Mediaindustry Jan2011

SECTOR REPORT
PRIVATE CLIENT RESEARCH JANUARY 14, 2011
Ritwik Rai ritwik.rai@kotak.com +91 22 6621 6310
Indian Media Industry

Riding on two key macroeconomic factors, growth in consumption and increasing penetration of media, the Indian media industry is set to grow at a strong pace through the next decade and beyond. We build a case for 15% CAGR growth in Indian adex and Indian (broadcasting) subscription revenue growth of 16% CAGR. We believe that sector-level growth will be moderated at company-level by forces of inter-industry as well as value chain competition, which would place limitations on assumptions of value - creation that can be made in financial models. We zero-down on two critical qualitative factors that enable assumption of industry/ super-industry growth among media companies - monetization of assets (readership/ viewership), and bargaining power within the value chain to pick potential long-term outperformers within the space. We conclude that HT Media and Sun TV Network are among the best positioned companies on these counts and rate them BUY. While monetization theme remains strong in the case of Jagran Prakashan and DB Corp, we find valuations of these incorporating significant upsides. Monetization is also a strong theme in the case of IBN18, but risks are high in the company's execution of future plans. We initiate on Jagran Prakashan, DB Corp, and IBN 18 with ACCUMULATE rating. We initiate on ZEEL with a REDUCE rating as we think the competitive position of the company is weak in relation to valuation enjoyed. 1. Industry Topline Growth To Rescale Highs Topline growth in both broadcasting and print spaces will remain strong. Growth in advertising revenues is well under way, as indicated by recent financial results and management comments. Strong GDP growth, along with improving consumption growth, shall see advertising expenses re-scale old highs. As consumption growth strengthens, we believe India is set for a long-term adex growth of 14-15%. We believe print adex, as has been shown by historical growth rates, is likely to grow at a rates similar to broadcasters. Subscription revenues among television broadcasters are likely to remain on a high growth trajectory, as a result of value chain reorganizations, as well as rising digitization and higher C&S television penetration. We believe broadcasters shall register long-term growth rates of 16% CAGR for the next ten years. We note that print players shall register poor growth in circulation revenues as a result of intensifying competition.
Companies covered
n DB Corp n HT Media n IBN18 n Jagran Prakashan n Sun TV Network n Zee Entertainment

x
Valuation
CMP (Rs) Mkt Cap Ent. Value LT Sales (%) 23 18 23 18 14 16 LT PAT (%) 30 16 NM 38 20 16 ROIC (%) 42 15 -0.2 25 42 28 FY11E ROE (%) 35 14 -9.9 17 32 32 PER (x) 26.5 23.2 NM 19.6 19.0 19.2 FY12E PER (x) 21.4 20.5 57.0 13.9 15.6 17.5 FY11E PEG (x) 0.9 1.5 NM 0.5 0.9 1.2 FY12E EV/ EBITDA 10.6 12.1 30.5 7.4 9.7 10.2 Price Tgt 666 126 107 226 153 312 Up/ Reco Down (%) 32.8 BUY -4.2 REDUCE 17.8 ACCUMULATE 46.4 BUY 23.6 ACCUMULATE 22.4 ACCUMULATE
(Rs mn) (Rs mn) Sun TV Network Zee Entertainment IBN18 HT Media Jagran Prakashan DB Corp 502 197,631 191,858 132 128,633 123,513 91 154 124 255 21,454 36,165 37,345 46,286 21,737 36,305 36,809 46,048
Source: Kotak Securities - Private Client Research; Note: LT Sales, LT EBITDA and LT PAT growth refer to growth between 2010-2013
Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.
SECTOR REPORT
January 14, 2011
2.Competition a key factor - Monetization a Key Theme Over the past few years, competition within industry has increased meaningfully. While there have been significant readership/ viewership acquisitions in the past few years by new entrants, challenger's models have typically been poorly monetized relative to the incumbent. The monetization of challengers shall happen, to a significant extent, at the cost of the incumbent, and shall alter significantly, the growth profiles of industry players.
Monetization - Key lies with regional players, new entrants: Sun TV, HT Media, IBN 18
Although regional television channels enjoy viewership numbers of mainline Hindi GECs, they do not enjoy subscription revenues that are in line with Hindi GEC players. We believe that this is likely to change in the future, benefiting undermonetized players. Sun TV Network, with an all-regional bouquet and lower subscription revenues than Hindi peers, is one such play. We also find that IBN18's mass entertainment channels bring in poor subscription revenues relative to peer Zee Entertainment, which provides basis for the stance that subscription revenues of the company could rise sharply, and provide upsides. Among newspaper publishers too, monetization is a significant theme. Most publishers have expanded into new territories with significant spends in building up circulation and readership. Broad indicators show, for example, that a few of HT Media's newspapers (Hindustan, HT-Mumbai, Mint) are under-monetized relative to peers. With strong trends in readership, we think there is reason to believe the monetization will occur over time. This is the key reason for our bullish stance on HT Media. ZEEL's long history has enabled to develop strong subscription revenue streams. In time, as competition rises (and if average payments from cable homes do not rise), the company could see stagnation in a large part of its revenue pie. This is among our reasons for our non-sanguine stance on ZEEL. 3. Value Chain Key Determinant of Value Creation - Industry Concentration, Bargaining Power Key Indicators of Long-Term Performance
Broadcasting players beset with value chain issues, Sun TV stands out as exception
Three key participants in broadcasters' value chain - media buyer, content provider (for content - aggregating entertainment channels), and distribution partners enjoy high bargaining power in the scenario when number of channels has run up to over 500. The value chain of broadcasters is complex, and, with high competition, players will, as they have already, see escalating expenses on account of distribution/ content. We find that Sun TV is the only broadcaster positioned strongly in its value chain. Sun TV's markets are, in general, more concentrated than peers IBN18 and Zee Entertainment; Sun TV has greater exposure to the local media buyer (thus lower concentration at media buyer's end); Sun TV has significant say in distribution in certain areas - due to promoters' interests in distribution. Print players are less dependent on value chain partners - advertising revenue streams are better diversified among categories; newspapers typically compete with only 2-3 players within each city, and typically have a brand stickiness that is rare to find among broadcasters. Newsprint (key raw material for newspapers), however, remains a cyclical commodity that newspaper publishers' earnings are exposed to. Even so, we think that newsprint prices, affected thus far by sudden spike in price of raw materials (pulp) caused due to a natural calamity; have been factored well into estimates. We believe that newspaper publishers are, in general, in a greater possession of control on their value chains.
Print players: newsprint key issue
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
SECTOR REPORT
January 14, 2011
4. Growth Profiles of companies reflect our beliefs, HT Media and Sun TV top picks in the space.
Sales Growth (FY10-13E CAGR)
25% 20% 15% 10% 5% 0% Jagran DB Corp ZEEL HT Media Sun TV Netw ork IBN 18
Source: Kotak Securities - Private Client Research
PAT growth
35% 28% 21% 14% 7% 0% ZEEL DB Corp Jagran Prakashan Sun TV Netw ork HT Media
5. Valuations Reasonable, But Advice Selective Approach

Top Picks: Sun TV, HT Media
We believe that media's strong long-term story shall be manifest in players with two characteristics: 1/ under-monetized media assets (readership/ viewership), and 2/ strong bargaining power, helped by factors such as strong industry concentration, control over distribution, diversified media buyer base, and leading position. We contend that in stocks that carry these characteristics, predictability of the flow-through of the macro story grows strong and upsides to industry growth may exist. As such, these stocks are stronger candidates for buying into the media story of India.
SECTOR REPORT
January 14, 2011
INDIAN MEDIA INDUSTRY A STRUCTURAL GROWTH STORY

Media Story Tied with Indias Consumption Growth A significant stream of media revenues, that is, advertising expenditures is a function of consumption expenditures and corporate confidence/ profitability. Indias long-term consumption story remains intact private consumption is expected to quadruple in 2005-2025 (CAGR ~7% in real terms)1 led by strong growth in household disposable incomes. The growth in incomes is likely to be broad-based as well. In 2025, the deprived (population living below official line of poverty), is likely to reduce to 22% of the population down from 54% in 2005. India is likely to have middle/ upper income class that accounts for 78% of its population by 2025. (Source: McKinsey) As a large part of India's population moves into higher income brackets, consumer spends are more likely to be directed towards discretionary purchases, rather than staples; and branding shall be a key differentiator between producers - which implies that India as a purchasing class will be more brand-conscious, and advertising in India will accelerate. In the period 2000-2009, India's adex grew at a trend level of 4 percentage points above PCE growth. Were the present trend to persist, there is reason to expect adex growth of 15%+ in the coming decade, based on nominal PCE growth of 11%. Comparison With Peers Shows Potential for sustained growth As of now, Indias advertising expenses to GDP ratio is 0.4%, as compared with 0.8% for global peers as shown in the graph below:
Media Spends as % GDP, select countries
120% 90%
251
Per Capita Media Spends ($US)

491
343
60% 30%
4
27 UK US China Japan
0% India UK US China Japan World

India
Source: FICCI KPMG Report
Source: FICCI KPMG Report
As a result of the divide shown above, Indias advertising and media spends have been rising at a rate well higher than the nominal GDP in the recent past.
Growth, Advertising Expenditures
28% 21% 14% 7% 0% -7% 2010E
4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Media Planning and Buying, Arpita Menon
2009
SECTOR REPORT
January 14, 2011
Between 1996 and 2010, Indias adex has grown at an average rate of 15.7%. If we were to exclude the two exceptional years 1998 and 2009 (impacted severely by East Asian Crisis and the global financial crisis respectively), Indias adex has grown at an average rate of 18% - well above nominal GDP growth rates. n A Comparison with China: An examination of take-off (in adex) in the Chinese markets indicates that the trend of rising adex may show considerable acceleration, as consumption expenditures reach a threshold point. There is, therefore, merit in the belief that Indias adex growth in the next decade could be well above the past decades average of 15%.
Take-off of adex in India, Lessons from China
Source: HT Media Investor Presentation
SECTOR REPORT
January 14, 2011
Media Penetration Rising

An implication of poverty in India is relatively poor media penetration, which is likely to change considerably in future, as incomes and literacy levels rise. With increasing affordability, the consumption of newspapers as well as television is set to rise, leading to a larger advertising market and better ROIs for advertisers.
Media Reach over the yeas - Growth in Media Reach
(Figures in Lakhs) 12+ Population Any Media Any Publication TV (Any TV) TV (C&S) Any Radio FM Radio Cinema Internet Source: Vanita Kohli-Khandekar 2005 7780 5257 2913 4277 2102 1609 716 889 111 2006 8040 5441 3102 4378 2308 1699 852 868 122 2007 8243 5614 3155 4538 2553 1788 969 837 143 2008 8429 5745 3234 4674 2873 1804 1120 833 173
Low media penetration result of poverty, poor infrastructure
India's penetration of TV is well below global averages. We believe this is a result of poverty, and that penetration levels could rise significantly (up to 86% in 2020, see pay TV model assumptions later in the report), as population moves out of the deprived category and basic facilities (electricity, availability of cable and satellite) are made available to a larger population. A combination of low incomes and technology issues has led to Cable and Satellite (C&S) penetration in India being low. We believe this is due for a correction as new technologies, such as DTH and HITS improve affordability of C&S TV in rural areas.
India TV Penetration versus the ROW, C&S Penetration as % TV HH
120 90 60 30 0 India China HK Korea Brazil UK US Russia
Source: The Indian Media Business, Vanita Kohli-Khandekar
India pay TV (C&S) penetration compared with Global Peers

100 75 50 25 0 China UK India HK US Korea
Source: The Indian Media Business, Vanita Kohli-Khandekar Note: China and UK have a high proportion of viewers using terrestrial broadcasting
Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation
SECTOR REPORT
January 14, 2011
Enabling Factors in Place: Technology Getting Cheaper, Removing Bottlenecks Cable television investments in rural areas are difficult in so far as analogue cable distribution is concerned, as TV owning population is sparsely populated. For this reason, a large part of the rural population has been deprived of C&S TV. We believe DTH and HITS (Headend in The Sky) are technologies that can reduce the investments required in these areas. DTH companies report that a large part of growth witnessed in DTH subscriptions is coming in from rural areas. Combined with the investments discussed above, Indian DTH players have grown aggressively, proliferating DTH technologies while taking a loss on set-top boxes (sold at Rs 1500 on the average, against average cost of Rs 2500).
DTH: C&S growth with low capex
While HITS technology is yet to take off in a big way in India, there are considerable benefits that the rural/ sparsely populated areas can have from the technology. In order to achieve scale, DTH providers have also kept subscription rates low, which has led to strong take-up of DTH services even in low income and rural areas. As per Tam, DTH households account for about 35% of the total Cable and Satellite (C&S) households in rural India. We believe DTH shall continue to grow at a robust pace in India, leading to strong additions in C&S homes.
India: DTH Subscribers (mn)
60
45
30
15
0 2009 2010E 2011E 2012E 2013E
SECTOR REPORT
January 14, 2011
Regionalization to remain a theme across the sector

We believe that shift away from metros shall be a theme across both print and broadcasting players. With consumption growth being witnessed in smaller towns, these are receiving attention from the media buyers. While the per capita consumption from these towns is smaller than metros, the overall size of the pie is large, and incomes in non-metro towns are rising at a faster level.
Split of urban expnditure
Split of Urban Population Est All India Urban Exp (Rs Crs) 336,572 228,880 673,686
Non-metros seeing strong growth
Metro KUT ROUI
51,371,205 55,490,940 231,300,828
Source: Ernst & Young. Note: KUT - Key Urban Towns, ROUI: Rest of Urban India
Growth in household incomes

Estimated Per Capita Urban Cons Expenditure Metro KUT ROUI 65518 41246 29126 Average Growth (%) in Urban Household Income 21 25 23
Source: Ernst & Young. Note: KUT - Key Urban Towns, ROUI: Rest of Urban India
The higher attention has led to increasing spends on regional media, both in television and print advertising. We believe this trend would continue.
Genre-Wise TV Ad-Spends
2006 2007 24.5 26.4 7.1 19.1 10.1 5.8 4.7 2.3 2008 26.6 25.7 9.7 17.9 8.8 5.8 2 3.5 2009 28.6 25.3 12.2 17.7 7.2 4.7 1.7 2.5
Adex moving to non-metro, regional markets
Regional Channels Hindi GECs Sports News Doordarshan Cinemas/ Movie Channels Kids Others Source: FICCI - KPMG Report
20.9 26.1 7.2 17.7 15.5 6.1 2.1 4.3
Split of print Adex
Source: DB Corp Presentation
SECTOR REPORT
January 14, 2011
Near-Term Outlook Strong

Consumption, Adex Slowed Down Considerably, Estimates may be cautious; Upside Likely
Adex moves in line with consumption expenditures
FY 2010 saw significant slowdown in consumption expenditures in India. As can be seen from chart below, consumption expenditures in India have a strong bearing on advertising expenditures. Adex typically declines sharply as consumption growth decelerates below 5%.
Adex - Real PCE
Grw , Nominal Advertising Expense (LHS) 30% 24% 18% 12% 6% 0% -6% FY97 FY99 FY01 FY03 FY05 FY07 FY09E Grw , real PCE (RHS) 15% 12% 9% 6% 3% 0% -3%
Source: Company, Kotak Securities - Private Client Research
Projections of various agencies, CY2010

15% 12% 12% 9% 9% 6% 3% 0% Zenith Optimedia
Source: Company
12%
13%
Group M
FICCI-KPMG
Pitch- Madison
Return of double digit Adex growth in CY2010
Industry estimates point to a return of double- digit growth in advertising. We believe the estimates provided by media agencies for 2010 are likely to be beaten, and future growth is likely to be stronger - for if it is true that India is set to witness a sustained period of 8% growth, we are likely to see consumption expenditures grow by well in excess of 6%, and, with consumption expenditures robust, we believe the medium-term strength in advertising expenditures is likely to be 3-4 percentage points over the projections made. The following factors support an assumption of higher consumption growth in future: 1/ return of urban demand as fears of job losses subside, job creation begins, salaries rise (11%-12% growth expected in FY11, as per various agencies), and consumer confidence returns (2QFY11 PCE registered growth of 11%), 2/ wealth effect impacts on consumers, as real estate and financial investments approach peak values, and notional losses decline, creating a psychological boost, 3/ companies no longer hoarding cash as fears relating to capital availability have been removed. We note that our base case assumes that food inflation shall ease off in the next few months. AS such, inflation and rate hikes by RBI are risks to our base case, which we shall monitor.
SECTOR REPORT
January 14, 2011
Recent advertising trends point to a robust future. Media companies across print and broadcasting have raised advertising rates in 2010, and report a certain degree of pass-through, implying that the worst (in terms of advertising rates) is now past. The state of competition among consumer companies also point to a healthier future. We note specifically that Hindustan Unilever, Indias largest advertiser (largely broadcasting) has raised its advertising and promotional spends to a historical high, as a result of stiff competition being witnessed in the space. With volumes returning in some of the worst effected sectors (real estate, financials, travel and tourism), we believe near-term outlook on advertising expenditures is likely to be well over projections made by industry experts, unless the world faces fresh issues of confidence. Given the past history of media spends; we also think that there is reason to believe that print media is as likely to benefit from fresh confidence among consumers and media buyers as television is.
Share in Media Spends over the years (% of total adex in India)
60 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 New spapers TV
Source: Arpita Menon, Media Planning and Buying
10
SECTOR REPORT
January 14, 2011
3QFY11 Expect Robust Growth

We believe that media companies shall provide robust growth in advertising as well as subscription revenues in the coming quarter. While circulation revenues of key newspaper publishers will suffer on account of growing circulation in undermonetized markets and a price-war in Jharkhand/ certain parts of Uttar Pradesh, we believe advertising revenues have grown robustly in 3QFY10, on account of festival season. Moreover, many industry players suggest that advertising has been strong in the post-festive season as well. We factor in 20-25% advertising revenue growth for most print players key exception being Deccan Chronicle, which has lagged industry in the past few quarters. We expect revenue growth would be strong enough to offset poor newsprint expenses scenario.
Expect robust revenue growth, watch out for expenses
While advertising revenue growth among broadcasters is expected to be less than print counterparts, revenues from DTH shall be strong on account of higher adds during the festive season. Other subscription revenues shall vary widely between companies, we think , with Sun TV expected to continue making y/y gains in analogue cable revenues, and Zee Entertainment registering soft revenues in analogue and international subscription revenues. Our summary of quarterly estimates is provided below:
Quarterly Estimates
Revenues (Rs mn) DB Corp HT Media IBN18 Jagran Prakashan Sun TV Network* ZEEL 3QFY11 3,377 4,784 2,079 2,733 6,395 7,404 2QFY11 2,976 4,455 1,890 2,769 4,248 7,116 3QFY10 2,814 3,661 1,934 2,269 3,951 5,309 3QFY11 1,159 971 5 817 3,187 1,938 EBITDA 2QFY11 951 791 18 909 2,415 1,885 3QFY10 959 745 85 653 2,240 1,573 3QFY11 666 521 (75) 503 2,207 1,388 PAT 2QFY11 551 399 (132) 555 1,674 1,253 3QFY10 506 369 (106) 397 1,519 1,151
Source: Kotak Securities, Private Client research; * for comparability we provide Sun TV EBIT numbers (for EBIDTA)
11
SECTOR REPORT
January 14, 2011
PRINT
AND
BROADCASTING SECTOR STATISTICS
Indian Media and Entertainment Industry is pegged at Rs 580.8Bn, and is broken down as under:
Indian Media Shares of Sub-Industries (%)
OOH 2% Animation Gaming and VFX 4% Music 1%
Online 1% Radio 2%
Films 16%
Television 46% Print 28%
Source: FICCI KPMG report
In this resport, we deal primarily with the television and print sub-industries. Both television and print industries have dual income streams advertising and subscription, which break down as under:
Newspapers Television
Subscription 38%
Advertising 35%
Advertising 62%
Subscription 65%
Source: Industry
Source: Industry
12
SECTOR REPORT
January 14, 2011
Media Consumption by Genre

We provide below a summary of media consumption. GECs (Hindi + Regional) account for ~50% of the total television viewership in India. This, along with the fact that most of Indias viewership is accounted for by analogue cable households, is the prime reason for the fact that GECs/ movies are a must-have in order to generate subscription revenues.
Mass channels key for subscription revenues
Among print players, it is noteworthy that Hindi newspapers have a readership that is more than four times that of English newspapers. This forms the ground for monetization argument for Hindi print media players.
Genre Distribution Television Viewership
Terrestrial 2% regional Music 2% Hindi New s 3% Regional New s 4% Regional Movies 4% Kids 6% Regional GEC 24% Hindi Movies 12%
Source: Price Waterhouse Coopers (TAM)
Music 2%
Other 4% Hindi GEC 26%
Sports 3%
Cable 8%
Genre Distribution Newspaper Readership

134
41
32
29
23
22
21
16
16
9 Oriya
8 Asamese
5 Punjabi
2 Urdu
13
Tamil
Malayalam
Hindi
Marathi
Gujarati
English
Telugu
Bengali
Source: Price Waterhouse Coopers
Kannada
SECTOR REPORT
January 14, 2011
Top Sectors Advertising on TV

(%) F&B Personal Care/ Personal Hygeine Services Telecom/ ISP Hair Care Auto Banking/ Finance/ Investment Personal Accessories Personal Healthcare Household Products Source: FICCI - KPMG Report 14 11 6 5 5 4 4 4 3 3
Media Buyer Profiles Television and Print

We provide below a summary of key categories that contribute to television and print advertising. It is clear from the below that FMCG players account for ~50% of the total advertising spends on television. This fact, along with fragmentation in most television markets, places bargaining power in the hands of the media buyer. Print players are less dependent on specific sectors. Education sector is created of multiple advertisers, as is retail. The non- consolidation of the media buyer, along with the less - fragmented nature of the print industry provides print players (in general) greater bargaining power versus the media buyer as compared with broadcasters.
Advertising Spends - by Recipient

The charts below show the consumption of advertising rupees by various genres. As in the case of viewership, the pie is loaded with mass channels, especially GECs. Sports and news receive attention well in excess of the viewership share due to the male TG that they provide. Print media is dominated by English newspapers as they are deemed to attract the highest quality of reader, with Hindi/ regional dailies accounting for a far lower percentage of advertising spends (relative to readership). We also note that business dailies earn advertising revenues far in excess of their readership, on account of a perception that the readership is exclusive and the reader is more influential.
Genre -Wise Advertising Spends (Television)
Kids 2% Others 3% Regional Channels 28%
Top 10 Sectors - Print

(%) Education Services Banking/ Finance/ Investment Auto Retail Durables Personal Accessories Personal Healthcare Corporate/ Brnad Image textiles/ Clothing Source: FICCI - KPMG Report 15 12 9 7 6 4 4 3 2 2
Cinemas/ Movie Channels 5% Doordarshan 7% New s 18%
Sports 12%
Hindi GECs 25%
Source: FICCI- KPMG Report
Genre - Wise Advertising Spends (Print)

Magazine 7% Business Dailies 6% Other Language Dailies 23%
English Dailies 45%
Hindi Dailies 19%

Source: HT Media Investor Presentation
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SECTOR REPORT
January 14, 2011
INDUSTRY VIEW: BROADCASTING

Advertising Expenditures Fragmentation to be strong; So will Be
Adex in the broadcasting sector, on the whole shall be on the rise, owing to the following factors: 1/ Rising penetration of television, 2/ Rising penetration of cable television, 3/ Greater variety to the viewer as new genres become available, 4/ Improving technology and quality that shall raise overall time spent on television. On an industry level, we believe advertising revenues shall grow at a robust 16% CAGR through FY10-FY20. We believe that due to a greater amount of media buyer interest in regional markets, as well as better bargaining power of broadcasters in the regional space (broadcasters in the regional space would typically attract local as well as national advertising), regional channels shall witness a higher growth than Hindi counterparts.
Regional broadcasters to register faster growth than Hindi mass channels
Fragmentation is a regular feature of competition. As competition rises, the number of channels available to the advertisers will increase, leading to declines in TRPs. Since advertisers use TRPs as a guide to media buying, the fragmentation witnessed could lead to a soft growth in advertising rates.
Number of Television Channels - All India
600
450
300
150
0 2002 2003 2004 2005 2006 2007 2008 2009 2010E
Source: Industry Presentations, PWC M&E Report, Industry Discussions

Average Monthly Cable Bill
Mar-10 Chennai Delhi Kolkatta Mumbai Bangalore Hyderabad Ahmedabad Bhopal Chandigarh Cuttack Guwahati Jaipur Jamshedpur Raipur Kochi Lucknow Shimla Patna Dehradun Varanasi Jammu Shillong 106 183 161 248 209 153 259 174 165 207 187 208 149 203 137 156 172 129 204 157 185 319 Jan-07 146 156 171 240 211 169 217 193 212 256 200 244 158 232 149 160 171 158 218 159 197 322
Subscription Revenues to Rise, Taker Uncertain

With growth in the viewership base, the subscription revenues paid out by Indian subscribers are set to rise. However, the destination of this high growth is uncertain. The Indian subscribers seem unwilling to pay a higher amount for his subscription. Therefore, the division of the amount (~Rs 160/ subscriber) is going to be the prime driver of growth. The distribution of amounts received from analogue cable subscribers continues to be an arbitrary action taken by the Local Cable Operator, and which broadcasters have little say in. While digitization continues to be a hope, let us remember basic facts about media businesses in general: there is, broadly speaking, a trade-off between advertising and subscription revenues. For the purposes of this report, we make a few assumptions that are provided below:
Source: Price Waterhouse Coopers E&M Report
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SECTOR REPORT
January 14, 2011
Television Model
2009 Broadcasters' Revenues -o/w Advertising Revenues Grw, Advertising Revenues -o/w Subscription Revenues Grw, Subscription Revenues Derivation, Subscription Revenues: Population Growth # per household Households (000) - o/w Television Households % Penetration (TV) - o/w C&S Households % Penetration (C&S TV) - o/w Analogue Households - o/w Digital Cable Households - o/w DTH Households ARPU (Rs/ Month) - Analogue Households - Digital Cable - DTH 160 160 160 160 160 160 192,950 132,278 11,520 49,152 25% 20% 20% 40% 48,420 26,456 2,304 19,661 160 160 165 214,414 128,705 17,280 68,429 26% 20% 20% 40% 56,569 25,741 3,456 27,372 160 160 170 231,963 116,117 24,192 91,653 28% 20% 25% 40% 65,933 23,223 6,048 36,661 160 180 180 258,929 102,243 35,381 121,306 31% 20% 30% 40% 79,585 20,449 10,614 48,522 160 193 193 293,955 99,259 45,429 149,267 32% 20% 35% 40% 95,459 19,852 15,900 59,707 160 206 206 334,062 100,114 53,470 180,478 34% 20% 40% 40% 113,602 20,023 21,388 72,191 160 221 221 383,370 108,014 62,934 212,423 34% 20% 40% 40% 131,745 21,603 25,174 84,969 160 236 236 458,234 134,139 74,073 250,022 34% 20% 40% 40% 156,466 26,828 29,629 100,009 171 252 252 534,704 153,245 87,184 294,275 34% 20% 40% 40% 183,233 30,649 34,874 117,710 183 270 270 611,641 162,663 102,616 346,362 35% 20% 40% 40% 212,124 32,533 41,046 138,545 196 289 289 699,474 171,027 120,779 407,668 35% 20% 40% 40% 245,584 34,205 48,312 163,067 4.7 245,507 147,304 60% 91,329 37% 69,000 4,000 16,000 1155348 1170368 1185582 1200995 1216608 1232424 1248445 1263427 1278588 1293931 1309458 1325171 1.3% 4.6 253,774 152,265 60% 100,495 40% 68,895 6,000 25,600 1.3% 4.5 262,320 162,638 62% 110,594 42% 67,034 9,000 34,560 1.3% 4.4 271,153 173,538 64% 118,006 44% 60,478 12,600 44,928 1.3% 4.3 280,284 184,987 66% 125,791 45% 53,251 16,380 56,160 1.3% 4.3 289,722 197,011 68% 135,938 47% 51,698 19,656 64,584 1.3% 4.2 299,478 209,635 70% 146,744 49% 52,143 21,622 72,980 1.2% 4.1 309,257 222,665 72% 160,319 52% 56,257 23,784 80,278 1.2% 4.0 319,355 236,323 74% 184,332 58% 69,864 26,162 88,306 1.2% 3.9 329,783 250,635 76% 200,508 61% 74,593 28,778 97,136 1.2% 3.8 340,551 265,630 78% 212,504 62% 73,998 31,656 106,850 1.2% 3.8 351,671 281,337 80% 225,070 64% 72,713 34,822 117,535 40,320 99,000 113,850 15.0% 48,420 20.1% 130,928 15.0% 56,569 16.8% 154,494 18.0% 65,933 16.6% 179,214 16.0% 79,585 20.7% 207,888 16.0% 95,459 19.9% 241,150 16.0% 113,602 19.0% 279,734 16.0% 131,745 16.0% 324,491 16.0% 156,466 18.8% 376,410 16.0% 183,233 17.1% 436,635 16.0% 212,124 15.8% 506,497 16.0% 245,584 15.8% 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Revenues, Industry (Distrbn.) (Rs mn) 170,880 - Analogue Households - Digital Cable - DTH Broadcaster's Share - Analogue Households - Digital Cable - DTH Broadcasters' revenues (Rs mn) - Analogue Households - Digital Cable - DTH Source: Company 132,480 7,680 30,720 24% 20% 20% 40% 40,320 26,496 1,536 12,288
Even as the advertising and subscription growth is strong, and macro factors favor the industry, value creation at the industry - level is poor, and margins of the industry have declined over the past few years, as may be seen from the chart below:
Profitability of Television Industry in India : Cross Sectional and Time Series Estimates
Source
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January 14, 2011
We consider briefly the issues faced by broadcasters in translating industry level growth into margin maintenance/ enhancement and value creation:
Poor Bargaining Power in Value Chain

a. Poor bargaining power with content provider as viewer has loyalty to programs, not channel - In general, given the high number of channels, the viewer tends to be loyal to programs rather than channels. This implies that the content provider (producer) has the ability to raise programming expenses, in as much as program preferences can be predicted. This is most apparent in the movie content acquisition. News channels are often dependent on star anchors for viewership. In a situation where channels are largely undifferentiated, this leads to steep escalations in employee expenses. b. Poor bargaining power with distributors: The number of channels in India has risen to over 500, whereas most analogue providers can only supply up to 100 channels. This has led to a situation where frequencies are "auctioned", leading to high carriage fees. c. Poor bargaining Power with media buyer: Television is highly dependent on FMCG companies for advertising. FMCG companies account for a high proportion of advertising on television, and bargain hard for advertising seconds, leading to poor advertising yields. It is also useful to note that most 'national' advertising is concentrated in the hands of few media buying agencies. Investment Recommendation- Braoadcasting: 1. Strong models shall be those that possess a distributor/ broadcaster nexus: Bargaining power of a distributor is a key factor in influencing the value that a broadcaster may create. As such, control over distributor is a key factor that would enable lasting strength in viewership. Nearly all large broadcasters in India (Star India, Sun TV, and Zee Entertainment) have a strong nexus with distributors. However, players in the Hindi space have, we believe, less market share in the distribution market than Sun TV has in Tamil Nadu. Moreover, Sun TV has taken a strong position in the South Indian markets with its DTH service. 2. Bargaining Power with media buyer requires industry concentration, leadership: Most of the Indian broadcasting space is highly fragmented, which improved the media buyer's bargaining power. Significant industry concentration, however, is seen in regional markets. We note that Sun TV's markets are highly concentrated, with top two players accounting for 60-80% of the market share. Moreover, we believe industry's bargaining power would be helped by media buyers who are not concentrated. Regional broadcasters have the additional benefit that they are able to rope in local advertisers, thus diversifying their buyer base, and improving yields. 3. Prefer to chase under-monetized, rather than well-monetized properties: Given that ARPUs are not likely to rise meaningfully, and a higher number of players are likely to fight for the same pie, we believe that under-monetized broadcasters provide a better opportunity for growth than well-monetized ones. This is the reason behind our preference for Sun TV and IBN18 over Zee Entertainment.
Capacity to carry channels by bandwidth, number of channels

Bandwidth 300 450 550 750 860 Source: TRAI Max. # Channels 36 54 67 92 106
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January 14, 2011
INDUSTRY VIEW - PRINT

Advertising Growth Strong, Fragmentation Low:
We expect print to continue being a strong recipient of advertising expenditures. Overall, we expect print players' advertising revenues to grow 15% CAGR over FY10-FY20. Growth would likely be faster in the regional print media space, which has received relatively less attention from media buyers in the past.
Print Adex growth strong as categories improve performance
Print media players are typically less fragmented than broadcasters. For most states in India, print industry is fairly consolidated, and the top three players account for 60-80% of the total newspaper readership. This has the following implications: 1/ Bargaining power with the media buyer is strong. Print players have a strong control over advertising rates, and concessions are low. Moreover, a single sector does not contribute significantly to print advertising revenues. For example, education, one of the largest categories of print advertising is spread over many educational schools and colleges, as well as coaching institutions, 2/ Key variable costs of employees are kept under check as newspaper brand is more important and few editors/ reporters enjoy the stardom that television anchors/ reporters do, 3/ There is greater co-operation between players in times of industry adversity. For example, newspaper publishers did, in unison, raise cover prices in the last year, when newsprint prices were high and advertising revenues had declined. As a result of the above, newspaper publishers are usually profit-making entities and enjoy margins that are, in general, higher than the average broadcaster.
Circulation Revenues Growth to be soft

