
the profit of the movie.
Digital screens and increasing number of screens facilitate wider release of movies
Digital prints have enabled distributors to release a large number of copies at the same time,
thereby allowing producers to capture revenues outside urban areas and recover their
investment more quickly. This is expected to have a positive impact on box office revenues,
as the maximum box office collection is earned during the first week of release of the movie.
The total number of digital screens in India is currently estimated at over 3,000. Digitization
reduces incremental distribution costs as cinemas upload films to computer hard drives,
thereby eliminating the need for physical prints to be produced and delivered. Increased
digitisation of single screen theatres is also helping the regional film industry in terms of
wider release and the opportunity to capture theatrical revenues within shorter windows.
TV industry to have larger share of ad-revenue pie by 2014
The contribution of Television to the overall revenues of the M&E industry has gone up
considerably in 2009 as compared to 2006 and is expected to continue increasing and
achieve almost 48% of the total revenues in 2014. On the other hand, the contribution from
sectors like Films, Print, Music and OOH has come down in 2009. Going forward, it is
expected that the contribution from Films and Print may come down further in 2014, as the
overall size of the M&E industry continues to grow. Television is expected to grow at a
higher rate of 15% over next five years compared to an almost 9% growth in both the Films
and Print sectors.
Overall the industry grew from ` 241 billion in 2008 to ` 257 billion in 2009 recording a
growth rate of 7% compared to 14% last year. It is expected to reach a size of ` 521 billion in
the next 5 years i.e. by 2014 at a CAGR of 15.2%. The growth in advertisement revenues is
expected at a rate of 15.6% which is marginally higher than the subscription revenues
growing at a rate of 15%.
Digitization and increasing number of TV households to spurt subscription
revenues
TV penetration is increasing with the growth in the number of TV households. The number of
TV households grew at a rate of 5% to reach 129 million in 2009 compared to 123 million in
2008. The penetration of TV in the country grew from 56% in 2008 to 58% in 2009. Currently
TV penetration in India is much lower as compared to some of the developed markets which
are almost fully penetrated. Hence, the numbers have potential headroom for growth.
The penetration for Cable & Satellite (C&S) households increased from 70% of total TV
households in 2008 to 74% in 2009. The overall number of C&S households reached 95
million registering a growth of 10%. A large part of this growth came from the digital homes
being added.
Different genres in TV content also garnering TRPs
More than 50% of the viewership share in Hindi speaking markets (HSM) is dominated by
Hindi GEC and movies combined. However, in the South Regional GEC alone captures close
to 50%. Given the fatigue factor that had set in with similar serials being aired across
channels, TV producers try to innovate with novel concepts like reality shows, game shows,
etc. Reality shows like ‘Emotional atyachar’, ‘MTV Roadies’, etc are gaining popularity among
the youth.
Gaming scenario in India and world over
According to the Game White Paper 2010 (Ministry of Culture‐Korea), the global gaming
market is expected to grow at a CAGR of 7% to reach USD 143bn in 2012 from USD 117bn in
2009. The mobile and online segment is expected to grow at a CAGR of 16% and 17%
respectively over the next three years, mainly driven by the growth in Asia‐Pacific region,
particularly China and Korea.
Overall, the Indian gaming industry is expected to grow at a CAGR of 32% between 2009 and
2014 to reach ` 31.9 billion by 2014. Driven by factors such as a young population, rising
disposable incomes, increasing PC and wireless users, progressive distribution models
gaming companies across the segments are provided with a market opportunity to co‐exist
and collectively grow the audience for their respective businesses.
New media
The role of the new media is becoming increasingly important in the distribution portfolio of
advertisers. New media is bringing about a revolution by merging the functionalities of
customer end terminal devices like TV, PCs, Mobile phones, etc. For example, IPTV, online
newspapers and magazines, podcasts, Wi-Max, new video formats, internet streaming, etc.
are technological advancements leading to convergence of two or more media into a
converged communication channel. This creates new and exciting methods of monetising
content and attracting new media consumers. The advent of 3G is likely to be a great
catalyst to the convergence phenomenon by making the mobile phone a very handy tool for
accessing video and audio formats. This has increased the number of entertainment and
information delivery choices available to consumers and intensified the challenges posed by
audience fragmentation. The launch of I-Pad provides a new delivery platform for news,
entertainment, etc. in future. We are likely to see more content being customised for these
new portable devices compared to the traditional stay-at-home devices. We are also likely to
see emergence of new models for advertisement and subscription revenues.
Key risks
• Movies production is inherently risky business. It is difficult to predict the success of a
movie. Poor performance at the box office of UTV’s movies successively would adversely
impact the overall movies revenues and margins. It would also exert pressure on
working capital and the planned funding of the upcoming film slate. However, with UTV
pursuing pre-selling aggressively, there are lesser chances of making losses.
• Movies piracy, including digital and internet piracy which is rampant in India, may
decrease the revenues from theatrical exhibition of movies.
