Batlivala & Karani

CONFERENCE UPDATE

Media & Entertainment Sector

10th April 2007

We attended the 8 th Annual Convention FICCI-FRAMES 2007 organised by Federation of Indian Chambers of Commerce and Industry (FICCI), from 26th-28th March 2007 in Mumbai. The conference had representation from across the Indian Media & Entertainment Industry Broadcasting, Cinema, Radio, Animation, Gaming as well as abroad. Indian companies who participated include NDTV, TV Today, UTV, TV 18, Adlabs, Mukta Arts, Shringar Cinema, GBN, ENIL, Saregama, Cinemax, Inox and Crest Animation. The issues dealt with were of a wide range relating to: Challenges faced by various segments of the industry. Regulatory bottlenecks. New trends and technology & international experience.

Key takeaways of the convention:

Media & Entertainment sector expected to post a CAGR of 18% from current size US$ 9.7 bn to US$ 22.2 bn between 2007 and 2011. Channel pricing and non-exclusivity of content would deter growth of niche channels. Proposed Broadcasting Services Bill to bring about regulatory convergence, government assures that it will be progressive and industry friendly. Industry is concerned on the increasing government regulation for the sector. News genre getting crowded with too many channels, grown from 6 to 19 between 200203 to 2006-07. Lower than expected take-up of pay channels in CAS areas, a reason for concern for Broadcasters. IPTV (offered by VSNL & BSNL) could potentially provide strong competition to cable Government policy of single-licence-per-city policy, non-news content could inhibit growth of Radio business. Listed Media Companies in India
Company Sensex Adlabs Films Cyber Media Mid Day Crest Animation Cinemax PVR Prime Focus UTV Software Inox TV Today Pyramid Saimara
Source:B&K Research

CMP (Rs.) 13,178 412 92 40 93 126 179 481 287 111 123 281

MCap (Rs. mn) 16,394 915 2,024 2,099 3,520 4,102 6,107 6,564 6,645 7,117 7,947

Absolute Returns (%) 1m 3m 12m (8.4) 0.6 (8.3) (10.4) (15.4) (17.0) 16.8 4.9 1.6 2.8 5.1 (2.7) (9.9) (10.2) (29.9) (28.3) (33.5) (22.4) 17.9 0.9 (24.7) 33.9 (8.4) 2.4 (13.5) (54.7) (28.8) (44.7) 27.6 38.4 (49.9) 14.7

Company GBN Balaji Telefilms Zee News ENIL NDTV Wire & Wireless Jagran Prakashan TV 18 Deccan Chronicle HT Media Sun TV Zee Entertainment

CMP (Rs.) 571 128 39 335 324 86 365 638 145 177 1,548 268

M Cap (Rs. mn) 15,251 8,346 9,435 15,940 19,917 18,626 21,985 36,013 34,718 41,517 106,640 116,152

Absolute Returns (%) (x) (x) (x) (6.2) 8.0 (3.2) 2.0 14.3 (9.0) 9.9 16.4 (8.8) (8.3) (1.1) 18.0 (3.0) 20.4 8.5 10.3 5.8 (1.6) 0.7 3.2 (2.9) (30.8) 35.6 27.9 59.2 1.3 56.3 (63.7) 34.5

B&K RESEARCH Segment distribution of listed Media & Entertainment companies

Company Adlabs Films Cyber Media Ashtavinayak Mid Day Crest Animation Cinemax PVR Prime Focus UTV Software Inox TV Today Pyramid Saimara Balaji Telefilms Zee News ENIL NDTV Wire & Wireless Jagran Prakashan TV 18 Deccan Chronicle HT Media Sun TV Zee Entertainment Network 18 GBN
Source: B&K Research

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Broadcasting

Print

Radio

Film

Animation

TV Content

Exhibition

Others

The FICCI-PwC Report on the sector and the FICCI-Amarchand Mangaldas Entertainment Law Book were released. The draft framework of Optical Disk Law which recommends regulatory changes to address piracy as formulated by the high-power committee was also presented to the I&B Ministry.