Search for new geographies leading to lower cover prices
Newspaper raw material expenses, consisting mainly of newsprint, are in the range of Rs 5.5-Rs 6/ copy for English newspapers and Rs 2-Rs 2.5/ copy for Hindi/ regional newspapers. In comparison, cover prices are in the range of Rs 2-Rs3/ copy for English newspapers, and Rs 2-Rs4/ copy for Hindi/ regional newspapers. Net of agent/ hawker commissions, which is typically in the range of Re 0.5-Re1/ copy, the realization for newspapers is low, in so far as subscriber generated revenue is concerned. For this reason, newspapers are largely a play on advertising revenues. Traditionally, Indian newspapers were territory players, with each player confined to certain geographical areas. In the past two decades, however, this has changed, and newspaper publishers now try to scale up to new cities/ states. Since newspapers are a habit product, trial of the product for extended periods is necessary before a newspaper can create a market for itself in a city that has been traditionally dominated by another player. A useful practice for a challenger is to "tie-up" readers for extended periods using "subscription offers". In typical subscription offers, the subscriber is provided a yearly subscription for Rs 199, or even lower. This has led to a general decline in newspaper cover prices.
Advertising & circulation
300 240 180 120 60 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Circulation Advertising
Source: FICCI - KPMG Report
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We believe this trend is likely to continue, and intensify over the years. While the trend has been most pronounced in English newspapers thus far, regional dailies have, in the recent times, used cover price as a prime tool in making market entries. We therefore tend to believe that there will be general softness across the board in the circulation revenues of newspapers, with circulation rising and realization declining over time.
Under-monetization key Theme

Monetization is the key theme of investment among newspaper publishers as well. As we see it, there are two aspects to monetization: one relates with regionalization of the media buying activity and is a broad, macro theme, the other relates simply to the general case of a challenger in a market garnering significantly lower revenue per reader (which requires a shift of media budgets between publications, rather than between languages)
Shift to regional news papers a broad theme
Hindi/ Regional newspapers account for a large amount of media penetration in the country. However, media buying has largely been focused on metro cities; and English newspapers within these metro cities. The reason for this is that the class consuming these media products has largely been seen as the drivers of large consumption. However, as benefits of economic prosperity have been spread across a large part of the nation, the smaller cities/ towns have begun to display strong growth. The cost to the advertiser is measured in a "Cost Per Thousand" basis (that is, the money spent in order to reach a thousand people. Based on the CPT metric, Hindi newspapers continue to be well cheaper than their English counterparts, even as the disount has reduced over time.
Share of Print Adex over the years
80 60 60 46 40 40 54 English Indian Language
20
0 2003
Source: DB Corp. Company Presentation
2009
Reach of newspapers
SEC A AED (Any English Daily Reach) ALD (Any Language Daily) Source: DB Corp. Company Presentation 30% 60% SEC B 10% 50%
The regional under-monetization, relative to English language, is therefore one theme. However, under-monetization may exist within genres (that is English newspapers versus English newspapers). This would happen when a new entrant in the market is involved in price discounting with consumers, and/ or is in a position where rates can't be charged in line with the readership position. This may happen due for many reasons, but primarily because the entrant's readership/ circulation is not up to a 'threshold level', where rates in line with readership can be demanded. We find an example of such under-monetization in the case of HTMumbai, and Hindustan.
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January 14, 2011
Newsprint Key Risk

Newsprint is the key raw material for newspapers, accounting for ~30-40% of sales of a mature newspaper company. Newsprint is essentially a cyclical product. In the recent past, newsprint prices have been rather volatile, hitting an all-time high of $750/ MT in 2008-2009, and hitting an all-time low of $450/MT in 2010. Long-term newsprint prices shall be influenced by the following trends: 1/ longterm demand from western economies shall continue to be weak. Most westers economies are seeing declining circulation in newspapers, affecting newsprint demand negatively, 2/ newsprint prices shall continue to be affected by energy prices. Energy prices form a large part of the expenses of newsprint production, 3/ Pulp as well as recovered paper are the raw materials used in newsprint production. Longer-term, realization of scrap paper is likely to be smaller as demand is likely to come from China/ India. This will have a positive impact on newsprint prices, 4/ There has been considerable consolidation in the newsprint industry, globally, in the recent past. As producers look to control supply, there is likely to be greater consolidation in the newsprint industry. As a balance of these factors, we think long-term newsprint prices shall be slightly higher than long-term average of $600/ MT. We factor in long-term newsprint prices of $700/ MT in our models.
Newsprint Prices over the years (US$/MT)
800 700 600 500 400 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
20
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Source: Bloomberg
Our assumption of $700/MT for newsprint prices is in line with newspaper publisher's expectations for the near future. Newspaper publishers tend to hold a consensus view that the newsprint price increase we are witnessing is almost entirely on account of steep rise in prices of pulp, which shall likely come down as capacities in Chile, idled due to the earthquake, come back online.
Pulp Prices (Indexed to 2000), Europe
Source: RISI
Jun-10
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January 14, 2011
Historically, two things regarding newsprint prices deserve mention: 1/ newspapers have resorted to creative measures when faced with extremely high newsprint prices. Creative measures can include reducing width of pages, reducing grammage, and changing the mix of newsprint to use a higher amount of inferior grade newsprint. In extreme cases, companies have resorted to reduce width of the newspapers, which can have a significant impact on newsprint demand. 2/ The print industry in India has shown far greater amount of unity when newprint prices are high, in so far as raising advertising rates (passing on costs to the advertiser) or raising cover prices (passing on higher costs to the subscriber of the newspaper), The second of these came in ample evidence in FY09/ FY10.
Newspaper publishers: Investment Recommendation

1. We find the newspaper publishing space attractive for the long-term, given: 1/ continued strength in readership, 2/ potential for higher growth via expansion into new geographies, 3/ the catchall, habit-forming nature of the product as opposed to channel-surfing nature of the broadcaster's audience, 4/ better control over the value chain, 5/ better co-ordination among publishers, and strong profit profiles of players.
BUY HT Media, ACCUMULATE DB Corp, Jagran Prakashan
2. Measured by broad valuation tools, newspaper publishers are cheaper than broadcasters. This is counter-intuitive, as broadcasters have substantially greater volatility in sales, and margins are under pressure from value chain participants. We believe there is considerably greater value in newspaper publishers than in entertainment broadcasters. 3. While newsprint prices remain a risk, we believe that margins of most publishers shall be protected, even in such circumstance. Broadly, our discussions with industry players suggest that there is sufficient growth in advertising yields to maintain strong margins. Moreover, we believe that newspaper publishers have significant leeway in cutting newsprint consumption in adverse times - this is especially true in the case of publishers who have a dominant position in certain geographies. 4. We look at monetization in a wholesome fashion. Hindi and regional newspapers are, as an industry, likely to display higher growth in the future. This will happen as a result of higher growth in the Tier 2/ Tier 3 towns than in metro cities. However, we find that certain characteristics of metro newspapers (higher entry barriers due to higher circulation/ better exploitation of reader's time) are worthy of note, and advertising revenue growth in these spaces, while softer than Tier2/ Tier 3 towns, is likely to be robust. On the whole, we find three of the newspaper publishers are candidates for greater monetization - and we maintain a positive stance on all three (HT Media, DB Corp, and Jagran Prakashan).
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January 14, 2011
COMPANIES
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January 14, 2011
DB CORP LTD
PRICE : RS.255 TARGET PRICE : RS.312 RECOMMENDATION : ACCUMULATE FY12E PE: 17.5X
Stock details
BSE code NSE code Market cap (Rs mn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume Shares o/s (mn) Source: ACE Equity : : : : : : : 533151 DBCORP 46,286 13.7 307/207 76,500 181.51
Summary table
(Rs mn) Sales Growth (%) EBITDA Net profit Net Debt EPS (Rs) Growth (%) CEPS DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) FY10 10,630 10.6 3,429 1,748 1,257 10.0 369.6 12.1 1.3 39.3 20.3 4.5 13.9 25.5 21.0 7.0 FY11E 12,548 18.1 4,118 32.8 2,417 (238) 13.3 33.4 15.9 2.5 32.4 22.5 3.7 11.2 19.2 16.1 5.4 FY12E 14,337 14.3 4,364 30.4 2,642 (1,819) 14.6 9.3 17.3 3.0 27.7 20.7 3.1 10.2 17.5 14.7 4.4
We see DB Corp as a company with exceptional vision, and ability to expand and consolidate regional markets. DB Corp is in the leading position in most of the markets that it operates in, and is in prime position to benefit from strong growth in regional markets. Execution risks in the expansion underway in Bihar/ Jharkhand are, we think, balanced by strong growth in the company's other markets. We see sales - led PAT growth of 22% CAGR in FY10-FY13E. While we are positive on the company's approach and financials, we believe current valuations account for the same in a significant way. We rate DB Corp. ACCUMULATE with a price target of Rs 312/ share.
Investment Rationale
q Strong Play on Regional Media: DB Corp is a strong play on the regional print media space. The company is a fast-growing, regional print media player, with presence in two languages - Hindi and Gujarati, together accounting for ~17mn readers. Macro drivers of Hindi / regional print media remain strong, on account of significant cost per thousand differentials between the yields of English and Hindi newspapers. q Company's strengths - Vision, Execution, Consolidation: The company's track record in making entry in new markets is well above-par. Over the past fifteen years, the company has successfully grown into markets such as Rajasthan, Chandigarh, Punjab, Haryana, Gujarat, and Jharkhand. We concur that DB Corp has a vision, and execution ability that is the best-in-class. Moreover, it is evident from the company's record of maintaining positions that DB Corp has strong systems in place to manage a highly diversified set of geographies consistently. q Focus on Urban, Monetizable Reader: The company has a strong focus on developing a presence in urban areas to ensure greater monetization of its readership. Further, the newspaper is a leader in a large-number of high growth states and urban centres; and its revenue stream is well diversified across states. q Strong Revenue Prospects, Margins to Remain Healthy in Old Editions: Topline growth in the company will be driven by the increasing focus of the media buyer on regional media, as well as the company's presence in geographical areas that are witnessing strong consumption growth. DB Corp's more recent editions have less than optimised models. Some of these generate losses, and will be significant drivers of margins on account of rising advertising rates. q Negative Impact on margins on account of new geographies to remain contained: The company's entry in new geographies - Jharkhand and Bihar will generate losses in the medium term, impacting EBITDA margins negatively in FY11-FY14E. However, we believe that given the company's track record, there is reason to believe that DB Corp shall be EBITDA positive in these regions in the next four years. The company's margins and ROIC shall be supported by strong performance among older editions. As such, long-term drivers of the stock are well in place.
EBITDA margin (%) 32.3
Shareholding pattern
Corporates 1% Institutions Public 3% 5% Foreign 5%
Promoters 86%
Source: ACE Equity
1 year performance (Rel to sensex)
Source: ACE Equity
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January 14, 2011
q PER Highest Among Peers, Premium Valuations Sustainable: Including losses emanating from Bihar and Jharkhand editions, we forecast a FY10-FY13E EPS CAGR of 23%. We note that DB Corp, at 19.6 PER FY11 and 17.9 PER FY12, is the most expensive print media stock in our coverage universe. Even so, for reasons discussed above, we believe that a premium over peers is called for and sustainable. We rate the stock ACCUMULATE. q Valuation: We compute the DCF value of the stock at Rs 312/ share (FY12E), implying 20% upside from present levels. Our FY12 -end price target implies Rs 277/ share on FY11 -end, which denotes a fair but limited price - value gap. q Risks: 1/ competitive risks across geographies, 2/ execution risks involved in new editions planned in Bihar/ Jharkhand, and 3/ spikes in newsprint prices, and risks relating with soft adex growth.
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January 14, 2011
Regional Media Powerhouse

DB Corp has expanded from being a MP-Chhatisgarh player to a regional media powerhouse, by expanding into diverse territories such as Gujarat, Rajasthan, Punjab, and Haryana. The company has also launched an edition in Ranchi and expects to have editions across Bihar, Jharkhand and Jammu over the next two years. Moreover, DB Corp. is the only regional print player to have successfully crossed the language barrier. Its Gujarati newspaper, Divya Bhaskar, is the largest circulated (and second largest read) Gujarati daily.
Growth of DB Corp
1995 State Editions Language Readership 1 5 1 3.2 2010 13 53 3 17.5
DB Corps geographical reach
Source: Company
Source: Company
Vision, Execution, Consolidation

Hindi newspapers have, in the past decade or so, been more reliant on circulation than their English counterparts. This is likely on account of the fact that Hindi markets have attracted lower advertising volumes/ yields, forcing publishers to place the burden of costs on the reader in a larger way. However, as regional media has begun to attract greater attention of the media buyer, adex driven to Hindi newspapers has increased. The trend has implications: 1/ if national advertisers are more interested in regional media, the advertiser shall share a greater burden of the newspaper's costs, thus providing a newspaper an opportunity to raise circulation/ readership by cutting cover prices, 2/ if national advertisers are more interested in regional media, there are network benefits of being a larger player, 3/ newspaper cover prices, sometimes as high as Rs 4/ copy are a deterrent to readership, implying that there are circulation/ advertising revenue tradeoffs. We believe the strength of DB Corp lies in recognition, with certainty, of the trend and its implications. DB Corp has committed itself to growing across markets, providing a people's newspapers, at people's cost.
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January 14, 2011
DB Corp has had a strong track record of success in expansion of its newspaper business. In virtually all of its new markets, the company's newspaper is in #1/#2 position. The company believes that its strong track record in building on new editions is a result of its unique strategy for launch, which relies on three essential steps: 1/ engagement with the reader, by way of a near exhaustive survey of the market, 2/ involving the customer in product creation, by seeking her inputs in the designing of the newspaper, 3/ going back to the customer with the designed product and seeking subscriptions. DB Corp identifies a market based on growth potential - determined primarily by factors such as monetization of readership and print penetration among literates.
Strong track record in finding/developing new markets
In certain cases, the company's ability to spot potential and create markets is more pronounced than the others. The best example of DB Corp's exceptional ability to sight potential is the Chandigarh market. The Chandigarh market, prior to DB Corp's entry, was widely believed to be an "English market", meaning people somehow preferred English newspapers. DB Corp explored the market, and found that most people were familiar with Hindi, but did not like the way Hindi newspapers were presented - which discouraged reading of Hindi newspapers. A result of the above is the launch and success of the Chandigarh edition, which is the leader by far in readership within the Chandigarh market - English or Hindi. In terms of maintaining the position it has created, DB Corp's track record has been no less spectacular. The company believes that it is able to come across as a neutral media group (not aligned with a party/ ideology), and is able to localise content through its various editions and sub-editions. The company believes that in order to make significant profits in the newspaper publishing business, one must be #1 or a strong #2, and moves aggressively to ensure strong competitive position in all its markets.
DB Corp - Timeline of Growth
Year 1992-95 1996 2000 2003 2006 2007 2010 2010 2011E Event Consolidated presence in MP/ Chhatisgarh to emerge as #1 Launched in Rajasthan, beginnning with Jaipur. #1 on Day one (circulation) Launched in Chandigarh and Haryana Launched Gujarati daily Divya Bhaskar, emerged as #1 on day one (circulation) Launched in Punjab (Amritsar/ Jalandhar) Launched Business Bhaskar, agreement for DNA in select geographies Launched in Jharkhand (Ranchi) Launched in Jammu Likely launch in Bihar
Source: Company
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SECTOR REPORT
January 14, 2011
Regional Media - A Broad Play on Reader Monetization

Regional print media players have benefited and are likely to continue benefiting from lower monetization of readership as compared with English newspapers. As shown below, DB Corp's Cost Per Thousand (CPT) is well lower than English players such as The Times of India and Hindustan Times. Gujarat Samachar, which can be assumed as a valid proxy to Divya Bhaskar, is also, undermonetized in this sense.
Cost Per Thousand (CPT) Metrics indicate potential for growth in Long Term Yields
CPT Index, Various Newspapers
100 86
Low CPT of regional players presents long term opportunities in raising ad-yields
62
21
18
13
10
The Times of India*
Hindustan The Times Times (Del+Mum) of India (AE)
Dainik Bhaskar
Eenadu
Dainik Jagran
Gujarat
Malay ala
Samachar Manorama
CPT index (SEC-AB), Various Newspapers
100 85 63 62 54 53 36 24
The Times of India*
Eenadu
Dainik Bhaskar
Malay ala Manorama
Dainik Jagran
Gujarat Samachar
Source: Ernst & Young
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January 14, 2011
Macro Trends Favour Tier -2 Towns, Hindi dailies continue to be cheap on a CPT basis
As stated previously in the report, there is a case for media buyers to look beyond metros for beter ROIs. India's media buyers have thus far been concentrating largely on metro newspapers, due to which the adex is tilted heavily in favour of metros. Moreover, there has been a case of differential treatment in so far as the case of regional versus English newspapers are concerned - with Hindi newspapers typically getting only 10-12% of the advertising rate on the average (cost per thousand basis). Trends confirm that media buyers have started to look afresh at regional markets, and the differential (between English and Hindi newspapers, CPT basis) has declined over the years. We expect this trend to continue - benefiting Hindi newspaper players.
DB Corp present in some of the faster growing cities
DB Corp is positioned well in some of the faster growing states of India, and has presence in some of the key cities identified for growth. The chart below shows the extent of growth expected in key cities of India (cities to which DB Corp has exposure are highlighted in blue marker.
Growth in Key Urban Towns (2005-2010)
Bhopal Kanpur Coimbatore Kolkatta Hy derabad Rest of India Pune Faridabad India Jalandhar Chennai Chandigarh Delhi Amritsar All 20 Cities Bangalore Lucknow Mumbai Jaipur Ahmedabad Nagpur Surat 0 2 4 6 8 10 12 14 16 18
Source: E&Y, The New Market Shehers
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SECTOR REPORT
January 14, 2011
DB Corp - Regional Play, Diversified Geographies

DB Corp is the owner of two of the largest newspapers in India - Dainik Bhaskar and Divya Bhaskar, together accounting for ~17mn readers.
Top Newspapers in India

Rank 1 2 3 4 5 6 7 8 9 10 13 17 Publication Dainik Jagran Dainik Bhaskar Hindustan Malayala Manorama Amar Ujala Lokmat The Times Of India Daily Thanthi Rajasthan Patrika Mathrubhumi Gujarat Samachar Divya Bhaskar Language Hindi Hindi Hindi Malayalam Hindi Marathi English Tamil Hindi Malayalam Gujarati Gujarati 2007R1 2007R2 2008R1 2008R2 2009R1 2009R2 2010Q1 2010Q2 2010Q3 17,112 12,512 9,045 8,835 8,376 6,872 6,781 8,350 6,945 6,958 5,303 3,311 16,502 12,816 8,547 8,658 8,075 6,704 6,827 7,909 7,403 6,664 5,006 3,294 16,386 12,824 8,749 8,613 8,091 6,767 6,792 7,565 7,328 6,378 5,034 3,544 16,289 13,000 9,210 8,413 8,072 6,627 6,705 7,679 6,667 6,123 5,343 3,566 16,071 12,878 9,302 8,883 8,185 6,788 6,863 7,604 6,663 6,411 5,417 3,435 16,095 12,881 9,338 9,183 8,300 7,103 7,137 7,516 6,481 6,675 5,211 3,375 16,315 13,330 9,916 9,582 8,491 7,360 7,032 7,354 6,682 6,696 5,216 3,249 15,925 13,303 10,143 9,841 8,417 7,402 7,088 7,402 6,900 6,566 5,218 3,388 15,950 13,488 10,839 9,927 8,583 7,809 7,254 7,245 7,217 6,678 5,249 3,603
Source: IRS 2010 Q3
DB Corp's readership is well spread across various geographies in central and North India, and Gujarat.
Distribution of Readership: DB Corp
Other 4% CPH 14% MP/ Chhatisgarh 25%
Gujarat 21%
Rajasthan 36%
Source: IRS 2010 Q1
A note on relative positions: DB Corp is a clear, dominant leader in Madhya Pradesh, Chandigarh, and Haryana. Punjab is a fragmented market, with four players involved in the race for #1 spot. In Gujarat, DB Corp (Divya Bhaskar) competes with Gujarat Samachar (#2)and Sandeh (#3). In Rajasthan, DB Corp is second to Rajasthan Patrika.
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January 14, 2011
Readership relative to Competition (Dainik Bhaskar)

Madhya Pradesh (AIR, 000) Chhatisgarh (AIR, 000)
4000 3000 2000 1000 0
Dainik Bhaskar
Nai Duniya
Dainik Bhaskar 1200 900 600 300
Hari Bhoomi
2010 Q1
2010 Q2
2010 Q3
0 2010 Q1 2010 Q2 2010 Q3

2010 Q3
30
2007 R1
2007 R2
2008 R1
2008 R2
2009 R1
2009 R2
2007 R1
2007 R2
2008 R1
2008 R2
2009 R1
Punjab (AIR, 000)
Chandigarh (AIR, 000)
Punjab Kesari (#1) Dainik Jagran Dainik Bhaskar (#4) 1500 1200 900 600 300 0
Jag Bani Ajit
Dainik Bhaskar (#1) Amar Ujala 300 240 180 120 60 0
2010 Q1
2010 Q2
2010 Q3
2007 R1
2007 R2
2008 R1
2008 R2
2009 R1
2009 R2
2009 R2
The Tribune Hindustan Times
2010 Q1
2010 Q2
2010 Q2
Haryana(AIR, 000)
Rajasthan(AIR, 000)
1600 1200 800 400 0
Dainik Bhaskar Punjab Kesari
Dainik Jagran
8000 6000 4000 2000 0
Rajasthan Patrika Dainik Bhaskar
2010 Q1
2010 Q2
2010 Q3
2007 R1
2007 R2
2008 R1
2008 R2
2009 R1
2009 R2
2007 R1
2007 R2
2008 R1
2008 R2
2009 R1
2009 R2
Gujarat(AIR, 000)
6000 4500 3000 1500 0 2010 Q1 2010 Q2 2010 Q3 2007 R1 2007 R2 2008 R1 2008 R2 2009 R1 2009 R2 Gujarat Samachar Sandesh Divya Bhaskar
Source: IRS
2010 Q1
2010 Q3
2007 R1
2007 R2
2008 R1
2008 R2
2009 R1
2009 R2
SECTOR REPORT
January 14, 2011
Stronger in Urban Areas/ Cities

DB Corp's management is focussed on readership within urban areas, and its urban readership is especially strong relative to competition.
DB Corp: Urban Readership Relative to Competition
AIR, '000 Punjab Punjab (Urban) AIR, '000 Haryana Haryana (Urban) AIR, '000 Gujarat Gujarat (Urban) AIR, '000 Rajasthan Rajasthan (Urban) AIR, '000 Madhya Pradesh Madhya Pradesh (Urban) DB 810 699 DB 1,446 696 DvB 3,579 2,652 DB 6,104 3,333 DB 3,357 2,659 DJ 802 692 DJ 927 488 SS 240 176 RP 7,135 3,298 ND 1,081 801 PK 1,078 816 PK 1,013 473 GS 4,472 3,197 DNA 25 25 NvD 174 129 Tribune 306 257 Tribune 136 117 Sandesh 3,377 2,067 TOI 199 186 Patrika 937 853
Source: Company, IRS Data. Note: DB: Dainik Bhaskar, DJ: Dainik Jagran, PK: Punjab Kesari, DvB: Divya Bhaskar, SS: Saurashtra Samachar, GS: Gujarat Samachar, RP: Rajasthan Patrika, ND: Nai Duniya, NvD: Navbharat
We note that even in states where DB Corp. holds a second position; its newspapers have a strong position in the key cities as shown. We note that newspapers are largely a city phenomenon, and readership in the larger cities is more monetizable than readership in smaller towns and villages. DB Corp. believes that 50% of the advertising of the regions originates from, and is targeted at, these top cities.
Dainik Bhaskar/ Divya Bhaskar - Relative Position in Cities (AIR, '000)
Ahmedabad DvB 1,038 Jaipur DB 969 Bhopal DB 316 Indore DB 442 Chandigarh DB 171 SS RP 720 ND ND 222 Tribune 89 GS 876 DNA 25 NvD 68 NvD Amar Uj 78 Sandesh 474 TOI 85 Patrika 255 Patrika 169 HT 85
Source: Company, IRS Data. Note: DB: Dainik Bhaskar, DJ: Dainik Jagran, PK: Punjab Kesari, DvB: Divya Bhaskar, SS: Saurashtra Samachar, GS: Gujarat Samachar, RP: Rajasthan Patrika, ND: Nai Duniya, NvD: Navbharat
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SECTOR REPORT
January 14, 2011
Revenues will be on a Strong Growth Path

On account of factors discussed above, we believe DB Corp shall register strong growth in advertising revenues, as it has through its recent financial history.
Revenue Growth over the years (Rs mn)
17,000 12,750 8,500 4,250 0 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E
Source: Company Reports, Kotak Securities - Private Client Research
Revenue Break - Up by Geographies (2011)
1%
In our understanding, the company's revenues are spread fairly evenly across various geographies. In addition to growth in advertising revenues from existing markets, DB Corp's revenues shall also grow on account of expansion in new geographies, such as Bihar and Jharkhand.
Margins to remain at healthy levels despite new editions

42% 57%
- Mature States - New States/ Other - Bihar & Jharkhand

Source: Kotak Securities, PCG Research; Note: "Mature States" include MP, Chhatisgarh, and Rajastha. These are states where the newspaper has been rolled our across the state, for over ten years. "New states"/ Other include Chandigarh, Punjab, and Haryana, as well as Gujarat, and other publishing revenues.
DB Corp has launched two editions in Jharkhand, namely Ranchi (launched August, 2010), and Jamshedpur (launched Dec, 2010). The company has moved aggressively in these markets, and has brought in strong subscriptions. As per management, DB Corp has a print order of 150,000 copies in Ranchi. AS of now, the company plans to launch another edition in Dhanbad (March, 2011). The company will launch its paper in Bihar in mid FY12, an dplans to complete expansion in Bihar in mid- FY13. New editions, to be launched through FY13E in Bihar and Jharkhand, shall struggle initially, until such a point that the company's circulation/ readership is stabilized and well - known. As such, we believe that the company shall bring in significant losses from these operations in the initial years.
Estimation of Losses - Bihar and Jharkhand Editions
2000 1500 1000 500 0 -500 -1000 FY11E FY12E FY13E FY14E FY15E FY16E Revenues EBITDA
Expansion in Jharkhand and Bihar shall be a difficult affair for DB Corp, notwithstanding its strong track record in other markets. Competitors in these markets have reacted with vigour and determination. In Jharkhand, Prabhat
32
SECTOR REPORT
January 14, 2011
Khabar, the #2 newspaper of state, reacted to DB Corp's plans by a sharp cut in cover price (Rs 2/ copy from Rs 4/ copy) across the state. Following this move, all print players, including Hindustan, the market leader, have cut cover prices. Moreover, companies have invested aggressively in facilities following this news, and players like Prabhat Khabar have gone completely colour. In short, to the extent possible, incumbents have closed easy paths for DB Corp to gain on account of attraction to the reader or the advertiser. We also tend to think highly of the capabilities of HT Media (Hindustan) to withstand and fight competition. We believe that HT Media has come out richer from the experience of defeat and resurgence in the Delhi market, and is unlikely to concede ground without struggle.
We expect DB Corp to emerge as a #2 / strong #3 in Bihar and Jharkhand
Even so, we think DB Corp, given its track record, could emerge as a #2/ respectable #3 in both the Bihar and Jharkhand markets. We believe that the company shall break even by FY15E in these geographies. We set DB Corp's advertising market share at 20% of Bihar/ Jharkhand market FY15E onward. Longterm EBITDA margin for Bihar / Jharkhand editions has been set at 33%. Margins could rise on account of: 1/ strong advertising revenues in high-growth markets, 2/ higher circulation revenues. It is worth noting that the management expects that margins shall be in the 31%-32% range in FY12-FY13 period even after taking into account losses from Bihar and Jharkhand markets.
Outlook on Growth and Profitability - Newspaper Publishing

We forecast healthy gains in advertising yields for DB Corp. across editions in 2HFY11/FY12, as well as healthy growth in volumes, leading to strong gains in circulation revenues in FY11/ FY12. While the company is well placed relative to competition, we think DB Corp. shall like to maintain cover prices in most editions to maintain competitive position. As such, we are unlikely to witness meaningful growth in circulation revenues. Therefore, circulation revenues as a percentage of total shall decline over time. Newsprint prices shall impact DB Corp, as with all print media players. The growth in advertising that we have factored in shall offset growth in newsprint expense, leading to flat margins.
Under monetized properties in new states to help maintain strong margins
Placed into geographies, DB Corp has significant losses from certain editions started in the past 3-4 years. In our understanding, the company has significant loss making editions in the CHP and Gujarat markets, where it has entered in the past 4-5 years. Markets in Punjab and Gujarat are also highly competitive, which means that margins in these regions shall continue to be well below other "mature states" in the next two-three years. In the meanwhile, we believe Bihar and Jharkhand editions shall bring in losses, leading to margin erosion in FY12-FY13.
EBITDA (Rs mn): DB Corp's Geographies
5000 4000 3000 2000 1000 0 -1000 FY11E FY12E FY13E FY14E FY15E - Mature States - New States/ Other - Bihar & Jharkhand
Source: Kotak Securities - Private Client Research; Note: "Mature States" include MP, Chhatisgarh, and Rajastha. These are states where the newspaper has been rolled our across the state, for over ten years. "New states"/ Other include Chandigarh, Punjab, and Haryana, as well as Gujarat, and other publishing revenues.
33
SECTOR REPORT
January 14, 2011
However, we think certain factors are going to impact margins of the company positively in the long-run. The company has been showing strong trends in readership in the competitive markets of Punjab and Gujarat. As DB Corp's newspapers emerge as clear leaders on readership, we think yields in these geographies shall rise strongly, leading to margin gains. In addition, improvement in the margins in Bihar and Jharkhand region (mentioned on the previous page) shall be a positive.
Presence in alternative media a positive

The company has been conscious of leakages to alternative media vehicles. Since a large part of DB Corp's revenues are related with local (as opposed to national) advertising, radio could be a potential challenger to the company's newspaper activities. DB Corp operates, through subsidiary Synergy Media, 17 FM radio stations. Strategically, the company owns stations in such cities where it has strong newspaper operations, as the management believes that there are synergies in cross media promotions as well as 360 degree solutions to the media buyer. It appears that the company's strategy is working to its advantage, with Synergy Media approaching breakeven in FY11E. Synergy Media is also set to benefit from the recent order from the Copyright board, which reduces royalty payments to music companies. We note that as of FY10, the company paid Rs 87 mn, or 22% of revenues, as royalties to music companies. As per the order, which has come into effect from August 2010, the company shall be obliged to pay 2% of gross revenues as royalties. This, in addition to operating leverage, shall enable the company to raise its EBITDA margins to over 20% in FY12E.
1000
Revenues (LHS)
Margin (RHS)
100%
500
50%
0%
-500
-50%
-1000 FY09 FY10 FY11E FY12E FY13E FY14E
-100%
The company also punlishes DNA from certain geographies, as per an agreement with Diligent Media. These activities help DB Corp provide 360 degree solutions to the advertiser and are a long-term positive for the company.
34
SECTOR REPORT
January 14, 2011
Strong Margins in Addition with Improved Turnover to Drive Value Creation

DB Corp has invested aggressively in its printing facilities, in order to ensure that the company is able to provide the highest quality of newspaper to consumers and advertisers. In FY06-FY10 period, DB Corp has invested Rs 6 Bn in development of quality print facilities/ updation of existing facilities in order to ramp up capacities/ build greater capacity for color newspaper, and the like. This investment, not met with sales that are witnessed in mature editions, have led to a consistent softness in asset turnover for DB Corp, which have a dampening impact on the copmany's ROIC.
Asset Turnover Ratio versus peers
2.4 DB Corp Jagran HT Media
Higher asset turnover, improved margins post scale - up will create value
1.8
1.2
0.6
0.0 FY07
Source: Companies
FY08
FY09
FY10
With strong margins and healthy growth in advertising revenues, we believe DB Corp shall register healthy gains in its sales turnover ratio, leading to strong improvements in its ROIC over 2011-2014.
Asset Turnover, margins to drive ROIC Incrementally
2.0 Asset Turnover (x) ROIC (%) 40
1.5
30
1.0
20
0.5
10
0.0 FY10
Source: Companies
0 FY11E FY12E FY13E FY14E
We believe the company shall bring in strong operating cash flows of over Rs 8Bn in the next three years. The company has a strong balance sheet, with zero net debt (FY11E), and the cash shall provide the company with an opportunity to pursue other growth options.
35
SECTOR REPORT
January 14, 2011
Quarterly Trends Indicate Traction in Advertising, Quality Management of Expenses

Recent quarterly results of the company show strong traction in advertising revenues. Moreover, while earlier quarters (Q1 FY11) witnessed growth largely on account of growth in volumes (upto 90% on account of volumes), management has confirmed that yields are recovering, and, in the most recent quarter, growth in advertising revenues was split 50:50 into volume and pricing
Revenues (Rs mn) and Margins - Quarterly Results
3500 2800 2100 1400 700 0 -700 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 Revenues (LHS) EBITDA Margin (%), RHS 60 48 36 24 12 0 -12
Source: Company Reports
Personnel expenses have risen sharply over the past year, as the company has brought in certain employees, earlier employed under agencies, into the copmany's rolls. In addition, the company has added employees in Jharkhand. The company continues to have significant control over newsprint expenses, leading to a healthy EBITDA margin of 31% in 2QFY11, even as DB Corp has expenses the costs of survey conducted in Jharkhand prior to the launch of its Ranchi edition. Quarterly trends of the company indicate that DB Corp is set to register strong margins over the next few quarters, notwithstanding the expenses that the company shall incur on account of Bihar/ Jharkhand editions rollout.
Assumptions and Value Drivers

With continued growth in areas dominated by the company, and strong adex growth returning in the industry, we expect DB Corp's revenues to grow 17% through FY10-FY13E. Due to its strong competitive position in most geographies, we also think DB Corp's long-term growth prospects are strong. We factor in 13% advertising revenue growth through FY11-FY20E. In line with the industry, circulation revenue growth shall be soft (4% CAGR through FY11-FY20E). DB Corp has significant levers at its disposal to manage newsprint expenses, including management of newsprint mix (domestic versus imported), and management of pagination. However, we believe that current trends suggest that the company is utilizing these levers to a great extent. Considering the impact of sharply higher circulation (due to impending launches in Jharkhand, and Bihar), we factor in FY10-FY13E raw materials' expenses growth of 50%. With other operating expenses largely held under check, we estimate that the company's margins will decline in FY12-FY13 on account of new editions. Net-net, we see turnover-led PAT growth of 22% CAGR over FY10-FY13E.
36
SECTOR REPORT
January 14, 2011
Profit Model - DB Corp