• Increased competition in TV broadcasting may lead to UTV paying higher carriage fees
for its existing & planned new channels, impacting margins significantly.
• Any decrease in the viewership share of UTV’s existing channels would adversely impact
advertising and subscription revenues.
• The lack of transparency and under declaration of subscription revenues in case of
analog cable systems has traditionally been a challenge for the broadcasters.
• UTV is a comparatively new player in the gaming business. It faces severe competition
from companies across the globe. This may lead to longer break-even period. However,
the MG contract for its upcoming game El Sheddai mitigates its risks.
Q3FY11 – Result Review & key developments during the quarter
• UTV reported Net Revenues of ` 2551 mn, growth of 18% Y-o-Y, with Movies
contributing 42%, Television contributing 40% and Games and Interactive contributing
18%.
• The EBIDTA for the quarter at ` 534 mn, has shown a growth of 42% Y-o-Y, with the
EBIDTA margin at 21%.
• Net profit after minority interest stood at ` 400 mn, a decline of 6% on Y-o-Y basis on
account of deferred tax write back of ` 143 mn in Q3FY10. The PAT margin for the
quarter was 16%.
• In Q3FY11, the movies business earned revenues of ` 1076 mn. During the quarter UTV
has released two movies - Guzarish and Tees Maar Khan. In addition to box office
revenues from movie releases, UTV has earned revenues from sale of satellite and audio
rights for Guzarish and We Are Family. UTV has sold the audio and satellite rights of
Tees Maar Khan for ` 300 m, which will be booked in Q4FY11. EBIT margin of the movies
segment has come down to 25% from 40% in Q3FY10, owing to the losses made in
Guzaarish.
• UTV plans to venture in the South Indian languages’ movies production to further
expand the UTV brand.
• The television business continues to perform well and earned revenues of ` 1016 mn,
growth of 14% Y-o-Y. There is a significant improvement in the profitability of the
business with EBIT for the quarter at 20% (5% in Q3FY10) at ` 207 m (` 48 m in Q3FY10).
• With all its brands currently doing well and the flagship brand Bindass having good
headroom visa-vis MTV, UTV is looking at increasing its ad-rates for its broadcasting
business by 25% to 30%. It also plans to enter the Indian regional language space in the
broadcasting business over the next 3-6 months either through the brand name of
Bindass or through the brand name of Action.
• The gaming and interactive business revenues for the quarter stood at ` 459 mn and the
EBIT stood at ` 106 mn, with the EBIT margin at 23%. With planned release of El Sheddai
(AAA IP title) (Ignition) and launch of three new MMOG Games (massively multiplayer
online game) (True Games), the current calendar year is critical for UTV’s gaming
business.
• UTV will be releasing El Sheddai on 28 April 2011 in the Japanese market, just before an
eight-day week called their golden week which is equivalent of the Chinese New Year in
China. UTV has entered into a partnership with Sony and Microsoft for distribution and
marketing of the game in Japan. It has locked in a minimum guarantee (MG) of USD 10
mn with two Japanese companies as a part of a merchandizing agreement. Of the MG of
USD 10mn, UTV has booked revenues to the tune of USD 5 mn in Q3FY11 and
operational costs to the tune of USD 2.5-3 m for the game. The remaining USD 5 mn will
be booked in Q4FY11.
• During the quarter the company has merged the entire operations of its online gaming
businesses, bringing about location consolidation. So its three different operations for
publishing games on the west coast, a studio on the East Coast and the MMOG play in
Austin are now all consolidated in one place in Austin. This has brought about an
annualized cost savings of between USD 3-4 million.
Financial Analysis
Revenue to grow at a CAGR of 46% over FY10‐FY12E
We expect revenues to grow at a CAGR of 46% over FY10‐12E to reach ` 14202 mn in FY12E
from ` 6641 mn in FY10. We expect the revenue growth to be driven mainly by higher
contribution expected from games and interactive segment with the launch 3 AAA games,
which will improve contribution of games segment from 16% in FY10 to 21% in FY12E.
EBITDA margins to improve to 26% in FY12E
With the investments in broadcasting and gaming & interactive segments starting to pay off,
we expect the EBITDA margins to improve to 26%. We expect the EBIDTA to grow to ` 3695
mn in FY12E from ` 473 mn in FY10.
PAT set to grow at CAGR of 41% during FY10-FY12E
We expect the PAT to grow at a CAGR of 41% in the next three years to ` 1877 mn in FY11E
and ` 2268 mn in FY12E.
Valuation methodology
UTV has a unique business model with diversified revenue segments. We have valued UTV
Software by using Sum‐of‐the‐parts valuation (SOTP) method to arrive at the real value of its
individual businesses by trading multiples appropriate for that particular segment. Based on
the individual business segment's growth and profitability vis‐à‐vis its peers we have used
relevant multiples for valuation.
