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UTV: A long-term pick
Arun Rajendran in Mumbai
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February 21, 2005

Amid the hoopla of big budget initial public offerings, the IPO from integrated media and entertainment company UTV Software Communications [Get Quote] may not generate too much excitement.

For starters, the company hopes to raise only Rs 80.5 crore (Rs 805 million) to Rs 91 crore (Rs 910 million) to part-finance its plans to expand business. The IPO includes an offer for sale of 24.99 lakh (2.5 million) shares by CPQD, a Canadian private equity investor.

UTV has been behind the production and/or distribution of Hindi movies like Lagaan, Mission Kashmir, Chalte Chalte and Lakshya and the recently released Swades apart from serials like Shanti and Shakalaka Boom Boom.

One can dissect UTV's business into three sections: television, movies and allied content and services. The television business includes content production (both fiction and non-fiction), animation and airtime sales.

The movie business comprises production and distribution. The broadcasting business, which is handled by associate company United Home Entertainment, primarily manages the children's entertainment channel, Hungama, while allied content and services include making ad films and dubbing besides post-production activities.

Currently, television contributes around 40 per cent of UTV's revenues.

The fact that the television software business is expected to do well going forward is a clear positive for UTV.

Analysts expect the content industry to rise to be a Rs 550 crore (Rs 5.5 billion) one and UTV -- being a player catering to different genres of programming - is likely to be one of the key beneficiaries.

UTV's film production arm was recently in the news for its partnership with Fox Searchlight for Mira Nair's forthcoming film The Namesake based on the popular novel by Jhumpa Lahiri.

It will also produce the Aamir Khan starrer Rang De Basanti, to be directed by Rakesh Mehra. The company has also acquired distribution rights of 130 titles from international movie house Miramax Studios, which boasts of a number of English movie hits.

Besides, it has tied up with the Star Group to produce two movies by March 2006 and has recently taken steps to integrate its movie making business, from production to distribution.

"This help us realise a better price for our movies than what distributors would normally pay us after production," says Ronald d'mello, chief investment officer, UTV. d'mello adds that the diversified nature of movie projects means that the division would more than break even, even if half of the movies produced by the company may not do well.

To move to the cons, the company has been witnessing a steady deterioration in EBITDA (earnings before interest, tax, depreciation and amortisation) margins.

EBITDA as a percentage of total income has declined from 22.48 per cent in 2001 to 12.56 per cent in 2004. The company says it maintained its margins around the 16-17 per cent level in the past and 2001 margins were an aberration due to the success of Fiza.

The present drop in EBITDA is attributed to setting up of its domestic and international movie distribution network. However, analysts are concerned about the lumpiness of revenue flows from the movie business and Hungama.

Pricing is another issue. Analysts feel that as per H1FY05 numbers, the company has an annualised EPS of Rs 7 per share which, taken at the upper band of Rs 130, would translate into a P/E of around 19x.

This would put it on a par with the likes of Zee and NDTV. They feel that given the prospects in the television, animation and movie production fields, the stock may be a good bet for the long term.

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