Rs mn, FY Ends March Revenues: -o/w Sales -o/w Income from Event Management -o/w Advertising Income -o/w Other Op. Income Expenses: Raw Materials Consumed Event Expenses Operating Expenses Personnel Expenses Admin, Sales and Other Expenses EBITDA Margin Depreciation and Amortization EBIT PBT Provision for Tax PAT before Exceptionals FY10 10,630 2,272 148 8,085 124 7,200 3,279 118 1,315 1,318 1,170 3,429 32.3% 378 3,051 2,806 1,057 1,748 FY11E 12,548 2,524 170 9,710 144 8,430 3,864 127 1,368 1,771 1,299 4,118 32.8% 466 3,652 3,607 1,190 2,417 FY12E 14,337 2,678 196 11,298 164 9,973 4,743 138 1,494 2,207 1,391 4,364 30.4% 502 3,862 3,943 1,301 2,642 FY13E 16,466 2,845 225 13,211 184 11,733 5,471 150 1,770 2,634 1,708 4,732 28.7% 538 4,195 4,417 1,458 2,959
37
SECTOR REPORT
January 14, 2011
Valuation
Based on our DCF valuation, we see fair value of the stock at Rs 312/ share (FY12 - end). As indicated brfore, we factor in revenue growth of 10.5% CAGR over the long-term, led by advertising revenues of DB Corp. On account of strong growth in yields, and strong but stagnant newsprint prices (we factor in long-term newsprint price of Rs 27/ kg), we think the company shall register s strong growth in EBITDA margin post the roll-out of Bihar/ Jharkhand editions. We set a peak and terminal EBITDA margin of 41% - amongst the highest in our coverage universe. We believe DB Corp's diversified revenue and EBITDA streams, as well as presence in the regional media, call for a strong terminal growth assumption. Accordingly, we factor in 5% terminal growth rate for cash flows. Our FY12E PT of Rs 312/ share implies Rs 275/ share on FY11E PT. On account of sufficient price-value gap, we initiate on DB Corp. with an ACCUMULATE rating. We believe significant catalyst for price- value convergence shall be: 1/ strong earnings performance from DB Corp in the coming quarters, 2/ clarity about the extent of losses from the company's forays in Jharkhand/ Bihar.
DCF valuation
Rs mn, FY Ends March Revenues Growth EBITDA Margin EBIT NOPLAT Add: Non-Cash Charges Gross Cash Flow Changes in WC Cash Flow from Operations Capex Free Cash Flow PV -FCF PV 2012-21 Terminal Growth PV - Terminal Value Ent Value Net Debt/ Cash Mkt Value Per Share FY11E 12,548 18.1 4,118 32.8 3,652 2,447 466 2,913 627 2,286 600 1,686 1,686 22,837 5% 31,978 54,815 (1,819) 56,634 312 FY12E 14,337 14.3 4,364 30.4 3,862 2,587 502 3,089 717 2,372 600 1,772 1,574 FY13E 16,466 14.8 4,732 28.7 4,195 2,810 538 3,348 659 2,690 600 2,090 1,648 FY14E 18,704 13.6 6,104 32.6 5,530 3,705 574 4,279 748 3,531 600 2,931 2,053 FY15E 21,015 12.4 7,456 35.5 6,846 4,587 610 5,197 841 4,356 600 3,756 2,336 FY16E 23,181 10.3 8,459 36.5 7,813 5,235 646 5,880 927 4,953 600 4,353 2,405 FY17E 25,333 9.3 9,490 37.5 8,808 5,901 682 6,583 887 5,696 600 5,096 2,501 FY18E 27,574 8.8% 10,546 38.2% 9,828 6,584 718 7,302 965 6,337 600 5,737 2,500 FY19E 30,192 9.5 11,820 39.1 11,066 7,414 754 8,168 1,057 7,111 600 6,511 2,520 FY20E 33,700 11.6 13,585 40.3 12,795 8,573 790 9,363 1,179 8,183 600 7,583 2,606 FY21E 37,655 11.7 15,626 41.5 14,800 9,916 826 10,742 1,318 9,424 600 8,824 2,693
38
SECTOR REPORT
January 14, 2011
Risks and Concerns

1. Competitive concerns relating with the durability of the company's dominance/ strength in various geographies: recent quarters have seen aggressive moves by "Patrika" into MP and Chhattisgarh markets. Patrika has registered a strong growth in the recent quarters (MP), in certain cities (notably Bhopal), even though overall numbers remain small when compared with Dainik Bhaskar. 2. The company faces strong execution risks on account of planned launches in Bihar and Jharkhand. These are geographies dominated by Hindustan, the Hindi daily from HT Media. The company's entry strategy in Jharkhand has been blunted by incumbents' across the board reduction in cover price to Rs 2/ copy. Recent surveys also show strong improvements in readership of incumbent dailies, with Hindustan's readership rising 36% over 2009 R2 levels. We believe, however, that DB Corp's management is likely to take a pragmatic and step-wise approach to expansion, and shall be able to manage these risks. We are comforted by the strong track record of DB Corp in launching editions in new geographies, as well as management comments on the same, which indicate that the rollout of Ranchi edition has met with success, and the newspaper is well in competition with the market leader in Ranchi, Prabhat Khabar.. 3. Earnings risks also arise from sharply higher newsprint prices. As stated previously in the report, we do not see reason to believe that a spike from present levels of $650-$700 is likely, and we are likely to see moderate increase in newsprint prices going ahead. High newsprint prices, to the extent observed at present, are likely to be sustained into the future, and we believe the same is built into street estimates. The company uses 20% imported newsprint. 4. Other macroeconomic risks relating with poor adex growth, and declines in particular categories that may affect volumes/ pricing for the company
About The Company

DB Corp's primary revenue-generating activity is newspaper publishing. The company is also involved in other media activities, such as FM radio operations and event management.
DB Corp: Business Overview
Source: DRHP
39
SECTOR REPORT
January 14, 2011
Newspaper publishing: 'Dainik Bhaskar', India's second-largest read daily is DB Corp's most important media property. The company also publishes 'Divya Bhaskar' (Gujarati daily), certain other dailies including 'Business Bhaskar' (Hindi business daily), and 'Bhaskar Gold'. 'DNA' and 'DNA Money' are published by the company under a franchisee agreement (with Diligent Media) in the states of Gujarat and Rajasthan. The company also publishes five periodicals, namely 'Aha Zindagi' (Hindi and Gujarati), 'Bal Bhaskar', 'Young Bhaskar', and 'Lakshya'. Radio operations of the company are under its (56.82% stake) subsidiary, Synergy Media and Entertainment Limited, which operates 17 radio stations under the brand name 'MY FM'. SMEL currently operates 17 FM radio stations in Jaipur, Ahmedabad, Chandigarh, Amritsar, Jalandhar, Indore, Bhopal, Gwalior, Udaipur, Ajmer, Surat, Bilaspur, Nagpur, Kota, Jabalpur, Raipur and Jodhpur. Promoters: The Company is promoted by Ramesh Chandra Agarwal and Sudhir Agarwal. The promoter group consists of several relatives of the promoters. The promoter group has a vast array of business interests, with a total of 97 companies forming a part of promoter group companies. Although there are no immediate risks to the fact, we find it useful to note the fact that the promoters of the company are involved in other media activities, held under different entities - most notably Diligent Media, the publisher of DNA.
40
SECTOR REPORT
January 14, 2011
FINANCIALS: DB CORP LTD

Profit and Loss Statement (Rs mn)
(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY09 9,610 11.4 1,474 (19.4) 290 1,184 -26.4 115 782 -46.0 423 54 359 -56.2 169 2.1 0.5 3.8 14.7 FY10 10,630 10.6 3,429 132.7 378 3,051 157.7 160 2,806 258.7 1,057 38 1,748 387.3 182 10.0 1.3 12.1 36.6 FY11E 12,548 18.1 4,118 20.1 466 3,652 19.7 402 3,607 28.6 1,190 33 2,417 38.2 182 13.3 2.5 15.9 47.0 FY12E 14,337 14.3 4,364 6.0 502 3,862 5.7 245 3,943 9.3 1,301 33 2,642 9.3 182 14.6 3.0 17.3 58.1 Net Fixed Assets Investments Inventory Debtors Cash&Bank balances Loans & Advances Current Assets Total Assets 6,471 238 711 1,774 452 1,052 3,988 10,914 6,475 205 722 1,934 1,951 1,008 5,614 12,294 6,609 205 1,046 2,266 3,446 1,255 8,012 14,826 6,707 205 1,195 2,589 5,027 1,434 10,244 17,156
Balance sheet (Rs mn)

(Year-end March) Shareholder's Equity Reserves Net worth Secured Loans Total Loans Minority Interest Net Deferred tax liability Current Liabilities Provisions Total Liability FY09 1,688 889 2,577 5,631 5,631 124 393 1,817 372 10,914 FY10 1,815 4,546 6,361 3,207 3,207 44 609 1,706 367 12,294 FY11E 1,815 6,672 8,487 3,207 3,207 44 609 2,091 387 14,826 FY12E 1,815 8,679 10,494 3,207 3,207 44 609 2,389 412 17,156
Cash Flow Statement (Rs mn)

FY09 Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investment cash flow Equity Raised Debt Raised Other Financing Cash Flows Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash 782 290 342 (423) 991 (170) (3,138) (3,308) 223 2,195 (217) 2,201 (241) (356) 808 452 FY10 2,806 378 (244) (1,057) 1,882 33 (382) (350) 4,001 (2,424) (338) 1,240 (1,274) 1,499 452 1,951 FY11E 3,607 466 (497) (1,190) 2,386 (600) (600) 251 (529) (278) (13) 1,495 1,951 3,446 FY12E 3,943 502 (328) (1,301) 2,816 (600) (600) (635) (635) 1,581 3,446 5,027
Ratio Analysis
FY09 EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover Interest coverage (x) Debt/ equity ratio Return Ratios: ROE (%) ROIC ROCE (%) Multiples: EV/ Sales EV/EBITDA Price to earnings (P/E) 5.4 35.0 120.0 4.5 13.9 25.5 3.7 11.2 19.2 3.1 10.2 17.5 14.7 7.8 8.9 39.3 22.9 20.3 32.4 27.9 22.5 27.7 27.8 20.7 67.4 1.9 2.9 11.2 66.4 1.6 12.4 2.7 65.9 1.9 81.0 -0.5 65.9 2.2 n/a -3.9 15.3 12.3 3.7 -52.6 FY10 32.3 28.7 16.4 369.6 FY11E 32.8 29.1 19.3 33.4 FY12E 30.4 26.9 18.4 9.3
41
SECTOR REPORT
January 14, 2011
HT MEDIA LTD
PRICE : RS.154 TARGET PRICE : RS.224
532662 HTMEDIA 36,165 31.17 185/125 175,480 234.23
RECOMMENDATION : BUY FY12E PE: 13.9X
Stock details
BSE code NSE code Market cap (Rs bn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume BSE Shares o/s (mn) Source: ACE Equity : : : : : : :
Summary table
(Rs mn) FY10 FY11E 17,920 26.8 3,441 19.2 1,855 140 7.9 30.3 11.0 0.4 17.0 14.3 2.0 10.6 19.6 14.0 3.1 FY12E 21,015 17.3 4,524 21.5 2,624 (2,714) 11.1 41.3 14.4 0.4 20.1 17.4 1.6 7.4 13.9 10.8 2.5 Sales 14,129 Growth (%) 4.0 EBITDA 2,554 EBITDA margin (%) 18.1 Net profit 1,424 Net Debt 2,038 EPS (Rs) 6.0 Growth (%) 333.7 CEPS 9.0 DPS (Rs) 0.4 ROE (%) 15.4 ROCE (%) 12.6 EV/Sales (x) 2.7 EV/EBITDA (x) 15.0 P/E (x) 25.6 P/Cash Earnings 17.1 P/BV (x) 3.6
HT Media owns some of the strongest newspaper brands in India. With #2 English newspaper (HT), #3 Hindi newspaper (Hindustan), and #2 business newspaper (Mint), readership assets are strong. The company's strategy revolves around expansion in large markets. A result of this strategy is that the company has not been able to scale up operations quickly, and margins have suffered. However, readership trends as well as results of operations indicate the company's performance maybe close to an inflection point. In this changing circumstance, we believe that EV/ Sales of 2.3x FY11E, a discount of 30-50% to other media companies, is not justified. We see a possibility of strong scale-up in the company's operations and margins, which is reflected in our DCF fair value of Rs 223/ share. We initiate coverage on the company with a BUY rating.
q EV/ Sales at a large discount to peers, indicates potential for large returns: The fact that HT Media trades at 2.3x EV/ Sales FY11E, compared with 3.5x for Jagran Prakashan, and 3.7x for DB Corp, suggests expectation of either/ both of two factors: 1/ below industry sales growth, 2/ consistent margin underperformance relative to DB Corp/ Jagran Prakashan. HT Media has the second largest topline in the print media business, even as the company has small (adex) market share in properties such as HT Mumbai and Mint. Therefore, if the market belief on the revenue and margin prospects of the company is pessimistic, the returns could be significant. q Strong Readership Trends, Strong Entry Barriers: We argue that the above market expectations seem unrealistic in view of: 1/ strong growth in readership of the company's newspapers, 2/ Strong entry barriers of the company in key Delhi market, 3/ Large markets require large upfront marketing expenses, which we believe will moderate over time. q Near-Term Prospects strong on adex buoyancy, return in metro advertising: We find the near-term prospects of the company encouraging, and downside risks are low. As displayed by recent quarterly results, HT Media's top line growth is higher than peers. We believe the improvement in yields/ advertising volumes that the company is witnessing shall offset the adverse impact of newsprint prices. q Readership Nearing Threshold Levels, Company making aggressive investments in circulation: We find that HT Media is close to critical thresholds in many of its properties, especially in Mumbai, and Uttar Pradesh; these could lead to stronger than expected growth in these geographies. Revenue per reader of HT - Mumbai is ~70% discount to TOI. Revenue/ Reader of Hindustan is a 24% discount to peers - indicating strong potential for a monetization play. UP and Mumbai are the biggest advertising markets in India in their respective categories, and big wins here can have a strong positive impact on valuations. q DCF Value of Rs 223/ share, Risk-Reward Favourable, Initiate with BUY: With assumptions that are, we believe, realistic rather than optimistic, we project that HT Media's fair value Rs 223/ share (FY12 - end estimate). Our estimates factor in continued strength in newsprint prices. In return for lack of visibility in near-term earnings, we believe the stock has the potential to offer strong returns. We find the risk-reward favourable in HT Media, and initiate with a BUY rating. q Risks: Risks to our rating and price target include: lack of visibility in profits as the company is in an aggressive expansion mode on circulation, industry level risks such as spike in newsprint prices, and softening adex environment, as well as competitive risks.
Please see the disclaimer on the last page For Private Circulation
Source: Company, Kotak Securities - Private Client Research; *- Incl Rs.515 mn of tax write back in FY09
Corporates 2% Institutions 14% Foreign 12%
Public 3%
Promoters 69%
Source: ACE Equity
Source: ACE Equity
42
SECTOR REPORT
January 14, 2011
Monetization Key Theme; EV/ Sales a Starting Point

HT Media is the largest print media stock by sales, and among the smaller ones by enterprise value. The company is valued at 2.0x EV/ Sales the lowest among media companies under examination in this report.
EV/ Sales FY11E Media Companies
4.0 3.4 3.7 2.8 3.1
Low EV/Sales relative to peers
2.0
HT Media
Jagran Prakashan
DB Corp
TV-18
IBN-18
Zee Entertainment
The ratio, along with poor margins of the company relative to print peers, suggests that the prevailing thought in the market on HT Media stock must run on one of these lines: a/ HT Media has poor sales growth prospects, b/ HT Media has grown at a high cost to its margins, i.e. due to high circulation expenses and high advertising expenses, and these costs will consistently be high, leading to persistently low margins. We analyse both these possibilities and find that there seems to be an unwarranted scepticism in the market on HT Medias prospects. #1: Sales Growth Prospects We believe HT Medias sales growth prospects stay bright for the following reasons: 1/ Key city (Delhi) for the company remains well defended in the twocompany scenario, 2/ Mumbai edition of the companys newspaper has emerged as #2 broadsheet in the city, which is likely to lead to a strong growth in advertising revenues, 3/ the company is also well exposed to growth in regional markets due to ownership of Hindustan, Indias 3rd largest newspaper. #2 Margin Prospects The companys EBITDA margins are low relative to peers, in our opinion, for the following reasons: 1/ HT Media has, as a matter of strategy, moved into large markets. These markets have also seen fairly high competitive activity, due to which the company has not been able to make quick progress on readership. With recent readership surveys indicating strong growth for Hindustan (UP) and HT (Mumbai), this is clearly changing, and will raise margins of the company significantly. 2/ Non-print operations of the company, loss-makers to the extent of Rs 300 mn, need not be remain loss makers indefinitely into the future.
43
SECTOR REPORT
January 14, 2011
Sales Growth and Margin Prospects - Key Properties

A newspapers sales growth prospects depend primarily on the growth in adex within a city and market share gains. While growth in adex has received ample attention in recent times (regionalization has been perhaps the most discussed theme in industry), we believe it remains important to understand the size of the print market opportunity to develop a view on where HT Media is likely to derive growth from. 47% of all print advertising in India relates to English newspapers, i.e. ~47 Bn advertising rupees are accounted for by English newspapers. Of these, 55% are contributed by two cities: Delhi and Mumbai. Rs 25.85Bn is the total revenue potential of these two markets alone. We examine these markets to understand the size of opportunity, as well as stability, in these markets. Delhi Solid Entry Barriers, HT is #1 in Duopoly Market Hindustan Times is the largest newspaper in Delhi the second largest print market in India, sized at ~Rs 13bn-Rs14 bn. HT used to enjoy monopoly status in Delhi, before The Times of Indias launch. After losing the # 1 position in the city, the newspaper has fought back, and has emerged as the leader in the city once again although the lead over TOI is small.
Average Issue Readership (AIR) 000 Delhi
2400 1800 The Times Of India Hindustan Times
Delhi market is well penetrated by HT Media, BCCL
1200 600 0 2007 R1 2007 R2 2008 R1 2008 R2 2009 R1 2009 R2 2010 Q1 2010 Q2 2010 Q3
44
Source: Company Presentations, IRS
Due to the duopoly situation, Delhi as a market has very strong entry barriers. As of now, a large number of households in Delhi are subscribers to both TOI and HT. Further, Hindi readers also subscribe to Hindustan/ Navbharat Times (a Hindi newspaper published by BCCL), and readers who are interested in business news have a choice of two newspapers: Economic Times and Mint. A subscriber buying three/ four of these newspapers is already paying a monthly bill of ~Rs 300/ month and reading over 120 pages, leaving little wallet/ time space for another newspaper. The volumes served in the Delhi market are staggering. HT and TOI each circulate ~8-9lakh copies in Delhi. A challenger looking to enter the market would have to print over half a million copies, and await readership numbers before gaining significant advertising revenues. The impact on a challengers financials can therefore be large, considering each newspaper would take Rs 5-Rs 6 in raw material expenses (newsprint) alone. Further, distribution issues would be difficult to resolve. TOI and HT typically sell their newspapers in jodi packages to agents/ hawkers, and so initial acceptance of a new product would be difficult. As discussed before, newspaper companies have the option of selling bundled packages to advertisers, which can reduce the cost per contact to the advertiser. HT Media and TOI each have over 1 mn readers in Hindi language papers. This further reduces the scope of a new player entering the market.
SECTOR REPORT
January 14, 2011
Delhi Dominance of BCCL/ HT Media Combine (AIR, 000)

2400
1800
1200
600
0 The Times Of India

Source: IRS Q3 2010
Hindustan Times
Navbharat Times
Hindustan
HT Media and BCCL newspapers, put together, account for ~75% of the total newspaper readership of Delhi, making Delhi a high concentration market. We believe Delhi as a market would grow at ~13-14% over the next ten years, providing the base for HT Media. In our understanding, HT Delhi brings in ~60% of the advertising revenues of HT Media (consolidated). Mumbai : Now #2, Now Needs to crash Mirror HT Media launched the Mumbai edition of its newspaper in year 2003. The launch was co-occasioned by the launch of DNA, a newspaper from Diligent media, as well as Mumbai Mirror a tabloid from BCCL.
HT Mumbais position relative to Mumbai Mirror will be critical
It is important to understand the strategies of these two players in order to understand the positioning of HT Mumbai. DNA launched in Mumbai with the following strategy: 1/ massive media campaign and individual interactions, 2/ large advance bookings at cheap rates that could garner readership (and therefore advertising revenues) from the start, and 3/ use the traction achieved to gain scale needed to become a complete Mumbai newspaper (i.e, with classifieds and the like). The Times of India responded to this by: 1/ raising cover price of the newspaper (The Times of India) with mandatory subscription to an additional newspaper from BCCL (ET/ Maharashtra Times), 2/ launch of a tabloid newspaper, Mumbai Mirror, widening choices for TOI reader and also developing a second line newspaper that could be used to place a ceiling on the advertising rates charged by competitors, and provide an alternative TG to the advertiser. Hindustan Times, stuck between two aggressive competitors decided to lie low and build on Mumbai consistently, rather than sharply. Initially the company ran the newspaper on relatively low costs. As the downturn hit, and Diligent Media found it difficult to sustain its losses, HT Media invested in the business - both in enhancement of the product offering, developing connect with the Mumbai reader, and in brand promotion activities. While HT consolidated its operations in Mumbai, DNA expanded to other markets, including Pune and Bangalore. 3Q2010 IRS survey shows that HT Mumbai has overtaken DNA in Mumbai. Considering that HT media has stepped up its print orders in Mumbai, and currently has a print order that exceeds DNA by 80,000 copies, we believe HT shall establish itself as a clear #2 broadsheet in Mumbai in the next few quarters. Our opinion on HTs position in the Mumbai market, therefore, runs as follows: 1/ HTs slow start need not be seen as an inability but a strategic move, allowing a key competitor (DNA) to exhaust itself prior to resorting to aggression, 2/ Apart from readership trends, the departure of key editorial staff from DNA suggests that the competition from DNA is weakening, and Hindustan Times has an opportunity to bolster its position significantly in the city.
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SECTOR REPORT
January 14, 2011
HT Mumbai versus TOI and DNA

1719 1666 1524 TOI DNA HT 409 270 R1 06 R2 06 R1 07 501 320 R2 07 354 R1 08 603 622 381 R2 08 673 526 705 548 683 503 610 538 606 563 592 575 1553 1571 1553 1520 1478
1461
1451
1559
R1 09
R2 09
2Q2010
Source: Company Presentation, IRS
The second key obstacle ahead of HT Media is Mumbai Mirror, the tabloid publication from BCCL. Mumbai Mirror stands at a readership of ~8 lakh (IRS 2Q, 2010, AIR figures). We note the following about Mumbai Mirror : 1/ Mumbai Mirrors threat lies primarily in attracting local (retail) advertising, and its impact on national advertising is not so significant, 2/ Given MMs readership of 8 lakhs, HT Mumbais yields are set to receive a boost as readership approaches 7-7.5 lakhs. HT Mumbai currently has a readership share of ~20% among broadsheet dailies. However, the advertising revenues share of the newspaper is far lower, at ~6% (FY10) - the difference is, we believe, on account of low yields, and lack of volumes in local advertising. As HT Mumbai establishes itself as a distinct #2, and raises its readership to the level of Mumbai Mirror, we believe volumes as well as yields will rise sharply
Revenue Per Reader TOI vs HT (Rs)
7442
HT 6% Regional Dailies 12% TOI 69%
Source: Company
Mumbai Advertising Market Shares (Value)

Other 13%
1776
TOI
Source: Company
HT
The company has now taken an aggressive, higher circulation based approach in Mumbai. Post the recent scale up, HT Mumbais print order (PO) (3.8 lakhs per day, up from 2.5 lakhs per day) is ~60% of TOI, whereas its readership is only 40% of TOI, therefore, there is a case for rising readership in the near future. Usually, English, metro newspapers have a readership per copy (RPC) of ~2.4. If HT Medias higher print order is met with readership take up, the current print order may result in 7.5 lakhs -8 lakhs readership in the medium-term.
1Q 2010
3Q2010
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SECTOR REPORT
January 14, 2011
HT Mumbai - Estimates and Projections (Rs mn)

4500 3600 2700 1800 900 0 -900 FY11E FY12E FY13E FY14E FY15E FY16E FY17E Revenues EBITDA
Mint: Brings in Important Competencies, Growing at a fast pace Mint, the business newspaper from HT Media has, in a space of 5 years, established itself as the #2 most-read business newspaper of India. As with HT Mumbai edition, the business newspaper has tried to establish an advertising based model in Mumbai. As a result, a large percentage of Mints circulation is effectively negative in net revenues to the editions (Mumbais) topline.
Mint provides long term competencies, will break-even in FY11
Mint has 6 editions namely Delhi, Mumbai, Chennai, Bangalore, Ahmedabad, Kolkatta. We believe Mint provides important competencies to the group in the long-term. First, the newspaper can be utilized to provide the advertiser a greater choice of spread (higher number of metros with selective audience), and therefore has some network benefits. Given The Times of Indias aggression with Economic Times (providing a package of TOI+MM/ ET), the newspaper can potentially be used to provide the reader a combo pack of a general and a business newspaper. Lastly, the newspaper has the potential to develop into niche web property (livemint.com), or a business news channel as and when economies are favourable. Business newspapers across the world have a few interesting characteristics: 1/ Business newspapers have flexibility in (cover) pricing, as the target group is not price conscious. In that sense, content rules, 2/ As the TG is broadly wealthier than is the case with general newspapers, business newspapers tend to enjoy higher yields, 3/ business newspapers are scalable on multiple platforms, perhaps to a greater extent than the general newspapers. As of now, Mint brings in ~Rs 700mn in revenues. The newspaper is in high demand with media buyers, and ranks as the #1 publication in Pitch Barometer, a survey of media buyers. YTD revenues of the newspaper are up 50%. Management has indicated that the newspaper shall break even in FY11.
Mint Revenue and EBITDA Assumptions (Rs mn)
3000 2400 1800 1200 600 0 -600 FY11E FY12E FY13E FY14E FY15E FY16E FY17E Revenues EBITDA
47
SECTOR REPORT
January 14, 2011
Hindustan - The Regional Dimension

HT Medias Hindi newspaper Hindustan, the third most widely read daily in India, has also been displaying strong readership trends. In addition to the benefits enjoyed by Hindi media in general, the newspaper is also leveraged to the high growth being witnessed in Bihar. Bihar, a traditional stronghold of Hindustan, has seen a strong growth in its economy since the end of the JD (U) - led government.
Top Hindi Newspapers, '000,AIR
All India, '000 Dainik Jagran Dainik Bhaskar Hindustan Amar Ujala Rajasthan Patrika Source: IRS R1 2007 17,112 12,512 9,045 8,376 6,945 R2 2007 16,502 12,816 8,547 8,075 7,403 R1 2008 16,386 12,824 8,749 8,091 7,328 R2 2008 16,289 13,000 9,210 8,072 6,667 R1 2009 16,071 12,878 9,302 8,185 6,663 R2 2009 16,095 12,881 9,338 8,300 6,481 1Q 2010 16,315 13,330 9,916 8,491 6,682 2Q 2010 15,925 13,303 10,143 8,417 6,900 3Q2010 15,950 13,488 10,839 8,583 7,217
It is noteworthy that while Hindustan has 10.8 mn readers (compared with Jagran Prakashans 15.9mn, and Dainik Bhaskars 17.9mn), it brings in revenues of Rs 5.7 Bn only implying a discount of 30% (average) per reader.
Revenue Per reader (Rs)
800 600
400 200 0 Hindustan Dainik Bhaskar Dainik Jagran
Source: Kotak Securities Private Client Research
Low monetization is a result of exposure of the company to Bihar and Jharkhand markets. This is likely to change going forward, as a result of higher growth (relative to rest of India) in Bihar and Jharkhand markets, as well as rising exposure of the company to Uttar Pradesh.
Readership pie of Hindustan (AIR)
Other 3% Delhi/ NCR 11% Bihar 42% Uttar Pradesh 29%
Jharkhand 15%
Source: IRS Q3, 2010
48
SECTOR REPORT
January 14, 2011
A key development to watch for would be the entry of Dainik Bhaskar into Hindustans strongholds, Bihar and Jharkhand. The entry of DB Corp in these areas will have an impact on HMVLs (Hindustan Media Ventures Limited) in circulation revenues, in the immediate future. Traditionally, Bihar and Jharkhand have been markets that have seen a healthy circulation revenues, with circulation/ copy as high as Rs 4. DB Corp intends to utilize this as an entry opportunity. Since defending the market would be the primary priority for HT Media, we believe circulation revenues will decline in the near future
State-wise competitive position of Hindustan (AIR, '000)
R1 2007 Bihar, '000 Hindustan Dainik Jagran Prabhat Khabar Jharkhand, '000 Hindustan Prabhat Khabar Dainik Jagran Uttar Pradesh, '000 Dainik Jagran Amar Ujala Hindustan Uttarakhand, '000 Amar Ujala Dainik Jagran Hindustan Delhi, '000 Navbharat Times Hindustan Source: IRS 1,703 790 1,733 837 1,661 947 1,539 1,103 1,569 1,262 1,590 1,183 1,690 1,188 1,724 1,160 1,795 1,163 904 582 2 872 547 847 511 826 555 821 541 823 596 142 849 620 185 831 606 193 805 586 222 9,965 6,446 2,230 9,418 6,080 2,034 9,158 6,138 2,149 9,192 6,165 2,191 9,142 6,278 2,312 9,065 6,381 2,353 9,067 6,517 2,599 8,847 6,525 2,919 8,945 6,749 3,189 1,109 912 792 1,086 1,014 801 1,164 966 851 1,217 923 869 1,252 982 795 1,196 1,004 776 1,353 981 854 1,469 1,001 800 1,630 1,133 823 4,865 2,442 525 4,547 2,595 501 4,384 2,756 418 4,564 2,505 365 4,337 2,410 275 4,331 2,382 284 4,475 2,526 270 4,294 2,512 238 4,515 2,527 264 R2 2007 R1 2008 R2 2008 R1 2009 R2 2009 1Q 2010 2Q 2010 3Q2010
Surveys indicate that Hindustan has, ahead of Dainik Bhaskars launch, bolstered readership significantly. We note that Hindustan has been steadily raising its readership in Uttar Pradesh. The company has raised circulation strongly in Uttar Pradesh, and will, we believe continue to see gains.
Hindustan Revenue and EBITDA Estimates (Rs mn)
10000 Revenues 8000 6000 4000 2000 0 FY11E FY12E FY13E FY14E FY15E FY16E FY17E EBITDA
49
SECTOR REPORT
January 14, 2011
Strong Portfolio of Newspapers Imposes another entry barrier The fact that HT Media has a more diversified portfolio allows it to package deals to both the subscriber and to the advertiser in a different way. To the subscriber, many of the newspapers go in as jodi packages (a combine of HT and Hindustan, or a combine of HT/ Mint). To the advertiser, the company is able to sell a package of HT/ Hindustan / Mint which would help it, produce different TGs for the advertisers. As of now, few publication houses (none, practically, with the exception of BCCL), are able to offer a package like this to advertisers/ subscribers. HT Media is amongst the only print companies in India that has a promising presence in Hindi, English, as well as business news genre. This provides HT Media a unique pool of readership to sell to the advertiser: HT Media is present in two of Indias key metro cities, and can provide reach to Indias elite through its business newspaper Mint. In addition, HT Media is present in some of Indias poorest, but fast-developing states of Bihar and Jharkhand, and has a fast-growing presence in Uttar Pradesh, Indias largest Hindi print market.
HT Newspaper Assets Summary (Relative to Competition), All India Rank-wise Readership 000
8000 6000 4000 2000 0 TOI HT The Hindu
20000 15000 10000 5000 0 DJ DB Hindustan
800 600 400 200 0 ET Mint Business Standard
HT Media has bolstered its presence in the metro cities of Mumbai and Delhi with a radio offering. Fever FM has established itself well in the metros. While it is a #2 channel in Delhi and Bangalore, the channel is also a worthy competitor for the lead channels in Mumbai and Kolkatta. We believe the companys cross-media strategy is useful, in that radio could well be a preferred medium for the local advertiser in the near-term, substituting the newspaper in some sense. Therefore, HT Medias foray into radio represents a desire to cap the downsides that the company may see, and therefore provide greater visibility. Near Term Growth Appears Strong Advertising in metro newspapers has been the worst-hit in the downturn that hit the industry in 2008/ 2009. The reasons for the decline include the relative strength in rural economy, decline in consumer confidence in the urban economy and slowdown in key sectors (real estate, travel and tourism, and financials). We note that HT Media is an important player in two of Indias key metro markets, Delhi and Mumbai, which are believed to account for 57% of the total English market in India.
50
SECTOR REPORT
January 14, 2011
Summary of Indian Print Adex Destinations

Magazines 7% Business Dailies 6% Other language Dailies 23% English Dailies 45%
Other 43% Delhi and Mumbai 57%
Hindi Dailies 19%

Source: Company Presentations
Growth in under performing categories to lead yield improvements in metro markets
Comments from the management, wellness of the indicated sectors, as well as anecdotal evidence from media buyers, suggest that these sectors have picked up. These sectors have a significant bearing on the advertising yields that are received by companies. As such, a rise in advertising shall be most pronounced in these sectors across the key Delhi-Mumbai combine. As per company, volumes in 1HFY11 have risen faster in English newspapers as compared with Hindi newspapers (15% versus 9%). We see HT Media as amongst the best placed companies to benefit from the improved conditions.
Improving advertising yields in Delhi (Indexed to 1QFY11)
140
105
70
35
0 Q1FY10
Source: Company
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
51
SECTOR REPORT
January 14, 2011
Recent Results Indicate Traction, HT Media an Outperformer on Topline In contrast with long-term trends, the company has been reporting strong growth in recent quarters, largely on account of strength in advertising revenues. The company has confirmed that in FY11, metro revenues have also contributed in a meaningful manner to growth.
Quarterly Trends Strong
30% 25% 20% 15% 10% 5% 0% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
Revenue Grow th (%)
EBITDA Margin (%)
We note that 2QFY11 margins have come in sharply lower. This is on account of : 1/ strong declines in circulation revenues, as a result of declines in Hindustan revenues (price war in Jharkhand), and strong subscription growth (~25%q/q) in Mumbai, 2/ losses on account of HT-Burda, 3/ rise in newsprint expenses. Factors related with higher circulation are a long-term positive, in our view, as the company must raise circulation in order to develop long-term competitive strengths. The company shall be able to make up for these in the coming years as readership rises. Moreover, the industry is still in recovery phase, and most of the growth is, as of now, volume-led. As yields improve, we believe that margins would stabilize. The management has clarified that since 2QFY11 was the first year of operation for HT-Burda, there is an element of one-time costs in the financials. The Burda ventures is, in the medium-term, expected to bring in margins of 15-20%.
Long-Term Margins to Improve on account of Operating Leverage