Highlights of FICCI-PwC Report

Media & Entertainment sector to outperform economic growth by 2x
The Indian entertainment and media industry is expected to outperform broad economic growth by 2x, it is expected to post a CAGR of 18% between 2007 and 2011 from the current size of US$ 9.7 bn to US$ 22.2 bn by 2011. The front runners to this growth would be TV growing at 22%, radio at 28% and other media like animation, mobile gaming, internet, OOH and live growing at an average 22%. MEDIA & ENTERTAINMENT 2

B&K RESEARCH Media growth expected 2006-11 (CAGR)

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43% 28% 22% 13% 16% 4% Television Live Ent. Internet Ad. Print Radio Music OOH Film 17% 16%

Source: Industry Estimates and PwC

TV to contribute 51% of industry revenues by 2011

While TV is expected to increase its market share from 45% to 51% by 2011, the print medias share is likely to decline from its current 29% market share to 23% by 2011. Indias Ad spend still offers great growth potential, it currently constitutes just 1% of media spend in US which though has just 6% of world population accounts for 60% of worlds media & entertainment spend.

Individual share in Media & Entertainment Industry

2006 (US$ 9.7 bn)
1% 2% 2% 2% 19% 45%

2011 (US$ 22.2 bn)

2% 2% 1% 2% 1% 18%

Televis ion Print Film Radio Mus ic OOH Live Ent. Internet Ad.
29%
Source: Industry Estimates and PwC

23%

51%

The key takeaways of the conference were:

Increasing trend of regulation

Proposed Broadcasting Services Bill aimed at regulatory convergence for film, radio and television
In the 90s, the Broadcasting Industry had remained largely unregulated until the government passed uplinking guidelines and placed restriction on advertising in private channels. Uplinking was allowed only from outside India and Indian corporates were not allowed to advertise in the channel. After almost a decade later, uplinking of news had to be compulsorily be made from India and ownership in these channels were restricted to 26%. Subsequently, other areas like distribution were enveloped with the DTH guidelines. A film content code was developed, sharing of Sports feed with Prasar Bharti made compulsory, downlinking guidelines required each channel to register in India and obtain a licence. The government has increasingly looked at regulation and is now on the verge of unfolding the Broadcasting Services Regulation Bill which it aims would help regulatory convergence for the three media industries of film, television and radio. Though, the government reassured the industry that the proposed Broadcasting Regulation Bill would be progressive and industry friendly, industry is unhappy with the increasing trend of government intervention as opposed to measures to promote self-regulation. MEDIA & ENTERTAINMENT 3

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APRIL 2007 Restrictions placed on FDI/FII for investment in DTH & cable business seems unwarranted looking at the huge amounts of capex required ensure digitisation of networks. The government has clamped down on some channels, industry feels that the government has been selectively punitive and the code itself requires change as it is vague making it open to interpretation. Other directives on non-exclusivity of content and cap on channel pricing, makes the business model for niche channels unviable.

Excessive regulation unwarranted

Content code
Content code to be finalised with broad framework
The government clearly denied that it advocated moral policing and was instead looking at mechanisms which would encourage self regulation. Instances in which the government had stepped in were very extreme and rare. A committee has been setup to work on a content code which once finalised would lay down broad norms on which the broadcaster would self regulate content. It also proposed to setup a board for broadcasting and radio similar to Advertising Standards Council of India to address complaints.

Channel price regulation hindering growth of niche channels

The current cap placed on channel pricing and the must carry clause makes the model for niche channels unviable, as these channels have limited viewership in turn attracting less advertisers which makes the channel dependent on subscription. The governments motive behind the directive was to improve consumer choice and affordability prescribing a large volume and low margin model for broadcasters. Broadcasters believe that the model is feasible for popular channels but for niche channels it would not make sense, as there would be low viewership even if it is free. In such a scenario, television would remain largely dominated by three-four mass preferred genre with little or no variety.

