Viacom18 restructuring may boost TV18's growth even as RIL owns majority: Elara Capital's Karan Taurani

Restructuring in Viacom18 may boost TV18's growth prospects even as RIL is set to own much more than a majority stake in the company, said Karan Taurani, Senior Analyst at Elara Capital. 

As per NCLT approval, Viacom18 allotted shares to Uday Shankar and James Murdoch-led Bodhi Tree and RIL group entities as consideration for the scheme of the merger. 

With this merger, JioCinema too will be integrated into Viacom18 and the latter will have access to a cash balance of Rs 15,145 crore, which can be used as growth capital by the company. 

What works in favour of TV18

According to Taurani, this partnership will provide expertise from Shankar and Murdoch, who have been stalwarts of the TV industry and have been the reason for Star’s success in India. 

It will also provide an edge over the competition when it comes to OTT offering, as Jio Cinema may become the largest OTT platform after aggregators like YouTube due to IPL, said Taurani.

Taurani went on to share, “It will also help leverage Lupa Šystems on the digital and OTT offering, which will augur well and may improve the user experience of JioCinema over the medium term. Push towards regional content on linear and OTT will also augur well as this segment is seeing the highest amount of traction in terms of growth.” 

Taurani also said that the capital infusion will help JioCinema compete better with other OTT apps in terms of new original content and also help combat competition from global OTT giants. 

Jio Studios has also announced a slate of 100 new launches (a mix of movies and web series), which will help enable a large-scale OTT offering.  

What works against TV18

Taurani emphasised that it will be tough to expect a turnaround or profitability in JioCinema as IPL content costs are hefty on digital with limited monetisation opportunities (over-dependence on AVOD, as SVOD remains subdued due to lower ARPUs in a price-sensitive market like India).

“Profitability metrics and return ratios for the merged entity may see a severe negative impact due to IPL, as cricket content cost is high, which may in turn negatively impact valuation multiples too,” he added. 

He also shared that TV18 has a sizeable presence in infotainment and English genres - which has seen a severe negative impact due to digital and OTT.

In terms of growth avenues, “Growth rates in the Indian TV industry (Ad and subs revenue) have been converging from 11.6% (FY15-18) towards -0.9% (FY19-22), due to 1) increased penetration and consumption on OTT side and 2) some disruption on the back of pandemic; this leaves TV18 with limited avenues of growth,” he commented. 

Taurani believes that because the TV business in India is led by scale and consolidation; with Zee and Sony merger that may come over the near term, there will be limited opportunities for other players like Sun TV, and TV18 to scale up in terms of revenues.

According to Taurani, another challenge for TV18 will be the lack of growth initiatives on the linear TV side as Star and Zee are market leaders in multiple regional genres, with Colors having limited or poor recall in the genre.

Background of the event

In April 2022, TV18 made an announcement that Bodhi Tree plans to invest Rs 13,500 crore for a 40% stake in Viacom18 (Currently, jointly owned by RIL/Paramount in a ratio of 51:49). Bodhi Tree was to rope in a consortium of investors for this 40% stake. 

Taurani shared that this means that they had valued the Viacom18 entity at Rs 33,000 crore (including Jio cinema).

As per the announcement made last week, Bodhi Tree will infuse only Rs 4,300 crore, which is raised from Qatar Investment Authority, for a 13% stake in Viacom18. 

RIL will infuse Rs 10,839 crore for increasing its stake in Viacom18.

Post this arrangement, the stake of Paramount will come down towards 13% (from 49% stake currently). Basis this, the valuation of the Viacom business remains the same at Rs 33,000 crore, but the only difference is that Bodhi Tree will have a 13% stake as against the earlier planned 39% stake.

As per Taurani, the cash infusion of Rs 15,100 crore is large given the need for investments in the content on linear TV and digital side; they may be able to compete aggressively with the market leader– Star; Zee’s merger with Sony can potentially lead to Star/Zee and Sony commanding an ad revenue market share of 51.7%. 

He further said, “Uday Shankar will also join the board of Viacom18 as he possesses great expertise in the M&E business after having spent 17 years at Star. Paramount Global will remain a shareholder in the merged entity and provide access to its global content catalogue,” 

On a fully diluted basis, RIL group entities will own 60% of Viacom18. Whereas, TV18/Paramount Global/Bodhi Tree will own 13% each in Viacom. 

Basis the valuation assigned to Viacom18 (Rs 33,000 crore) – the listed entity – TV18’s market cap should be at least Rs 4,400 crore; The entertainment segment (Viacom18) has a revenue contribution of 80% (9MFY23) in TV18 and reported a revenue CAGR of 3.3% (FY19-22), at an EBITDA margin of 3.1% (9MFY23).  

Further, TV18 also has a range of 20 news channels, and this segment contributes 20% of total revenues for TV18 (9MFY23); in terms of profitability, it operates at an EBITDA margin of ~0.6% (9MFY23).

The news business (9MFY23) net profit stood at Rs 14.2 crore, down from Rs 172.6 crore in FY22 whereas the 9MFY23 net profit of the entertainment business stood at Rs 93.9 crore, down from Rs 753.7 crore in FY22 due to weak advertisement revenues, high content costs and investments in digital, stated Taurani.

Considering that the net profits of both businesses recover at least 50% of FY22 net profits in FY25, Elara Capital believes the news business which is a highly fragmented business should be valued at approximately Rs 863 crore (10x FY25 PER) and the entertainment business should be valued at around Rs 4,522 crore (12x FY25 PER, due lack of size and scale, limited opportunities post Zee/Sony merger). 

Taurani added, “This means TV18's potential market cap could be Rs 5,385 crore, vs its current market cap of Rs 5,100 crore.”

Business dynamics of TV18

TV18 was able to turn around over FY19-22 as EBITDA margins moved up from high single digit (FY19) to over 18% in FY22 primarily led by better revenue growth and cost-cutting measures/operating efficiency, but the margins dipped to ~2.5% in 9MFY23 due to weak advertisement revenues, high content cost and distribution initiatives and costs related to digital platform. 

“The company has been able to improve its presence in the regional genre (specifically Kannada and Marathi) coupled with dominance in the urban GEC genre led by successful franchise reality shows,” commented Taurani. 

According to data provided by Elara Capital, as of FY22, TV18 has a 12.4% ad revenue market share in the TV industry, which is the third-largest after Star and Zee.  The data further stated that in terms of AVOD, their market share is a mere 2% as this market is dominated by aggregators and sports-based OTT players. 

“However, Jio Cinema may emerge as the biggest broadcaster-backed OTT platform in CY23 due to access to the digital rights of IPL. Disney +Hotstar may lose a sizeable chunk of their revenues due to IPL moving away,” said Taurani. 

Financials of TV18

The consolidated revenue and net profit of TV18 grew at a CAGR of 3.8% & 63.9% respectively over FY19-22 with an average EBITDA margin of 14.2%. The consolidated EBITDA margin improved from 6.3% in FY19 to 18.8% in FY22. The news business revenue and entertainment business revenue grew at a CAGR of 5.4% & 3.3% over FY19-22 with an average EBITDA margin of 13.4% & 14.4% respectively. “Although the 9MFY23 consolidated EBITDA margin stood at 2.6%, down substantially YoY due to high content cost, weak advertisement revenues and investments in digital,” read the Elara Capital Analysis report.

Info@BestMediaInfo.com