Personal Finance: Stock; Zapped By Media Magic

PERSONAL FINANCE: STOCK
Zapped By Media Magic

Media stocks may still be a risky proposition. Yet they are the scrips that are hot and happening. Don't miss out on the manna, but be careful.

By Roshni Jayakar

Every media and entertainment company, it would appear, wants its 15 minutes of fame under the Initial Public Offering (IPO) sun. Forty companies ranging from film production units to TV channels, television software production houses to music companies, and back-end studio-infrastructure companies to animation boutiques have announced their intention to tap the capital market. Sure, Zee Telefilms and the Gramophone Company of India (GCI) started their market-career with IPOs a few years ago, but picking the next GCI out of a crowd of unproven companies at the IPO stage is a rather low percentage bet.

Just how low, becomes clear in the light of the fact that the 16-odd entertainment and media companies listed on Dalal Street so far-after much fanfare-have seen their prices erode by 85 to 90 per cent. A few specifics: TV 18 is currently quoted at Rs 451 against a 52-week high of Rs 2,330 (IPO at Rs 180); Crest Communications is quoted at Rs 184 against a high of Rs 1,375; and Mukta Arts, at Rs 175 against the issue price of Rs 165 and a high of Rs 260. Indeed, the volatility in these scrips ranges from 10 per cent to 1,000 per cent. And the trend is clear: it was financial services companies in 1993, granite companies in 1994, and it services companies in 1998 and 1999 that led many investors astray; today, circa 2000, it's media companies. Not that these companies are intrinsically rotten, but the risk associated with their stocks is huge. As U.R. Bhat, the Chief Investment Officer of Chase Jardine Fleming Asset Management India puts it: ''Given the nature of these companies, they are more suited for private equity investors, where the upside is huge, but the downside is also large.''

Some Filters

Still, if you're one of those individuals who believes in investing dangerously, here are some filters that will help you see through the promises of a Technicolor El Dorado some of these companies detail in their offer documents.

Cash Flows: Often, profits reported by these companies in their prospectus may not reveal the true picture. A number of listed media companies, like Sri Adhikari Brothers, or those that have just completed the IPO-process, like Balaji Telefilms, may report a healthy growth in profits, but cash flows could tell a different story. Some of these companies could be strapped for working capital and could well be tapping the market for that reason. For instance, in the case of Balaji Telefilms, Rs 16.05 crore of the issue-proceeds are earmarked for working capital requirements. Points out Devina Mehra, Director, First Global Finance: ''Working capital cycle (for media) is inordinately long and provides scope for accounting jugglery.'' Watch for the fine print: amortising the cost of a mega-serial over its life may be alright; but amortising the telecast cost payable to a broadcaster like Doordarshan isn't on.

Management: Managing a 'professional' company is very different from making a film or a serial. Even if a company is promoted by a brandname media personality, there is no guarantee of professional management. Says Anoop Bhaskar, Senior Analyst, Kothari Pioneer Mutual Fund: ''In a business where creativity is the key, 'institutionalisation' of the process is more important than being merely creative.'' Adds Amit Rathi, Director, Anand Rathi Securities: ''If a business is process-driven, it can be scaled up.''

Big Is Beautiful: There is no room for small players in this business. For instance, a company like Sahara TV will find it extremely difficult to compete against Zee, Sony, and Star. The business economics of the media business are simple: the top three players take 90 per cent of the advertising revenues, thereby stifling small players.

The Revenue Factor

Business Model: Here's the most critical question: how many of these media companies have a revenue-heavy business model? Broadcasting companies derive the bulk of their revenues from advertising and subscriptions, operate in a highly capital intensive business, and will take a minimum of five years to turn profits. Content providers like Cinevista, Pentamedia Graphics, and Nimbus supply software to broadcasters and film production companies. Their revenue comes from the sale of content. Remember, traditional valuation mechanisms don't work while evaluating media companies, since so much depends on intangibles.

A quantitative measure in assessing the value of a media company involved in production, is the number of programming hours (in its library) and the potential for re-run. News and current affairs programmes, predictably, have limited potential. Films have a higher potential (if the company has them in sufficient number). And new projects entail a high risk-exposure.

Bottomline: If you don't want to miss out on the wave but are worried about getting burnt, allocate, say, two per cent of your portfolio to this sector. If things work out, great. If they don't, you won't lose your shirt.

Additional inputs from Shilpa Nayak

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