Utv Ipo

1. What UTV Software Communications Ltd (USCL) needs the IPO money for?

A slew of initiatives actually.

USCL plans to get into movie production, set up a full-fledged domestic and international movie distribution network with plans to become the sole distributor of new movies and launch the 24-hour children's channel, Hungama TV.

Are these businesses risky? They certainly seem to be.

i. The kids channel

Hungama TV's operations will be looked after group company United Home Entertainment Pvt. Ltd. USCL's balance sheet will incur tremendous losses if UHEPL fails to earn profits from its operations.

In spite of experienced promoters at the helm of affairs, there is no guarantee that Hungama TV will start earning profits from the very first year. It has tough competition from other other channels like Cartoon Network and Pogo.

ii. Film distribution

The company plans to enter into distribution of films on its own for the first time. The management's lack of experience in this uncharted business exposes the company's balance sheet to the vagaries of the distribution business in India. Moreover, USCL also plans to distribute films in the international market.

So far, the company has only distributed Hyderabad Blues II and Morning Raga on its own.

iii. Film production

In the field of producing movies, USCL has co-produced Fiza and fully producing the dud, Dil Ke Jharokon Main.

Recently, it also announced its production, Rang De Basanti, starring Aamir Khan, which will be directed by Rakesh Mehra. This hardly infuses any confidence in the investors who would want to participate in USCL's IPO.

USCL has produced and distributed Lakshya and Swades on its own till now.

2. USCL and STAR

The company also depends heavily on STAR TV, USCL's principal customer, to generate revenues by selling television serials.

On a positive side, the company is gradually reducing this dependence.

STAR contributed to 90.72% of total revenues in the year 2003-2004, but dropped to 66.67% of total revenues for the six months period ended 2003-2004.

As of today, out of 20.5 hours per week of total television content produced by USCL, 14.5 hours per week goes to non-STAR channels, like Doordarshan, Sony, Zee, Hungama and Vijay TV.

3. Then there is the loan

One final risk factor that prospective investors need to take note of is the proposed interest-free, unsecured loan amount of Rs 6 crore (Rs 60 million) to be given to its group subsidiary United Entertainment Solutions Pvt. Ltd.

An secured loan is one that is not backed by any collateral. So in the case of default, there is no asset pledged against it that can be sold to recover the money.

The moot point is: why should this loan from the proceeds to be raised through a public issue be given interest free and without any security?

Most important, the deployment of funds in new businesses is entirely at the management's discretion. There has been no independent appraisal of the project.

4. How the company is valued

Let's see what the Red Herring Draft Prospectus has to say. This is the preliminary prospectus filed by the company with the Securities and Exchange Board of India and is subject change before the issue.

i. P/B ratio is high

The company has fixed the price band of Rs 115 to Rs 130 for each share of Rs 10.

USCL's book value for the period, September 30, 2004, was Rs 44.72.

Book value is what would be left over for shareholders if the company were sold and all its loans were paid off.

It is calculated by subtracting total liabilities (money owed) from total assets (all that it owns) and dividing the result by the total number of shares.

In technical terms, BV is the accounting value of a firm.

So a BV of Rs 39 would indicate what each share owner would get at this point if the company liquidated.

That means the price/book value ratio = 2.57 (lower end of the price band) and 2.9 (upper end).

What it simply means is that the company is asking more than double the amount of money through its offer price than it would get if the company were to go bankrupt.

The P/B ratio of 2.57-2.9 seems to be steep indeed.

ii. P/E ratio is high

The Earnings Per Share is arrived at by taking the company's net profit and dividing it by the total number of shares. For the period ending September 30, 2004, the EPS was Rs 5.02.

The price to earnings ratio is the market price of the share (here, we take the issue price of Rs 115 to Rs 130), divided by the EPS.

The P/E ratio seems to be very high at 23 and 26. Generally, a lower PE ratio stock is much sought after, indicating that there is room for growth.

iii. Over to EBITDA

Let's take a look at USCL's Earnings before Interest, Tax, Depreciation and Amortisation (repayment of the principal of a loan), popularly known in financial parlance as EBITDA.

It is commonly used to measure the profitability of a company. It is also a measure of a company's ability to service debt (loans) efficiently.

From March 31, 2001 to March 31, 2004, EBITDA has slipped constantly from 22.48% to 17.92% to 16.13% to 12.56% for the corresponding periods in subsequent years. For the period ending September 30, 2004, EBITDA stands at 6.99%.

A drop in this critical parameter -- from 22.48% to a mere 7% -- does not augur well for the company as well as for prospective investors in the company's IPO.

5. The last word

UTV has a portfolio of 620 episodes of animation library that is not matched by its competitors like Crest Communications, Jadooworks and Toonz Animation.

It also has firm business relationships with global clients like Disney Channel, Teletoon and France 5.

The issue comprises:

Fresh equity = 4.5 million shares
Canadian private investor, CDPQ's offer for sale = 2.49 million shares
For UTV employees = 3.49 million shares

According to USCL Director (Operations and Finance) Ronald D'Mello, Rs 30 crore (Rs 300 million) will be channelised towards movie production, Rs 10 crore (Rs 100 million) in Hungama TV, Rs 10 crore (Rs 100 million) in ramping up office infrastructure and Rs 6 crore (Rs 60 million), in the distribution of movies across India.

The success of USCL's IPO offer will now completely depend on how the market perceives the management's efficiency to pull off a surprise from its risky business ventures like movie production and distribution.