Outlook and Valuation
We assign a value 9x EV/EBITDA for its Movies business, which is at a marginal discount to its
domestic peer group average of 9.5x FY12E EBITDA. Considering its niche positioning and
focus towards youth segment, we believe that the TV broadcasting business of UTV would
be performing better. However, we still assign a sales multiple of 2.5x to the broadcasting
business, a small discount to the other Indian broadcasting peers considering that it is not
present in general entertainment channel segment and the growth of regional market
segment. We value the gaming business at 2.5x EV/EBIDTA, at a discount to its global gaming
companies average of 7.4x considering the execution risks involved, UTV being a new
entrant. We have valued TV content business at 8x EV/EBITDA, a significant discount to Balaji
Telefilms (market leader in TV production segment) EV/EBIDTA multiple of 13.9x. We have
valued New media and Interactive business at 2x EV/Sales at a discount to industry average
3.6x EV/Sales multiple.
We initiate coverage on UTV with BUY rating and SOTP based target price of ` 629, implying
an upside of 25% from its current price.
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UTV Software Communications- Gaming fueling the growth trajectory
UTV Software Communications Ltd (UTV) is India's first integrated global media
and entertainment company with businesses spanning across film production and
distribution, gaming, TV content, TV broadcasting and new media (content on
web and mobile). It has a dominant presence in movies production business, with
the movies business contributing 49% to UTV’s operating revenues. Its
broadcasting business is also growing at a fast pace, with its youth oriented
channels garnering higher TRPs. Also, the gaming business is about to generate
returns on the investments made earlier, with 3 IP titles ready for release. UTV’s
strategic partnership with Walt Disney (with a 56.67% stake) gives UTV the access
to overseas markets.
• Strong movie content pipe line: UTV follows the Studio approach in its movie
production and distribution business. It has a strong movie pipeline with
movies like ‘Thank You’ lined up for release. It has release-locked 8-10 movies
for FY12. It de-risks its movies’ box-office performance by pre-release selling
the satellite and music rights, thereby recovering about 50% of its production
costs.
• Youth oriented TV broadcasting garnering higher TRPs: UTV’s broadcasting
business consists of 4 ‘mass specialty’ network of TV channels. These
channels target particularly the youth audience. The channels are gaining
popularity with its target audience, which is reflected in its improving TRP
numbers. The broadcasting business has achieved break even at EBIDTA level
with a 100% YoY growth in revenues during H1FY11. UTV also produces
television content for several channels and is also a quasi broadcaster for Sun
Network.
• Gaming at inflection point: UTV has developed 3 AAA game titles through
UTV Ignition for PS3 and XBOX 360. Its first game El Shaddai won ‘Most
Anticipated Future Title’ award on its debut at the Tokyo game show. UTV
has signed a USD 10 mn minimum guarantee contract with two Japanese
companies as a part of merchandizing agreement. It plans to sell the
publishing rights of El Shaddai by the end of FY11. UTV’s tie up with
international game publishers and success of its console games will be key
positive triggers for the company. We initiate coverage on UTV Software
Communications Ltd with a ‘BUY’ rating with one-year price target of ` 629
on SOTP, return of 18% from current levels.
Investment rationale
Market leader in movies production
UTV is the market leader in the movies business this fiscal with twelve films released during
FY11. Currently, UTV is the only studio with 8-10 movies release-locked for next year 2011-
2012.
Movies slate in FY11
Movies released during first 9 months of FY11
Q1FY11
• Chance Pe dance
• Harishchandrachi factory (Marathi)
Q2FY11
• Rajneeti
• I Hate Love Storys
• Udaan
• Peepli Live
Q3FY11
• We are Family
• Guzaarish
• Tees Maar Khan
Movies released during Q4FY11
Q4FY11
• No One Killed Jessica
• Dhobi Ghat
• Saat Khoon Maaf
Source: Company, Jaypee Research
UTV amortises about 60% of the cost of production of a film in the year of release, followed
by 10% of the cost in each of the next 4 years.
De-risking box-office performance of movies
UTV sells the satellite and music rights of movies prior to the release of the movies. These
revenue streams such as home video rights, cable and satellite rights, music rights, mobile
and internet rights, film advertising and merchandising contribute about 30%-50% of the
total revenues, depending on the type of the film and its performance at the box office.
Through such pre-selling UTV recovers the cost of producing the movies, at least partially,
thereby de-risking the box office performance of the movie.
Studio approach reduces dependence on few successful films
UTV has adopted the studio approach for movies production wherein it produces and
distributes its own films across genres. Thus at a time, it produces a number of projects with
different budgets. The company does not plan to pursue the acquisition-focused model,
wherein films made by third-party producers are acquired for distribution by paying a
minimum guarantee.
A diverse mix of films spanning across various genres, a range of budgets and targeted at
different audiences reduces the dependence on few successful films. UTV is also actively
involved in films co-produced by other production houses, right from the inception in
scripting and production-related activities.
UTV has created a separate sub-brand, UTV Spotboy, which produces small-budget films
with unusual storylines targeted at the urban multiplex audiences.