Challenges in the News Space

Growth of News channels
2002-03 English Hindi Business Total 3 2 1 6 2004-05 4 6 4 14 2006-07 6 9 4 19

The news market has shown strong growth in the last four-five years, the market grew from Rs. 3,750 mn in 2003-04 to Rs. 8,500 mn now. During the same time, the number of news channels has also increased manifold, from a total of 6 channels in 2002-03 to 19 channels currently. With this deluge of channels, the market has become increasingly cluttered with lack of differentiation each revolving around the 4 Cs Cricket, crime, cinema and crisis. Panelists feel that some news channels in a desperate measure to differentiate were now adopting the role of a GEC by offering sensationalism and drama. The news segment is obviously facing the challenge of differentiating and need to move beyond the 4Cs.

Source: Industry

Government promoting growth of Digital Cinema

The government clearly showed its focus towards promoting wider media reach by facilitating digitisation of cinema and encouraging growth of new media delivery platforms. It is currently engaged in overhauling the Cinematograph Act to simplify the film certification process and give an impetus to the growth of Digital cinema. With this view certain recommendations have already been placed in the budget giving concessions to Digital cinema.

Digital cinema to get major impetus in the industry going forward

MEDIA & ENTERTAINMENT

However, there exists certain issue relating to Digital cinema due to which it has not been adopted widely in various other parts of the world. Internationally, Digital cinema technology has specifications as laid down by Digital Cinema Initiatives (Hollywood), which covers five 4

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APRIL 2007 broad areas of video compression, watermarking of content, file size, security standard and encryption. As the specs are demanding it has made the D cinema projectors very costly, for example in India it would cost upwards of 5 mn as compared to Rs. 1.5-2 mn for a normal projector. Though, the projection system is state-of-the-art but it often does not justify the gains realised from the setup, as a result very few theatres in India are using these projectors. In other countries like UK, Italy and China the government funds them while in Sweden a rental model is adopted. Proponents of D cinema in India have developed an alternate technology popularly known as E cinema which lowers the capital cost of the equipment. A developer UFO Movies offers these equipments on rental basis to theatres across India on a per show basis at a nominal charge of Rs. 200. These projectors are being used by ~525 screens in India primarily in non-A class theatres as there is some deterioration in quality. This technology has been immensely beneficial to exhibitionists firstly the low rentals making it affordable and secondly making it feasible to distribute films across many theatres leading to better collections. The only drawback apart from the slight lower quality is the non-availability of Hollywood movies in this particular standard despite this the technology is expected to widely adopted by Multiplex players for their future expansion plans across Tier II-III cities.

Multiplexes improving prospects for film industry

Better revenue flow encouraging alternate cinema subjects
Exhibition has in the last couple of years not only profited with the growth of Multiplexes but also created strong revenue flow for the producer making available funds for further investment. Movie content itself has changed which is now increasingly moving away from mass focus to niche. Movies like Khosla ka Ghosla, Being Cyrus, Namesake, etc. are exploring new subjects and are being widely appreciated by a large segment of the audience. Today, close to 30% of box office collections are contributed by Multiplexes fuelled by the success of such movies. Other sources of revenue like embedded advertising, sale of mobile/gaming rights, international distribution, merchandising, etc. are also playing a good support role for films. Apart from offering differentiated content multiplexes are employing innovative strategies like loyalty schemes, special screenings for children and senior citizens, free delivery of tickets, mobile/internet booking, gaming zones, etc., being used to draw footfalls. Some of the challenges facing the multiplex industry are project execution risks, rapid build up of competition and content inflation. With the market getting increasingly fragmented, the content providers would push for a higher share of revenues while digital theatres which are aiding wider release of films could further boost realisation for both exhibition and production houses. The number of Multiplex screens is expected to go up from 400 now to over 1,200 in the next five years. Some of the major listed players in India are PVR, Adlabs, Inox, Cinemax and Shringar.

