Coverstory - pg [1] : Back to Earth

COVERSTORY
Back to Earth

Subhash Chandra's lot is a pocketful of kryptonite: a besieged market leader in television, and a rash of capital intensive convergence ventures that won't break even in a hurry. Can he pull it off?

By Brian Carvalho

In the old days, when ice was no more than something you dropped in your drink, and market capitalisation just another financial yardstick, companies called press conferences when damage control was the need of the hour. These days, they call in the research analysts. That's what the Rs 486-crore Zee Telefilms Ltd (ZTL) resorted to last fortnight when it wished to clarify that its first quarter results appeared unimpressive-consolidated net profits of the group were virtually stagnant at Rs 32 crore-because of the conservative accounting practices adopted by the Information, Communication & Entertainment (ICE) major. Indeed, if various amounts had not been not written off by its assorted subsidiaries, the Rs 800-crore Zee Network's consolidated profits would have been up 61 per cent.

That's just one bit of 'positive news' that Zee Chairman Subhash Chandra's senior aides had for the analysts-transparent accounting policies. There were others: that despite the cut-throat competition, Zee TV, the group's flagship Hindi entertainment channel had succeeded in increasing its viewership market share -as indicated by INTAM (Indian Television Audience Measurement, a division of ORG)-in the first quarter of 2000-01to 41 per cent, from 38 per cent in the last quarter of 1999-2000; that the gross rating point (GRP) gap between the channel and Sony TV, had widened considerably to 100 points; and that eight of the 10 programmes with the highest television rating points (TRPs) were from the Zee TV stable; and that Zee News had increased its share by 6 per cent.

Were the analysts impressed? If you had checked the following day's stock price for an answer, you wouldn't get much of one-the ZTL stock inched up by 1.5 per cent to Rs 451 (face value: Re 1). True, there was a 11.5 per cent spurt in the share price a day later, but that swallow might not be enough to make Zee's summer. Subhabrata Majumder, 25, Research Analyst at First Global (who did attend the meet), sums it up well: ''Even if the Sensex does move up, we don't see ZTL outperforming the market. The Rs 500-crore barrier will be very difficult to cross.'' Adds another analyst at a foreign brokerage: ''Almost all the major FIIs have been dumping the Zee stock. The recent run-up in the last couple of days is nothing but pure operator activity.''

Zee executives will argue that they're not doing too many things wrong to deserve such treatment. Maybe they're right. Maybe it's just that the competition is beginning to get its act together. Neither does there appear anything wrong with Zee's game plan of having a presence at every point in the media spectrum-be it providing Net access via cable, foraying into portals, publishing, and fm radio, or setting up sports, English and regional channels. It's just that the Zee Chairman needs close to Rs 2,500 crore over the next couple of years to finance this convergence play. Chandra also needs big money for another project, which is not a part of Zee but something very close to his heart-the $800-million Agrani satellite, in which he has to pump in $120 million as equity (See Hanging In The Sky).

Five years from now, Zee expects its Indian broadcasting operations to contribute merely 24 per cent of its then estimated revenues of Rs 10,000 crore. Last year, that contribution was 73 per cent. Bringing in most of the rest will be direct-to-home (DTH) services with 10 per cent, the Internet Service Provider with 9 per cent, and the cable operations with 19 per cent (revenues from international operations and miscellaneous will account for the rest).

That's a high-risk game plan. But you couldn't expect otherwise from Chandra, whose very definition of ambition would appear to be risk-taking. This, remember, is the man who flagged off Zee TV by making the highest bid of $5 million for a transponder that Star TV wished to lease out. A couple of years later, when Murdoch took over the Star Network from the Hutchison group, the obituaries were being written for Zee. Chandra then silenced doomsayers by persuading Murdoch to partner with him. Then, he pulled off a masterstroke by roping in Vijay Jindal (who is now Vice-Chairman of the group) from Bennett, Coleman and Co. Jindal revamped the network by getting rid of deadwood, cutting costs with a vengeance, and focussing on the bottom-line. And last year, when he no longer needed Murdoch, Chandra managed to buy him out. On another front, he came in from nowhere to acquire global satellite telephone company ICO Global along with Teledesic Chairman Craig McCaw. ''By and large the Chairman is a risk taker-in both men and material. But these are calculated risks,'' says a Zee insider. Today, though, if the rumblings from within Continental Building-Zee's Mumbai headquarters-are any indication, some of these risks in people haven't quite paid off. ''Some executives have delivered extremely well, but there are others who have betrayed Chandra's confidence,'' adds the insider. For Chandra's style is to hire street-smart wheeler-dealers who can get the job done, not jargon-spewing MBA types. Indeed, the battle for the Indian skies is likely to end up being a 2-way one between two no-nonsense result-oriented entrepreneurs: Chandra and Murdoch.

