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Suresh Krishnamurthy

INVESTMENTS in Balaji Telefilms can be pared down. Quite a few factors suggest that investors should consider reducing their exposures to the stock.

The stock price has gained significantly in the past six months beating the market by a fair distance. Investors, therefore, can utilise the opportunity to book profits in the stock and reduce the level of exposure to the stock.

At Rs 325, the stock of Balaji Telefilms is trading at a price to earnings multiple of 13 times its expected earnings for the 12-month period ended December 2001.

The valuation can be considered high because the extraordinary growth rate in earnings is unlikely to continue beyond the next quarter. In the past year, consistently high television ratings points for its serials across many channels translated into considerable margin expansion.

However, expansion in margins in the future is likely to be restricted. Even according to the company, quarter-on-quarter growth for the period ended December 2001 will be 15 per cent compared to 26 per cent in the earlier quarter. Restricted growth in margins for its existing portfolio of programmes is likely to be the future trend since the scope for increased revenues from commissioned programmes (the genre of programmes that contribute significantly to the company's bottomline) is generally less.

Beyond that, earnings growth will have to come mainly from fresh programming. Since fresh programming may or may not meet with success, earnings growth is subject to considerable risk. In addition, the continuing poor revenue inflow for television channels will eventually reflect in the earnings growth of Balaji Telefilms. Given this backdrop, it would be better to book profits and keep restricting the exposure to the stock.

In addition, cash flow from operations of Balaji Telefilms requires a close watch. In the year-ended March 2001, net cash from operations registered negative growth despite substantial improvement in revenues and earnings. While the performance on the cash flow front this year will not be known until later, such information is required to gauge the potential for future growth. As such, until such information is available, prudence dictates that exposure to the stock be trimmed and maintained within certain limits.

Suitability: The stock of Balaji Telefilms belongs to the media sector whose earnings growth is generally subject to a high degree of volatility. The stock, therefore, needs to be considered as a high-risk, high-growth investment option.

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