HT Medias newspapers have low operating margins on account of the highly competitive markets that the company is engaged in as well as the high costs that have to be incurred upfront to make a meaningful presence in these markets. For example, HT Media, on account of the slew of newspaper launches that it has done over the past few years, spends Rs 1.4 Bn of its revenues on advertising, a figure nearly twice that of comparables like Jagran Prakashan and DB Corp. Such expenses (as a percentage of revenues, in the least) are bound to decline as the companys advertising revenues grow along with its readership. Promotion also takes the form of poor circulation revenues. We believe that HT Media brings in negative circulation revenues on account of HT Mumbai, and Mint, to the extent of Rs 50-Rs 70mn, as copies are provided in subscription offers , which bring in revenues lower than agent commissions. We believe HT Medias margins will improve strongly on account of operating leverage, with two of its newspapers (Mint and HT-Mumbai) turning to profit in the coming years. We also believe other newspaper of the company shall maintain/ raise their margins. We also expect the Hindi newspaper of the company to expand its margins in line with peers such as Jagran Prakashan and DB Corp as the company begins to bring in stronger advertising revenues in Uttar Pradesh.
52
SECTOR REPORT
January 14, 2011
Revenues and EBITDA

(Rs mn) Revenues - Advertising Revenues - Hindustan % Growth - HT % Growth - Mint % Growth - Circulation Revenues -Hindustan -HT &Mint -Other EBITDA, Total -HT & Mint -Hindustan -Other EBITDA Margin, HT Media -HT Mumbai -HT Delhi -HT Other -Hindustan 1,764 1,177 586 1,500 3,441 2,738 984 (364) 19.2 -18.0 39.4 24.3 19.1 700 9,412 FY11E 17,920 14,126 3,970 FY12E 21,015 16,762 4,860 22.4 10,855 15.3 1,047 49.6 1,638 1,060 577 2,000 4,524 3,235 1,317 71 21.5 -11.1 38.2 23.3 22.3 FY13E 23,327 19,166 5,545 14.1 12,216 12.5 1,405 34.2 1,442 851 591 2,000 5,440 4,020 1,512 134 23.3 -0.5 38.5 26.1 23.6 FY14E 25,815 21,563 6,298 13.6 13,569 11.1 1,697 20.7 1,430 844 585 2,000 6,477 4,717 1,950 203 25.1 4.1 38.6 28.8 27.3 FY15E 28,327 23,907 7,022 11.5 14,836 9.3 2,049 20.8 1,510 832 678 2,000 7,451 5,375 2,399 220 26.3 7.9 39.4 26.3 30.6
HT Media Assumptions and Value Drivers

We factor in 17% advertising growth in HT Medias revenues through FY10-FY13E. Advertising revenues shall be strong on the back of: 1/ strong industry level growth, 2/ return in growth for metros, 3/ readership traction ahead of the industry. Circulation revenues shall decline 10.4% in FY11, on account of: 1/ price war in Jharkhand following DB Corps entry in the state, 2/ higher circulation in Mumbai (which will impact circulation revenues negatively). We believe that going forward, circulation revenues shall continue to remain under pressure from DB Corps entry in Bihar. However, we think Bihar circulation revenues shall be impacted less severely. Also, the company can potentially raise circulation revenues in other geographies. Net-net, we factor in -3% CAGR through FY10-FY13E. Following this, however, we believe there shall be robust growth in circulation revenues, as HT Mumbai, Mint, and Hindustan (UP) come out of the investment mode, and as competitive situation in Bihar/ Jharkhand eases. We factor in newsprint consumption growth of 20% in FY11E. We set newsprint prices at $700/ MT into perpetuity. With declining expenses on advertising and promotion, we expect EBITDA margins to expand 5 ppt in the next two years. Net-net, we see PAT expanding 38% CAGR through FY10-FY13E.
53
SECTOR REPORT
January 14, 2011
Revenue and Profit Model HT Media

Rs mn, FY ends Mar Revenues o/w Newspapers o/w Circulation Revenues Operating Expenses Cost of Goods Personnel Expenses Advertising Expenses Other Operating Expenses EBITDA EBITDA Margin EBIT PBT PAT after Minority Interest Adjusted EPS FY09 13,591 13,082 1,540 12,586 5,587 2,419 1,541 3,039 1,005 7.4% 316 324 326 1.4 FY10 14,129 13,243 1,833 11,410 11,575 4,760 2,520 1,159 3,137 2,554 18.1% 707 1,847 1,961 1,413 6.0 FY11 17,920 15,890 1,764 14,126 14,479 6,488 3,074 1,275 3,643 3,441 19.2% 741 2,700 2,692 1,844 7.9 FY12 21,015 18,399 1,638 16,762 16,491 7,458 3,535 1,466 4,032 4,524 21.5% 762 3,762 3,923 2,605 11.1 FY13 23,327 20,608 1,442 19,166 17,888 7,852 4,065 1,686 4,284 5,440 23.3% 782 4,658 5,133 3,404 14.5 FY14 FY15 25,815 28,327 22,993 1,430 21,563 8,256 4,675 1,854 4,552 6,477 25.1% 803 5,675 6,512 4,315 18.4 25,416 1,510 23,907 8,625 5,377 2,040 4,835 7,451 26.3% 823 6,628 7,897 5,233 22.3
o/w Advertising Revenues 11,335
19,338 20,876
Depreciation and Amortization 688
Source: Company Reports, Kotak Securities Private Client Group
Valuation
We value HT Media based on a DCF methodology, the details of which are provided below. Based on the same, we see valuation of HT Media at Rs 223/ share.
Valuation
Rs mn, FY ending March Revenues Growth (%) EBITDA Margin (%) EBIT NOPLAT Add: Non-Cash Charges Gross Cash Flow Change in Working Capital Operating Cash Flow Less: Capex Free Cash Flow Discounted Free Cash Flow Assumptions: WACC Terminal Growth Rate (FCF) Fair Value Computation: PV 1-10 PV - Terminal Value PV, Cash Flows to Firm Less: Net Debt PV, Equity PV, Equity per Share 12.6% 4.0% Rs mn % Value 24,941 25,886 50,827 (1,760) 52,587 224 -3.3 47.4 49.2 FY11E 17,920 26.8 3,441 19.2 2,700 1,809 741 2,550 (100) 2,450 700 1,750 1,750 FY12E 21,015 17.3 4,524 21.5 3,762 2,521 762 3,282 (134) 3,149 700 2,449 2,175 FY13E 23,327 11.0 5,440 23.3 4,658 3,121 782 3,903 86 3,989 500 3,489 2,752 FY14E 25,815 10.7 6,477 25.1 5,675 3,802 803 4,605 (266) 4,339 550 3,789 2,654 FY15E 28,327 9.7 7,451 26.3 6,628 4,441 823 5,264 (335) 4,929 605 4,324 2,690 FY16E 31,027 9.5 8,483 27.3 7,639 5,118 844 5,962 (405) 5,557 666 4,891 2,702 FY17E 33,949 9.4 9,555 28.1 8,690 5,823 864 6,687 (446) 6,241 732 5,509 2,703 FY18E 36,806 8.4 10,376 28.2 9,492 6,359 885 7,244 (491) 6,754 805 5,948 2,592 FY19E 39,596 7.6 10,962 27.7 10,056 6,738 905 7,643 (540) 7,104 886 6,218 2,406 FY20E 42,210 6.6 11,123 26.4 10,198 6,832 926 7,758 (594) 7,165 974 6,190 2,127 FY21E 44,743 6.0 12,528 28.0 11,485 7,695 1,043 8,738 (653) 8,085 1,072 7,013 2,141
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Our price target does not envision a situation where HT Media brings in margins in line with peers (our DCF valuation above factors in a peak EBITDA margin of 30%, and terminal margins of 29%, well lower what we incorporate for peers DB Corp and Jagran Prakashan). We believe that if HT Media is able to clear hurdles set up by competition, the company could well achieve margins that peers enjoy, leading to greater upsides. Our valuation implies a PER of 21xFY12 EPS estimate. HT Media trades at NTM EV/ Sales of 1.6 close to the lowest band that the company has traded at. Given that the multiple is at a point when the outlook for the company appears bright, we believe that the downside, going forward, is limited.
EV/ Sales HT Media
100000 75000 50000 25000 0 Dec-07 Aug-05 Oct-06 Sep-09 May-07 Feb-09 Mar-06 Apr-10 Jul-08 Nov-10
55
(Rs mn)
4.5x 3.5x 2.5x
1.5x
Source: Bloomberg, Kotak Securities - Private Client Research
We initiate coverage on HT Media with a BUY rating and a price target of Rs 223/ share (FY12 end). Bull Case for HT Media would mean strong upsides from Target Price HT Mumbai has raised its print order meaningfully over the past year. As of now, HT Mumbai has a print order of 3.8 lakh copies a rise of about 25% y/y. HT Mumbais current RPC is in the region of 1.75, as compared with ~2.3 for TOI. At an assumed RPC of 2, HT Mumbai chould have a readership of 7.5 lakhs in the next two years. Assuming all others remain same, HT Mumbai has the potential to be the #2 broadsheet in Mumbai with a readership share of 27% - or a market potential of ~20%. Given Mumbai market's growth of 14%, this would translate into Rs 350 crores - twice the revenues as it gains now. The company has also ramped up its circulation in Uttar Pradesh, and could witness a similar upswing in UP, if it were to establish itself as # 2 in key cities.
SECTOR REPORT
January 14, 2011
Circulation: Hindustan (UP/ Uttarakhand) (mn copies)

0.8 0.6 0.4 0.2 0 2007
Source: Company
2008
2009
2010 (Q2)
We are not bullish on the prospects of HT Media's digital assets. While reasons are not clear to us, the company has failed to succeed in its ventures, the most important of which is shine.com. The company runs in EBITDA losses of Rs 300 mn on this account.
Risks/ Concerns
1. Competitive action from Bennett Coleman & Co. Ltd. Remains the largest risk faced by HT Media. In the past, BCCL has taken aggressively competitive positions against Hindustan Times in Delhi. Given HTs rising influence in Mumbai, aggressive discounting by TOI is a large risk. However, we think that this risk is mitigated by the somewhat minor growth assumptions (relative to the size of the market) that we make in the case of Hindustan Times. 2. Competitive action from DB Corp related with Bihar and Jharkhand markets is a second important competitive risk that HT Media faces. We estimate that Hindustan derives Rs 1800 mn in advertising revenues and ~Rs 700 mn in circulation revenues from these geographies. Our models factor in a decline in circulation to the extent of Rs 150 mn in FY11(from Jharkhand). Our discussions with the company indicate that competitive action is unlikely to be as swift in Bihar, as it has been in Jharkhand (Jharkhand competitive situation has worsened as Prabhat Khabar has dropped its cover price to Rs 2/ copy in all Jharkhand editions). We believe our estimates on advertising revenues are conservative enough to accommodate DB Corp as the second largest player in these markets. Since HT Media has acted swiftly in reducing cover prices and maintaining price competitiveness in these markets, we believe it is likely that the company shall be able to defend its turf and advertising revenues shall continue to grow robustly. We factor in 17% CAGR in advertising revenue growth in Bihar and 15% CAGR in advertising revenues in Jharkhand over the period FY11E-FY15E. 3. Lack of Earnings visibility may impact valuations: Due to competitive factors, the company may raise circulation/ marketing spends sharply in certain geographies. Although such actions would, in the long-term, be beneficial for the company, they are likely to create short/ medium term lack of visibility in earnings. As such, we may be early on our call in so far as the price target is concerned. 4. Sharp spikes in newsprint prices: While we have factored in continued strength in newsprint expenses, there could be significant earnings risks from sharply higher (than $700/MT, built into our estimates) newsprint prices. We do not attempt a sensitivity analysis on the same, as we think newspapers have considerable flexibility in managing consumption as newsprint prices rise, as shown in the downturn. Even so, sharply higher newsprint prices can potentially prolong the scale-up of operations that HT Media intends to achieve.
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SECTOR REPORT
January 14, 2011
About The Company

HT Media is involved largely in the business of publishing newspapers. The company publishes Hindustan Times, the #2 English daily of India, Hindustan, the #3 Hindi daily of India, and Mint, the #2 business daily of India. Hindustan Times. The company is also involved in publication of magazines. The company covers most of the metros with Hindustan Times (Delhi, Mumbai, Kolkatta), and Mint (other metros shown in the chart below). Hindustan, the Hindi newspaper of the company operates in Bihar, Jharkhand, UP, and Uttarakhand, apart from the NCR region.
Geographic Coverage of HT Media Print Business
Source: Company Presentation
The company also owns radio operations in four metro cities (Mumbai, Delhi, Kolkatta, and Bangalore), operated under the brand Fever 104. Internet activities of the company, including newspaper websites, social networking (desimartini.com), and classifieds (shine.com) are owned by the company via subsidiary Firefly e-Ventures. Through joint venture HT-Burda (51:49 JV with Burda Druck GmbH), the company is also engaged in the business of third party printing and press work. The company is promoted by Shobana Bhartia.
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SECTOR REPORT
January 14, 2011
FINANCIALS: HT MEDIA
(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY09 13,591 13.0 1,005 -41.0 688 316 -72.1 143 324 -76.7 125 38.5 199 -80.4 234 1.4 0.3 4.3 35.9 FY10 14,129 4.0 2,554 154.2 707 1,847 483.7 178 1,961 505.0 537 27.4 1,424 614.4 234 6.0 0.4 9.0 42.4 FY11E 17,920 26.8 3,441 34.7 741 2,700 46.2 323 2,688 37.1 833 31.0 1,855 30.3 234 7.9 0.4 11.0 49.9 FY12E 21,015 17.3 4,524 31.5 762 3,762 39.4 295 3,917 45.7 1,293 33.0 2,624 41.5 234 11.1 0.4 14.4 60.7

(Year-end March) Shareholder's Equity Reserves Net worth Secured Loans Total Loans Minority Interest Net Deferred tax liability Current Liabilities Provisions Total Liability Net Fixed Assets Investments Inventory Debtors Cash&Bank balances Loans & Advances Other Current Assets Current Assets Total Assets FY09 470 8,015 8,485 3,706 3,706 (69) (207) 5,227 172 17,728 7,717 3,035 1,756 2,199 705 2,167 148 6,976 17,728 FY10 470 9,241 9,711 3,125 3,125 218 (178) 6,377 279 19,888 8,407 4,755 1,200 2,422 1,087 1,959 58 6,726 19,888 FY11E 470 10,998 11,468 3,125 3,125 218 (178) 7,715 353 23,058 8,166 4,755 1,522 3,072 2,985 2,485 73 10,138 23,058 FY12E 470 13,524 13,994 3,125 3,125 218 (178) 8,756 414 26,686 7,704 4,755 1,785 3,603 5,839 2,914 86 14,227 26,686

FY09 Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investment cash flow Equity Raised Debt Raised Other Financing Cash Flows Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash 324 688 835 (125) 1,722 (379) (2,576) (2,954) (475) 1,476 (27) 974 190 (69) 774 705 FY10 1,961 707 1,859 (537) 3,989 (1,720) (1,397) (3,116) (159) (581) 179 (561) 70 381 705 1,087 FY11E 2,688 741 (100) (833) 2,497 (500) (500) 13 (112) (98) (0) 1,898 1,087 2,985 FY12E 3,917 762 (134) (1,293) 3,252 (300) (300) 23 (121) (98) 0 2,854 2,985 5,839
Ratio Analysis
FY09 Margins and Growth: EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover Interest coverage (x) Debt/ equity ratio Return Ratios: ROE (%) ROIC ROCE (%) Multiples: EV/ Sales EV/EBITDA Price to earnings (P/E) 2.9 39.0 111.0 2.7 15.0 25.6 2.0 10.6 19.6 1.6 7.4 13.9 3.8 2.4 3.5 15.4 16.8 12.6 17.0 25.4 14.3 20.1 35.6 17.4 59.1 2.0 1.0 8.3 62.6 1.8 6.3 5.6 62.6 2.2 10.8 0.4 62.6 2.6 12.0 -7.5 7.4 2.3 2.4 -68.0 18.1 13.1 10.0 333.7 19.2 15.1 10.3 30.3 21.5 17.9 12.4 41.3 FY10 FY11E FY12E
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SECTOR REPORT
January 14, 2011
IBN 18 BROADCAST LTD

PRICE : RS.91 TARGET PRICE : RS.107 RECOMMENDATION : ACCUMULATE FY12E PE: 56.7X
Stock details
BSE code NSE code Market cap (Rs mn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume BSE Shares o/s (mn) Source: ACE Equity : : : : : : : 532800 IBN18 21,577 41.98 134.8/75 279,000 237.50
IBN 18's investment case is built on the success and lack of monetization (subscription revenues) of its mass entertainment channels (particularly Hindi GEC Colors)held under JV Viacom 18. We build a case for contained expectations on subscription revenues of IBN 18, given significant bouquet gaps in the company's properties. We believe that domestic subscription revenues can be scaled up to ~50% of revenues of Zee Entertainment. Our DCF valuation of the stock, at Rs 107/ share represents an upside to CMP. We rate IBN 18 ACCUMULATE.
FY12E 9,562 27.6 828 8.2 381 1,352 1.6 (177.3) 2.7 6.0 5.3 2.4 27.7 56.7 33.2 3.3
Summary table
(Rs mn) ales Growth (%) EBITDA Net profit Net Debt EPS (Rs) Growth (%) CEPS DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) FY10 6,035 230.3 (328) (1,096) 1,971 (6.0) 17.4 (5.0) (33.4) (6.0) 3.1 (15.1) n/a 4.4 FY11E 7,496 24.2 (13) (1.0) (492) 1,348 (2.1) (65.6) (1.1) (9.9) (3.5) 3.1 (43.8) n/a 3.5
q Investment Case to be built on monetization of mass channels' viewership: IBN-18's operations consist of news channels as well as mass entertainment channels. News channels have not, thus far, generated value for the company, and given the poor economics of the space, we do not foresee the channels creating value for the company in the near term. In our opinion, IBN-18's investment case is built largely upon the under-monetization of its mass channels' viewership, especially in that the company's subscription revenues appear far lower than listed peer Zee Entertainment. q Existing Operations have bouquet gaps, monetization to be limited to ~50% ZEEL: While there are strong reasons to believe a scale-up in IBN-18's revenues, the extent of the same is debatable. Considering that: 1/ network viewership of the company is about half that of Zee network, 2/ the company still doesn't have presence in three key genres, i.e. Hindi movies, regional channels, and sports, the achievement of subscription revenues equivalent to ZEEL appears doubtful, at least in the Indian subscription market. We believe that from existing operations, the company can bring in, at best, ~50% of ZEEL's subscription revenues, in domestic operations. q Scale up in subscription revenues a gradual process, high dependence on maintenance of Colors' ratings: Moreover, the scale-up to such levels shall be a process that is slow and constantly dependent on ratings performance of key channel, Colors. We factor in subscription revenue growth of 40.9% CAGR FY10-FY15E. Advertising revenues of the company have been scaled to a fair degree and we expect growth to be in the range of 13-14% CAGR through FY15E. We expect IBN-18 to breakeven in FY12, and expect the company to ramp up margins to 15% by FY15E. We see terminal EBITDA margin of the company at 29%. q Valuation: Our DCF valuation suggests value of Rs 107/ share (FY12 end). IBN 18 continues to be a stock with strong earnings risks, given that the company is still an evolving broadcaster, in so far as developing its bouquet is concerned. However, we derive some comfort from recent declines in the stock. We recommend ACCUMULATE. We believe that the proposed restructuring of Network 18 group entities shall not alter the valuation of IBN-18 in a significant way.
EBITDA margin (%) (5.4)
(56.4) (1,785.0)
Public 14% Corporates 6% Institutions 10% Foreign 12%

Source: ACE Equity
Promoters 58%
Source: ACE Equity
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SECTOR REPORT
January 14, 2011
q Network Scale-Up a Necessity, May lead to value improvement: In order to credibly grow at higher rates, and create greater value, the company should be able to scale up into large genres where it does not have a significant presence, including Hindi movies and regional entertainment channels. While bargaining power with distributors shall be helped by newly forged partnership with Sun TV Network, the company shall have to scale up presence in other key genres in order to compete with key channels. With certain simplifications, we believe a credible case of an upside of Rs 10-Rs15/ share maybe made if the company were to launch channels in (Hindi) movie genre and two regional languages. q In view of restructuring (underway), TV-18 may be a better way to participate in the monetization story: Given restructuring that is underway (expected to be completed by FY12 beginning), we think there is a value gap between TV-18 and IBN-18 stocks at the proposed swap ratio. We therefore find a case for investment in TV-18 to be stronger than IBN-18 itself, if one were to find that the valuation of Network 18 at CMP is appropriate. At our computed DCF value of IBN 18 (Rs 107), and with calculations for valuation of Network 18 broadly in line with CMP, we think TV-18 has a potential upside of 33%. q Risks: IBN18, being a new entrant in the entertainment space, has significant upside and downside risks. While downside risks relate mostly to loss of traction in Colors and inability to bring in subscription revenues to the extent it is envisaged, upside risks relate with development and successful monetization of channels in new genres, relating to movies and regional general entertainment. We believe there are significant execution risks to the company's scale up plans, and do not find it useful to expect higher growth on account of operations in movie channels, and regional channels that the company is likely to launch.
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SECTOR REPORT
January 14, 2011
Company Description
IBN 18, promoted by Network 18, has broadcasting operations in both news and entertainment genres. The company (standalone) owns and operates two news channels - CNN-IBN and IBN-7 (Hindi news). In a joint venture with the Lokmat Group, the company operates Marathi News channel IBN-Lokmat. Entertainment channels of the company are held under subsdiary Viacom 18 - which owns Colors (Hindi GEC), MTV (music channel, with programming geared to youth), vh1 (English music), and Nickeledeon (kids channel). Through a restructuring affected by the Network 18 group in FY11, IBN18 is also likely (pending legal and shareholder's approvals) to own and operate TV-18's broadcasting operations, which include two key business news channels of India namely, CNBC - TV18 and CNBC - Awaaz. The restructuring is likely to be completed in FY11 - end / early FY12.
Operations Summary - IBN 18
IBN-18 Viacom - 18 IBN- lokmat TV - 18
Source: Kotak Securities - Private Client Research; Note: CNBC channels shown above, are presently in TV-18, and shall be part of IBN 18 (New TV-18) after reorganization.
While news broadcasting operations of the company/ group have a long history, the company has recently moved into mass entertainment with joint venture Viacom - 18. This move of the company, in our opinion, is designed to provide IBN18 an entry into the subscription revenue market of India. News operations in India are not differentiated sufficiently, and fragmentation is high - meaning low ability to raise advertising revenues. Further, competition bids up the cost of operations. For this reason, news broadcasters in India score poorly on profitability.
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SECTOR REPORT
January 14, 2011
News Broadcasting - Lack of Visibility in Value Creation

Due to high competitive intensity, we are bearish on the entire (general) news broadcasting space. As of now, English/ Hindi news are amongst the most competitive genres, with Herfindahl Index of 0.11 for Hindi news channels and 0.2 for English news channels.
Channel Shares: English News
BBC World New s 2% New s X 5% New s 9 6% Headlines Today 14% CNN 1% Times Now 28%
News broadcasters: confusion on content, leadership difficult to obtain or maintain
NDTV 21%
CNN-IBN 23%
Source: TAM, Data for Week 51, TG: 25+; Data extracted from exchange4media.com
Channel Share: Hindi News

P7 New s DD New s 2% CNEB 2% 1% New s 24 Aaj Tak 5% 16% TEZ 6%
Live India 6% Samay 6%
India New s 15%
NDTV India 8% Zee New s 9% Star New s 14% IBN 7 10%
Source: TAM, Data for Week 51, 2010, TG: 15+, Data extracted from exchange4media.com
One of the reasons that led to growth in the news channels space was that the space provided the male target group (TG), and was, in that sense, the only alternative to advertising on sports channels. Moreover, it was believed that news channel viewers were opinion makers and therefore higher quality audience, deserving higher advertising rate per rating point.
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SECTOR REPORT
January 14, 2011
As competition in the space has heated up, the following has changed: 1/ Advertisers have reason to be indifferent between news channels. In the English space, there is no clear leader. CNN-IBN/ Times Now/ NDTV continually displace each other for the #1 spot. While Hindi news genre has been consistently led by Aaj Tak (TV Today), competitors have been close to the leader in the recent past, 2/ News is not seen as differentiated, therefore the viewer is unwilling to pay a subscription fee for it, and subscription-based models have not emerged, 3/ A race for ratings has led to increasing amount of entertainment content (for example:, portions of comedy shows, film award functions and the like) taking up disproportionate time on news channels. This afflicts Hindi news more than English news. This makes the task of programming on news channels challenging, since there is considerable confusion in content itself, 4/ The effort to stay ahead in a competitive market has led to escalation in costs, especially on distribution and employees have risen in a big way, thus erasing profitability across news broadcasters.
Expect no value creation from news operations in the medium term
We are unable to see how the situation can change meaningfully in the news genre in the medium term. As we see it, news channels shall not be creators of value in the medium term. As such, we do not see channels CNN-IBN, IBN7, and IBN Lokmat as critical assets, in generation of value for the company.
IBN 18 Margins and Revenues (Standalone Operations)
4500 3000 1500 0 -1500 -3000 -4500 FY09 FY10 FY11E FY12E FY13E FY14E Revenues (Rs mn - LHS) EBITDA Margin (% - RHS) 45% 30% 15% 0% -15% -30% -45%
Source: Company Reports - Kotak Securities - Private Client Research
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SECTOR REPORT
January 14, 2011
Viacom - 18: Breakthrough into Mass Viewership

We begin our discussion with the broadcasting properties of the Network 18 group (new TV-18). These have been the most stellar performers in the broadcasting space, in so far as growth in viewership is concerned. From a mere 0.9% viewership share in year 2005, Network 18 group's television channels have developed an 8% share of the total TV viewership of India. The primary reason for the change is the company's entry into new mass genres via Viacom -18.
Network Viewership
Source: Business Standard
In line with viewership, revenues of the Network - 18 group have seen a strong rise in revenues.
IBN - 18 Revenues FY07-FY10 (Rs mn)
8000 Other (Subsidiary) Revenues Standalone Revenues
6000
4000
2000
0 FY07
Source: Company reports
FY08
FY09
FY10
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SECTOR REPORT
January 14, 2011
The Way Forward to Profitability

Thus far, Viacom 18 has relied primarily on advertising revenues to bring in growth. While this has resulted in a significant achievement - in that Colors is not a drag on the company, the company is yet to be achieve EBITDA profitability. Hindi GECs, given high costs of operations and fluctuating viewership, must develop strong subscription revenues in order to achieve stability in operations. As of FY10, Viacom 18 brought in Rs 1.1Bn in revenues and Rs 314 mn in EBITDA losses - even as Colors had unexpectedly risen to the #1 position in the Hindi GEC space - widely believed to be the cornerstone of strong advertising and subscription revenues, as well as development of a performing bouquet. A comparison with Zee Entertainment is essential to see the investment argument for IBN18. Zee Entertainment, a broadcaster with a fully developed subscription model in addition to a strong bouquet, has brought in consistent margins of 20% -35% through the past decade. ZEEL's margins have been able to withstand the competitive pressure that the company had to face, even while its key channel (Zee TV) was, for an extended period, forced to the # 3 position in the space.
Monetization of Colors key factor to watch for
The primary reason why Viacom 18 is unable to generate margins similar to Zee Entertainment is the fact that the company (Viacom 18) does not possess a significant subscription revenue stream at present. Collection of subscription revenues depends largely on the viewer pull, which can be developed through strong presence in mass genres. Globally (as well as for select companies in India), broadcasters are able to have a roughly equal stream of revenues from advertising and subscription. In India, most broadcasters have a 35:65 ratio between subscription and advertising (Source: TRAI). This clearly does not apply to IBN-18, with 11% revenues from subscription, and 89% revenues from advertising (estimated by Kotak Securities, Private Client Group). The investment case for IBN - 18 (NEW TV 18) depends largely on the extent to which one believes that this gap may be filled.
IBN-18 Revenue Streams (FY11E)

Subscription Revenues 4%
ZEEL Revenue Streams (FY11E)

Other, 1535, 5%
Subscription Revenues, 11084, 39%
Advertising Revenues, 15746, 56%
Advetrising Revenues 96%

Source: Kotak Securities - Private Client Research Source: Kotak Securities - Private Client Research
In FY10, Colors went pay, and received fixed revenues through the year. The channel was distributed by The One Alliance, which distributes Sony channels. The company had agreed to the fixed arrangement in order to ensure that price for Colors did not dissuade operators from carrying the channel. Also, the management saw merit in aligning with The One Alliance in order to ensure that the company was carried by a bouquet that was set to benefit from IPL - which was carried by The One Alliance (Set Max). In FY11, the company has forged a new venture - Sun 18 - that will carry the channels of the Network 18 group and Sun TV Network. We believe the development of a strong subscription stream for IBN-18 (Viacom 18) shall not be easy, and will take time to scale up. We see three key factors that are a hindrance to achievement of strong subscription revenues. We compare the company with ZEEL on these factors
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SECTOR REPORT
January 14, 2011
1. Legacy: ZEEL was one of the first broadcasters in India to turn pay. The company was able to affect a change to pay when it held top positions in genres that were strongly placed, and when competitors were few. ZEEL also was among the first movers in the international markets 2. Presence of a Strong Bouquet: ZEEL has continually strengthened its channels' bouquet that has created mass demand for "must have" channels. While the flagship channel was losing viewership to Star and Sony, ZEEL strengthened its presence in regional space. ZEEL has also had strong partnerships - most notably with Turner, due to its strength in distribution - which creates demand for mass channels (such as Cartoon Network) as well as specialty channels (such as HBO). One of the reasons why ZEEL continues to invest heavily in sports is the company's intent to utilize the "must have" factor to extract subscription revenues from errant cable operators.
Viewership Across Genres
Music 2% Terrestrial Regional Music 2% 2% Sports 3% Hindi New s 3% Regional New s 4% Regional Movies 4% Kids 6%
Other 4%
Monetization faces certain hurdles as bouquet is incomplete
Hindi GEC 26%
Cable 8% Hindi Movies 12%
Regional GEC 24%
Source: PWC (TAM Data), Year : 2009
3. Viewership Pull: The buzz around a channel/ property, including celebrity shows/ strength in programming and the like. On this count, Colors is strongly placed, with shows such as Fear Factor - Khatron Ke Khiladi, Bigg Boss, and other reality formats. We see several gaps in the IBN-18 bouquet on these factors. While the company has compensated for the lack of regional channels in its bouquet via the Sun 18 alliance, the company is yet to develop a strong Hindi movie channel, and a strong sports franchise. These two segments account for ~16% of the total viewership in India, and are significant factors of viewer pull that determines rates. While Colors has developed a strong viewership in the first year of operations, and has a number of brands that create buzz, we note that the channel has, in the most recent past, lost its #1 position quite decisively to Star Plus
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SECTOR REPORT
January 14, 2011
Quarterly Viewership Share of Hindi GECs

