(BSE: 532619 | NSE: UTVSOF | ISIN: INE507B01022)
Company Background UTV Software has transformed itself into an integrated media & entertainment company with a presence across the entire value chain. The company produces Indian and international films through its subsidiary UTV Motion Pictures Plc, which it recently listed at the Alternative Investment Market (AIM) in London by off-loading a 23% stake. It recently acquired Indiagames and Ignition to enter into the mobile and console gaming space and has re-entered into the broadcasting space with launch of Bindaas channel. It also plans to launch a total eight channels by FY09 across various genres. The company has a 225-seater animation studio and also produces television content.
Investment rationale Strong Indian and International movie slate We expect movies to be a major driver for the company going forward, both in the production and distribution space. We believe the company has struck a successful formula in terms of its movie production business both for domestic and international audience. UTV has removed the perception that movies are a risky business. It has successfully catered to all movies with budgets ranging from Rs 4-6 crore to Rs 15-20 crore and Rs 30-45 crore. The forthcoming movies in FY08 and FY09 cater to this range and the downside is protected in these movies as more than 30% of the revenues would come from selling the international rights, satellite rights, music rights, home video rights. Some of the forthcoming domestic releases are Goal, Jodha Akbar, Fashion, Welcome, Tarey Zameen Parr . The company expects to release more than 25 movies in next two years.
UTV is not only de-risking it movies business, but also geographies by foraying into international production of movies. It has recently produced Namesake and I think I love my Wife, which had reasonable success in the international market. It has strong relationship with international production houses like Walt Disney, 20th Century Fox, and Overbrook Entertainment which will help UTV build relations with production companies who can market the movies in international market and help UTV in long term to build the brand.
Interactive media to have exponential growth UTV forayed into the US$39 billion international gaming market through acquisition of Ignition and Indiagames. With this the company is present into the high growth mobile and console gaming segment, which has high synergies with the animation business. We expect the growth in console gaming to come in FY09 with the release of Waredevil , having development cost of more than US$18 million for Sony PS3. Last quarter the company also released the game Mercury Meltdown , on the Nintendo platform and has plans to develop few more games in coming years. UTV plans to enter the telecom VAS market through Indiagames, which is the biggest mobile game operator in India and operates in 67 countries,
In the interactive media the company also places its animation business and has Walt Disney as a strategic partner through which the company expects to get outsourced work. The current order book in the animation space is $11 million and the company has plans to produce three movies, one each with Porchlight and Will Smith, which the third is a home production.
Ambitious broadcasting plans After the success with Hungama TV, which the company sold in December 2006, the company has aggressive plans to re-enter the broadcasting space. It has already started two youth centric channels namely Bindaas and Bindaas Movies . It has further plans to launch another six channels by end of next year across genres. The company has already invested Rs 40 crore and plans to invest another Rs 360 crore in this venture. Since broadcasting is in investment space the company has yet not consolidated its financials with the parent company. It has further plans to divest stakes up to 40%-45% in this vertical through a strategic investor or partner. We expect this business to breakeven by FY10 and give diversification to the company.
Key Concerns Movies revenues are expected to be volatile depending on the success and failure at the box-office and timing of release. – Broadcasting vertical is expected to make losses for next two years and may mute numbers if the company decides to consolidate the same with itself. – Failure of the game Wardevil ($18 million development cost) from Ignition could dampen profitability for the company in coming years.
Financials UTV posted a top line of Rs 127.3 crore and bottom line of Rs 20.5 crore for H1FY08 against Rs 238 crore and Rs 46.33 during the entire year in FY07. The revenue in FY07 includes one-time income of Rs 27 through sale of Hungama. We expect the company to post a top line of Rs 382 crore and a bottom line of Rs 53 crore for FY08E with movies contributing more than 45% and interactive media 32% to the top line.
Valuations Given the various business segments in which the company operates, we believe a sum-of-the- parts valuation methodology is the best for the company. We value it at an Enterprise Value (EV) of Rs 19,832 crore, translating into a target price of Rs 820 with a 6-month time horizon.
Technical Outlook The stock has been trading above the 200-day simple moving average (SMA), which is at Rs 267. It was trading sideways for the last three weeks and we saw a bull candle this week with good volume. It strongly bounced from Rs 620 to Rs 700, touching a high of Rs 750 on good volumes. If the stock manages to close above the Rs 755 levels with good volume, we expect it stock to move further to the Rs 785 and Rs 805 levels very soon. On the downside, the stock has a strong support at Rs 620. The RSI momentum has began to show strength, which is another positive sign.
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