Movie segment - largest contributor to revenues
The movies business is the largest contributor to revenues with 49% share in the total
revenues during 9MFY11. During the first 9 months of FY11, the movies segment reported
an increase of 28% in revenues to ` 3391 million from ` 2649 million in the same period of
last fiscal. We expect the percentage contribution to revenues to go down with UTV’s
broadcasting and gaming segments showing a growth in revenues.
In addition to the movie releases during 9MFY11, income was realized from (a) the satellite
revenue for Raajneeti, (b) syndication from the sale of rights of catalogue titles and (c)
revenues from the Hollywood slate.
FY11 started strongly with the release of Raajneeti emerging as the fourth biggest
blockbuster in the history of Indian cinema, and the positive trend continued with an even
stronger second quarter, putting UTV well ahead of the competition both in terms of
number of movies released and revenue. UTV is poised for continuing success for the coming
fiscal with a strong pipeline of films.
Going forward, the company plans to produce and release 12-15 movies of varying budgets
per year. To avoid lumpiness, UTV has scheduled the release of its movies consistently across
all quarters and plans to do so in the coming years also. Being the largest player in the
industry, we expect UTV to benefit from the growth opportunities in the movies business.
Growing number of multiplexes have resulted in wider release of films on the day of
theatrical release, thereby increasing the box-office collections phenomenally. Also the,
growth in ancillary revenue sources such as sale of Cable & Satellite, home video, music and
digital rights would further add to the revenues and profits, particularly since UTV would
have a larger number of movies in its kitty to exploit.
Considering the above factors and the robust movie pipeline of UTV we expect the revenues
from the movies segment to grow at a CAGR of 30% over the next 3 years to touch ` 6069
mn in FY12E.
Youth oriented TV channels gaining viewership
Constituting 37% of total revenues during 9MFY11, UTV’s television segment includes the
broadcasting business and television content business.
UTV forayed into the television broadcasting business in FY08 through UTV Global
Broadcasting Ltd, in which UTV holds an 85% stake with Walt Disney holding 15%. UTV has
identified the youth as its target audience for its broadcasting segment. All four channels in
its portfolio - UTV Movies, UTV World Movies, Bindass and UTV Action – have a definite
target audience, mainly the youth audience. This strategy has been successful for UTV as its
channels’ viewership has seen a steady improvement, with most of the channels competing
closely with leading channels in the respective categories
All four channels have turned profitable in Q1FY11. We expect the broadcasting business to
post strong performance during FY11E and FY12E on back of increasing advertising volumes
and inventory utilization.
UTV’s channel share - defined as the market share of UTV’s channels in genres where it is
present - has been consistently increasing, indicating the growing popularity of its channels.
All of UTV’s channels are ranked among the top five in their respective genres.
DTH penetration to drive subscription growth
The digitisation of TV platforms has given way to more transparent distribution of revenues
for stakeholders in the value chain and more bandwidth becoming available to broadcasters,
giving them the opportunity to provide value add services. This could boost the availability of
niche content in the future.
The advantages of DTH as a platform include a user-friendly interface and a large no of
channels as compared to the analog platform. It is likely to continue to increase penetration.
DTH was one of the biggest contributors to the digitisation story. DTH has displayed rapid
growth to reach 20 million gross subscribers by the end of 2009. The number of subscribers
excluding the churn stands at 16 million. Going forward, the amount of churn is expected to
be at least 3% to 5% of the overall DTH subscriber base per month. By 2014, the DTH
subscriber base is expected to reach 43 million.
Also, many DTH subscribers are coming from states with class 2 and 3 towns and not just
metros. For example, in Rajasthan and Maharashtra, the platform has found acceptability in
a lot of small towns and cities. In a state like Assam, where cable is difficult to install due to
the mountainous terrain, DTH is gaining strong ground and reached a growth rate of ~25%.
Steady growth seen in TV content
UTV is one of the largest players in the television content space. The TV content business
comprises production of content for channels across the GEC (General Entertainment
Channels) space and sale of airtime on channels.
The television content segment is a steady growth business with relatively low margins and
low costs, which lends stability to UTV’s operations. The TV content business model does
not require high upfront capital expenditure. This, coupled with maturity of the business
itself, enables UTV to enjoy high return on investment as compared to its other business
segments. The TV content division saw a total investment of ` 322 mn as of March 2010,
which is 1.85% of total capital employed. ROCE in this segment stood at 10% in FY10.
The Company currently has strong slate of shows on air with 5 new shows launching in Q4
including Maa Exchange (Sony) (on air), Dor (Star Plus), Kadmambari (Zee Marathi), among
others.
Quasi broadcaster to Sun TV
In the airtime sales, UTV generates advertising revenues by selling airtime on various
channels on Sun Network by showcasing programmes created and aggregated by UTV. On an
average UTV sells 125 hours per month of air time on Sun Network. Currently, its shows
enjoy the number one position on Sun TV and Surya TV. Its association with Sun Network
gives UTV the access to regional markets which are the fastest growing advertising markets.