(%) Star Plus Colors Zee TV Sony Entertainment TV SAB Imagine TV Star One DD1 Sahara One Star Utsav 9X Other Network Shares: Star (Plus + One + Utsav) Sony + SAB Viacom 18 Zee 39.3 11.1 26.1 41.3 11.1 21 36.1 11.2 10.9 18.6 32.3 12.2 20.2 16.2 32.8 11.1 22.3 17.5 28.9 11.8 22.1 19.7 26.9 15 22.2 19.8 23.7 18.2 23.8 18.5 26.1 17.3 22.6 19.4 30.1 17.8 20.4 18.8 31.1 21.2 20.3 17.0 Q108 30.6 26.1 8.2 2.9 6.5 6.4 6.1 6 2.3 4.9 0 Q208 31.5 21 8.2 2.9 7.7 6.6 4.2 6.4 3.2 8.3 0 Q308 26.4 10.9 18.6 8.7 2.5 7.2 7.2 4 5.8 2.5 6.2 0 Q408 22.7 20.2 16.2 8.5 3.7 6.3 7.1 3.4 4.5 2.5 4.8 0.1 Q109 24.9 22.3 17.5 7.1 4 5.8 5.4 3.7 3.9 2.5 2.5 0.4 Q209 22 22.1 19.7 7.2 4.6 8.2 4.9 2.8 3.4 2 1.9 1.2 Q309 21.4 22.2 19.8 9.8 5.2 8.8 3.9 2.9 2.5 1.6 1.4 0.5 Q409 18.9 23.8 18.5 12.8 5.4 7.8 3.5 4.5 2.3 1.3 0.9 0.3 Q110 21.6 22.6 19.4 11.1 6.2 8 3.1 3.3 2.2 1.4 0.6 0.5 Q210 25.2 20.4 18.8 11.4 6.4 7.3 3.3 3.1 1.9 1.6 0.2 0.4 Q310 25.6 20.3 17.0 13.3 7.9 5.9 3.9 2.1 1.9 1.6 0.2 0.3
Source: TAM (All India), Data Published in Business Standard
Most large GEC players have a few channels, and may have a larger share of the GEC pie than what is suggested by standalone channels. With this perspective, it requires note that Sony has developed a significant property in SAB TV, and the two channels now account for the second largest chunk of Hindi GEC viewership, next to Star. This too may have implications for the subscription revenues that Colors will likely collect. In development of an international subscription revenue stream, the company shall face issues similar to those faced in the Indian markets, with carriage being the key issue. IBN-18 has started broadcasting operations in the USA, UK, and the Middle East. As of now, these channels are largely available free to air (FTA), but the company intends to go pay in these geographies in FY12. Medium-term, we believe the company will need to at least launch a Hindi movies channel. The company is trying to develop an independent distribution line (via acquisition of TIFC), which will likely help secure long-term content for the company.
67
SECTOR REPORT
January 14, 2011
Viacom 18 - We factor in strong growth Despite the challenges, we factor in a strong growth in revenues of IBN - 18, led by subscription revenues. We project that the subscription revenues of Colours could rise to Rs 5.5Bn in FY12 - up from Rs 1.3Bn in FY10. Since the company does not provide data on subscription revenues and there have been certain changes in the distribution structure in FY10/ FY11, we start with explicit assumptions on subscription revenues' sources from 2012(E). Our revenue assumptions are provided below:
Revenue Model, Viacom - 18 (owned 50% by IBN18)
Assumption and Estimates, Viacom 18 Revenues (Rs mn) Revenues Advertising Revenues -o/w Advertising Revs, Colors -o/w Advertising Revs, Other Subscription Revenues -o/w Subscription Revs, Indian Ops -Analogue Revs -DTH Revs Driver: Subs> <Driver: ARPU> -o/w Revenues, Intrenational Ops FY10E 7,000 5,000 2,000 1,336 1,336 NA NA NA NA FY11E 8,630 6,250 2,380 1,937 1,537 NA NA NA NA 400 FY12E 9,925 7,188 2,737 4,089 3,089 2,000 1,089 15 6 1,000 FY13E 11,276 8,266 3,011 5,552 3,552 2,700 1,651 20 7 2,000 FY14E 12,817 9,505 3,312 6,585 4,085 2,781 2,359 25 8 2,500 FY15E 14,574 10,931 3,643 7,272 4,697 2,864 3,052 28 9 2,575
Source: Kotak Securities - Private Client Research; Note: The company does not provide details of its revenue break-up, nor of its subscription revenues. The above are based on assumptions made by Kotak Securities.
IBN-18 has begun to receive pay revenues from overseas. The overseas revenue stream is strong for players like Zee Entertainment, Star India, and Sony (India). Zee Entertainment, the only listed broadcasters among those receiving international subscription revenues, brings in Rs 4 Billion in international subscription revenues. Zee Entertainment usually runs a bouquet of 3-5 channels in international markets, important among which are Zee TV and Zee Cinema. Considering that the bouquet of Viacom is well-weaker than that of ZEEL, we have factored in small realization from DTH operators (Rs 6, versus about Rs 20 received by ZEEL for its exhaustive bouquet), and raised the same gradually. We believe the domestic subscription revenues of the company (Viacom -18) are scalable to 50% of ZEEL levels. As international bouquets of ZEEL are not very different (usually carry two important channels, including one for movies), we factor in a full scale up of Viacom 18's international operations to ZEEL levels by 2014E.
68
SECTOR REPORT
January 14, 2011
Revenue Model - IBN 18 Given IBN-18's current low revenues from subscription, the company is set to witness strong growth in subscription revenues, as discussed on the previous page, through JV Viacom - 18. . The company has already extracted significant benefits on advertising revenues of strong viewership of Colors. Vaicom 18's other channels remain competitive in their respective genres. While Nickelodeon has clearly established itself as a topline childrens' channel, MTV continues to maintain a strong brand equity in a cluttered market. Viacom 18 is strategically raising original content on MTV, effectively turning it into a second-run GEC with youth focus, which would help the channel generate better yields. We factor in advertising growth revenues in line with the industry, for IBN 18 channels.
Viewership: Kids
Disney XD 8% Disney Channel 9% POGO 19% Hungama TV 20% Nickelodeon 22%
Viewership: Music
VH1 1% Zing 2% ETC 1% Imagine Show biz 1% Mastii 15% 9X M 14%
Cartoon Netw ork 22%
Music India 4% E 24 8% Zoom 9% Channel V 9%
MTV 13% Bindass 13%
B4U Music 10%

Source: TAM, TG: 15+, HSM
Source: TAM, CS 4-14, All India, Week 51, 2010
We factor in strong growth in subscription revenues of the company going forward. FY12 subscription revenues are forecast to grow 31%, on account of higher realization from domestic operators (DTH penetration as well as better realization from analogue revenues), and a strong international subscription revenue stream. We have factor in a full-scale scale-up in international revenues of IBN 18. Overall, we factor in a three-fold growth in subscription revenues of the company over FY11-FY15.
Revenue Model: IBN 18
Rs mn, FY ends Mar Net Sales from Operations Advertising Revenues -o/w Revenues, Standalone Entitiy -o/w (50%) Viacom 18 -o/w IBN-Lokmat Growth, % Subscription revenues -o/w Subscrition Revenues, Analogue as % Industry -o/w Subscription Revenues, DTH as % industry as % ZEEL -o/w Subscription Revenues, International Ops as % Zee Entertainment Other Operating Revenues Growth FY2011E 7496 6527 2066 4315 146 13% 968 0 0 FY2012E 9484 7440 2314 4962 163 14% 2044 1000 8% 544 5% 13% 500 12% 0 27% FY2013E 11189 8413 2592 5638 183 13% 2776 1350 11% 826 5% 16% 1000 24% 0 18% FY2014E 12809 9516 2903 6409 205 13% 3292 1391 12% 1179 6% 20% 1250 29% 0 14% FY2015E 14404 10768 3252 7287 229 13% 3636 1432 11% 1526 6% 22% 1288 29% 0 12% FY2016E 16210 12183 3642 8289 252 13% 4027 1475 11% 1916 6% 24% 1326 29% 0 13% FY2017E 18260 13788 4079 9432 277 13% 4472 1519 10% 2107 6% 24% 1366 29% 0 13%
200 5% 0 24%
Source: Kotak Securities - Private Client Research; Note: The above refer only to IBN 18 operations as they are at present, that is they do not include revenues from TV-18 channels that are proposed to be consolidated with IBN 18 operations, under a new entity "NEW TV 18"
69
SECTOR REPORT
January 14, 2011
Quarterly Trends Indicate Stability in Viacom 18, Company Awaiting Growth from Subscription Stream
Revenues and Margins
2400 1200 0 -1200 -2400 Q1FY10
Net Sales (Rs mn - LHS)
Margin (% - RHS)
30% 15% 0% -15% -30%
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
The company's quarterly trends have the following key features: 1/ Viacom 18's revenues have continued to gain, although the management did not indicate that the growth is on account of rise in subscription revenues, 2/ Standalone operations' revenues continue to be stagnant and bring in significant losses at the EBITDA level, 3/ IBN Lokmat continues to run under losses. Management has indicated that strong growth in subscription revenues may be expected from the next year onward. As of now, the company is engaged in finalizing distribution deals with cable operators in India.
Profit Model - IBN 18 (Present Entity)

Rs mn, FY ends Mar Net Sales from Operations Growth Expenditure Production, Administrative and Other Expenses -o/w Programming Expenses -o/w General and Administrative Expneses -o/w Sales and Distribution Expenses Growth Personnel Expenses EBITDA Margin Growth Depreciation and Amortization EBIT Interest Expenses EBT Other Income PBT Provision for Tax PAT Source: Kotak Securities - Private Client Research FY2011E 7496 24% 7508 6209 3175 678 2356 19% 1300 -13 0% -96% 234 -247 305 -552 119 -432 60 -492 FY2012E 9484 27% 8734 7239 3757 773 2709 17% 1495 750 8% -5943% 270 480 54 427 -86 341 34 307 FY2013E 11189 18% 9889 8170 4317 873 2980 13% 1719 1300 12% 73% 312 988 54 934 -21 913 183 731 FY2014E 12809 14% 11086 9109 4845 987 3278 11% 1977 1723 13% 33% 360 1363 54 1309 15 1324 437 887 FY2015E 14404 12% 12372 10158 5437 1115 3606 12% 2214 2032 14% 18% 414 1619 54 1565 73 1637 540 1097 FY2016E 16210 13% 13764 11329 6103 1260 3966 12% 2435 2446 15% 20% 474 1972 54 1918 154 2072 684 1388 FY2017E 18260 13% 15316 12637 6851 1423 4363 12% 2679 2944 16% 20% 540 2404 54 2350 266 2617 864 1753
70
SECTOR REPORT
January 14, 2011
Valuations Indicate Potential for Growth

Given the poor profitability of the company and evolving revenue streams, we find DCF valuation the most suitable for IBN-18. We factor in 14% CAGR through FY11-FY21, and set peak (also terminal) EBITDA margin at 27%. The details of our DCF valuation and assumptions therein are provided below:
DCF valuation
Rs mn, FY Ends March Revenues Growth EBITDA Margin EBIT NOPLAT Add: Non-Cash Charges Gross Cash Flow Changes in WC Cash Flow from Operations Capex Free Cash Flow PV -FCF PV 1-10 Terminal Growth Terminal Value Ent Value Net Debt/ Cash Mkt Value Per Share FY11E 7,496 24.2% (13) -0.2% (247) (307) 234 (73) 1,741 (1,814) 400 (2,214) (2,214) 5,678 6.0% 20,313 25,991 748 25,243 107 80% 103% -3% FY12E 9,484 26.5% 750 7.9% 480 446 270 716 327 390 400 (10) (9) 22% FY13E 11,189 18.0% 1,300 11.6% 988 805 312 1,117 42 1,075 400 675 533 FY14E 12,809 14.5% 1,723 13.5% 1,363 926 360 1,286 490 796 400 396 277 FY15E 14,404 12.5% 2,032 14.1% 1,619 1,078 414 1,492 483 1,009 400 609 379 FY16E 16,210 12.5% 2,446 15.1% 1,972 1,288 474 1,762 547 1,215 400 815 450 FY17E 18,260 12.6% 2,944 16.1% 2,404 1,541 540 2,081 616 1,465 400 1,065 522 FY18E 20,589 12.8% 3,543 17.2% 2,931 1,844 612 2,456 695 1,761 400 1,361 593 FY19E 23,235 12.9% 5,002 21.5% 4,312 2,685 690 3,375 784 2,591 400 2,191 848 FY20E FY21E 25,885 28,886 11.4% 6,283 24.3% 5,509 3,368 774 4,142 873 3,268 400 2,868 986 11.6% 7,715 26.7% 6,851 4,109 864 4,973 974 3,999 400 3,599 1,098
Launch of New Ventures, if successful, could provide upsides

We believe that the Hindi movie channels' market is significant in size, accounting for ~Rs 6Bn in advertising revenues - with top channels bringing in about Rs 2 Bn in advertising revenues. Costs of new, big budget films have risen significantly in the past few years, due to which content expenses are a major hindrance in the space. Fragmentation in the space is high, implying significant costs would have to be incurred in order to gain wide distribution. Overall, we believe that the introduction of a Hindi movies channel, if successful, could bring in ~25-30% EBITDA margins in the long - run, with significant losses in the near-term. We believe that regional channels are a less risky proposition, as the costs (content as well as distribution) are lower in the space, and as such the sunk costs in the case of regional channels is lower. However, we note that: 1/ In our opinion, IBN18 is less likely to launch regional channels in the south Indian markets, due to its association with Sun 18, 2/ Other markets (Bengali, Marathi) are seeing interest from a wide variety of players. We believe that IBN 18 is unlikely to launch more than two regional GECs. A moderately successful regional channel can bring in margins of 25% four years into operations. In our estimate, such streams, with industry level assumptions for the long-term, could generate a value of Rs 20/ share for IBN 18. Given execution risks involved, we would be comfortable assuming Rs 10-Rs 15/ share, if these operations were to take off, and give initial signs of success. These are likely upsides to our chosen base case price target.
71
SECTOR REPORT
January 14, 2011
Impact of Restructuring
Network 18 has proposed to merge the broadcasting operations of TV-18 (CNBC TV18 and CNBC Awaaz) with IBN 18. The transaction is likely to be completed by the end of FY11. The structure of entities, prior and post the transaction, is provided below:
Changes in Group Structure Pre-restructuring
Promoters (Raghav Bahl) 58% Network 18
Post-restructuring
Promoters (Raghav Bahl) 57% Network 18 Yellow Pages/ Magazines Web 18 Events 18 Sports 18 Yatra Homeshop 18 Viacom 18 Capital 18 IBN Lokmat Newswire 18
70% 100% 50% Viacom 18 51%
59.5%
36.5% 21%
58%
Events 18 Sports 18 Advisory

51%
TV 18
IBN 18 CNN - IBN IBN 7

50%
New TV 18 CNN IBN IBN 7 CNBC TV 18 CNBC Awaaz
CNBC TV 18 CNBC Awaaz

76.5%
Homeshop 18 Setpro 18 TIFC
Web 18 Newswire 18 Infomedia 18
66%
70%
50%
80%
48%
TIFC
50%
Setpro 18 Investments Infomedia 18
66%
IBN Lokmat
48%
Source: Company Presentations
The restructuring is an attempt to bring all broadcasting operations of the company under a single umbrella (IBN - 18). Post the restructuring, IBN - 18 will be referred to as TV - 18. The transaction is a positive for IBN18/ TV-18, in the sense that following the transaction, operations of the entity would be clear, and the balance sheet of the company shall be better equipped to grow operations/ fund losses of existing operations, if needed. The changes in the balance sheet of IBN 18, following the restructuring, are provided below:
Balance Sheet Changes Following Restructuring
IBN 18 (New TV 18 Sources of Funds Equity Debt Application of Funds Fixed Assets Investments Cash and Equivalents Net Current Assets P&L a/c Source: Company Presentation FY2010 12,180 9,245 2,935 12,180 750 4,650 4,050 850 1,880 Pro-Forma 14,450 8,420 6,030 14,450 1,510 4,690 5,070 2,180 1,000
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SECTOR REPORT
January 14, 2011
The merger of TV-18 operations will provide stability to the company's profits in the short - term, given higher margins of TV-18 broadcasting operations. However, we believe that long-term, the merger will have limited impact on value.
Changes in EBITDA/ Share
IBN-18 Rs mn, FY Ends Mar Revenues EBITDA Share Capital EBITDA/ Share FY12 9,484 750 238 3.2 FY13E 11,189 1,300 238 5.5 FY14E 12,809 1,723 238 7.3 FY12E 3,740 702 TV-18 FY13E 4,427 1,034 FY14E 4,847 1,152 FY12E 13,235 1,464 360 4.1 New TV 18 FY13E 15,510 2,228 360 6.2 FY14E 17,534 2,753 360 7.7
Net -net, we note the following on our recommendation for IBN18: 1/ CMP includes significant positives for the company in the medium-term, and valuation upsides are limited, if one were to assume continuity of present operations, 2/ Merger of TV-18 operations provides stability to margins of the company in the near-term while it is unlikely to add significantly to value, 3/ While upsides may exist from successful launch of new operations, we do not find it prudent to include any of these to our price target before the company announces greater details on the same, 4/ recent decline in the stock provides an opportunity to investors targeting high - risk growth. We initiate on IBN18 with an ACCUMULATE rating and price target of Rs 107/ share.
73
SECTOR REPORT
January 14, 2011
Risks
n Our estimates assume that Colours shall be able to hold on to its position in the Hindi GEC space, or at least be a significant player in the space in the future. If this is not the case, the likelihood of Viacom18 enjoying such high revenues is relatively small. Moreover, such an event would require a re-launch of the channel, which may be an expensive exercise. n Many steps to be taken towards growth: Although IBN-18 has grown to a reasonably large size, the company must continue to invest in new properties in order to remain relevant and reduce its dependence on Colors. It is likely that the company shall make an attempt to develop a strong presence in Hindi cinema, as also certain regional channels. As such, the company is not likely to have distributable cash flow over a long period of time. Moreover, such moves expose the company to a large amount of execution risk. n Promoter's interests in other media activities - IBN 18's promoter, Network18 are an ambitious company that is willing to take on risks in various media projects. n Lack of clarity over the scale - up in TIFC:. Further, as can be seen from the proposed acquisition of The Indian Film Company, NEW TV-18 is likely to be a company that shall have two broad segments - broadcasting and movie production and distribution.
74
SECTOR REPORT
January 14, 2011
Appendix: Buying TV-18 versus IBN18

n Post the reorganization, TV-18 shareholders will get 0.68 shares of IBN-18 and 0.14 shares of Network 18 for each share held n This note aims to: a/ provide assumptions and estimates for TV-18 standalone operations, b provide a rough valuation for Network 18, c/ judge if ownership of TV-18 might be a viable investment option n We conclude that buying TV-18 shares may be a more efficient method of buying into IBN18 story. Assumptions and Value Drivers: TV-18, with its two news channels, CNBC - TV18 and Awaaz, has been a first mover in the business news broadcasting space and has maintained its dominance in the market. In the recent past, the key channel of the network, CNBC - TV18, has been under pressure from two well funded broadcasters, ET Now, and Bloomberg UTV. FY2009 -FY2010 were a specially challenging year for the company, as it was faced with sharp declines in adex relating with business news broadcasting, as well as worsening competitive environment. The company has had to take various steps to ensure that it remains the leader in the space, and continues to be a leader. Observation shows that the company's channels have strong connect with viewers and we believe the channel will be difficult to displace. In FY11, the company has started showing signs of revival, with profitability emerging via reduction in personnel expenses as well as moderation in growth of marketing and distribution expenses. For 2QFY11, TV 18 news operations have brought in margins of 31%. We make the following projections for TV-18 standalone operations:
TV18 Standalone P&L
(Rs mn) Revenues Operating Expenses, Total: EBITDA Growth, Y-o-Y (%) EBITDA Margin (%) Depreciation & Amortization EBIT FY09 2,877 1,910 (1) -100.0 0.0 190 (191) FY10E 2,769 1,836 358 -35067.0 13.0 138 220 FY11E 3,131 2,657 475 32.0 15.0 149 326 FY12E 3,740 3,038 702 48.0 19.0 168 534 FY13E 4,427 3,393 1,034 47.0 23.0 188 846 FY14E 4,847 3,695 1,152 11.0 24.0 204 949
75
SECTOR REPORT
January 14, 2011
Valuation - New TV 18
Given the reorganization that is underway, TV-18's valuation is dependent on: 1/ valuation of the merged entity (NEW TV-18), and 2/ valuation of Network 18 as it would be post the reorganization.
We provide the valuation for NEW TV - 18 below:
DCF Valuation Revenues EBITDA Margin (%) NOPLAT Non-Cash Charges Changes in WC Capex Free Cash Flow PV 1-10 Terminal Value PV - Terminal Value Enterprise Value Implied EV/ Sales Implied Market Cap Shares Outstanding Price per Share FY12E 13,235 1,464 11.1% 673 460 342 550 240 9,370 111,010 30,091 39,461 3.7 39,461 360 110 76 FY13E 15,510 2,228 14.4% 1,157 502 790 550 318 24 FY14E 17,534 2,753 15.7% 1,477 550 783 550 693 FY15E 19,517 3,085 15.8% 1,663 604 847 550 869 FY16E 21,766 3,502 16.1% 1,902 664 916 550 1,099 FY17E 24,304 4,023 16.6% 2,206 730 995 550 1,391 FY18E 27,170 4,626 17.0% 2,563 802 1,084 550 1,730 FY19E 30,308 6,303 20.8% 3,634 880 1,173 550 2,790 FY20E 33,413 8,038 24.1% 4,740 964 1,274 550 3,879 FY21E 36,893 9,949 27.0% 5,960 1,054 1,389 550 5,074 FY22E 41,039 12,748 31.1% 7,771 1,150 1,459 550 6,912
We value the resulting entity (new TV-18) at Rs 109/ share, in line with the value for IBN-18.
76
SECTOR REPORT
January 14, 2011
Value of TV18, if restructuring is to go through

Valuation of Network 18 is made difficult by the presence of certain entities that continue to be under re-organization (Infomedia), uncertainty in growth of operations (Internet), and finally, investments made by the media Venture Capital Trust in small companies. We present our valuation for TV-18 stock below. We verify first that Network 18 should be valued at its market price, by a sum of the parts approach. We start with valuing Network 18s 57% stake in New TV18 at 20% holding company discount., yielding Rs 133/ share of Network 18. Valuing other operations with parameters given below , we see enterprise value of Network 18 at Rs 178/ share, and equity value of Network 18 at Rs 138/ share, close to CMP of Rs 131/ share. Given that TV-18 shareholder is entitled to 0.68 shares of IBN18 and 0.13 shares of Network 18, we obtain value of TV18 share at Rs 95/ share a significant upside from CMP
Sum of parts valuation for TV 18
Rs/ Share of Network 18 Valuation Comments 20% Disc. To DCF EV/Sales Book Value EV/ Sales EV/ Sales EV/ Sales Multiple NA 0.5 0.5 1 2 1 Value/ Share (Rs/ Share) 133 4 10 21 12 2 182 45 138 95 77 18 71.5 33%
We see TV-18 as a better participation route in IBN 18 monetization story
Valuation of broadcasting Ops (57%) Add: Infomedia 18 Add: Capital 18 Add: Homeshop 18 Add: Web 18 Add: Newswire 18 Value of All Assets - Network 18 (per share) Less: Net Debt/ Share Value, Network 18 Value to TV - 18 -o/w Value from 0.68 IBN 18 -o/w Value from 0.13 Network 18 CMP TV - 18 Upside
We conclude that there is greater value in TV-18 stock, in as much as one can assume that the restructuring shall be affected in the manner described by the management, and that Network 18's CMP (Rs 133), is an accurate representation of its value.
77
SECTOR REPORT
January 14, 2011
FINANCIALS: IBN 18 LTD

(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY09 1,827 35.2 (569) (142.1) 175 (744) (155.1) 75 (903) (166.8) 17 -1.9 (920) (168.0) 179 (5.1) (4.2) 15.7 FY10 6,035 230.3 (328) (42.4) 186 (514) (31.0) 581 (1,095) 21.2 1 -0.1 (1,096) 19.1 182 (6.0) (5.0) 20.6 FY11E 7,496 24.2 (13) 234 (247) (52.0) 135 (432) (60.5) 60 -13.9 (492) (55.1) 238 (2.1) (1.1) 25.9 FY12E 9,562 27.6 828 270 558 (326.2) 62 423 (197.8) 42 10.0 381 (177.3) 238 1.6 2.7 27.5

(Year-end March) Shareholder's Equity Reserves Net worth Secured Loans Total Loans Minority Interest Net Deferred tax liability Current Liabilities Total Liability Net Fixed Assets Investments Inventory Debtors Cash&Bank balances Loans & Advances Other Current Assets Current Assets Miscelleanous Expenses Total Assets FY09 358 2,458 2,816 1,309 1,309 853 4,978 969 2,360 1 588 139 921 1,649 4,978 FY10 583 3,066 3,649 4,540 4,540 2,464 10,652 4,485 4 370 2,282 2,569 1,034 6,254 (91) 10,652 FY11E 583 5,579 6,162 2,540 2,540 3,076 11,778 4,545 4 1,041 3,123 1,191 1,874 7,229 11,778 FY12E 583 5,960 6,543 540 540 3,908 10,991 4,575 4 1,328 3,984 (812) 1,912 6,412 10,991
(96.1) (6,548.2)

(Year-end March) Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investment cash flow Equity Raised Debt Raised Other Financing Cash Flows Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash FY09 (903) 175 (657) (17) (1,401) (2,443) (1,145) (3,588) 4,059 1,309 5,368 (239) 139 139 FY10 (1,095) 186 (565) (1) (1,474) 2,356 (3,702) (1,346) 2,019 3,230 5,249 1 2,429 139 2,569 FY11E (432) 234 (1,741) (60) (1,999) (294) (294) 2,916 (2,000) (0) (1,378) 2,569 1,191 FY12E 423 270 (354) (42) 297 (300) (300) (2,000) (2,003) 1,191 (812)
Ratio Analysis
(Year-end March) Margins and Growth: EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover Interest coverage (x) Debt/ equity ratio Return Ratios: ROE (%) ROIC ROCE (%) Multiples: EV/ Sales EV/EBITDA Price to earnings (P/E) 9.5 NM NM 3.1 NM NM 3.1 NM NM 2.4 27.7 56.7 (65.3) (71.3) (38.2) (33.4) (8.9) (6.0) (9.9) (0.2) (3.5) 6.0 9.7 5.3 117.4 3.8 (9.9) 7.2 138.0 2.2 (0.9) 11.9 152.1 1.7 (1.3) 6.2 152.1 2.1 4.1 6.3 (31.1) (31.1) (50.3) (168.0) (5.4) (5.4) (18.2) 17.4 (0.2) (0.2) (6.6) (65.6) 8.7 8.7 4.0 (177.3) FY09 FY10 FY11E FY12E
916 (2,000)
78
SECTOR REPORT
January 14, 2011
JAGRAN PRAKASHAN LTD

532705 JAGRAN 37,345 57.61 148/104 425,400 301
RECOMMENDATION : ACCUMULATE FY12E PE: 15.0X
Stock details
BSE code NSE code Market cap (Rs mn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume BSE Shares o/s (mn) Source: ACE Equity : : : : : : :
Summary table - Consolidated

(Rs mn) Sales Growth (%) EBITDA Net profit Net Debt EPS (Rs) Growth (%) CEPS DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) FY10 9,419 14.4 2,823 1,760 1,214 5.8 23.3 7.5 3.5 30.0 23.5 4.0 13.4 21.2 16.5 6.1 FY11E 10,795 14.6 3,274 30.3 2,027 1,415 6.7 15.2 8.5 4.0 31.5 24.7 3.4 11.2 18.4 14.6 5.5 FY12E 12,432 15.2 3,852 31.0 2,482 1,415 8.2 22.5 9.9 4.9 34.8 27.5 2.9 9.3 15.0 12.5 5.0
With 15.9mn readers, Jagran Prakashan's daily newspaper Dainik Jagran is the most widely - read newspaper in India. Dainik Jagran is also amongst the most under-monetized advertising properties in India, when seen in comparison with English dailies. As such, macro prospects of the company remain strong. We recognise and evaluate long-term downside risks for Jagran Prakashan, arising from competitive pressures across various regions, most notably in Uttar Pradesh. We conclude that while Jagran must make critical choices, the company is able and willing to take steps to counter such threats in the medium term. We see contained upsides for the stock, and rate Jagran Prakashan ACCUMULATE with a price target of Rs 153/ share.
q Biggest In India, and in India's Biggest Hindi Print Market: Jagran's flagship newspaper, Dainik Jagran, has readership of 15.9 mn, and is the largest read newspaper in any language in India. Dainik Jagran is the leading newspaper in Uttar Pradesh, the largest Hindi print market in India, where it leads the nearest competitor by over 30%. q Higher Exposure to Circulation Revenues, Flexibility in Operations: Circulation revenues contribute 20% to Jagran's revenue stream. Moreover, the company's strong position in Uttar Pradesh provides it flexibility in management of operations, which limits downside in extreme circumstances, relative to other industry players. q Strong Convergence Story of Advertising Rates: With Cost Per Thousand (CPT) about 1/9th of English newspapers, Jagran's growth is a function of convergence of Hindi newspapers' advertising rates with English newspapers. q Competitive Activity in UP Key Hurdle: We believe the convergence story faces a major hurdle in strong competitive activity that Hindi newspapers are seeing. We are wary of the fact that Jagran's impressive readership depends heavily on readership in Uttar Pradesh, where the newspaper is dominant. Going forward, we believe, the positives of low CPT are going to be offset by significantly higher competitive activity in Uttar Pradesh, which is a key long-term risk for Jagran. q Further Competition in Bihar; Dissatisfactory competitive Position in Other States: Jagran also faces the prospect of lower growth in Bihar/ Jharkhand, owing to entry of DB Corp in these geographies. We factor in soft growth in Jagran Prakashan's revenues through our forecast period.
Public 12% Corporates 8% Promoters 42%
Institutions 20% Foreign 18%

Source: ACE Equity
q Recent Moves Indication of Search for New Markets: Jagran Prakashan has received an investment from Blackstone in its holding company, and has a clearly stated aim of looking for new markets. The acquisition of Mid-Day, we think, is one of the many steps that the company shall take to develop/ acquire positions in new markets - a positive given the fragmentation underway in Hindi markets.
Source: ACE Equity
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SECTOR REPORT
January 14, 2011
q Immediate - Term Prospects remain predictable, low earnings risk relative to peers: Competition notwithstanding, Jagran's positions in key markets remain in line with recent past. While HMVL remains a medium - term threat in UP, and DB Corp is likely to take market share from Jagran in Bihar, these activities are uncertain, and it may not be wise to assume Jagran shall give up the markets without a fight. We factor in 16% CAGR in revenues and 19% CAGR in PAT for Jagran over FY10-FY12E. Jagran has thus far held a different view of media - in that the UP readership could support editions in other states. This thought will likely be challenged, and we believe the company is preparing for changed circumstances. q Valuations Reasonable, Initiate with ACCUMULATE: We believe the risks of higher competitive activity are well - matched by cheap valuations of the stock. Further, we believe Jagran has, in the medium term, significant flexibility in managing expenses, which shall be helpful in a scenario of uncertainty in newsprint prices. Based on our DCF valuation, we assess the fair value of Jagran Prakashan at Rs 153/ share (up from prior price target of Rs 140/ share, as we roll forward price target to FY12E). We re-iterate an ACCUMULATE rating on the stock. q Risks: 1/ Competitive Risks, 2/ Macroeconomic Risks, 3/ Risks related with higher newsprint prices
80
SECTOR REPORT
January 14, 2011
Biggest in India Leader in Hindi

Jagran Prakashans flagship daily Dainik Jagran has been the #1 newspaper in India (IRS) for over a decade. The newspaper currently has 15.9 mn readers, leading the second largest daily in India (Dainik Bhaskar) by over 20%.
Readership (AIR, 000) of Top Hindi Dialies
Dainik Jagran 18000 13500 9000 4500 0 2007 R1 2007 R2 2008 R1 2008 R2 2009 R1 2009 R2 2010 Q1 2010 Q2 2010 Q3
Source: IRS 2010Q3
Dainik Bhaskar
Hindustan
Amar Ujala
Rajasthan Patrika
Jagrans strong readership position is on account of the moves the company has made in the early part of the decade. Jagran has been Indias #1 newspaper since 2002. Below is a brief history of Jagran Prakashan:
Milestone
Year 1942 1979 1986 2000 2001 2002 2003 2004 2004 2005 2005 2006 2006 2007 2009-2010 2010 Milestone First edition of Dainik Jagran launched from Jhansi Launch of Lucknow edition of Dainik Jagaran Launch of Agra edition of Dainik Jagran Launched the Hisar and Patna editions of Dainik Jagran. Launch of the Aligarh edition Declared Indias largest read daily newspaper (Sce: IRS 2002) Launched the Ranchi, Jamshedpur, Dhanbad, Panipat and Bhagalpur editions of Dainik Jagran. Launched the Ludhiana and Haldwani editions of Dainik Jagran. Started Jagran Solutions, division offering outdoor advertising and event management Became the first Indian newspaper to cross readership beyond 20 million as per NRS survey. Launched the Muzaffarpur, Jammu and Dharamshala editions of Dainik Jagran. Launched bilingual paper I Next in Lucknow and Kanpur Launched City Plus from Delhi Launched City Plus Bangalore edition Exit of investments by IPCL Investment by Blackstone into the holding company
Source: Company
A comparison between the history of Jagran Prakashan and DB Corp. would show that Jagran Prakashan is, in some sense, a predecessor of DB Corp. A key difference between the two players' strategies is that while Jagran has been less insistent on occupying the #1 spot, and has been content to maintain circulation at a level that optimises near-term profitability. DB Corp. differs in its approach, we think, primarily in the sheer faith of regional markets' long-term potential and the importance of occupying top places in all geographies that the company operates in.
81
SECTOR REPORT
January 14, 2011
Competitive Position Uttar Pradesh Is Critical

We outline the readership of Jagran Prakashan, along with the compeititive position of the company, in its key geographies, below. We note that Uttar Pradesh is the single most important region in determining the readership of Jagran Prakashan, accounting for 56% of the total readership generated by the daily. Among other states, Jagran is a #2/#3 player.
Jagran Prakashan : Competitive Position (Readership in AIR 000)
Region Uttar Pradesh Bihar Haryana Punjab Jharkhand Uttarakhand Delhi MP HP Readership 8945 2527 927 802 823 586 704 296 36 % TJR 56% 16% 6% 5% 5% 4% 4% 2% 0% % Category 41% 32% 20% 14% 21% 32% 16% 4% 3% Rank #1 #2 #2 #3 #3 #2 #3 #6 #6 Mkt Leader Dainik Jagran Hindustan Dainik Bhaskar Punjab Kesari Hindustan Amar Ujala Navbharat Times Dainik Bhaskar Amar Ujala R'Ship Rel to ML NA 56% 64% 74% 50% 73% 39% 9% 9%
Source: IRS 2010 Q3, Kotak PCG Calculations; Note: TJR Total Readership of Dainik Jagaran
It is clear from the above that: 1/ UP is a critical market for Dainik Jagran. The company has a market leading position in Uttar Pradesh. Uttar Pradesh is the largest Hindi print market, with estimated (adex) size of Rs 7Bn. 2/ The company has a strong position in Uttarakhand, Haryana, and Punjab market, and has a strong chance in closing the gap with the market leader, 3/ Delhi, Bihar and Jharkhand are important markets for readership of the newspaper, and may be important factors in selling all-edition advertisements for the newspaper.
Current strategy focuses on monetization in immediate future
In our understanding, UP/ Uttarakhand markets account for ~60% of the advertising as well as circulation revenues of Jagran Prakashan. Jagran Prakashan's strategy involves utilizing the readership of the company to realize better yields with national advertisers. For this reason, the company has not, thus far, been overly aggressive in developing #1/#2 positions in all geographies.
Readership (AIR, 000, Uttar Pradesh)
12000 9000 6000 3000 0 2007 R1 2007 R2 2008 R1 2008 R2 2009 R1 2009 R2 2010 Q1 2010 Q2 2010 Q3
Source: IRS
Dainik Jagran
Amar Ujala
Hindustan
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SECTOR REPORT
January 14, 2011
Convregence Story Strong

