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02 September 2009


In a previous post (read here) we discussed the business profile of Network 18 with its integrated media play covering all aspects both vertically and horizontally. Must say it is quite an ambitious company.

However in this part we shall be discussing its fundamentals as a company and valuation as a stock.

While the sales dropped 30 % year on year, the expenses dropped 20 % only, largely due to doubling of administrative expenses. Running a media company is an expensive business, one not conducive to slowing economic trends.

While the operating business was profitable at Rs 36 Cr (an OPM of 36%), it was the Net Profit which took a hit( an actual loss of Rs 21 Cr ) against a profit of Rs 43 Cr last year. This was largely due to doubling of financial expenses from Rs 26 Cr to Rs 53 Cr. The quarterly picture is grimmer. Operating losses for three consecutive quarters.

This calls for a deeper look at the balance sheet which has taken a hit, on two counts. 

Firstly. An equity dilution via a Rights Issue and Preferential Allotment(which incidentally saw the promoter holding drop from 54 % to 49 %). Secondly. Unsecured loans of Rs 114.38 Cr. (Unsecured debt is generally at higher rates than secured debt).

The result of the above is a negative EPS of 2.7, a fall from the high of 8.55 last year when the stock was trading at Rs 204. This can of course be laid at the feet of the slowdown. However it only highlights the edge of the seat action in such stocks, something which only a strong stomach can digest.

I think the way to value such companies is to do a sum of the parts. The two major pieces of action are TV18 and IBN18. A 50% stake in the former and 39 % in the latter gives Rs 643 Cr and Rs 826 Cr respectively. This itself is a 58% upside from the current market cap of Rs 929 Cr. There are a host of other businesses as mentioned in my prior post on Network 18 (read here) most not worth a lot except a 5% stake in The Indian Film Company. Valuing all these businesses at a total of Rs 100 Cr and giving Network 18 a 20% discount for being a holding company, we arrive at a value of Rs 199/-(quite the Bata price it is!), which is a double from the prevailing market price. 

The Dampener
This analysis is not complete without the dampener I alluded to in a previous post. Firstly cash flow seems to be a serious problem with the group. However the more serious issues plaguing it are two - a lack of depth in the higher management and a lack of clarity on a number of issues. The board resembles that of a closely held company. For a company which lists 'Transparency' as a corporate governance philosophy, it is surprisingly opaque about a lot of issues. The Annual Report ignites more questions than it answers. There are a total of 81 companies that comprise the group. Does it have the management bandwidth to optimally run these or some of them are just some shell companies created for purposes other than the operations? Setpro 18 is listed as a wholly owned company. What does it do and is earning something for the shareholder? Why did Network 18 not comply with RBI norms of capital adequacy and concentration of investments? In view of the substantial losses of Rs 18.2 Cr to the company, why did the Managing Director take home a salary of Rs 1.146 Cr? Why was Rs 70 Cr raised as a short term loan, used for a long term investment? 

These are just some of the issues I highlighted here just to give a flavour of the dampener I had in mind. Suffice it to say, if one were to invest in this company, one must do so after significantly more research than normal.

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