MEDIA & ENTERTAINMENT

B&K RESEARCH Penetration of CAS C&S homes (stipulated) Kolkata Delhi Mumbai
Source: TAM (mid March 2007)

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CAS affect
In the pre-CAS scenario with channel bouquets on offer the consumer had practically little choice for selection of channels but now with the a-la-carte offering mandated by the government, a consumer can now evaluate whether a channel offers enough value to pay for them. As a consequence in CAS stipulated areas penetration of STB has been lower than expectation, consumers have opted for the FTA basic bouquet and not subscribed to pay channels denting viewership of pay channels. Channels that had turned pay and were planning to tap subscription revenue are now accessing whether to remain pay or shift to FTA.

28% 40% 30%

Distribution business
MSOs entered the distribution business a decade ago incurring high capex for setting up infrastructure for delivery to the last mile-cable operators. Despite the huge investments made, the business has largely offered low profitability. Squeezed by cable operators who under declare while broadcasters pressurise for lower declarations and raise bouquet prices. With another round of investments demanded by digitisation, MSOs have been once again caught in a perplexing situation, a legacy of high investments make the case for future investments but the governments directive on revenue sharing leaves little money on the table for them. The MSOs have as a result appealed for a share of the revenue from the basic tier fee originally stipulated for the cable operator.

Cable could face strong competition from IPTV

The competition emerging from distribution platforms like DTH and IPTV which involve disintermediation are another looming threat for cable. Apart from Dish TV and TATA Sky three more players Bharti, Sun TV and Reliance are also waiting to enter. IPTV services are currently being offered by two players BSNL & MTNL both having a wide direct reach to consumer homes. Though, full-fledged services have not rolled out, IPTV offers great potential both in terms of customer penetration and also as a superior service. It offers triple play and with its two-way pipe could offer the widest range of services as compared to cable or satellite. IPTV in many countries has not really taken off, primarily due to the already high penetration of cable/DTH in those markets; shift to IPTV offers no dramatic value against the cost involved.

User generated content USG

USG is the new buzzword which is not only changing existing business model but also creating new profitable opportunities. USG is a form of collaboration with the viewer where the service provider merely facilitates content creation, sharing and consumption. Some of the best examples are blogging, You Tube, social networking sites, Second Life, etc. allowing people to connect with a larger audience. A 24-hour television channel in UK called SUMO TV uses a continuous stream of USG. The process starts when a content originator creates video (through camera/mobile), the host processes/filters it and then uploads it on TV. The creator not only gets to place his creation on TV for mass consumption but also gets to share a part of the revenues. Some of the challenges being faced by USG are issues relating to IP ownership and effectively monitoring video piracy.

MEDIA & ENTERTAINMENT

B&K RESEARCH How SUMO TV works

Viewer generates content

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Upload on Sumo TV website

Revenue share with viewers User Generated Content

Processing (Tagging, Compliance, Video Quality)

Download via mobile/internet Viewers watch on TV

Broadcast edit (online by user)

Challenges in Radio content and licencing

Content differentiation possible only through consolidation of stations within cities
The Phase II of radio licensing which awarded 245 licences was successful largely due to the change of the fixed fee arrangement to the revenue sharing model. However, despite the progressive policy change, the industry is grappling with certain issues which could curb the potential growth in the industry. One of the major issues which could cripple growth is the lack of differentiation of content among players. Most stations play only music and even with music there is no differentiation as each one is focused to serve the masses. The industry feels that this has largely been a result of the governments policy of single-licence-per-city policy leaving players with little or no incentive to differentiate. Older players feel that it is the onus of news comers to differentiate and move away from the mainstream music while for new players it fails to make business sense. Multiple licenses awarded through beauty contest natured auction would have helped develop of content variety which would in turn help expand listnership and grow the market. The current size of the industry is Rs. 5 bn which is projected to grow by a CAGR of 28% to Rs. 17 bn by 2011. There are a total of 37 companies owning licences covering 87 cities across India. Currently, news is not allowed on Radio due to operational difficulty in monitoring content as radio though with mass reach but is much localised. The government has hinted towards allowing particular variety of news which once permitted, would be immensely beneficial to the industry reducing its dependence on music content. The government is also looking to further liberalise community radio service which it feels would help expand reach of radio in smaller under-penetrated pockets. With the proposed liberalisation the government expects the number of operational community radio licences to increase dramatically. Apart from issues relating to content, radio also faces challenge from other radio formats like digital audio broadcast (DAB), mobile & visual radio, Internet radio, hi-definition radio, satellite and IPTV among others, which could gain relevance in the coming years.