Jagran Prakashan rides on a strong macro story of advertising rate convergence. Advertising rates for Hindi newspapers are lower than those of English newspaper. This leads to poor per reader economics. As per industry, per reader advertising revenues of Hindi newpapers are only a ninth of per reader advertising revenues for English newspapers.
Per Reader Economics for Newpsapers
Language Advertising 2099 233 157 9.0x 13.4x Circulation 728 208 203 3.5x 3.6x Total 2827 441 360 6.4x 7.9x
Low CPT points to high potential for long term yield improvements
English Hindi Vernacular Premium of English over Hindi Premium of English over Regional Source: HMVL Red Herring Prospectus
Going by the Cost Per Thousand (advertising rate divided by readership of the newspaper), Dainik Jagran is among the cheapest newspapers in India.
Relative Cheapness of Regional Dialies
CPT Index, Various Newspapers
100 86 62
21
18
13
10
The Times of India*
Dainik Bhaskar
Eenadu
Dainik Jagran
Gujarat
Malay ala
Samachar Manorama
CPT index (SEC-AB), Various Newspapers
100 85 63 62 54 53 36 24
The Times of India*
Eenadu
Dainik Bhaskar
Malay ala Manorama
Dainik Jagran
Gujarat Samachar
Source: Ernst and Young
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SECTOR REPORT
January 14, 2011
Strong Track Record of Growth

So far, the story of the Hindi newspapers has been encouraging. Spurred on by the rising affluence in non-metros, media buyers have raised attention to non-metro markets. This has led to a higher advertising rates/ volumes for regional newspapers like Dainik Jagran, and in turn, has led to strong advertising growth at such newspapers. Jagrans revenues have grown at 19.6% CAGR through FY02FY10.
Advertising Revenues, Jagran Prakashan (Rs mn)
8000 6000 4000 2000 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
A few factors have been critical in the advertising rate increases that Jagran has been able to pass on: 1/ strong growth in market, as media buyers have begun to take a fresh look at regional media due to higher growth in non-metro areas, 2/ change from black and white to color advertising. Hindi newspapers in non-metro areas typically have color rates that are much higher than black and white rates. Media buyers have adopted a stance of higher color advertising, which has benefited players like Jagran Prakashan, 3/ Poor penetration of other media in DJ markets, especially in Uttar Pradesh, 4/ High proportion of local advertising helps bargaining power of newspapers. Circulation revenues of the company have been strong, and have doubled over the past eight years, as the company has raised its circulation, without cutting cover prices (on the average).
Circulation revenues (Rs mn)
2500 2000 1500 1000 500 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
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SECTOR REPORT
January 14, 2011
Dominance in Uttar Pradesh provides flexibility

Jagran has developed a large part of the Uttar Pradesh newspaper market, and is the most widely read. Jagran is ahead of its closest competitor (Amar Ujala) by a ~40% margin in Uttar Pradesh, and in certain areas, it is further ahead. As a result, Dainik Jagran possesses several advantages with the reader, which it can utilize to gain flexibility in its earnings: 1. Jagran is able to charge a significantly higher cover price than peers. Jagrans average realization per copy is highest among print peers (Realization/ copy of Rs 2 compares with Rs 1.55/ copy for DB Corp).
Jagran Prakashan - Revenue Streams 2011
Other 10%
Circulation Revs 11%
Jagran Prakashan - Revenue Streams 2016

Other 7%
Circulation Revs 20%
Ad. Revs 70%

Source: Kotak Securities, Private Client Research
Ad Revs 82%
Source: Kotak Securities, Private Client Research
2. In adverse times, Jagran can raise its ad-edit ratios well higher than peers in competitive markets, and make changes to its newsprint mix. An example of such flexibility is the most recent crunch when newsprint prices rose, Jagran raised its newsprint mix it raised the proportion of domestic newsprint to 75%, from ~65%, raised its ad-edit ratios, and cut down on certain supplements while raising cover prices in selected areas. The companys flexibility and lower risk profile was in ample display in the 20082010 period. The companys stock outperformed HT Media and DCHL significantly through the period.
Jagran Prakashan: Outperformer in Uncertainty
120 90 Jagran HT Media DCHL
60 30 0 Jul-08 Jul-09 Mar-08 Mar-09 May-08 May-09 Mar-10 Jan-08 Jan-09 Jan-10 May-10 Nov-08 Nov-09 Jul-10 Nov-10
85
Sep-08
Sep-09
Source: Bloomberg
Sep-10
SECTOR REPORT
January 14, 2011
Strong Margins, Cash Flows to Aid Expansion

Due to its strong readership positioning as well as largely mature properties, the company is able to generate strong margins. In FY10E, the company recorded the strongest margins in its listed history, even as some of the more recent editions of the newspaper (including editions in Punjab, Haryana, and experimental English product "City Plus") continue to run under losses. JPL is likely to generate an operating cash flow of Rs 8.8 Billion over the next three years. As of now, the company does not have any debt. Along with its strong cash flow, this provides Jagran Prakashan an opportunity to seek expansion of the newspaper into new territories.
Jagran Prakashan: Operating Cash Flows to Remain Strong (Rs mn)
5,000 Pre-Tax Profits Operating Cash Flow s
3,750
2,500
1,250
0 FY2009 FY2010 FY2011 FY2012 FY2013
Source: Company reports, Kotak Securities Private Client Reseacrh
Strong cash flows of the company, along with deteriorating competitive position, imply two actions that we believe the company is set to take: 1/ We believe Jagran will firm up plans to raise circulation in key geographies, including Punjab and Uttar Pradesh, and reposition Dainik Jagran as a strong newspaper, 2/ The company will be able to take on challenges that it is likely to face in Bihar, from the entry of DB Corp in this geography, and 3/ We think the company will keenly look to create new properties, including new languages, and development of some of the properties it has been working on in the recent past. Recent moves of the company are, we think, a pre-cursor to expansion.
Recent Moves Indicate Strategy to look beyond current Markets

Jagran Prakashan has altered its corporate structure in FY2010, to create a holding company (Jagran Media Investment Private Limited). Blackstone Capital has taken a stake of ~12% in the holding company, for a consideration of Rs 2250mn. The objective of the above reorganization is to provide Jagran Prakashan funds for expansion, as well as to allow Jagran to benefit from the expertise of Blackstone in the understanding of the media business. Jagran Prakashan has stated clearly at various conference calls, that all investments shall continue to be made at the level of Jagran Prakashan Limited. Jagran Prakashan has acquired the print assets of Mid-Day Multimedia Limited. The print assets of Mid-Day Multimedia include Mid-Day, a tabloid published from Mumbai, Delhi and Bangalore, Mid-Day Gujarati a tabloid in the Gujarati language, and Inquilaab an Urdu daily that is published from Mumbai , where most of its readership is based. Jagran Prakashan intends to strengthen the presence of Mid-Day in Mumbai, and intends to utilize the editorial strength of Inquilaab to extend the reach of the newspaper into geographies of its operation. Further, Jagran Prakashan believes that it will be able to create certain revenue synergies (Jagran does not, at present have significant metro presence, especially in English), and cost synergies mostly in the acquisition of newsprint.
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SECTOR REPORT
January 14, 2011
Acquired operations of Mid-Day would, in our opinion, require significant changes in order to be successful. The companys flagship newspaper, Mid-Day, has suffered following intensifying competition in the Mumbai market. We believe (the management disagrees with this belief) that Mid-Day has suffered in terms of revenues as The Times of India has launched Mumbai Mirror, a newspaper that rides pillion on The Times of India main edition, and has attracted significant readership. While the management believes that Mid-Day operates in a different segment (afternoon newspaper), we think that the essential traits of both newspapers are very similar, and it is likely that the TG would be similar as well.
Mid-Day acquisition, Blackstone participation in holding company points to JPL looking beyond current markets
We believe Jagran shall continue to search for spaces like Urdu newspapers, where the company believes that the newspaper penetration is small. Further, Jagran does not have a significant presence in some of the critical geographies relating with the Hindi advertising markets such as MP, Chhattisgarh, and Rajasthan.
Hindi Advertising Markets (Total Size Rs 23 Bn)
CHP 13% Maharsahtra 2% Delhi 13% UP/ Uk 27%
Rajasthan 17% Bihar/ Jharkhand 11%
MP/ Chhatisgarh 17%
Source: FICCI- KPMG Report, Kotak Securities - Private Client Research
Future Issues Relating with competition, slow growth in key markets

We focus on Uttar Pradesh as a market. UP print market, estimated at Rs 7 Bn, is the largest in India. The market is especially important because, as per our estimated, Uttar Pradesh accounts for over 60% advertising revenues and circulation revenues of Jagran Prakashan (Kotak Securies, PCG Estimates).
Hindustan as % Jagran Key Cities of Uttar Pradesh
Cities Agra Allahabad Kanpur Lucknow Meerut Varanasi (%) 44 59 27 71 23 120
Source: IRS 3Q 2010, calculations by Kotak Secrurities
Rising Competition from Hindustan In the recent past, Hindustan, the Hindi newspaper from HT Media, has made aggressive inroads in Uttar Pradesh. Even as the newspapers readership has risen 43% through 2007-2010, Hindustan has continued to remain aggressive. As per management of HMVL, the company has raised its print order in Uttar Pradesh significantly in the recent quarters, to 0.75mn (30% growth y/y). As of now, Hindustan has a print order of 0.75mn , with readership of 3.1mn. As of now, Hindustan has a lower readers per copy ratio than Jagran and, the newspaper is likely to grow its readership strongly (even with the current RPC, Hindustan shall have added 0.7mn readers in the next year or so). While readership of Hindustan shall still remain low relative to Jagran Prakashan (Hindustans readership in UP is only about 1/3rd the readership of Jagran), we note that Hindustans strategy is focussed on cities. Hindustans readership in key cities is about 50% of the Jagran readership. AIR of Jagran in these cities is 1.7mn versus 0.8mn for Hindustan. An additional 1.7lakh PO (affected in 2010), if converted at current RPC of 4, can bring Hindustan in direct competition with Dainik Jagran.
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SECTOR REPORT
January 14, 2011
Hindustans growth in Uttar Pradesh could have implications for Dainik Jagran on both advertising and circulation revenues. As per management, Hindustans advertising rates are ~ 40-50% discount to Dainik Jagran in key cities. Moreover, high concentration levels in the market and lack of competitive activity have ensured that Jagran Prakashan is able to charge a higher cover price. 20% of Jagran Prakashans revenues are currently contributed by circulation. Dominance in a market also provides several other flexibilities an example being the flexibility in managing newsprint expenses.
Uttar Pradesh - Flanking Strategy By and Large Unsuccessful

The company has taken a leaf from BCCLs book, and introduced daily tabloid newspaper I-Next in order to counter competitive threats. I Next has rapidly gained circulation, on the back of distribution strength in UP, and is the sixth largest daily in Uttar Pradesh.
Hindustan well ahead of I-Next in most cities in UP
We are unsure of the soundness of the flanking newspaper strategy in markets such as UP we tend to think that the markets are not large enough to create a new TG, and the newspaper is likely to cannibalize Dainik Jagran. Moreover, we believe that in order to be successful, a newspaper that has a different format (from the usual broadsheet daily), must exceed the readership of the nearest competitor. While I- Next has grown strongly, we believe the newspaper has failed on this count. In most editions, Hindustan is well ahead of I-Next. As we see from the chart below, I-Next is able to stand up to the readership of Hindustan in only one territory, namely Kanpur a city in which Dainik Jagran already leads the nearest competitor (Amar Ujala) by 183%. As such, we believe I Next has failed in so much as containing the growth of Hindustan is concerned. The company tends to believe that I-Next has the potential to develop into a fullfledged newspaper, attracting a different quality of reader, and enjoying higher advertising rates. We note that I-Next is expected to bring in revenues of Rs 400 mn and EBITDA Rs 50 mn in FY11 (Kotak Securities, Private Client Research estimates). I - Next currently has circulation of 2.75 lkh copies per day.
Hindustan versus I Next (AIR, 000) in key UP cities
300 240 180 120 60 0 Agra
Hindustan
I-Next
Allahabad
Kanpur
Lucknow
Meerut
Varanasi
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SECTOR REPORT
January 14, 2011
Uttar Pradesh:Long-Term Adex Growth Hindered by Poor GDP Growth; Rising Penetration of Other Media
The economic growth in Uttar Pradesh has been amongst the lowest in India in the recent past. Continued under-performance of the state, a likely prospect, is likely to create long-term growth issues for Jagran Prakashan
Growth in Per Capita State GDP 2004-2008 (CAGR)
16% 12%
Poor economic growth in UP is a hurdle for future advertising growth of Jagran Prakashan
8% 4% 0% UP Uttarakhand Jharkhand Chandigarh Delhi Haryana

89
India
Source: HMVL DRHP
Thus far, media penetration in Uttar Pradesh has been weak on account of lower reach of cable television in villages and small towns. C&S TVs reach in Uttar Pradesh is limited to 37% (as per IRS 2007 R2), as compared with an average of 54% across states. This is believed to be changing, as DTH technology has bypassed some of the bottlenecks faced by the rural areas. Increasing FM radio penetration shall also likely provide an alternative media vehicle for media buyers. Dainik Jagran is also unlikely to enjoy the circulation revenues/ copy that it has historically enjoyed in Uttar Pradesh, as new entrants such as Hindustan resort to cover price cuts to aid entry. We think, on the basis of factors discussed above, that the company faces significant risks of industry under-performance, due to its dependence on Uttar Pradesh.
Bihar and Jharkhand: Threats from DB Corp

DB Corp has launched two editions of its newspaper Dainik Bhaskar in Jharkhand market in Ranchi and Jamshedpur. DB Corps plans include expanding across Bihar and Jharkhand. Dainik Jagran has been the # 3 player in the Jharkhand market behind Hindustan and Prabhat Khabar. We note that Jharkhand is a market with inadequate adex to support newspaper margins at low cover prices. For this reason, traditionally, newspapers in Jharkhand have sold at a healthy cover price of Rs 4/ copy. However, since announcement of entry by DB Corp, Prabhat Khabar dropped its cover prices throughout Jharkhand by Rs 2/ copy, prompting the same action from competition (including Jagran). Bihar is a similar market, and while it is unlikely that the declines in Bihar market shall be similar, the prospect of a sharp, across the board cut in cover prices poses a significant threat to Jagrans margins. We believe that advertising revenues that Jagran brings in from Bihar and Jharkhand are a small portion of the Jagran revenue pie (~9%), these are markets which could have helped growth of Jagran Prakashan. Advertising growth in Bihar and Jharkhand for Dainik Jagran will, we believe, soften in phases as these are markets that rely on government advertising, which shall help Dainik Bhaskar only after the readership/ circulation data of the newspaper is available for the states.
Bihar
SECTOR REPORT
January 14, 2011
Dainik Jagrans other markets are highly contested. We believe that the newspaper faces unfavourable competitive situation in Delhi/ NCR due to the dominance of BCCL/ HT Media newspapers, while large parts of Punjab continue to see high competitive activity as entrant Dainik Bhaskar continues to make attempts to establish itself strongly in these geographies.
Assumptions and Value Drivers

We factor in a 14% CAGR in advertising revenues of Jagran Prakashan through FY10-FY21, as the company would be able to monetize its high readerhip in the coming years, in so far as advertising is concerned. However, we believe that rising competition in Bihar, Jharkhand as well as key territory of Uttar Pradesh and Bihar will drive down cover prices. As such, we think JPL is likely to see flattish circulation revenues in FY11-FY21 period. We expect overall revenues to rise 12-15% between FY11-FY13. As competition rises, a larger part of JPLs ad-revenue growth shall come in from growth in volumes (rather than price). Also, circulation will have to rise continuously to meet competitive pressures as Readership per copy declines. As a result of these factors, as well as newprint prices moving up, we think JPL will see rise in newsprint expenses of ~17% in FY11, followed by ~10% rise in FY12FY13E. With other expenses rising 12-15%, we expect EBITDA margin of the company to be maintained in FY11 even as advertising revenues rise significantly(due to newsprint expenses, lower circulation revenues), and rise to 34% in FY13E, on account of improving yields. We factor in long-term (and terminal) EBITDA margins of 37% for the company.
JPL Revenue and Profit Model
Rs mn, FY Ends March Revenues Growth, % -o/w Advertising Revenues Growth, % -o/w Circulation Revenues Growth, % - o/w Other Revenues Growth, % Operating Expenses - Cost of Goods -Newsprint (tonnes) -Newsprint (Rs/ Kg) -Personnel Expenses -Advertising and Promotion Expenses -G&A Expenses (ex-mktg) -Other Expenses EBITDA, JPL (Pre-Merger) Margin (%) FY09 8,234 9.8 5,517 10.6 1,970 7.7 747 10.1 6,156 3,414 2,898 29 1,065 384 961 332 2,078 25.2 FY10 9,419 14.4 6,384 15.7 2,138 8.5 897 20.2 6,596 2,959 2,466 22 1,212 438 998 988 2,823 30.0 FY11E 10,795 14.6 7,570 18.6 2,166 1.3 1,060 18.1 7,522 3,267 2,787 26 1,436 486 1,403 930 3,274 30.3 FY12E 12,432 15.2 9,132 20.6 2,056 -5.1 1,244 17.3 8,579 3,807 3,311 28 1,651 559 1,492 1,070 3,852 31.0 FY13E 13,865 11.5 10,494 14.9 2,015 -2.0 1,356 9.0 9,177 3,930 3,642 28 1,849 615 1,671 1,111 4,688 33.8
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SECTOR REPORT
January 14, 2011
Estimates and Businesses
Price
Target:
Impact
of
Mid-Day
Print
Jagran had announced the take-over of Mid-Day Multimedias print businesses in May 2010, upon which Jagran is to take over the publishing businesses of Mid-Day Multimedia. The swap ratio for the deal is 7:2 (2 Jagran Prakashan shares for each 7 held in Mid-Day Multimedia). The inclusion of Mid Day print businesses (approved in December 2010) is likely in the near future, and is likely to be reflected fully in FY12E. We provide below our estimates for JPLs EPS following the inclusion of Mid-Day Medias print businesses (Rs 200mn of net debt assumed in the transaction).
Impact of Mid-Day merger
Rs mn, FY Ends March -Revenues, Mid-Day Print -Expenses, Mid-Day Print -EBITDA, Mid-Day Print - EBITDA Margin, Mid-Day Print (%) EBITDA - Jagran Prakashan (Post Merger) Depreciation and Amortization Interest Expenses Other Income PBT Provision for Tax PAT, JPL Operations (pre-merger) PAT, JPL operations (post-merger) Equity (Pre-Merger) Equity (Post-Merger) EPS (pre-merger EPS (post merger) Source: Company, Kotak Securities - Private Client Research FY09 1,020 1,119 (100) -9.8 1,978 383 FY10 949 751 198 20.9 3,021 534 FY11E 1,119 894 225 20.1 3,498 550 FY12E 1,261 1,014 247 19.6 4,099 536 70 431 3,924 1,295 2,482 2,629 301.2 316.1 8.2 8.3 FY13E 1,422 1,150 272 19.1 4,960 561 70 393 4,722 1,558 3,035 3,164 301.2 316.1 10.1 10.0
We believe that the impact of Mid - Day merger on JPL's EPS shall be minor. We await further clarity on the growth of properties such as Inquilaab, as well as the data on progress of the same. While the general idea of growth in an Urdu newspaper appears to us favourable, it remains to be seen whether the idea is practical. As of now, we note that Urdu newspapers are a highly fragmented and underdeveloped market, and there may be unknown (although, we believe, small in so much as impact on financials is concerned) execution risks involved. We believe that Mid-Day has received a severe setback in the past due to entry of Mumbai Mirror, and the newspaper may find it difficult to regain ground in Mumbai. However, the impact of Mid-Day's competencies on Jagran's operations may be a positive, that is not incorporated in our model. We note that Jagran has been making an attempt to develop a differentiated weekly newspaper product which may benefit from Mid-Day's competencies.
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SECTOR REPORT
January 14, 2011
Valuation
We value JPL using a DCF methodology. The key assumptions include: 1/ long-term revenue growth of 11% CAGR as advertising revenues grow at 14% while circulation revenues witness soft growth, 2/ long-term EBITDA margin of 37%, largely due to improvements in gross margins as ad-rates rise following the longterm convergence to English newspapers, 3/ terminal growth rate of 5%, in line with DB Corp. Our new price target implies an upgrade of Rs 13/ share. The upgrade is largely on account of rolling forward our price target to FY12-end estimates.
DCF model
Rs mn, FY Ends March Revenues EBITDA Margin (%) EBIT NOPLAT Add: Non- Cash Charges Gross Cash Flow Changes in Working Capital Operating Cash Flow Capex Free Cash Flow Discounted FCF WACC Perpetual Growth Rate Valuation PV 1-10 Terminal Value PV - Terminal Value Enterprise Value Net Debt Market Value Implied Value - Rs/ Share 20,565 92,646 28,278 48,842 2,937 45,905 153 FY11E 10,795 3,274 30.3 2,750 1,856 524 2,380 161 2,541 (517) 2,024 2,024 13% 5% FY12E 12,432 3,852 31.0 3,343 2,257 509 2,766 (141) 2,624 (300) 2,324 2,064 FY13E 13,865 4,688 33.8 4,154 2,804 535 3,338 (343) 2,996 (400) 2,596 2,047 FY14E 15,305 5,247 34.3 4,686 3,163 561 3,724 (159) 3,566 (400) 3,166 2,217 FY15E 16,832 5,797 34.4 5,207 3,515 590 4,105 (173) 3,931 (400) 3,531 2,197 FY16E 18,540 6,422 34.6 5,803 3,917 619 4,536 (188) 4,348 (500) 3,848 2,126 FY17E 20,324 7,019 34.5 6,369 4,299 650 4,949 (400) 4,549 (500) 4,049 1,987 FY18E 22,324 7,703 34.5 7,021 4,739 682 5,422 (400) 5,022 (500) 4,522 1,970 FY19E 24,566 8,486 34.5 7,770 5,244 717 5,961 (400) 5,561 (500) 5,061 1,959 FY20E 27,078 9,381 34.6 8,628 5,824 752 6,576 (400) 6,176 (500) 5,676 1,951 FY21E 29,515 10,921 37.0 10,045 6,730 876 7,606 (400) 7,206 (500) 6,706 2,047
Rating
Even as we see significant difficulties for Jagran Prakashan in revenue growth and high competitive pressure, we believe that the company shall be able to maintain a strong position in Uttar Pradesh, in the near - term. Our estimation of fair value includes value-reducing measures such as lower cover prices that the company is due to take. The target price implies a fair upside from CMP. We recommend ACCUMULATE on Jagran Prakashan, with an FY-12 end price target of Rs 153/ share.
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SECTOR REPORT
January 14, 2011
Risks:
1. Competition remains the most significant risk faced by Jagran Prakashan, with Hindustan growing in strength in Uttar Pradesh and expected aggression from DB Corp in Jharkhand and Bihar. 2. Our base case does not assume strong revenues for I-Next/ City Plus. This is on account of the belief that most of Jagran's markets are not large enough to include a new TG, and that media buyers are unlikely to take it up in a significant manner. Upside surprises on I-Next could cause a significant deviation from our advertising revenue estimates. 3. Other Risks include macroeconomic risks such as a softer-than-expected growth in the industry, and higher newsprint prices.
About the company:

Jagran Prakashan, founded by Puran Chandra Gupta, is primarily a newspaper publishing company. Jagran Prakashan publishes three newspaper titles - Dainik Jagran, I-Next, and City Plus. Dainik Jagran is the largest read newspaper in India, and is spread over eleven states, and 37 editions. I-Next, a tabloid newspaper launched by the company covers eleven cities. City Plus, a weekly English tabloid from the company, is a free newspaper. Apart from print businesses, Jagran Prakashan is also involved in outdoor activities and event management activities through 'Jagran Engage'. These businesses contributed Rs 709mn to the topline of the company in FY2010. Jagran Prakashan is promoted by the Gupta family.
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SECTOR REPORT
January 14, 2011
FINANCIALS: JAGRAN PRAKASHAN LTD

(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY09 8,234 9.8 2,078 (13.7) 383 1,694 (18.2) 85.0 1,863 (16.4) 436 23.4 1,427 (18.5) 301 4.7 1.0 6.0 18.6 FY10 9,419 14.4 2,823 35.9 507 2,316 36.7 59.8 2,593 39.2 833 32.1 1,760 23.3 301 5.8 3.5 7.5 20.3 FY11E 10,795 14.6 3,274 16.0 524 2,750 18.7 59.0 3,009 16.0 982 32.6 2,027 15.2 301 6.7 4.0 8.5 22.4 FY12E 12,432 15.2 3,852 17.7 509 3,343 21.6 65.7 3,724 23.8 1,242 33.4 2,482 22.5 301 8.2 4.9 9.9 25.0 Net Fixed Assets Investments Inventory Debtors Cash&Bank balances Loans & Advances Other Current Assets Current Assets Miscelleanous Expenses Total Assets 3,711 1,568 318 1,330 1,225 655 214 3,743 9,022 3,941 1,666 533 1,812 852 717 259 4,173 9,780 3,934 1,568 600 2,039 1,947 900 90 5,575 11,077 3,724 1,568 691 2,348 2,784 1,036 104 6,962 12,255

(Year-end March) Shareholder's Equity Reserves Net worth Secured Loans Total Loans Net Deferred tax liability Current Liabilities Total Liability FY09 602 4,997 5,599 1,415 1,415 384 1,624 9,022 FY10 602 5,523 6,125 1,214 1,214 580 1,861 9,780 FY11E 602 6,151 6,753 1,415 1,415 580 2,329 11,077 FY12E 602 6,920 7,522 1,415 1,415 580 2,738 12,255

(Year-end March) Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investment cash flow Equity Raised Debt Raised Other Financing Cash Flows Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash FY09 1,863 383 568 (436) 2,379 265 (1,109) (844) 624 (348) 276 (868) 944 282 1,225 FY10 2,593 507 (567) (637) 1,896 (98) (737) (835) (201) (1,212) (1,413) (22) (374) 1,225 852 FY11E 3,009 524 161 (982) 2,711 98 (517) (419) 201 (1,398) 0 1,095 852 1,947 FY12E 3,724 509 (141) (1,242) 2,850 (300) (300) (1,712) 0 837 1,947 2,784
Ratio Analysis
(Year-end March) Margins and Growth: EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover Interest coverage (x) Debt/ equity ratio Return Ratios: ROE (%) ROIC ROCE (%) Multiples: EV/ Sales EV/EBITDA Price to earnings (P/E) 4.6 18.1 26.2 4.0 13.4 21.2 3.4 11.2 18.4 2.9 9.3 15.0 26.0 35.2 21.0 30.0 38.3 23.5 31.5 41.5 24.7 34.8 49.4 27.5 59.0 2.5 28.7 0.5 70.2 2.5 35.3 1.0 68.9 2.7 55.0 -1.4 68.9 3.2 66.9 -3.7 25.2 25.2 17.3 -18.5 30.0 30.0 18.7 23.3 30.3 30.3 18.8 15.2 31.0 31.0 20.0 22.5 FY09 FY10 FY11E FY12E
(1,197) (1,712)
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SECTOR REPORT
January 14, 2011
SUN TV NETWORK LTD

505537 SUNTV 197,631 23 550 / 328 315287 394
RECOMMENDATION : BUY FY12E PE: 21.4X
Stock details
BSE code NSE code Market cap (Rs mn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume Shares o/s (mn) Source: ACE Equity : : : : : : :
Summary table
(Rs mn) Sales Growth (%) EBITDA Net profit Net Debt EPS (Rs) Growth (%) CEPS DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) FY10 14,528 39.8 10,909 5,199 (3,283) 13.2 41.2 21.3 4.0 28.6 25.1 13.4 17.9 38.0 23.5 10.5 FY11E 20,384 40.3 15,771 77.4 7,471 19.0 43.7 31.7 5.7 35.0 31.1 9.4 12.2 26.5 15.8 8.3 FY12E 22,834 12.0 17,517 76.7 9,252 23.5 23.8 34.4 7.1 34.5 32.4 8.2 10.6 21.4 14.6 6.6
Sun TV is an entertainment focussed broadcaster, with leading position in three of the four south Indian markets that it operates in. Sun TV's markets have strong penetration of C&S television, and concentrated viewership which differentiate them from Hindi markets. The company has a strong track record of revenue and earnings growth, largely due to its better grip on the value chain, which we believe is sustainable. Sun TV's viewership is not monetized to the extent of Hindi broadcasters, in that its advertising rates are well lower, and its viewership does not bring in subscription revenues in line with lead broadcasters in Hindi GEC space. Under-monetization, along with domination in concentrated markets places Sun TV in the broadcasting sweet spot, which demands high multiples - we initiate on Sun TV Network with a BUY rating and a price target of Rs 666/ share.
q Play on well-penetrated markets - Sun TV competes in a market that is essentially different from the Hindi belt, to which most stocks discussed in the report are exposed. Within the broadcasting segment, the differences in the markets are especially manifested, with four southern states accounting for 44% of the C&S population of India. q Markets are concentrated, Sun TV dominates in most - Within this market, Sun TV Network is a dominant broadcaster in three of the four states, and has a near-unassailable lead in Tamil Nadu. Sun TV's markets are far less competitive than Hindi GEC counterparts, with top 2 players accounting for 60%80% of each of the markets. The positioning of Sun TV Network is the prime cause for our bullish stance on the stock - for the company's positioning creates bargaining power in the value chain, which makes Sun TV Network the most profitable broadcaster in India. q The position is sustainable - We believe the strong competitive position of Sun TV is sustainable - on account of its grip over distribution strength in addition to exclusive content (strong library of movies). We are therefore, more confident in modelling for Sun TV Network the full benefits of strong advertising growth in the future that we expect. q Strong Drivers of advertising and subscription revenues still in place Revenue drivers remain strong, on account of low advertising rates (CPRP basis) as compared with Hindi GECs, and lower monetization of viewership in terms of subscription revenues. Cost factors, while on the rise, shall be manageable, leading to 23% revenue CAGR and 30% PAT CAGR through FY10-FY13E. q Buy, With Target Price of Rs 666/ share - We value Sun TV aggressively given the confidence we can place in the company's position, strong macro drivers (regionalization), and under-monetized viewership. Sun TV currently trades at 22.4x FY12E PER - in our opinion, the multiple is inadequate to account for strong growth (FY10-FY13E EPS growth of ~30%) that the company appears set to witness. Based on DCF value Sun TV Network at Rs 666/ share, implying 28x PER FY12E (or 1.0x PEG). We initiate on the stock with a BUY rating. q Risks - 1/ Competitive Risks, 2/ Macroeconomic Risks relating with adex growth, 3/ Risks arising from political situation in Tamil Nadu and the position of the promoter
(5,773) (11,788)
Corporates 0.4% Public Institutions 10.0% 3.8% Foreign 8.8%
Promoters 77.0%
Source: ACE Equity
Source: ACE Equity
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SECTOR REPORT
January 14, 2011
Play on a Different India- Profiling Sun TV Markets

With a bouquet of 20 channels, Sun TV is present in all South Indian languages. These four languages TV adex generated put together accounts for Rs 22.5 Bn, or ~75% of advertising revenues generated in regional broadcasting that is a 18% of total advertising market of India, from states that account of 24% of the GDP of India.
Per Capita Incomes Sun TVs Markets

35 28 21
Advertising Spends (TV) in Regional Markets (Rs mn)

10000 7500 5000
14 7 0 Kerala Tamil Nadu India Andhra Karnataka Pradesh

2500 0 Tamil Telugu BengaliMalayalam Marathi Kannada
Source: Company
Source: FICCI-KPMG Report
Regional Markets: An Examination
Guj ara ti Size of Target Audience Purchasing Power of TA Advertising size and Rev Potentia l Numb er of Players Present Le ast Favourable Most Pre ferable
Source: FICCI - KPMG Report
Ma ra thi
Punjabi
Kannada
Tamil
Telugu
Ma layalam
Bengali
Sl ightly Favourable
Moderately Fa vourable.
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SECTOR REPORT
January 14, 2011
Sun TV Markets: 22% of Indias Income, 44% of Indias Viewership

South Indian markets are differentiated from the remaining Indian states, in that the penetration of C&S TV among these markets is quite high. Tamil Nadu, Karnataka, Kerala, and Tamil Nadu together account for 44% of Indias C&S viewers, while accounting for only 22% of population.
Headline
State Uttar Pradesh Maharashtra and Goa Bihar West Bengal Andhra Pradesh Tamil Nadu Madhya Pradesh Rajasthan Karnataka Gujarat Orissa Kerala Assam Punjab/ HP Haryana Delhi Pop Share 16% 9.40% 8% 7.80% 7.41% 6.07% 5.87% 5.49% 5.14% 4.93% 3.58% 3.10% 2.59% 2.96% 2.06% 1.35% C&S Share 6% 13% 3% 8% 15% 14% 6% 3% 9% 6% 1% 4% 1% 5% 3% 5%
Source:TRAI, Census 2001
In a sense, the geography differentiates Sun TV from most other broadcasters/ print players discussed in the report. While other broadcasters are a play on rising penetration, television penetration is already quite high in markets of Sun TV Network. While other broadcasters subscription revenue growth depends on rising subscribers, Sun TV Networks subscription revenue growth depends on greater monetization of existing viewership (hence ARPU, conversion to digital will be main drivers). While other broadcasters revenues in future are more dependent on competitive position, Sun TV must concentrate on market expansion to drive growth, as it has proven, long-standing #1 position in most of its markets and has the wherewithal to carry the same.
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SECTOR REPORT
January 14, 2011
Broadcasting Clich: Content is King, Distribution is God