Currently the Air Time Sales business division has 12 shows running across the South
channels with 8 of the 12 shows among the Top 5 programs its respective genre and
channel.
Gaming and interactive business set to surge
UTV has made significant investment in gaming (market size of USD 60 bn) by taking stakes
in Ignition (console gaming), True Games (internet gaming), and Indiagames (mobile
gaming). We expect the gaming business to report strong growth once the AAA titles
developed by Ignition for PS3 and XBOX 360 are released during FY12 along with new
launches which have been lined up by True Games. While Indiagames has turned
profitable in Q2FY11, True Games is expected to break even by the end of FY11E. The
gaming division posted revenue of ` 950 mn in FY10. We expect a significant boost to the
segment’s performance during FY12.
El Sheddai to be released in April 2011
El Shaddai, a third person action adventure game developed out of UTV Ignition Japan’s
studio received an award for the “Best Future Game” at the Tokyo game show. UTV is
actively negotiating for a multiple of merchandising/ licensing / co-branding / co-marketing
deals - where the commercials include (a) Minimum Guarantees, (b) Revenue Share, and (c)
Advertising & Marketing Support. UTV has finalized two such arrangements with, viz;
1. “EDWIN” - the number 1 Jeans company in Japan
2. “Bandai Toys” - the number 1 Toy company in Japan
In addition the game has potential to generate ancillary revenues from ‘motion picture’
rights. The Game has 50-60 minutes of graphics - backed by a strong storyline for a motion
picture.
Superior graphics enable premium pricing over competitors
Most AAA games retail for around USD 60 per unit, but due to (a) the highest quality of
graphics, plus (b) the pre buzz in Japan and (c) supported by Sony and Microsoft, and (d) a
strong Yen - El Shaddai will retail in Japan as close to USD 81 per unit, giving boost to UTV’s
overall commercials albeit for the Japan market, which is an important market for a game
like El Shaddai.
El-Sheddai’s distribution strategy to optimize sales in Japan
The company has decided to break its Publishing and Distribution Strategy in four key
geographies (a) Japan, (b) North America, (c) Europe (including UK), and (d) Rest of the
World. In Japan, backed by a healthy retail price and a strong support from the platform
owners, UTV Ignition has concluded partnership with Sony and Microsoft jointly. In Japan,
Sony has 3 times more PS3 installed than Microsoft’s Xbox 360. Microsoft is also aggressively
growing their presence in Japan. UTV’s partnership with Sony will give it (a) Maximum retail
support, (b) Strong marketing spend, (c) Highest share per unit compared to any other
Publisher it would have gone with and they will push on their PS3 platform. Similarly, the
same arrangements and benefits with Microsoft, and they will push on their Xbox 360. With
this strong support and marketing push from these platforms, the combined sales are
expected to cross 500,000 units in Japan alone.
Supplementary revenue streams in UTV TrueGames
Truegames, UTV’s online gaming subsidiary, is expected to generate additional revenues
from the expansion packs for its existing games. Expansion packs increase a game’s longevity
and momentum. In addition Truegames is also planning to incorporate supplementary
revenue streams through In-Game advertising and licensing/merchandising deals. It has
recently signed a million dollar licensing deal for South East Asia territories with Yamaia
Limited. Its last online game released was ‘Mytheon’.
UTV Indiagames - Market leader in mobile games in India
Indiagames, UTV’s mobile gaming developer is a market leader in the mobile gaming market
in India. It has expanded its footprint in games to DTH, Online and iPad/iPhone ++.
Indiagames has signed a deal with Reliance Big TV, the Direct-To-Home (DTH) arm of
Reliance Communications, wherein it will offer gaming services on Reliance Big TV’s DTH
platform in India. Indiagames will make available eight games on BIG TV DTH, for a
subscription fee of ` 30 per month.
Innovative offerings made by Interactive & new media
UTV provides various innovative media offerings through its Interactive and new media
segment. It is a pioneer in ‘made for mobile content’. UTV Audio Cinema already has 3.5
million subscribers and earns consumer spending over ` 5 Cr/month. UTV Powered
Vodafone Mobile Box Office is one of the fastest growing subscription services in Vodafone
VAS (value added services). UTV launched celebrity live interactive voice chat service
through Airtel’s Talk To Me (TTM) product. It has also launched the celebrity voice blog
service and has acquired digital rights of leading Bollywood and Southern Cinema celebrities
for 2 to 5 years e.g. Priyanka Chopra, John Abraham, Lara Dutta, Ileana D'Cruz and
continually adding more to its repertoire. It has established itself as key player in the short
format video content and has entered into long term partnerships with leading Telcos to
provide consumers ‘Made for Mobile’ content. Being a pioneer in the business, UTV is in the
best position to exploit the opportunities presented by the changes in consumption pattern
due to the advent of 3G and 4G.
Company background
UTV is an integrated entertainment company with three distinct business verticals -
Television, (includes broadcasting and content), Gaming & Interactive and Films.