MEDIA & ENTERTAINMENT

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APRIL 2007 Among the major listed players in radio are ENIL with 32 stations, Adlabs with 45 stations and Sun TV with 44 stations. Adlabs has by far the largest number of operational stations at 14 while ENIL follows with 10 operational.

Animation with original IP?

Indian animation industry has endeavoured to offer itself as a cheaper creative destination; with this focus the industry has explored limited opportunity to create its own IP. Some of the questions arising from inward focus would be to understand who the target market would be; would the primary market be India or whether the IP should have international appeal. Some panelists were of the view that content should be designed keeping in mind the needs of the global buyers while others debated on whether it could be targeted towards Indian audience. With international successes like Japanese anime Pokemon which was created with own traditional style and was inwards driven. The challenge which lies in front of Indian animation if they were to grow into the Pixars or Disneys of the world, was whether they want to continue to view animation as a business and not as a creative endeavour which would encourage own style of story telling with use of Indian art forms. The Animation sector in India is currently estimated to be worth Rs. 11 bn this is expected to increase to Rs. 29 bn by 2011 growing at a CAGR of 22% over the next five years. Some of the listed players in animation are Crest Animation, Adlabs and UTV.

Mobile Television
Technology is enabling multiple distribution platforms for media consumption; one of the emerging platforms is Mobile. Clip casting, real time television is some of the service which offers tremendous potential and can revolutionize TV viewing. Though, these services look very attractive certain issue like spectrum allocation and terrestrial broadcasting are issues which need to be sorted out. Mobile TV is expected to be commercially available in India in the next two years. Nokia has tied up with Doordarshan for pilot testing of DVB-h technology.

B&Ks view
In the last few years the degree of choice available for the Indian consumers has increased manifold both in terms of content and also platform on which content can be consumed. Technology would further promote personal segmentation and mass customisation for consumers while traditional appointment viewing would slowly be replaced by time shift and play shift viewing. This change in media consumption presents both challenges and opportunities for the Industry. Technology will on one hand, reduce the cost of creating content encouraging competition and on the other hand threaten IPR. IPR diffusion would in turn challenge existing revenue streams from subscription and advertising in the midst of new emerging platforms like DTH, digital video broadcasting and IPTV, creating a new widow and markets for content distribution. For our universe of Media companies, we expect revenue CAGR of 24% with PAT growing at 34% CAGR respectively. Zee Entertainment is our preferred pick due to the resurgence in ratings for its premier channel and the potential growth which subscription revenue can offer, with increase in penetration of CAS.

MEDIA & ENTERTAINMENT

B&K RESEARCH Valuations

Price Company Adlabs Films Mcap EPS (Rs) FY08E FY09E 20.1 16.4 6.5 11.0 13.0 7.0 9.0 22.1 20.9 10.2 16.9 15.6 8.7 10.9 P/E (x) FY08E FY09E 20.5 22.2 49.8 16.2 49.1 17.6 29.8 18.6 17.4 31.8 10.6 40.9 14.1 24.6

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Mcap/Sales (x) FY07 5.6 3.7 7.1 2.4 15.4 3.8 7.9

Reco (Rs.) (Rs.mn) BUY 412 365 324 179 638 123 16,398 22,027 19,944 4,090 36,022 7,155

Jagran Prakashan MP NDTV PVR TV 18 TV Today Zee Ent. BUY MP BUY MP BUY

268 116,196

MEDIA & ENTERTAINMENT

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Sushil Sharma sushil.sharma@bksec.com Tel.: 91-22-4007 6222

Analyst Certification

Pratik Nowlakha pratik.nowlakha@bksec.com Tel.: 91-22-4007 6213

We, Sushil Sharma & Pratik Nowlakha, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities and issuers. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendation or view expressed in this report.

MEDIA & ENTERTAINMENT

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