Sun TV Beneficiary from both n Sun TV started broadcasting operations in 1991. As a result of its longstanding lead position in these markets, Sun TV has acquired a library of ~ 9000 movies - with most movie rights running into perpetuity. Sun TV uses this content across various channels, especially lead GEC and movie channel in each of the four languages.
Sun TV Library Break-Up
(%) Tamil Telugu Kannada Malayalam Source: Company ~50% ~20% ~20% ~10%
n Along with its strong library, and legacy status, Sun TV Networks viewership and sustenance is helped by promoters interests in distribution. Sun TV had started as a cable company, and continued to invest heavily in MSO Sumangali Cable. The company (Sumangali Cable) has been a dominant market leader in Tamil Nadu especially in Chennai. As we have stated earlier in the report , we believe that broadcasters operations are helped by presence of a sympathetic MSO as an MSO can potentially block off competitions channels, and place own channels in prime bands of the viewer. In this reference, we also look favourably at Sun Direct, the promoters foray in DTH (JV with Astro). Sun Direct has expanded in large parts of South India and is currently third largest player in the Indian DTH space. n The content-distribution combination makes Sun TV Network unassailable in Tamil Nadu the largest south Indian market, and explains the continued dominance of Sun TV over a period of 20 years. Sun TVs legacy position in other south Indian markets as well as content domination also lead to the companys other language GECs being well ahead of rivals.
Viewership in Key Genres

6% of total Tamil GEC Sun TV Kalainagar TV Vijay TV Jaya TV Raj TV Zee Tamizh DD5 Podhigai TV Viewership 70.7 9.9 6.9 4.6 3.7 3.8 0.7 Mega TV Vasanth TV SS Music Telugu GEC Gemini TV Maa Telugu Zee Telugu Eanadu TV DD8 Telugu Vanitha TV 5% of total Viewership 44.9 17.5 17.6 19.1 0.8 0.1 Kannada GEC Udaya TV Suvarna ETV Kannada Zee Kannada Kasturi DD( Chandana 3% of total Viewership 39.4 23 14.6 13.9 7.1 2 Malayalam GEC Asianet Surya TV Kairali Amrita TV DD4 Malayalam 10.7 6.4 3.9 % of total Viewership 50.2 30.3 10.9 7 1.6 KTV Raj Digital Plus Tamil Movies 1% of total viewership 89.2 9 Sun Music Isaiyaruvi Jaya Max Raj Musix Tamil Music 1% of total viewership 47.5 20 9.3 2.2
Source: TAM, Viewership Data for Wk 47, 2010
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SECTOR REPORT
January 14, 2011
Advantages of Regional Markets Better Control over Value Chain

Sun TV is a dominant player in most markets that it operates in (the state of Kerala, where Surya TV lags Asianet, is the only exception). In Tamil Nadu and Andhra Pradesh, Sun TVs channels also have a complete (~90%) dominance in the movie channels viewership. Largely due to Sun TV, the concentration levels in these markets are well higher than most genres, implying strong bargaining power of Sun TV with the advertiser, as well as distribution partners (DTH/ cable operators). High concentration also implies that the significant other part of the value chain, the content producers, do not raise prices unduly to the broadcasters.
Herfindahl Index, Various genres
Tamil GEC 50% 45% 31% 30% 29% 28% 27% 19% 19% 18% 17% 16% 11%
Sun TV Network present in regional, concentrated markets
Malayalam GEC Business New s (English) Telugu GEC Marathi GEC Kannada GEC Bengali GEC English New s Kids Hindi Movies Telugu New s Hindi GEC Hindi New s
Source: TAM, calculations by Kotak Securities - Private Client Research
The chart below shows Selling and distribution expenses with respect to peers. We note that while most broadcasters margins have been affected negatively, Sun TV pays no carriage fees benefiting the companys margins.
SD&A Expenses as % Sales, Major Broadcasters
40% Zee Entertainment Sun TV Netw ork TV-18 TV Today IBN 18
30%
20%
10%
0% 2006 2007 2008 2009 2010
Source: Company Reports, compiled by Kotak Securities - Private Client Research
Further, on account of lower costs of talent, the cost of production of regional shows is also well lower than Hindi players.
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SECTOR REPORT
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Programming Costs: Hindi Versus Regional

Average Cost of Production/ Half hour episode Hindi GEC Regional Channels Malayalam Fiction Malayalam Mythological Kannada Fiction Kannada Mythological .07-0.08mn .09-.11mn 0.085-.01 mn .16-.21 mn
Low costs of production for regional GECs
Fiction Non-Fiction (No Celebrity) Non-Fiction (Single Celebrity) Non-Fiction (Many Celebrities) Source: FICCI KPMG Report
0.8-1 mn 2.5mn 10mn 20-30mn
Lastly, regional channels, because of their low costs, have been used by local players (retailers, regional FMCG players). As a result of this, these channels tend to have a higher percentage of local revenues in their advertising stream. 40% of Sun TV's advertising revenues come in from local advertising. This is helpful, in that discounting model followed by Hindi GEC players is less prevalent among regional players. Sun TV's management insists that there is no discounting, and card rates are sacrosanct.
Add to These: Unique Model Ensures De-risking of revenues

Slot sales reduce risks, provide opportunity to participate in upsides
Further to benefits enjoyed by Sun TV as above, the company follows a fairly unique model of advertising sales. In contrast with players like Zee Entertainment, which purchase (non-film) content from the content producer, Sun TV directly sells programming slots to the content producer (this model of sale is referred to as "sponsored programming", as opposed to "commissioned programming" where a content producer sells the content to a channel for a fixed fee), thereby ensuring a large amount of revenue upfront. Most of the company's prime-time programming is sponsored programming. Sun TV ensures a portion of the upside benefits, as it has 1/3 of the total free commercial time to itself. Sun TV continues to have significant inventory (85% utilization on mainline channels as of FY10, and ~50% inventory utilization in adjunct channels). As such, significant advertising revenue growth may be achieved without placing the media buyer in discomfort. Sun TV has launched channels in the recent past which have developed a significant amount of traction, and are yet to be monetized to the fullest extent of viewership.
Sun TV Network: Strong Track Record of Growth and Profitability
24000 Revenues (LHS) EBIT Margin (RHS) 18000 FY07-FY11 : 27% CAGR (Revs) 80%
60%
12000
6000
unmatched strength in margins
40%
20%
0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E
0%
As a result of factors discussed above, Sun TV has has a strong track record of growth. FY07-FY11E, the company shall have grown at 27% CAGR making Sun TV the fastest growing broadcasting company. As some of the other issues ailing broadcasting industry are less relevant to Sun TV, the company has also held margins well above industry levels, between 55% and 60%. Sun TV is the most profitable broadcaster in India.
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The company has a strong record of shareholder value creation, with the companys ROIC consistently and strongly above the companys WACC.
Sun TV: ROIC Over The Years
60 50 46 45 40 33 30 26 31
15
0 FY07 FY08 FY09 FY10 FY11E FY12E
Sun TV Network: Examination of Revenue Streams

Sun TV Network brings in advertising revenues of Rs 7.5 Bn 37% of the total advertising revenues of these markets. Advertising revenues form the backbone of Sun TVs revenue stream, accounting for ~54% of total revenues generated in FY10. Other key components of Sun TVs revenue model include subscription revenues, and slot sales (explained later in the report, which account for 23% and 10% of revenues in FY10.
Sun TV Revenue Pie
Movies 5% Licensing Income 4% Slot Sales 9% Advertising Income 56% Subscription 22%
Radio 4%
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SECTOR REPORT
January 14, 2011
Future Growth Drivers: (1) Subscription Revenues

Given ~50 mn households that receive transmission from Sun TV, we believe the current subscription revenues (Rs 3240 mn, year FY10) represent a potential for high growth. As of now, Sun TV receives only ~Rs 6 per viewer per month in subscription revenues. Excluding DTH subscription revenues (~Rs 1.8Bn), Sun TV receives Rs 3.7/ sub/ month. The under-monetization of revenues in the case of Sun TV emerges from the following factors: 1/ lack of digitization and addressability on analogue channels, 2/ large parts of Tamil Nadu (Chennai) and Kerala is largely an FTA (Free to Air) market, 3/ international revenues have been weak for Sun TV. In comparison with ZEEL, Sun TVs international subscription revenues are low.
International markets, digitization in India hold key for Sun TV subscription revenue growth
Sun TV has made attempts to rectify these. The companys channels have turned pay in Kerala already, and have begun to contribute to the companys pay revenues. The company has also formed a distribution entity Sun 18 in an attempt to raise revenues from South Indian viewership in northern India. Thirdly, the company has a very small stream of revenues in so much as international subscription revenues are concerned. Sun TV has recently appointed Global Media Management LLC and World Media Connect LLC to grow subscription and advertising revenues from international markets. In 3QFY11, the company has started receiving revenues after going pay in Malaysia. Over FY11FY12, Sun TV intends to start collecting revenues from USA after it sets up its distribution in the region.
Sun TV : Subscription Growth to Be a Parallel Driver
Rs mn, FY Ends Mar Subscription Revenues (a+b+c) - o/w Analogue Cable Revenues (a) as % ZEEL - o/w DTH Revenues (b) (Assumptions on DTH Revenues below) Driver:DTH Subscribers Driver: % of AI Subs Base: AI Subs - DH Driver: Realization/ Sub DTH revenues as % Industry DTH revenues as % ZEEL - o/w International Subscription (c) as % ZEEL 6 37.5 16 22 5.2 70.8 500 12.4 8 35.0 22 26 5.7 75.5 750 18.6 10 32.5 30 28 5.5 75.9 1,100 27.2 12 30.0 39 30 5.3 81.0 1,550 37.2 15 30.0 49 32 5.3 95.2 2,100 49.0 17 30.0 57 34 5.3 98.8 2,247 50.9 FY10E 3,700 1,600 48.2 1,600 FY11E 5,356 2,160 56.8 2,446 FY12E 6,692 2,311 59.0 3,281 FY13E 8,236 2,473 61.3 4,213 FY14E 10,381 2,646 63.7 5,635 FY15E 12,012 2,831 66.2 6,933
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SECTOR REPORT
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Future Growth Drivers (2): Cost Competitiveness to the Media Buyer

Lower Advertising Rates make regional media competitive Regional channels in general have a significantly lower advertising rate than national (Hindi) counterparts. On a cost per rating point scale, regional channels tend to be cheaper by 75-80% as compared with Hindi GEC. We believe a longterm convergence move, already in place, will strengthen. This is especially relevant in Sun TV Networks markets such as Tamil Nadu, where reaching the target group is unlikely until one utilizes regional channels. As has been witnessed in the last downturn, this valuation gap of Sun TV also tends to make Sun TV immune to extreme situations, as media buyers indulge in a down-trading to meet GRP targets.
Cost Per Rating Point of Various Genres
16000
Low CPRP of regional GECs relative to Hindi provide long term yield improvement opportunities
12000 8000 4000 0 Hindi GECs Kannada Tamil GECs GECs Telugu GECs Malayalam GECs Marathi GECs Bengali GECs
Source: FICCI KPMG report
In FY10, Sun TV made an effort to, and succeeded in, selling a larger amount of its inventory due to innovative marketing practices, involving attempts to raise inventory utilization, which drove an advertising revenue growth well in excess of the industry growth. The company also created certain new time bands (Sunday afternoons) which helped strong growth. As of now, certain channels of the company remain unmonetized, which presents an opportunity to further raise utilization levels. We note that although Sun TV has been raising advertising rates consistently, rates of Sun TVs channels stay highly competitive in comparison to Hindi GECs. As such, the company is set to benefit as media buyers focus shifts to regional markets.
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SECTOR REPORT
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Future Growth Drivers: (3) Raising Market Shares/ Expansion of Genres

While Sun TV Network has continued to be the #1 player in most of the markets that it operates in, the company has an opportunity to expand the (viewership of the) genres that it operates in. We note that over time, the overall network share of Sun TV (as % of India viewership) has declined as viewership has moved to new genres.
Sun TV Network Share
Source: Business Standard, TAM Data, CS4+
The company is making initiatives in this direction, that include commissioning of new reality show formats (an example being Deal or No Deal), which have, in the recent past, brought in new viewers. As is evident from FY10 results, the company has benefited from these initiatives.
Strong cash flows of the company may be used to expand into new genres
Sun TV has also tried to create niche (language) genres, such as kids programming, which attract significant viewership, but are yet to see scale-up of revenues to potential. Sun TV also has the opportunity to strengthen its presence in Kerala, where, after being market leader, the companys flagship channel Surya TV has lost share to Asianet. The company is considering not only niche genres, but also other regional languages, such as Marathi and Bengali, that Sun TV can launch operations in.
Future Growth Drivers (4): Growth in Radio Operations, Movie Production/ Distribution
The companys had developed a presence in radio via subsidiaries Kal Radio and South Asia FM (owned 100% and 59.15% respectively by Sun TV Network). Kal Radio and SA FM together have licences for 42 cities, of which 41 are fully operational. Following a rebranding exercise taken up by the company, all radio stations are now operated under the brand name of Red FM. The radio operations, even though they are loss-making, are a significant move by the company to move into new markets (that is, local advertising) if the advertisers were to try to shift to a cheaper media vehicle. Also, radio operations allow Sun TV Network to tap into the potential of one of the fastest growing advertising markets in India. Sun TV Networks radio operations, held under subsidiary Kal Radio and SAFM, have brought in significant losses in the recent past. However, as advertising growth has returned, the company expects radio operations losses shall not bring in EBITDA losses of more than Rs 100 mn. We note that Sun TV Network's radio operations will see benefits from reduction in programming expenses enabled by a recent order that provides for music companies to receive 2% of gross revenues in royalty.
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SECTOR REPORT
January 14, 2011
Cross Media Strategy Stepping into Movie Production In order to ensure that movies - the backbone of Sun TV Network's content superiority - remain affordable and monetizable (recent activity by some players has raised movie expenses in Sun TV Netork's markets), Sun TV has ventured into movie production and distribution. Sun TV Network has a target of producing 8-10 movies each year.
Quarterly Trends Show Traction in Indicated Spaces

Sun TV's quarterly trends remain strong, and the company has consistently outperformed industry growth, in the downturn as well as the upswing, through a combination of growth in advertising and subscription revenues.
Sun TV (Standalone) Quarterly Trends
60% 45% 30% 15% 0% Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
FY15E 35,671 17,727 3,301 12,012 695 15 1,922 1,555 2,781 10,381 661 15 1,693 1,296 105
Grow th, Net Sales (%, LHS)
EBIT Margin, (% RHS)
64% 60% 56% 52% 48%
Assumptions and Estimates

Revenues: We factor in 19% CAGR advertising and 28% CAGR subscription revenues in the period FY10-FY13. Advertising revenue growth will be seen via yield improvements as well as higher inventory utilization. Longer-term (FY10-FY21), we build in CAGR of 16% in advertising revenues and 18% in subscription revenues. Revenues of slot sales have been modelled to grow in line with the increase in yields. Among radio operations, we factor in 15.5% CAGR in revenues through FY10-FY21
Sun TV Revenue Model
(Rs mn) Revenues, Total - Advertising Income - Revenues from Slot Sales - Subscription Revenues - Program Licensing Income - Other Income - Radio Revenues - Movies Production/ Distribution FY10 14,528 7,887 1,343 3,431 544 87 562 674 FY11E 20,384 9,911 1,701 5,356 571 14 830 2,000 FY12E 22,834 11,457 1,987 6,692 600 14 1,185 900 FY13E 26,991 13,358 2,350 8,236 630 14 1,323 1,080 FY14E 30,621 15,090
SECTOR REPORT
January 14, 2011
Expenses: We factor in growth of 18% CAGR in programming expenses for the company, as competition bids up price for content (movies), and higher amortization costs are incurred. Personnel and other expenses are projected to grow at 12%. Overall, we expect Sun TV to bring in EBITDA margin of 58% on a consolidated basis on a continuous basis, implying flat EBIT margins through the forecast/ terminal period.
Sun TV Profit Model
Rs mn, FY ends March Revenues Growth, Revenues Operating Expenses: o/w Cost of Revenues o/w Personnel Expenses o/w SG&A Expenses EBITDA EBITDA Margin Depreciation and Amortization - Depreciation of Fixed Assets -Amortization of Intangible Assets EBIT EBIT Margin Interest and Financial Expenses EBT Other Income PBT Tax Effective Tax Rate PAT before Assoc/ ME PAT for the year Equity Capital Earnings Per Share FY10 14,528 39.8 3,620 1,227 1,340 1,053 10,909 75.1 3,209 881 2,328 7,700 53.0 49 7,650 350 8,000 2,991 37.4 5,009 5,199 394 13.2 FY11E 20,384 40.3 4,612 1,350 1,816 1,447 15,771 77.4 1,184 919 4,105 10,747 52.7 10 10,737 362 11,099 3,718 33.5 7,381 7,471 394 19.0 FY12E 22,834 12.0 5,318 1,458 1,973 1,887 17,517 76.7 1,473 970 3,322 13,225 57.9 10 13,215 703 13,918 4,662 33.5 9,255 9,252 394 23.5 FY13E 26,991 18.2 6,227 1,575 2,193 2,460 20,763 76.9 1,533 1,023 3,721 16,019 59.3 10 16,009 1,276 17,285 5,791 33.5 11,495 11,507 394 29.2 FY14E 30,621 13.5 7,484 1,701 2,329 3,455 23,137 75.6 1,597 1,079 4,160 17,898 58.4 10 17,888 1,982 19,870 6,656 33.5 13,214 13,185 394 33.5 FY15 35,671 16.5 8,984 1,837 2,474 4,674 26,687 74.8 1,662 1,137 4,638 20,912 58.6 10 20,902 2,822 23,724 7,948 33.5 15,777 15,743 394 40.0
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SECTOR REPORT
January 14, 2011
VALUATION
We value Sun TV on a DCF basis, the details on which are provided below:
DCF Valuation, Sun TV Networks
Rs in mn, FY end March Revenues Growth, % EBITDA EBIT Margin NOPLAT Add: Non Cash Charges (Dep. of FA) Gross Cash Flow Less: Working Cap Investments Operating Cash Flow Less: Capex Free Cash Flow PV- FCF Inputs Risk Free Rate Equity Premium Beta Cost of Equity Cost of Debt After Tax Cost of Debt Target Debt/ Equity WACC Terminal Growth Rate Present Value: Explicit Forecast Period (PV 2012-2021) 85,936 Terminal Growth Period Present Value, Enterprise Net Debt/ (Cash) Present Value, Equity Value/ Share 164,663 250,599 (11,788) 262,388 666 33% 63% 96% -4% 100% 8% 6% 0.85 12.6% 10% 7% 0% 12.6% 7.0% FY12E 22,834 12.0 17,517 13,225 57.9 8,596 970 9,566 (344) 9,222 (500) 8,722 7,746 FY13E 26,991 18.2 20,763 16,019 59.3 10,412 1,023 11,436 (515) 10,921 (525) 10,396 8,199 FY14E 30,621 13.5 23,137 17,898 58.4 11,634 1,079 12,713 (147) 12,565 (551) 12,014 8,415 FY15E 35,671 16.5 26,687 20,912 58.6 13,593 1,137 14,730 (637) 14,092 (568) 13,525 8,413 FY16E 41,326 15.9 30,551 24,193 58.5 15,725 1,196 16,921 (604) 16,318 (585) 15,733 8,692 FY17E 47,530 15.0 34,615 27,618 58.1 18,228 1,257 19,485 (678) 18,807 (602) 18,204 8,932 FY18E 54,041 13.7 38,969 31,269 57.9 20,638 1,320 21,958 (766) 21,192 (620) 20,571 8,964 FY19E 61,249 13.3 44,578 35,525 58.0 23,446 1,385 24,831 (829) 24,002 (639) 23,363 9,041 FY20E FY21E 68,061 74,867 11.1 10.0 50,216 54,432 39,475 42,824 58.0 1,524 57.2 1,676 26,054 28,264 27,577 29,940 (998) (1,066) 26,580 28,874 (639) 8,915 (639) 8,618 25,941 28,235
Source: Company, Kotak Securities - Private Ciient Research
We are bullish on Sun TV even as the company trades at a significant premium to peers on most valuation multiples. Our optimistic stance on Sun TV is on account of: 1/ high visibility on advertising revenues on account of strong competitive position, 2/ likely candidate for above industry growth on account of regional focus, 3/ under- monetizatized viewership relative to Hindi broadcasters create drivers of subscription revenues, 4/ strong track record of profitability, growth, and value creation relative to peers. Sun TV Network currently trades at 23.4x PER NTM earnings, a discount to 4-year average PER of 25.3x NTM earnings. Our price target implies a convergence to the average PER enjoyed by the company.
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SECTOR REPORT
January 14, 2011
PER (NTM) Band Chart: Sun TV Network

1000 Price (Rs) 750 10x 20x 30x 40x
500
250
0 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10
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SECTOR REPORT
January 14, 2011
COMPANY
AND BUSINESS DESCRIPTION
Sun TV is involved in the business of broadcasting (TV & radio). The company operates television channels in four key geographical areasTamil Nadu, Karnataka, Andhra Pradesh and Kerala. While the television operations of the company are handled by the parent, the radio business of the company is operated by two subsidiariesKal Radio and SFM (now branded Red). The company has recently become involved in film production, which forms a small part of the business. Sun TV was incorporated as Sumangali Cable Vision. The company launched Sun TV in 1995, and Surya TV in 1998. Sun TV completed the amalgamation of Gemini TV Private Limited and Udaya TV Private Limited in April 2006. The company currently operates a bouquet of 20 channels in four languages. Sun TVs subsidiaries are involved in radio broadcasting in 42 cities, through subsidiaries Kal Radio (97.8%) and SA FM (59.2%), which operate primarily in smaller cities in South India and North India, respectively. SA FM also holds a 49% stake in Red FM, a radio operator in big metro cities, from which it books associate income. = Sun TV is promoted by the Marans, who are also involved in politics and are a part of the DMK, a party that supports the Congress-led UPA at the Centre and is also the ruling party in Tamil Nadu. The promoter group is also involved in related businesses, including print (through Dinakaran) and cable and DTH distribution (via Sumangali Cable and Sun Direct, respectively). Quite apart from these, the promoters have interests in the aviation sector.
Sun TV NetworkCorporate Structure
Promoters
Print
TV Distribution
Radio
Broadcasting
Movies
MSO
DTH Opera tor
Dinaka ran Tamizh Murasu
Kal Radio, SA FM
S un Pictures
Sumangali Cable vision
Tamil
Telugu
Malayam
Kannada
Reading of Financial Statements - Certain Adjustments Needed to make numbers comparable: Sun TV's financials have certain peculiarities that we point out: 1/ Movie expenses are amortized fully upon the first screening of the film. This makes the movie virtually 'free' of content expenses on every subsequent screening, as also exploitation for other genres such as comedy and music. This practice (of amortizing the movie completely on the first screening) is in contrast to other broadcasters such as IBN-18 and ZEEL, which amortize a part (typically 50%) in the first year and the remaining over the next couple of years. 2/ Unlike broadcasters IBN-18 and Zee Entertainment, Sun TV Network Sun TV Network shows its movie expenses under the head of amortization, that is, includes the amortization in its Depreciation and Amortization line rather than its Cost of Production line. This practice makes the EBITDA of Sun TV incomparable to other broadcasters. As such EBIT provides for a better comparison of Sun TV Network with other broadcasters.
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Risks
1. Political Risks: As indicated earlier in the report, Sun TV Network's dominance depends in a large part, on distribution strengths, enabled by promoter group's Sumangali Cable - a dominant MSO in Tamil Nadu (Sumangali Cable has a virtual monopoly). In Tamil Nadu, most important C&S networks are owned by political players (Kalainagar TV, and Jaya TV are both owned by entities who have strong interests in politics). In the past, various governments have tried to break the monopoly of Sumangali Cable, once by even starting an MSO owned by the government. With elections due in the coming year, political risks are significant, and an adverse result (DMK losing Tamil Nadu) may have a dampening impact on the stock's prospects. 2. Competitive Risks: Sun TV currently faces little competition in three of the states that it has a presence in. Various factors have contrinubuted to this situation, one of which is that competition in Indian broadcasting has thus far been concentrated on ownership of a Hindi GEC. Due to this, Sun TV Network has not yet faced competitive pressures of the kind that Zee Entertainment has. As such, margins of the company could contract meaningfully as competition rises. 3. In our opinion, Sun TVs subscription growth depends, in a large way, on DTH revenues. The ongoing tussle between broadcasters and TRAI (decision from TDSAT impending), could therefore bring in substantial downsides to Sun TVs DTH revenue estimates. Since these revenues largely flow through to EBITDA, there is also a likelihood of significant impact on margins.
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SECTOR REPORT
January 14, 2011
FINANCIALS: SUN TV NETWORK LTD

(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY09 10,394 19.5 7,368 40.4 2,205 5,163 9.0 (347) 5,694 10.7 2,293 40.3 3,402 8.7 394 9.3 2.8 14.9 44.2 FY10E 14,528 39.8 10,909 48.1 3,209 7,700 49.1 (397) 8,008 40.6 2,991 37.3 5,017 47.5 394 13.2 4.0 21.3 47.9 FY11E 20,384 40.3 15,771 44.6 5,025 10,747 39.6 (530) 11,099 38.6 3,718 33.5 7,381 47.1 394 19.0 5.7 31.7 60.5 FY12E 22,834 12.0 17,517 11.1 4,292 13,225 23.1 (300) 13,918 25.4 4,662 33.5 9,255 25.4 394 23.5 7.1 34.4 75.8

(Year-end March) Shareholder's Equity Reserves Net worth Secured Loans Total Loans Minority Interest Current Liabilities Provisions Total Liability Net Fixed Assets Investments/ Assoc Inventory Debtors Cash&Bank balances Loans & Advances Other Current Assets Current Assets Total Assets FY09 1,970 15,046 17,016 716 716 384 1,874 468 20,459 9,718 1,805 1 2,449 3,654 1,667 1,192 8,964 20,459 FY10E 1,970 16,318 18,288 1 1 604 1,839 2,768 23,501 12,065 2,280 27 3,292 3,285 1,589 1,070 9,263 (106) 23,501 FY11E 1,970 21,273 23,243 1 1 604 3,945 2,011 29,805 13,083 2,280 27 4,747 5,775 2,265 1,396 14,210 233 29,805 FY12E 1,970 27,286 29,257 1 1 604 4,612 1,511 35,985 12,237 2,280 27 5,318 11,790 2,537 1,564 21,235 233 35,985
Miscelleanous Expenses/ Other (28)

FY09 Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investment cash flow Equity Raised Debt Raised Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash 5,694 2,205 (1,174) (2,017) 4,709 1 (4,255) (4,254) 437 21 (780) (317) (643) 4,297 3,654 FY10E 8,008 3,209 (700) (2,811) 7,706 (466) (5,556) (6,022) 0 (715) (1,433) (2,148) 94 (369) 3,654 3,285 FY11E 11,099 5,025 (1,108) (3,718) 11,298 (6,043) FY12E 13,918 4,292 (844) (4,662) 12,703 (3,446)
Ratio Analysis
FY09 Margins and Growth: EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover Interest coverage (x) Debt/ equity ratio 0 (2,547) (218) 2,490 3,285 5,775 0 (3,269) 27 6,015 5,775 11,790 Return Ratios: ROE (%) ROIC ROCE (%) Multiples: EV/ Sales EV/EBITDA Price to earnings (P/E) 18.8 26.5 53.7 13.4 17.9 38.0 9.4 12.2 26.5 8.2 10.6 21.4 22.7 25.8 19.6 28.6 32.9 25.1 35.0 42.3 31.1 34.5 50.8 32.4 86.0 1.2 n/a -1.5 82.7 1.3 n/a -1.7 85.0 1.6 n/a -2.9 85.0 1.8 n/a -6.0 70.9 49.7 35.4 12.8 75.1 53.0 35.8 41.2 77.4 52.7 36.7 43.7 76.7 57.9 40.5 23.8 FY10E FY11E FY12E
(6,043) (3,446)
Other Financing Cash Flows (1,239)
(2,547) (3,269)
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SECTOR REPORT
January 14, 2011
ZEE ENTERTAINMENT ENTERPRISES LTD

505537 ZEEL 114,028 57.2 163/122 1,689,000 40.63
RECOMMENDATION : REDUCE FY12E PE: 20.5X
Stock details
BSE code NSE code Market cap (Rs mn) Free float (%) 52-wk Hi/Lo (Rs) Avg. daily volume Shares o/s (mn) Source: ACE Equity : : : : : : :
Summary table - Consolidated

(Rs mn) Sales Growth (%) EBITDA Net profit Net Debt EPS (Rs) Growth (%) CEPS DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) FY10 21,998 1.0 6,135 5,970 (4,670) 6.9 12.2 7.2 2.2 16.3 16.0 5.0 17.8 19.1 18.2 3.0 FY11E 28,842 31.1 7,886 27.3 5,545 (5,120) 5.7 (17.6) 6.0 2.0 13.9 13.8 3.8 13.8 23.2 22.0 3.1 FY12E 32,351 12.2 8,869 27.4 6,262 (6,470) 6.4 12.9 6.7 2.2 14.3 14.1 3.3 12.1 20.5 19.6 2.8
Zee Entertainment is amongst the first movers in the Indian broadcasting industry. The company operates entertainment channels across the entertainment viewership spectrum and has a strong subscription revenue stream, which creates strength in the company's business model. However, having developed strong streams, the company faces a challenge in growing subscription revenues from a high base, in the face of rising competition. Moreover, ZEEL's historical financials suggest the company's advertising revenue growth is highly dependent on competitive position of key channels - which we find, is under pressure. Rising competition shall also lead to soft margins as the company is forced to invest aggressively in content and distribution. We initiate on ZEEL with a REDUCE rating and a price target of Rs 126/ share.
q Entrenched Broadcasting Network, Strong Subscription Revenues: Zee Entertainment Enterprises Limited (ZEEL), amongst the most entrenched broadcasting networks in India, enjoys 12% of the total advertising and 20% of the total subscription revenues in the Indian broadcasting space. With 46% of revenues coming in from subscription (FY10), the company's subscription revenue share (as percentage of total) is at par with international peers. q 70% of subscription revenues exposed to soft growth pies: International and domestic cable revenues, together accounting for ~70% of Zee Entertainment's subscription revenues (~33% of total revenues), are unlikely to grow meaningfully. Sales growth in these streams is likely to be soft on account of: 1/ lack of growth in the revenue pie, and 2/ competition from other GECs/ other mass genres. As such, DTH revenues shall be the only driver of subscription revenues, and ZEEL would be strongly dependent on advertising revenues to drive growth - which, in turn would be dependent largely on improving competitive position. q Competitive Pressures Strong: Competitive position, not industry growth, is the prime driver of advertising revenues in mass broadcasting genres. As history of ZEEL's financials shows, there is significant industry-underperformance when competitive position of key channel Zee TV weakens. The present circumstance calls for caution, in our opinion, as there is significant uncertainty about Zee TV's competitive position. There is, further, a lack of traction in other mass channels ratings. q Value Chain Issues to Rise in present industry environment: Rising competition is likely to lead to higher content and distribution expenses, which will keep margins subdued in our opinion. Further, we do not expect any respite for ZEEL in so far as loss making operations of the company (largely sports) are concerned. In the medium term, we do not see positive margin drivers for the company. q Fair Value of Rs 126/ share: We model for a soft growth in advertising and subscription revenues of ZEEL, and arrive at a DCF value of Rs 126/ share. We argue that consensus target prices reflect exaggerated margin and growth expectations. Our PT implies 20x PER FY12E.
Corporates 6% Institutions 18%
Public 3% Promoters 43%
Foreign 30%
Source: ACE Equity
Source: ACE Equity
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SECTOR REPORT
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q Fair Value Estimates Reasonable, considering historical financials/ operational performance: We factor in reasonable long-term growth (~10.5% CAGR), and strong peak margins for the company in our DCF valuation. We believe that given the current environment and trends in ZEEL channels' viewership, our projections are reasonable. ZEEL, which has grown 10.6% over FY02-FY10, and has had a peak EBITDA margin of 36% ( in 2000-2010). Currently, ZEEL brings in EBITDA margin of 27% (FY11E). q Lack of Incremental Drivers/ Upside risks appear low: With restructuring operations of the company nearing an end, incremental drivers are few. We do not see the stock rising in a significant manner from current levels. Downsides may exist considering weakness in Zee TV ratings, intensifying competition in other genres, and losses that sports bring. We initiate on ZEEL with REDUCE rating. q Risks: Significant risks to our rating and price target include: improvement in ZEEL channels' competitive position, pick-up in international revenues led by growth in international economies, faster than expected industry growth, and changes in long-term expectations of digitization.
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SECTOR REPORT
January 14, 2011
VALUATION
Our DCF valuation suggests Rs 126/ share
Zee Entertainment is exposed to a wide variety of industry dynamics, due to which revenues and margins fluctuate widely over time. DCF valuation has the advantage of smoothening these to give us a long-term picture of the appropriate valuation. Further, the valuation allows us to discuss our disagreement with the current market price, the likely causes for the same. Key inputs and valuation of the company is provided below:
DCF Valuation
2011E Revenues EBITDA EBITDA Margin EBIT NOPLAT Add: Non-Cash Charges Gross Cash Flows Changes in Working Capital Net Operating Cash Flows Capex Free Cash Flows Discounted Cash Flows Assumptions: WACC Perpetual Growth Rate Computation of Value: PV (2012-21) Terminal Value PV - Terminal Value Enterprise Value Net Debt/ (Cash) Value, Equity (FY12E) Value/ Share (FY12E) 38385 256857 78399 116784 (6,470) 123,254 126 -5% 64% 12.6% 7.0% % TP 31% 28842 7,886 27% 7,587 5,159 300 5,459 (3,077) 2,381 108 2,490 2490 2012E 32351 8,869 27% 8,562 5,822 307 6,129 (2,612) 3,517 -500 3,017 2680 2013E 35917 9,865 27% 9,551 6,399 314 6,713 (2,052) 4,662 -500 4,162 3282 2014E 39639 10,892 27% 10,571 7,083 321 7,404 (2,154) 5,250 -500 4,750 3327 2015E 44064 12,794 29% 12,466 8,352 328 8,680 (729) 7,952 -500 7,452 4636 2016E 48649 14,333 29% 13,998 9,379 335 9,714 (2,459) 7,254 -500 6,754 3732 2017E 53576 16,597 31% 16,255 10,891 342 11,233 (3,055) 8,178 -500 7,678 3767 2018E 59082 19,313 33% 18,964 12,706 350 13,055 (3,036) 10,020 -500 9,520 4148 2019E 64482 21,649 34% 21,293 14,266 357 14,623 (3,095) 11,528 -500 11,028 4268 2020E 70465 35% 16,111 364 16,474 13,167 -500 12,667 4353 2021E 76334 34% 17,383 371 17,754 14,237 -500 13,737 4193
24,409 26,316 24,046 25,945
(3,308) (3,517)
We assume a long-term FCF growth rate of 7%, and WACC of 12.6% (this is broadly consistent with remaining companies considered in the report). Our estimates in the DCF valuation above imply: 1/ long-term growth of 10.4%, 2/ long-term EBITDA margin of 34%.
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SECTOR REPORT
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In Line with average multiple of ZEEL over FY04-FY11 NTM PER Chart for Zee Entertainment
35.0 29.0 23.0 17.0 11.0 5.0 Dec-04 Dec-06 Dec-08 Aug-05 Aug-07 Aug-09 Dec-10 Apr-04 Apr-06 Apr-08 Apr-10
GRPs
Share Price Analysis: ZEEL