Movies production and distribution
UTV’s Movies business includes production, marketing, distribution, merchandising and
syndication worldwide. It has Hindi movies, animation films, international productions and
co productions across genres in its large portfolio. UTV is associated with renowned film
makers, directors and actors who have proven their mettle at the box office.
Television content
UTV was one of the earliest players in the television content space, and over the years has
produced a number of shows on a commission basis across various genres. UTV’s content
segment produces shows across channels like Star Plus, NDTV, Zee Network, Sahara Network
and Sun TV offering a host of genres such as drama, comedy, regional themes, fantasy,
action, horror, mythology and children’s shows. UTV is a quasi broadcaster in South India for
channels across the Sun TV Network. In the airtime sale business, the company acquires
airtime (mostly on South Indian channels) and sells commercial slots to advertisers.UTV has
clocked over 10,000 hours of air time sales across diverse genres on various channels. It’s
dubbing division has provided dubbing services for channels across genre.
Television broadcasting
UTV entered the broadcasting business in Sept 2007 with a clearly differentiated strategy of
having a strong targeted audience for each of its four channels. It is also clear about not
entering the GEC (General Entertainment Channel) space. It also plans to enter the Indian
regional languages space through its brands ‘Bindass’ and ‘Action’.
UTV Ignition
UTV Ignition is a developer & publisher of handheld and console games. Having a wide
customer base across UK, Europe, Japan and North America, Ignition develops, publishes and
distributes console games across multiple platforms like Sony's Playstation, Microsoft's X Box
and the Nintendo range of consoles. It currently has three AAA Titles under production - El
Shaddai, Project Kane and Reich.
UTV IndiaGames
UTV in 2006 had invested ` 68 crore to acquire 51% stake in Indiagames, which it further
increased to 58%. Indiagames is one of the major players in the Indian online and mobile
gaming segment and has a market share of around 50%. The company’s Games on Demand
subscription model has a base of 60,000 users. It is one of the three firms from India to have
logged a million downloads on Nokia’s Ovi store. It also has an exclusive Games channel on
DTH Reliance Big. Its game ‘Bruce Lee’ is amongst the top10 games on iPad / iPhone – across
USA, UK, Japan and EU.
UTV Truegames
UTV True Games Interactive Limited based in California is a massively multiplayer online
(MMO) games company with free-to-play micro transaction based model. It has three games
in pipeline - Faxion, Sky Legends and Planet Crashers.
New media and Interactive
The Interactive segment contains various products and services including portals such as
techtree.com and services such as distribution of movies and music based products on
mobile such as RBT/ CRBT, Wallpapers, Audio Cinema, Celebrity voice blogs, etc.
Walt Disney’s strategic stake
Walt Disney Company SE Asia has a 56.67% strategic shareholding in the company. However,
as per the agreement between Walt Disney and the promoters, Walt Disney’s voting rights
are capped at 32.1% for a period of 4 years from the date of completion of the open offer
(November 2008). Walt Disney has 3 nominee directors on UTV’s board. The association with
Walt Disney benefits the company, as it targets international markets in the gaming and
films segments.
Media sector in India
Media & Entertainment industry in India is indicating potential for growth
The Indian media & entertainment industry is at a nascent stage and is not as evolved as the
industry in developed nations. Media spend in India as a percent of GDP is 0.41%. This ratio
is almost half of the world’s average of 0.80% and is much lower compared to developed
countries like US and Japan. This indicates the potential for growth in spends as the industry
in India matures. With the increasing brand‐consciousness and purchasing power of the
Indian consumer the spending gap between India and other countries is likely to get
narrowed.
Ancillary revenue streams reducing risks in movie business
Several ancillary revenue streams have been provided by the evolution of digital technology.
Filmmakers are delivering film‐based content like music, videos, images and games on
mobile phones and the internet. Releasing movies on the DTH and cable platforms through
‘Pay Per View’ services soon after the theatrical release also helps filmmakers in monetizing
their movie content. Releasing films on the internet is another trend adopted by filmmakers.
Depending on several factors like the box office performance, direction, production house,
cast, etc. such ancillary revenue streams contribute about 30% to 50% of the total revenues,
thereby recovering the entire production costs. So the box office revenues entirely add to
the profit of the movie.
Digital screens and increasing number of screens facilitate wider release of movies
Digital prints have enabled distributors to release a large number of copies at the same time,
thereby allowing producers to capture revenues outside urban areas and recover their
investment more quickly. This is expected to have a positive impact on box office revenues,
as the maximum box office collection is earned during the first week of release of the movie.
The total number of digital screens in India is currently estimated at over 3,000. Digitization
reduces incremental distribution costs as cinemas upload films to computer hard drives,
thereby eliminating the need for physical prints to be produced and delivered. Increased
digitisation of single screen theatres is also helping the regional film industry in terms of
wider release and the opportunity to capture theatrical revenues within shorter windows.