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The hazards exist on the balance sheet too, which is groaning under its own weight as a result of acquisitions via stock swaps and a private placement. Worse, the balance sheet could come under much more strain if ZTL pitches in to raise funds for these long-gestation projects. The bearish picture is complete when you consider the indifferent showing of the two English Zee channels, the fact that Zee's regional channels will break even only next year (at the earliest), and the distinct possibility of a stillborn sports channel, thanks to Zee being pipped at the post for the World Cup rights by a World Sports Group-Murdoch combine. Add to that a born-again Star Plus, which seems to have got its Hindi formula well in place. Still worse (from Chandra's perspective), Star seems to be on a roll following the massive success of its Who Wants To Be a Millionaire inspired game-show Kaun Banega Crorepati.

All these are more than adequate reasons to keep investors away. Indeed, Rs 500 has been a level that ZTL's has been struggling to breach ever since it announced its 1999-2000 results, when profits increased 180 per cent. Largely because of some ingenious financial engineering-by selling software worth Rs 185 crore to subsidiary company Asia Today Ltd, in which Chandra had acquired Newscorp Chief Rupert Murdoch's 50 per cent stake last year-ZTL managed to increase its profits to Rs 267 crore. ZTL Senior Vice-President (Finance) Hitesh Vakil points out that this was merely a way to help ATL (which was a shell company) raise debt (by providing it with assets), which could in turn be used to fund the acquisition of Murdoch's 50 per cent stake in ATL, distribution arm Siticable, and programme supplier Patco.

Clearly, the backlash of that move is something the company's bean counters will not forget in a hurry. That explains the conservative accounting policies that were adopted in the first quarter. Still, despite the renewed burst of transparency, the stock appears a non-mover. The company's market capitalisation has eroded by over Rs 30,000 crore over the past three months. Goldman Sachs, which picked up 2 per cent of ZTL's equity at an effective price of Rs 1,000, won't be pleased. Nor will the promoters of southern broadcasters Asianet, who have swapped 61 per cent of their equity for 0.66 per cent of ZTL's equity when the stock price was close to Rs 1,000.

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Let's first deal with the exciting part-competition. Over the past few months, many new players like Sab TV, Sahara, and etc have entered the satellite television fray, chipping away at the Rs 2,700 crore television-advertising pie (including Doordarshan). Still, it's largely No 2, Sony, that's doing the damage. In the January-March quarter, Sony's viewership marketshare was, at 30 per cent, just 8 percentage points adrift of Zee's, and, at one point of time in the quarter, five of the 10 programmes with the highest TRPs belonged to Sony (the other five belonged to Zee). Today, Zee has regained ground, yet Sony has managed to increase its marketshare by another percentage point in the April-June period (although not at Zee's expense).

There's little doubt that Zee's advertising revenues are under pressure. In the first quarter of this year, programming revenues increased by only 9 per cent over the previous year's corresponding period. That Zee managed to post an overall topline growth of 13 per cent (excluding other incomes) was largely thanks to a 30 per cent increase in commission income. What's more, if you exclude other income, ZTL's net profit grew by a mere 5 per cent. That's dismal for a company that's been used to at least a 30-per cent topline growth, and net margins of 40 per cent or higher.

But the battle hasn't yet begun. ''We've become a full-fledged Hindi channel only since July 3 (with the launch of Crorepati), so the field has levelled out only now,'' says Samir Nair, 35, Head (Programming), Star TV (India).

That Star TV did precious little since it flagged off its Indian operations way back in 1992 was partly because of the nature of its relationship with Zee. Chandra and Murdoch were equal partners in the broadcasting arm ATL. A non-compete clause ensured that Star TV's programming could never be totally Hindi. Similarly, Zee couldn't foray into English and sports programming. But with Hindi programming ruling the roost among Indian viewers, you don't have to be a genius to guess who gained more for this clause.

Hanging In The Sky
Subhash Chandra has to wait for some more time before he can have his dream satellite up and running. But he has the right partner in his search for cellular glory in Teledesic's McCaw.

Loosen the seatbelts. Agrani's takeoff-slated for 2001-is delayed. Subhash Chandra's dream of putting a satellite in the sky to provide mobile telephony services across India will have to wait a little longer. For three reasons: the first is the adverse sentiment that rubbed off Chandra's project due to the Iridium debacle. Financial closure was scheduled for late last year, but Jai P. Singh, the 52-year-old Managing Director, ASC, the company floated for this project, says another 90 days are needed.

Another reason for the delay was clearance from the Indian security authorities, which came only in August, 1999. And the third can be blamed on the Pokhran blasts. Apparently, satellites are on the 'Munitions List' in the us, which means that satellites are treated as guns due to the sanctions, and ASC will have to get a four-year export licence to buy the satellite from Lockheed Martin.

So what does Chandra do? After all, his commitment to this project is $120 million (Rs 528 crore) in equity. But don't forget that Chandra has already pitched in with $50 million (Rs 220 crore) as his share in ICO-Teledesic Global, created after Teledesic Chairman Craig McCaw and Chandra jointly took it over.

Chandra's game plan here is simple enough: he will handle the services and distribution activities of the project-whose scope has now been widened to included Net protocol services-in the Indian region. But, more important, he will rely on McCaw's turnaround touch to ensure that his $50 million grows multi-fold. And hope that the very business of satellite telephony, which is under threat from the rapid spread of cellular services and the concept of global roaming (remember Iridium's bankruptcy), remains relevant at least in some geographically remote areas of the developing world.

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