UTV Software Comminication Ltd

Snapshot

UTV Software Communications Limited operates in the verticals of Television,
Movies, Broadcasting, Gaming and New Media and is thus close to achieving the status of a 3600 media company. Walt Disney, which is a leading global player in the Media and Entertainment (M&E) Industry, holds 60% stake in UTV.

Quarterly Results ‐‐‐‐ Revenues in line and profits above our

Expectations

UTV declared its Q2FY10 results which were above our expectations on the
profitability front. The company reported revenues of Rs. 237.7 crores in Q2FY10 as against Rs. 170.9 crores in Q2FY09 a rise of 39.1% on a YoY basis and Rs. 115.4 crores in Q1FY10, a 106.0% rise on a QoQ basis. This was mainly because in Q1FY10 there was a standoff between Producers and multiplex chains and so there were no movie releases, whereas in Q2FY10 UTV had nine releases including three Disney productions as part of the exclusive distribution deal with Disney.

The company reported EBIDTA of Rs. 21.5 crores in Q2FY10 as compared to a marginal loss of Rs. 0.1 crores in Q2FY09 and a loss of Rs. 32.9 crores in Q1FY10.

The company reported net profits to the tune of Rs. 8.3 crores in Q2FY10 as compared to net profit of Rs. 25.1 crores in Q2FY09 a fall of 67% and a loss of Rs. 23.3 crores in Q1FY10.

Better revenues and higher profits lead to rise in the margins on the operating as well as PAT levels

The revenues of the company were higher due to a slew of movies being released in Q2FY10. The company also distributed three movies of Disney productions viz. The Proposal, Race to Witch Mountain and Up. The gaming segment contributed 25% to the revenues. The company had new launches picking up demand in the market, thus resulting in higher revenues.

The gaming segment has become EBIDTA positive in Q2FY10 generating margins to the tune of 17.1%. The movies segment which constitutes around 55% of the overall revenues has generated margins to the tune of 22.8% thus increasing the overall profitability of the business.

Out of the 5 business verticals, Broadcasting and New Media are still in the investment mode impacting the overall margins. Thus the company had EBIDTA margins of 9% and PAT margins of 4.4%.

Going Forward

In the TV content segment, other than the dominance in the air time sales space, the TV content production business will see shows on air from Q3FY10 combined with a thrust in programs produced in Tamil and Telugu languages as well.

In the Movie Segment, UTV has one major release expected in Q3FY10 as on date. The revenues for ‘Whats your Rashee’ which was released at end of Q2FY10 will be accounted for in Q3FY10. ‘Wake up Sid’ which was in the beginning of Q3FY10 has already been a huge success at the box office for which revenues will be realised in Q3FY10. Five more releases are expected in Q4FY10 which are all big releases for the year. The company has not realised the revenues from alternate streams for the movies released in the past year which is expected to be in Q3FY10. Thus the movies segment will continue to remain the major constituent in the revenues of the company.

In the gaming segment, the companies subsidiary, Ignition will be releasing its AAA titles on PS3 and XBOX 360 in Q3FY11. The company will also see continued growth through release of its “publishing” games while 3 of its big IPs are set to release in FY11. The online game to be released by True Games, Warrior Epic is still in “Beta” mode.

Valuation & Recommendation

At the current market price of Rs. 415 per share, UTV is currently trading at a PE of 12.0x FY11E and 6.9x FY12E EPS estimates, which looks quite attractive. However due to a slower than expected pickup in the New Media and Broadcasting segments and a slow pickup in advertisement spends across the industry we reduce our price target to Rs.556 per share (Previous Target Rs.600 per share). At Rs. 415 per share the stock is trading at a discount of 34.0% from our price target of Rs. 556 per share which is 16.0x FY11E and 9.3x FY12E earnings.

We recommend a BUY rating on the stock with a long term view.

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