TV industry to have larger share of ad-revenue pie by 2014
The contribution of Television to the overall revenues of the M&E industry has gone up
considerably in 2009 as compared to 2006 and is expected to continue increasing and
achieve almost 48% of the total revenues in 2014. On the other hand, the contribution from
sectors like Films, Print, Music and OOH has come down in 2009. Going forward, it is
expected that the contribution from Films and Print may come down further in 2014, as the
overall size of the M&E industry continues to grow. Television is expected to grow at a
higher rate of 15% over next five years compared to an almost 9% growth in both the Films
and Print sectors.
Overall the industry grew from ` 241 billion in 2008 to ` 257 billion in 2009 recording a
growth rate of 7% compared to 14% last year. It is expected to reach a size of ` 521 billion in
the next 5 years i.e. by 2014 at a CAGR of 15.2%. The growth in advertisement revenues is
expected at a rate of 15.6% which is marginally higher than the subscription revenues
growing at a rate of 15%.
Digitization and increasing number of TV households to spurt subscription
revenues
TV penetration is increasing with the growth in the number of TV households. The number of
TV households grew at a rate of 5% to reach 129 million in 2009 compared to 123 million in
2008. The penetration of TV in the country grew from 56% in 2008 to 58% in 2009. Currently
TV penetration in India is much lower as compared to some of the developed markets which
are almost fully penetrated. Hence, the numbers have potential headroom for growth.
The penetration for Cable & Satellite (C&S) households increased from 70% of total TV
households in 2008 to 74% in 2009. The overall number of C&S households reached 95
million registering a growth of 10%. A large part of this growth came from the digital homes
being added.
Different genres in TV content also garnering TRPs
More than 50% of the viewership share in Hindi speaking markets (HSM) is dominated by
Hindi GEC and movies combined. However, in the South Regional GEC alone captures close
to 50%. Given the fatigue factor that had set in with similar serials being aired across
channels, TV producers try to innovate with novel concepts like reality shows, game shows,
etc. Reality shows like ‘Emotional atyachar’, ‘MTV Roadies’, etc are gaining popularity among
the youth.
Gaming scenario in India and world over
According to the Game White Paper 2010 (Ministry of Culture‐Korea), the global gaming
market is expected to grow at a CAGR of 7% to reach USD 143bn in 2012 from USD 117bn in
2009. The mobile and online segment is expected to grow at a CAGR of 16% and 17%
respectively over the next three years, mainly driven by the growth in Asia‐Pacific region,
particularly China and Korea.
Overall, the Indian gaming industry is expected to grow at a CAGR of 32% between 2009 and
2014 to reach ` 31.9 billion by 2014. Driven by factors such as a young population, rising
disposable incomes, increasing PC and wireless users, progressive distribution models
gaming companies across the segments are provided with a market opportunity to co‐exist
and collectively grow the audience for their respective businesses.
New media
The role of the new media is becoming increasingly important in the distribution portfolio of
advertisers. New media is bringing about a revolution by merging the functionalities of
customer end terminal devices like TV, PCs, Mobile phones, etc. For example, IPTV, online
newspapers and magazines, podcasts, Wi-Max, new video formats, internet streaming, etc.
are technological advancements leading to convergence of two or more media into a
converged communication channel. This creates new and exciting methods of monetising
content and attracting new media consumers. The advent of 3G is likely to be a great
catalyst to the convergence phenomenon by making the mobile phone a very handy tool for
accessing video and audio formats. This has increased the number of entertainment and
information delivery choices available to consumers and intensified the challenges posed by
audience fragmentation. The launch of I-Pad provides a new delivery platform for news,
entertainment, etc. in future. We are likely to see more content being customised for these
new portable devices compared to the traditional stay-at-home devices. We are also likely to
see emergence of new models for advertisement and subscription revenues.
Key risks
• Movies production is inherently risky business. It is difficult to predict the success of a
movie. Poor performance at the box office of UTV’s movies successively would adversely
impact the overall movies revenues and margins. It would also exert pressure on
working capital and the planned funding of the upcoming film slate. However, with UTV
pursuing pre-selling aggressively, there are lesser chances of making losses.
• Movies piracy, including digital and internet piracy which is rampant in India, may
decrease the revenues from theatrical exhibition of movies.
• Increased competition in TV broadcasting may lead to UTV paying higher carriage fees
for its existing & planned new channels, impacting margins significantly.
• Any decrease in the viewership share of UTV’s existing channels would adversely impact
advertising and subscription revenues.
• The lack of transparency and under declaration of subscription revenues in case of
analog cable systems has traditionally been a challenge for the broadcasters.
• UTV is a comparatively new player in the gaming business. It faces severe competition
from companies across the globe. This may lead to longer break-even period. However,
the MG contract for its upcoming game El Sheddai mitigates its risks.
Q3FY11 – Result Review & key developments during the quarter
• UTV reported Net Revenues of ` 2551 mn, growth of 18% Y-o-Y, with Movies
contributing 42%, Television contributing 40% and Games and Interactive contributing
18%.
• The EBIDTA for the quarter at ` 534 mn, has shown a growth of 42% Y-o-Y, with the
EBIDTA margin at 21%.