200 150 100 50 0 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-10
115
2Q07 average GRP 240, 3Q07 average 250 1Q08: listing of ZNews, Dish 1Q,2Q09:220 GRPs 3Q09: 200 GRPs
Stock performance dependent on competitive position of mass channels
continued climb in 1Q07, 200 GRP 4Q06: Zee TV becomes #2 GEC
4Q08:270 GRPs 2Q08 310 GRP
2QFY10: Reorganization, 256 GRPs nearing #1

Apr 2009: 235
ZEELs stock performance, as well as PER, have been historically dependent on a few key factors, including: a/ performance of Zee TV ratings (lead indicator of earnings), b/ restructuring initiatives taken by the company, and c/ concerns regarding related parties and impact on ZEEL balance sheet. ZEEL stock has traded at an average multiple of ~21x NTM earnings, compared with 20.3x NTM earnings as of the date of publishing this report. Our price target implies that CMP is broadly an accurate reflection of ZEEL value.
SECTOR REPORT
January 14, 2011
Examination of the Value Gap, and Statement of Investment Argument

In our opinion, ZEEL has a stable revenue base, with a volatile growth trajectory. We examine ZEELs revenue growth over the FY2002-FY2010 in the chart below:
ZEEL: Advertising and Subscription Revenues over the years
Advertising Revenues 25000 20000 15000 10000 5000 0 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
116
Subscription Revenues grabs 26% share, ad-revs surge includes R-GECs for full year.
Zee TV, Zee New s turn pay
FY02-FY07 advertising grow th rate (CAGR): 1.4%
Source: Company reports, Kotak Securities - Private Client Research; Note: FY11 advertising and subscription revenues include the impact of merger of R-GECs.
The competitive position of ZEEL channels does not merit an expectation of revenue spikes similar to the one seen in FY2008/ FY09.
Historically, a few things require note: 1/ ZEEL advertising revenues have floundered when competition has suddenly taken on strong position. FY2002FY2007, ZEEL advertising revenues grew 1.3% CAGR, with strength coming in only as ZEELs lead channel has performed in 2007, 2/ Strength in subscription revenues through the period 2002-2006 is largely a reflection of the strength in gains on C&S homes in India and development of an international subscription stream, 3/ Strength in subscription revenues and advertising revenues in 20072009 has been on account of strength in Zee TVs ratings, as well as development of a strong DTH stream. It is our argument that: n The competitive position of ZEEL channels does not merit an expectation of revenue spikes similar to the one seen in FY2008/ FY09. Zee TV, the primary driver of advertising revenues, is struggling to hold a #3 position in a 4-player market. This contrasts sharply with FY2008, when ZEEL was a contender for #1 in a two-player market. With exception of Zee Bangla, little is seen by way of traction in ZEEL bouquet mass channels, n Analogue Subscription market in India shall disappoint entrenched players in a weakening competitive position as more channels compete to gather a share in the same ARPU. As discussed in the sector section of this report, the consumer seems unwilling to pay a higher ARPU to the cable operator. This means that challengers will grow at the cost of incumbents- Zee is prime candidate for this substitution, as it is amongst the largest recipients of this stream. n With international subscription revenues also facing the heat from competitors, DTH revenues as well as under monetized regional channels remain the only long-term driver of subscription and advertising revenues. As such, we do not see merit in expecting higher topline growth than our assumptions.
SECTOR REPORT
January 14, 2011
We further note that our assumption on long-term EBITDA margin, that is, a peak EBITDA margin of 34%, is close to the highest EBITDA margin recorded by ZEEL, through FY2000-FY2010. Given that a higher number of channels has caused a shift in companies cost structures that may be permanent, we believe that our terminal and peak EBITDA margin assumptions are generous and do not factor in substantial headwinds that the company may face on account of rising competition.
Zee Entertainment EBITDA Margins over the years
40%
30%
20%
10%
0% FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
High competition, poor competitive position lead to decline in margins
Margins rise as competitive position improves
decline on a/c of new initiatives
Margin rise on a/c of shutting new ventures, improved competitive position (new players e.g. 9X shut shop)
Competitive Position Does Not Merit Enthusiastic Long-Term Forecasts

In its comeback last year, Zee TV had appeared to be a strong contender for the #1 position in the Hindi GEC space. However, following Star Plus' revamp in June, both Zee TV and Colors have been left behind. Sony TV has also made a significant comeback into contention, with special series on CID (one of the oldest properties on Hindi GEC space), blockbuster movies (3 Idiots), and KBC- Fourth Season. Sony has displayed commitment to high expenses with recent launch of Jhalak Dikhla Jaa, and is reportedly in talks with Amitabh Bachchan for two new seasons of KBC in 2011. A fresh round of rating war might have begun in the Hindi GEC space with three out of top four channels running high-expense, celebrity reality shows. Moreover, players in the space are well-funded, and the war maybe an extended one. Zee TV has traditionally stayed away from high expense reality shows, instead relying on non-celebrity shows like Dance India Dance and Saregama. Zee TV continues to be the backbone that supports the advertising and subscription revenues of Zee Entertainment. As such, the performance of Zee TV is critical in determining medium-term performance of the company. We note that the re-rating of Zee Entertainment last year was led by the strong rating performance of Zee TV. ZEEL, given its strong profitability focus (discussed later) is a strong investment candidate in adverse market conditions. As a matter of strategy, ZEEL possesses a model that is sustainable rather than one that works on content dominance and high distribution expenses. As a result, as the downturn hit, ZEEL was in a position to strengthen its programming efforts, as well as control expenses, while a number of challengers floundered.
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SECTOR REPORT
January 14, 2011
Weekly GRPs: Zee TV hitting a plateau?

Star Plus 36 SAB Colours NDTV Imagine Zee TV Star One Sony
Zee TV still far from Star Plus, Colors in Hindi GEC space
27 18 9 0 Week 4 Week 8 Week 12 Week 16 Week 20 Week 24 Week 28 Week 32 Week 36 Week 40 Week 44 Week 48 Week 52
118
Source: TAM (C&S4+, HSM)
The chart above shows the GRPs that Zee has generated over the past year. We note that although Zee has emerged #3 once again as KBC - 4 has ended, and new season of Dance India Dance has been launched on Zee TV, the channel has yet to show signs of improvement in its position relative to Colors and Star Plus. Moreover, the resilience in SAB TV's ratings implies that MSM's two channels (Sony and SAB) now have a greater share of the Hindi GEC pie than Zee TV. Zee is taking a few programming initiatives, including higher programming hours, lengthening the prime-time band, and launch of new programs, including Dance India Dance Doubles, and a few fiction shows including Geeta and Bhagonwaali.
Cinema Space to See Further Competition; Content Producers Bargaining Position Strong
With ~10% share of total (% India) viewership, Hindi cinema remains an important portion of the viewership pie. Zee Entertainment must, in our opinion, maintain leadership in the Hindi movies space in so long as it would like to be a strong recipient of subscription revenues. Acquisition of movies will also be important as they can be a useful driver of ratings in times that the companys programming is under stress (Zee TV). ZEEL faces the risk of acquiring movies at high prices, driving up content expenses for the company, while not bringing in revenues that are commensurate.
Content expenses rising, especially in Hindi movies
Cost of satellite rights for movies have risen up sharply, as broadcasters have gained confidence. Two recent deals are a pointer in this direction: ZEEL has signed a deal with Eros International for Rs 640mn, while Viacom 18 has reportedly acquired 30 movies for Rs 2.5 Bn. Our discussions with movie producers/ acquirers such as UTV Software and Eros International suggest that these costs shall continue to be high in the coming two years, in the least. Eros International and UTV software have cornered production of most superstar-led movies for the next two years. As we see it, Zee will be forced into a contest for content, a situation the company has traditionally not been comfortable with. It has been ZEEL's contention in the past that blockbuster movies/ celebrity shows are not monetizable. Demand from other industry players is likely to remain strong: likely launch of movie channel from Viacom-18. Recent news reports, as well as comments from the management indicate that the launch of a Hindi movie channel is in the offing. It is also well known that IBN18 is in the process of going pay in US and UK this effort will receive a boost from launch of a Hindi movie channel (that is to say, it makes logical sense for IBN 18 to launch a Hindi movie channel). The entry of a new player, one that has a history of strong execution and taking large risks, is a negative for all incumbents in the Hindi movie space from point of view of expenses both on content acquisition and carriage fees.
SECTOR REPORT
January 14, 2011
Channel Shares in Hindi Movie Genre

30 24 18 12 6 0 Zee Cinema FILMY Manoranjan TV Star Gold Enterr10
2Q11 1Q11
119
UTV Movies
B4U Movies
MAX
Source: TAM (C&S4+, HSM); Note: Channel shares above reflect the data for four weeks (Week 30Week33)
Given intensifying competition in the space, we find it likely that Zee Entertainment, after choosing to stay cautious for two years, will now need to aggressively invest in movie content, which could raise content expenses in FY11/ FY12 and beyond. Sports A Necessary Evil, and Not a Profitability Driver
Sports: Loss generating, but must have for subscription revenues
Zee owns rights to various sporting events through Zee Sports as well as Ten Sports (Taj TV, in which the company acquired remainder stake in the last year). Possessing a sports bouquet with significant cricket properties is a necessity, in that the bouquet provides the company bargaining power with distribution partners. One of the benefits of owning a sports channel with rights of important events is that the company can utilize upcoming events to bring errant MSOs in line by cutting off signals when the sports event is due. Sports channels are also important in the overall bouquet pricing. The profitability of sports channels depend on the extent to which rights paid for are monetizable, which, in turn is dependent on the popularity of events. Following the success of IPL and the T-20 format, there is reason to believe that many of the rights taken up by sports broadcasters may have become redundant from the profitability point of view. Even so, the rights of these events may not become cheaper in the near-term, for the holder of these rights has the ability to charge higher prices to subscribers for the bouquet. As such, Zee Entertainment faces the prospect of continued losses in its sports properties, impacting overall EBITDA margins.
Impact of high acquisition costs in sports on ZEEL Financials>
1500 1000 500 0 -500 -1000 3Q09E 4Q09E 1Q10E 2Q10E 1Q09 2Q09 3Q10 4Q10 Sports Business Revenues Sports Business EBITDA
Zee (3)
SECTOR REPORT
January 14, 2011
We believe that ZEEL shall continue to bring in losses from its sports businesses in the coming quarters, and do not see the same turning around in the near future. R-GECs: Key Drivers of Growth ZEEL has a strong presence in the Marathi and Bangla markets. Zee Bangla, having lost its #1 position to Star Jalsha, is making a strong comeback. ZEEL channels are far from top positions in other markets. Bengali and Marathi markets together account for ~Rs 6Bn in advertising revenues, ZEEL brought in ~Rs 4 Bn in advertising revenues from R-GECs last year, indicating that the company already holds a significant market share in the two geographies. We incorporate an advertising revenue growth of 16% CAGR through FY10-FY20, which we believe captures upsides that are due on account of changing preferences (towards regional broadcasting) of the media buyer. As of now, ZEEL subscription revenues from these channels are minor. We believe there is a case of strong growth in these, and factor in 16% CAGR through FY20E. Lack of dominating position in these markets implies that more aggressive estimates would not be prudent. We also note that ZEELs regional channels have not been able to gather a significant amount of subscription revenues, and believe this is unlikely to change unless ratings of these channels improve significantly.
Telugu Channels
50 40 30 20 10 0 Gemini TV Eenadu TV Maa Telugu Zee Telugu Other
Kannada Channels
50 40 30 20 10 0 Uday a TV Suv arna ETV Zee Kasturi Other Kannada Kannada
Source: TAM, Week 47, data extracted from exchange4media.com
Marathi Channels
50 40 30
Bengali Channels
40 30 20
20 10 0 Zee Marathi ETV Marathi Star Pravah Mi Marathi Other

10 0 Star Jalsha Zee Bangla ETV bangla Other
120
SECTOR REPORT
January 14, 2011
Recent results show pressure on subscription revenues

It was widely believed that following digitization, strong broadcasters would be able to extract significant amount of the payments made by subscribers. This, however, has proved unfounded as the digitization story has unfolded. MSOs have digitized significant portions of the non-DTH space. Even so, the amounts received by broadcasters are not made on a per-subscriber basis. This has led to a situation where, as DTH penetration has risen, the domestic cable revenues have flattened/ reduced. Given ZEELs high base, we believe it would be difficult to grow revenues from the analogue cable stream as seen in recent quarterly results. As the chart below shows, ZEELs revenues from analogue distribution have been flat over the past 1012 quarters the apparent pick - up in the past two quarters would, we believe, have benefits of inclusion of R-GECs in ZEELs financials.
International Revenues on the decline
1200 900 600 300 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
121
Domestic Cable Revenues Flattening

1000 750 500 250 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
Another significant stream of ZEEL revenues, the international subscription revenues, have seen a flattish growth in the recent past due to a combined impact of downturn and exchange rates. While this is itself not a cause for concern, we note that Colors is yet to go pay in the US/ UK markets, which is likely to have an impact on Zee Entertainment revenues. Net net, we see reason to believe that: a/ advertising and subscription revenues of ZEEL will see below-industry level growth in the future, b/ longer-term growth is suspect on account of rising competition in all parts of the value chain, c/ competitive situation will force ZEEL to raise expenses, including content and carriage. Therefore, there is a case to believe that market expectations regarding ZEEL margins and revenues may be exaggerated. We initiate with REDUCE.
SECTOR REPORT
January 14, 2011
RATING
AND
RATIONALE
Our DCF model suggests that, with some concessions in favour of the company, we view the fair value of the stock at Rs 127/ share. Below, we provide a summary of additional (qualitative and quantitative) factors that are a positive for the company and limit downside, even as we believe that as of now, these are well accounted for in the price of the stock:
Incumbent with strength in diversified genres

Strong, stable business model implies low downside risks
ZEEL clearly possesses characteristics that we believe can drive a successful broadcast enterprise. The company has had a strong position in Hindi GEC/ Movies space since inception. Consistently, flagship Hindi GEC channel Zee TV has been among the top three channels, demonstrating that the channel has capabilities of understanding and adapting to consumer tastes. Being one of the first movers in the space, the company enjoys benefits of legacy rights on many successful Hindi movies .A large number of these movies were acquired well before competition heated up in the Hindi GEC/ Hindi movie space as such these movies rights have been acquired into perpetuity, and costs have been amortized, providing cheap content for a number of ZEEL channels. ZEELs success in the broadcasting space is built on, and dependent on the performance of its Hindi entertainment and movie channels. The company has had a track record of profitable growth in these spaces, and continues to be among the top players in two of the key genres that drive advertising and subscription revenues in the Indian market. The position is further bolstered by numerous regional channels (following the merger of Zee News regional entertainment channels, hereafter referred to as R-GECs), and two sports channels (to be raised to three) that make the company a prime (and recurring) recipient of advertising and subscription revenues, while also providing the benefits of diversification. Zee Entertainment is amongst the only broadcasters in India to have a subscription revenue stream as large as its advertising revenue stream.
Zee Entertainment: Revenue Mix

Other, 1462, 7%
ZEEL Advertising Revenues Mix

- RGECs 27%
Advertising, 10511, 48%
- Other/ ETC Netw orks Channels 4% - Zee,English Channels 2% - Sports 11%
- Zee TV 42%
Subscription, 9824, 45%
- Zee Cinema 14%
Source: Company - Kotak Securities - Private Client Research
Source: Company - Kotak Securities - Private Client Research
122
SECTOR REPORT
January 14, 2011
Summary of ZEEL Channels
Profitable Business Model, Management Chases Profits, not Ratings

Zee Entertainment is amongst the most profitable players in the Indian broadcasting (and media) space, with EBITDA margin of 27% (FY11E), and cashflow generation ability of ~Rs 15 Bn over FY11E-FY13E. As of FY10-end, the company has also cleaned up, and fortified its balance sheet by recovering cash from loans made to promoter group companies (Dish TV and WWIL). Zee Entertainment is now practically debt-free, and has Rs 6.3 Bn net cash. The company therefore has the ability to take on competition if the need exists, by making large investments in content, distribution, or establishment of new properties in established/ new genres. While Zee Entertainment has created a large empire in broadcasting, the companys competitive behaviour is characterized by controlled aggression, and calculated risk-taking. One may note that even in years when the companys lead channel has taken a beating, ZEELs response to competition has been marked by a wait and watch approach. Although this soft approach taken up by ZEEL has led to its advertising revenues underperforming Indias adex growth5, the company has been profitable through its history. ZEELs management has consciously developed subscription revenues as a large stream of revenues thus making the profitability more certain even if advertising revenue growth is not strong. ZEELs PAT has grown at a robust 18% CAGR over the period FY2000-FY2010, while ZEELs ROIC has been well in excess of WACC (excluding loans and advances to group companies).
ZEEL: History of Value Creation
20% 16% 12% 8% 4% 0% FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
123
WACC
ROIC
SECTOR REPORT
January 14, 2011
Zee Group Association helps develop network benefits

Zee TV is supported by a significant bouquet of channels, including genres such as Hindi Cinema, English Entertainment, Sports and Spirituality. Through Zee Turner Limited, the bouquet of Zee TV includes channels of Zee News (news and regional entertainment channels) as well as CNN, HBO and Cartoon Network that create lasting bargaining power with the Local Cable Operators (LCO). ZEEL also provides a separate feed for international markets, and overseas subscription revenues for a significant portion of its revenue pie.
Zee Turner bouquet
Hindi Entertain ment Zee TV Zee Smile Zee Cinema Zee Classic Zee Action Zee Premier Zing etc (B2B) Hindi Movies Hindi Music English Entertain ment Zee Caf Zee Studios Ten Sports Zee Sports Zee Kannada Zee Telugu Zee Bangla ETC Punjabi Zee Marathi Zee Talkies Zee Kannada Zee Telugu Zee Bangla Zee Marathi Zee Trendz Zee Jagran English Movies Sports Regional Kannada GEC Telugu GEC Bangla GEC Punjabi GEC Marathi GEC Fashion Spirituality
Zee Group Structure
Essel Group Promoters
Zee News (News Broadcasting) (54%)
Zee Entertainment (Entertainment Broadcasting) (43%)
WWIL (Top 3 MSO) (58%)
Dish TV (#1 DTH Services provider) (61%)
The strength of ZEEL in terms of its bouquet has several important implications in our view: (a) the bouquet gives the company the ability to provide choices to the advertiser in terms of a tradeoffs between reach and frequency, (b) creates better bargaining power in negotiations for channel frequencies and pricing of the bouquet, and (c) makes distribution revenues possible via a reduction in perceived cost of the GEC. Zee Entertainment also possesses the benefit of having two promoter-owned companies involved in distribution. As stated earlier in the report, we think there is a definite need for backing of a distribution company. Dish TV (DTH operator, 9 mn subscribers), and WWIL (MSO), 8 mn subscribers, hold Zee Entertainment in good stead to this extent.
124
SECTOR REPORT
January 14, 2011
ASSUMPTIONS
Revenues:
AND
VALUE DRIVERS
a. Advertising Revenues: We factor in a 54% advertising revenue growth in FY11 (legacy Zee channels growth ~24%), with a contribution of Rs 4.3Bn from RGECs. As such, we expect legacy Zee channels to grow in line with industry growth. FY12 advertising growth is projected at 15%, while long-term growth (FY13-FY21) is set at 12%. b. Subscription revenues: We believe ZEELs subscription revenue growth shall be largely dependent on growth in the DTH segment. With severe setbacks in the domestic cable and international subscription, the overall subscription growth is likely to come in at Rs 11.0Bn, 13% growth in FY11, and 11% in FY12E. Long-term growth (FY13E-FY21E for subscription revenues is set at 6.3%).
Zee Entertainment Revenue Model
Rs mn, Year End March Revenues Growth, Revenues (%) - Advertising Revenues Growth, Ad-Revenues (%) - Zee TV - Zee Cinema - Sports - Zee,English Channels - Other/ ETC Networks Channels - RGECs (Since 4QFY10) Pro-Forma Advertising Revenues Pro-Forma (Advtg) Revene Grw (%) - Subscription Revenues Growth (%) - Domestic Cable Growth, Domestic Cable Revenues (%) - DTH Growth, DTH Revenues (%) - International Subns. Growth, International Subscription Revenues (%) Other Sales and Services -10.0 1,462 0.0 1,535 0.0 1,612 3.0 1,693 3.0 1,777 3.0 1,831 4,042 2010 21,797 4.7 10,511 -0.8 5,535 1,835 1,418 318 472 934 9,577 -9.6 9,824 8.7 3,318 7.9 2,261 2011E 28,842 32.3 16,222 54.3 6,874 2,279 1,761 395 586 4,327 11,895 24.2 11,085 12.8 3,803 14.6 3,240 43.3 4,042 2012E 32,351 12.2 18,461 13.8 7,768 2,576 1,990 446 662 5,019 13,441 13.0 12,279 10.8 3,917 3.0 4,320 33.3 4,042 2013E 35,917 11.0 20,826 12.8 8,700 2,885 2,229 500 742 5,772 15,054 12.0 13,398 9.1 4,034 3.0 5,200 20.4 4,163 2014E 2015E 39,639 44,064 10.4 23,499 12.8 9,744 3,231 2,496 559 831 6,638 12.0 14,364 7.2 4,155 3.0 5,920 13.8 4,288 11.2 26,518 12.8 10,913 3,619 2,796 627 930 7,633 12.0 15,716 9.4 4,280 3.0 7,019 18.6 4,417
16,861 18,884
Source: Kotak Securities - Private Client Research, Company Reports
125
SECTOR REPORT
January 14, 2011
Expenditures and Margins:

We set production expenditures to grow at 42% through FY11 (impact of R-GECs and higher content expenses), and 12% through FY12; with long term production expenses set at 11%. Personnel expenses are modelled to grow at between 11% and 15% after FY11, while selling and distribution expenses are set to grow 7% between FY12-FY21. With these assumptions, we see EBITDA margins flat through FY11-FY14. Longterm EBITDA margins are projected between 30% and 34%.
Zee Entertainment Profit Model
Rs mn, Year End March Revenues: -o/w Advertising -o/w Subscription -o/w Other Growth, Revenues (%) Operating Expenses: -o/w Personnel Expenses -o/w SG&A Expenses - fo/w Administrative & Other Exp. -fo/w Selling and Distribution Exp. Growth, Operating Expenses EBITDA Margin (%) Depreciation and Amortization EBIT Interest Expenses EBT Other Income PBT Provision for Tax Effective Tax Rate PAT (Net Income) Net Margin Growth, Net Income (%) 2010 21,998 10,670 9,869 1,459 0.3 15,863 1,963 4,448 2,113 2,335 -0.1 6,135 27.9 285 5,849 331 5,518 1,220 6,738 572 8.5 6,165 28.0 27.8 2011E 28,842 16,222 11,085 1,535 31.1 20,955 13,424 2,568 4,963 2,324 2,639 11.6 7,886 27.3 300 7,587 161 7,426 758 8,184 2,619 32.0 5,565 19.3 -9.7 2012E 32,351 18,461 12,279 1,612 12.2 23,483 15,064 2,954 5,465 2,510 2,955 10.1 8,869 27.4 307 8,562 120 8,443 767 9,209 2,947 32.0 6,262 19.4 12.5 2013E 35,917 20,826 13,398 1,693 11.0 26,051 16,782 3,249 6,021 2,711 3,310 10.2 9,865 27.5 314 9,551 120 9,432 1,011 10,442 3,446 33.0 6,996 19.5 11.7 2014E 2015E 39,639 44,064 23,499 14,364 1,777 10.4 26,518 15,716 1,831 11.2
28,747 31,270 18,770 3,574 6,403 2,928 3,476 6.4 10,892 27.5 321 10,571 120 10,452 1,310 11,762 3,882 33.0 7,881 19.9 12.6 20,528 3,931 6,811 3,162 3,649 6.4 12,794 29.0 328 12,466 120 12,347 1,894 14,241 4,699 33.0 9,541 21.7 21.1
-o/w Progrmmg. and Broadcasting Exp. 9,452
126
SECTOR REPORT
January 14, 2011
Risks
Upside Risks
1. Improvement in competitive Strengths of Zee Entertainment channels: Zee Entertainments revenues (advertising as well as subscription revenues) are highly dependent on the competitive position of its channels. Our estimates incorporate an 12% (average over 10 years) growth in advertising revenues for ZEEL, which could prove inadequate if ZEEL channels were to stregthen their position relative to competition. 2. Zee Entertainment exposed to larger (long-term) subscriber growth than Southbased peers: The Hindi-speaking belt of India, due to higher poverty and inadequate infrastructure has amongst the lowest penetration of C&S TV. As such, the growth in subscribers will be larger in this reason, which provides a longterm growth driver for Hindi broadcasters. However, given the long-term nature of this convergence, as well as uncertainty regarding CAS implementation, we are wary of factoring in a large amount of growth on this account. 3. Sharp reduction in carriage fees of broadcasters upon CAS implementation: As has been stated, digitization will raise the number of channels that can be beamed to subscriber homes, and reduce bandwidth issues. ZEEL pays out carriage fees that account for ~8-10% of revenues. A sharp reduction in this line item may lead to significant changes in long-term EPS
Downside Risks
1. A recent tariff order by TRAI recommends that DTH operators need only pay a maximum amount of 35% of the non-CAS rates of broadcasters. This casts a shadow over ZEELs DTH revenue growth, and could potentially result in a negative impact on our revenue and profit estimates. We believe that if the passthrough to DTH operators were to be to the fullest extent that is recommended by TRAI, ZEELs EPS could be significantly and structurally altered. 2. Our estimates do not incorporate the fullest extent of subsctitution effect that ZEEL could feel, if the cable consumer were to pay the same ARPU, and a new entrant, say IBN18, were to take up a high share from the existing pie. As such, there are long-term downsides to our estimates, which would depend on the extent to which IBN18/ other new entrants substitute ZEEL bouquet. 3. Competitive and Macroeconomic Risks relating with lower than expected adex and lower share of the adex pie.
ABOUT THE COMPANY

Zee Entertainment is among the first movers in the Indian broadcasting space. Zee started as a partner with Star Asia. Since the fallout (buyout of Star stake by Zee), the company has continued to grow its presence across broadcasting genres including General Entertainment (6 languages), Hindi movies, regional GECs, English movies and English entertainment, Sports, and spirituality; and currently runs a bouquet of 25 channels. Zee Entertainment, via subsidiary Zee Turner, is also involved in distribution of a bouquet of channels, including its own, Zee News channels, and certain international channels. Apart from domestic subscription and advertising revenues, ZEEL also has a strong presence in international markets, and brings in ~Rs 4bn in revenues from over 8 mn subscribers of its services across Europe, Americas, Africa, Middle East and Asia. The company is promoted by the Essel Group. Promoters are involved in other businesses in the Indian media sector, including MSO operations, DTH, news operations. Apart from the media space the Essel Group is involved in a number of activities that include packaging, infrastructure, education, and technology.
127
SECTOR REPORT
January 14, 2011
FINANCIALS: ZEE ENTERTAINMENT ENTERPRISES LTD

(Year-end March) Revenues % change yoy EBITDA % change yoy Depreciation EBIT % change yoy Net Interest Earnings Before Tax % change yoy Tax as % of EBT Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS(Rs) BVPS(Rs) FY09 21,773 18.6 5,480 1.1 310 5,170 -0.4 (464) 5,429 -9.4 208 3.8 5,221 19.5 868 6.1 1.0 6.5 40.3 FY10 21,998 1.0 6,135 11.9 285 5,849 13.1 (804) 6,738 24.1 572 8.5 6,165 18.1 868 6.9 2.2 7.2 44.1 FY11E 28,842 31.1 7,886 28.6 300 7,587 29.7 (259) 8,184 21.5 2,619 32.0 5,565 -9.7 978 5.7 2.0 6.0 42.7 FY12E 32,351 12.2 8,869 12.5 307 8,562 12.9 (889) 9,209 12.5 2,947 32.0 6,262 12.5 978 6.4 2.2 6.7 46.7

(Year-end March) Shareholder's Equity Reserves Net worth Secured Loans Total Loans Minority Interest Net Deferred tax liability Current Liabilities Total Liability Net Fixed Assets Investments Inventory Debtors Cash&Bank balances Loans & Advances Other Current Assets Current Assets Miscelleanous Expenses Total Assets FY09 434 33,561 33,995 5,757 5,757 948 (113) 5,803 46,390 18,093 1,271 4,576 6,437 1,926 14,087 27,026 46,390 FY10 434 37,866 38,300 1,195 1,195 (22) (133) 7,840 47,180 19,588 3,203 4,713 7,488 5,864 6,325 24,389 47,180 FY11E 489 41,283 41,772 1,195 1,195 (22) 7,902 50,847 19,180 3,203 6,322 9,482 6,315 6,345 28,464 50,847 FY12E 489 45,242 45,731 1,195 1,195 (22) 8,863 55,768 19,373 3,203 8,420 10,636 7,665 6,470 33,192 55,768

(Year-end March) Pre-Tax Profit Depreciation Change in WC Cash Taxes Paid Operating cash flow Change in Investments Capex Investment cash flow Equity Raised Debt Raised Financial cash flow Other adjustments Change in Cash Opening Cash Closing Cash FY09 5,429 310 (5,060) (757) (78) 1,244 (2,797) (1,553) 1,714 1,891 2,517 (612) 274 1,652 1,926 FY10 6,738 285 7,514 (1,355) 13,182 (1,932) (1,781) (3,712) 1,333 (4,562) (2,180) (5,410) (122) 3,938 1,926 5,864 FY11E 8,184 300 (3,077) (2,619) 2,787 108 108 0 0 (2,427) (18) 451 5,864 6,315 FY12E 9,209 307 (2,612) (2,947) 3,957 (500) (500) (2,107) 0 1,350 6,315 7,665
Ratio Analysis
(Year-end March) Margins and Growth: EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover Interest coverage (x) Debt/ equity ratio Return Ratios: ROE (%) ROIC ROCE (%) Multiples: EV/ Sales EV/EBITDA Price to earnings (P/E) 5.5 21.7 21.5 5.0 17.8 19.1 3.8 13.8 23.2 3.3 12.1 20.5 16.5 14.2 16.4 16.3 15.0 16.0 13.9 15.2 13.8 14.3 15.8 14.1 107.9 1.3 n/a 3.4 124.2 1.2 n/a -4.1 120.0 1.5 n/a -4.5 120.0 1.7 n/a -5.7 25.2 23.7 24.4 13.0 27.9 26.6 27.1 12.2 27.3 26.3 19.2 -17.6 27.4 26.5 19.4 12.9 FY09 FY10 FY11E FY12E
Other Financing Cash Flows (1,088)
(2,427) (2,107)
128
SECTOR REPORT
January 14, 2011
Research Team
Dipen Shah IT, Media dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement, Mid Cap teena.virmani@kotak.com +91 22 6621 6302 Saurabh Agrawal Metals, Mining agrawal.saurabh@kotak.com +91 22 6621 6309 Saday Sinha Banking, Economy saday.sinha@kotak.com +91 22 6621 6312 Sarika Lohra NBFCs sarika.lohra@kotak.com +91 22 6621 6301 Arun Agarwal Automobiles arun.agarwal@kotak.com +91 22 6621 6143 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6621 6448 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6652 9172 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6621 6310 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6621 6313 Shrikant Chouhan Technical analyst shrikant.chouhan@kotak.com +91 22 6621 6360 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311
Disclaimer
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group . The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Analyst holding in stock: Nil Kotak Securities - Private Client Research Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India. Please see the disclaimer on the last page For Private Circulation
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Mediaindustry Jan2011

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SECTOR REPORT

PRIVATE CLIENT RESEARCH JANUARY 14, 2011

Ritwik Rai ritwik.rai@kotak.com +91 22 6621 6310

Indian Media Industry

n DB Corp n HT Media n IBN18 n Jagran Prakashan n Sun TV Network n Zee Entertainment

January 14, 2011

Print players: newsprint key issue

Kotak Securities - Private Client Research

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January 14, 2011

Source: Kotak Securities - Private Client Research

Source: Kotak Securities - Private Client Research

5. Valuations Reasonable, But Advice Selective Approach

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January 14, 2011

INDIAN MEDIA INDUSTRY A STRUCTURAL GROWTH STORY

Per Capita Media Spends ($US)

0% India UK US China Japan World

Source: FICCI KPMG Report

Source: FICCI KPMG Report

Source: Media Planning and Buying, Arpita Menon

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January 14, 2011

Source: HT Media Investor Presentation

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January 14, 2011

Media Penetration Rising

Low media penetration result of poverty, poor infrastructure

Source: The Indian Media Business, Vanita Kohli-Khandekar

India pay TV (C&S) penetration compared with Global Peers

January 14, 2011

0 2009 2010E 2011E 2012E 2013E

Source: Kotak Securities - Private Client Research

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January 14, 2011

Regionalization to remain a theme across the sector

Non-metros seeing strong growth

Metro KUT ROUI

51,371,205 55,490,940 231,300,828

Growth in household incomes

Adex moving to non-metro, regional markets

20.9 26.1 7.2 17.7 15.5 6.1 2.1 4.3

Split of print Adex

Source: DB Corp Presentation

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January 14, 2011

Near-Term Outlook Strong

Source: Company, Kotak Securities - Private Client Research

Projections of various agencies, CY2010

Return of double digit Adex growth in CY2010

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