TV-18: Sell, especially on any uptrend

Recommendation: Sell, especially on any uptrend

S. Vaidya Nathan

THE performance of Television Eighteen (TV 18) in the first year of its listing has been a fairly dismal one.

The sustainable post-tax earnings stream for the October-September 2000 period declined by 82 per cent to Rs 0.74 crore (Rs.3.98 crore in 1998-99). Even this level of sustainable earnings was on account of a sharp spurt in `other income' from Rs 0.34 crore to Rs 4.27 crore. How much of the latter is sustainable is not clear at this point in time.

Of course, the company has taken the benefit of a windfall of Rs 16.18 crore, which came its way on account of interest on application money. The company's IPO, priced at Rs 180, was received well (it was the first significant IPO in the media sector after Zee Telefilms) and the high level of over-subscription led to a sizeable one-time cash flow for the company. This helped it portray a picture different from what the underlying numbers point to.

But for the spurt in `other income', the company may well have been in the red. It is this factor that was responsible for the pre-tax earnings reporting a healthy growth of 75 per cent, and a high outgo for tax of Rs 6.23 crore has cut into shareholder earnings in a big way.

Quite clearly, the company's profitability has been under stress. Though its revenues rose sharply by 80.85 per cent at Rs 31.67 crore (Rs 17.51 crore), the operating profit margins slipped sharply. A steep rise in operating expenses has cut into the profitability in a pronounced manner.

The company appears to have experienced major cost-side pressures -- personnel and programming costs seem to have risen sharply. To some extent, this may get neutralised in the coming years, as this was the first year when the company was scaling up its programming levels for CNBC India. But the steep fall is certainly a cause for worry and some of the profitability decline may last, given the intensity of competition in the industry.

To add to the stress imposed by lower operating profit margins, financial charges -- depreciation and interest -- have witnessed a sharp jump. Depreciation is up by 105 per cent at Rs 1.26 crore (Rs 0.62 crore) and interest charges by Rs 2.68 crore (Rs 2 crore). With a substantial tax outgo to add to the burden of higher costs, profitability at all levels has come under considerable pressure. The financial charges may be up on account of the support to joint ventures such as the one for CNBC India and its web ventures such as www.moneycontrol.com.

What the performance for 1999-2000 shows is that, as the company improves the scale of its operations, it is not necessarily going to add to the bottomline. The competition for personnel and with other channels may get translated into pressures on content providers. This may drive profitability levels lower across the industry and TV 18 may be no exception.

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The stock has declined close to 40 per cent in the last 10 trading sessions. Given the unimpressive show and doubts over Rs 4.27-crore of `other income', further downside risk appears imminent. Shareholders can pare exposures to the stock but track the company as it could turnaround to post a better showing, given its strengths in business programming -- a niche right now given its scale of operations, but something that could dissipate unless the company strengthens its position by improving constantly on quality.