• Net profit after minority interest stood at ` 400 mn, a decline of 6% on Y-o-Y basis on
account of deferred tax write back of ` 143 mn in Q3FY10. The PAT margin for the
quarter was 16%.
• In Q3FY11, the movies business earned revenues of ` 1076 mn. During the quarter UTV
has released two movies - Guzarish and Tees Maar Khan. In addition to box office
revenues from movie releases, UTV has earned revenues from sale of satellite and audio
rights for Guzarish and We Are Family. UTV has sold the audio and satellite rights of
Tees Maar Khan for ` 300 m, which will be booked in Q4FY11. EBIT margin of the movies
segment has come down to 25% from 40% in Q3FY10, owing to the losses made in
Guzaarish.
• UTV plans to venture in the South Indian languages’ movies production to further
expand the UTV brand.
• The television business continues to perform well and earned revenues of ` 1016 mn,
growth of 14% Y-o-Y. There is a significant improvement in the profitability of the
business with EBIT for the quarter at 20% (5% in Q3FY10) at ` 207 m (` 48 m in Q3FY10).
• With all its brands currently doing well and the flagship brand Bindass having good
headroom visa-vis MTV, UTV is looking at increasing its ad-rates for its broadcasting
business by 25% to 30%. It also plans to enter the Indian regional language space in the
broadcasting business over the next 3-6 months either through the brand name of
Bindass or through the brand name of Action.
• The gaming and interactive business revenues for the quarter stood at ` 459 mn and the
EBIT stood at ` 106 mn, with the EBIT margin at 23%. With planned release of El Sheddai
(AAA IP title) (Ignition) and launch of three new MMOG Games (massively multiplayer
online game) (True Games), the current calendar year is critical for UTV’s gaming
business.
• UTV will be releasing El Sheddai on 28 April 2011 in the Japanese market, just before an
eight-day week called their golden week which is equivalent of the Chinese New Year in
China. UTV has entered into a partnership with Sony and Microsoft for distribution and
marketing of the game in Japan. It has locked in a minimum guarantee (MG) of USD 10
mn with two Japanese companies as a part of a merchandizing agreement. Of the MG of
USD 10mn, UTV has booked revenues to the tune of USD 5 mn in Q3FY11 and
operational costs to the tune of USD 2.5-3 m for the game. The remaining USD 5 mn will
be booked in Q4FY11.
• During the quarter the company has merged the entire operations of its online gaming
businesses, bringing about location consolidation. So its three different operations for
publishing games on the west coast, a studio on the East Coast and the MMOG play in
Austin are now all consolidated in one place in Austin. This has brought about an
annualized cost savings of between USD 3-4 million.
Financial Analysis
Revenue to grow at a CAGR of 46% over FY10‐FY12E
We expect revenues to grow at a CAGR of 46% over FY10‐12E to reach ` 14202 mn in FY12E
from ` 6641 mn in FY10. We expect the revenue growth to be driven mainly by higher
contribution expected from games and interactive segment with the launch 3 AAA games,
which will improve contribution of games segment from 16% in FY10 to 21% in FY12E.
EBITDA margins to improve to 26% in FY12E
With the investments in broadcasting and gaming & interactive segments starting to pay off,
we expect the EBITDA margins to improve to 26%. We expect the EBIDTA to grow to ` 3695
mn in FY12E from ` 473 mn in FY10.
PAT set to grow at CAGR of 41% during FY10-FY12E
We expect the PAT to grow at a CAGR of 41% in the next three years to ` 1877 mn in FY11E
and ` 2268 mn in FY12E.
Valuation methodology
UTV has a unique business model with diversified revenue segments. We have valued UTV
Software by using Sum‐of‐the‐parts valuation (SOTP) method to arrive at the real value of its
individual businesses by trading multiples appropriate for that particular segment. Based on
the individual business segment's growth and profitability vis‐à‐vis its peers we have used
relevant multiples for valuation.
Outlook and Valuation
We assign a value 9x EV/EBITDA for its Movies business, which is at a marginal discount to its
domestic peer group average of 9.5x FY12E EBITDA. Considering its niche positioning and
focus towards youth segment, we believe that the TV broadcasting business of UTV would
be performing better. However, we still assign a sales multiple of 2.5x to the broadcasting
business, a small discount to the other Indian broadcasting peers considering that it is not
present in general entertainment channel segment and the growth of regional market
segment. We value the gaming business at 2.5x EV/EBIDTA, at a discount to its global gaming
companies average of 7.4x considering the execution risks involved, UTV being a new
entrant. We have valued TV content business at 8x EV/EBITDA, a significant discount to Balaji
Telefilms (market leader in TV production segment) EV/EBIDTA multiple of 13.9x. We have
valued New media and Interactive business at 2x EV/Sales at a discount to industry average
3.6x EV/Sales multiple.
We initiate coverage on UTV with BUY rating and SOTP based target price of ` 629, implying
an upside of 25% from its current price.
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