Bleeding to Death?

(From Money Life)
TV18 is in a mess – business-wise and financially. Its March quarter numbers lay bare a horrifying story of cyclical revenues and non-cyclical costs. Things may only get worse argues Debashis Basu

Mix the following four elements and shake well: glamorous businesses, dumb institutional investors, ambitious promoter and market valuation (not cash flow) as the key management goal. You get a deadly cocktail that will boost your spirits for a while but could kill you in the end. This is the business of television channels, especially TV18. NDTV is another in the same class. Both the groups, run by ambitious promoters, have a clutch of famous ‘brands.’ But to maintain these brands, both are losing money profusely. Losses were a little lower when the economy grew by 9% and the market euphoria fetched the two groups newer dumb investors and more money to keep going. But now, both are nearing this endgame.
If it were simply a question of business cyclicality that is affecting, say, commercial vehicles, it would be one thing. But these two are in the glamour businesses. They are a trap for everybody. The promoter has to keep the show going and the music playing as investors change seats in a game of musical chairs. This means more acquisitions or expansions. This also means when promoters run out of equity money, they have to borrow. Glamour businesses can’ t cut costs beyond a point. Indeed, to keep the show going, costs can even rise in a downturn. Meanwhile, more competition and a slight downturn means slipping revenue growth. But there cannot be a slippage in costs. The show must go on. The result? Revenues may be cyclical and, therefore, variable. But the costs are fixed and growing. Large debts and huge losses can push a company to a now-or-never situation which is hard to decipher, looking at the glitzy exterior.

For this article, we are examining the situation at TV18 as reflected in its recent results. TV18 has conveniently stopped disclosing segment-wise results and has also not disclosed results for the March quarter. From what one could piece together, the March quarter has been horrible. Everybody knew that the March quarter was going to be bad. But what has come as a rude shock to analysts and fund managers is the sharp increase in costs. (It has not come as a shock to us because we have been repeatedly emphasising that the media and a few other businesses in India are run for the promoters’ egos and for overpaid employees, not shareholders.)

In March 2008-09, TV18 reported revenues of Rs136 crore and a loss of Rs120 crore. Just one quarter earlier (December 2008), the net loss was just Rs22.7 crore. The business has simply nosedived. While the mainstay of the company, news broadcasting, suffered a 36% drop in revenues, costs actually went up. This is the worst of both worlds. If a company has revenues of Rs136 crore and costs of Rs256 crore in just one quarter, it is in serious trouble.

TV18 has four broad lines of business: broadcasting (CNBCTV18 and CNBC Awaaz), web (a plethora of sites like moneycontrol.com, in.com, yatra.com, jobstreet.com etc.), news service (newswire18) and print (Infomedia). The last three lose money quarter after quarter – in a normal economic situation. Since the December quarter, all four are haemorrhaging. Look at the yearly performance of the four segments that we could piece together from TV18’s poor disclosures.

Broadcasting:
Revenues are down and profits have collapsed, thanks to higher costs. Analysts think this is due to the absence of new equity issues and a cut in advertising by banking, finance and insurance companies. The rot goes deeper than that. One reason why costs went up is the launch of ET Now, but more about that later.

Web:
Internet business revenues have grown by just 17% to Rs65 crore over the year but, in doing so, it lost about Rs66 crore. The big hit to profits came from the launch expenses of in.com and continuous high expenses in running the money losing showpiece, moneycontrol.com.

NewsWire18:
Its revenues are supposed to have doubled to Rs23 crore but at what cost? It claims to have raised its ‘market share’ and also expanded the market (for real-time news and data terminals). It claims that, in as many as 24 banks, NewsWire18 has more unit sales than its global competitors (Reuters and Bloomberg). These include 10 public sector banks, including the State Bank of India, eight private banks and one foreign bank. NewsWire also claims to have entered markets like Guwahati and Nagpur, cities where global competitors do not have a presence. Great achievement perhaps but it lost Rs8 crore last year.

Infomedia18:
TV18 has bought a 44% stake in Infomedia18 and promptly lost over Rs50 crore. It has scaled down Infomedia18’s ambitious business and ended its collaboration with Reed Elsevier. It is now focusing more on business directory services.
TV18’s financial situation today is the result of accumulated sins of the past couple of years:

Furious expansion of web-based businesses, creating newer properties with no profitability in sight.

Massive expansion of Infomedia’s businesses which are now being rolled back.

Increased pressure on all its broadcasting businesses – CNBC, Ibn18 and CNBC Awaaz.

Huge expenses on staff, including stock options.

For this adventure, TV18 has added debt in spades.

Net debt is about Rs850 crore.
No wonder, the group has lost Rs138.99 crore on revenues of Rs266.55 crore during the second half of 2008-09. Will its troubles go away, now that the Sensex is back at 15,000 and all is supposed to be well with the economy? Unlikely. The problems of TV18 have just started, because the economics of the business has changed. Its flagship business comes under two kinds of threat— eroding revenues and higher costs. CNBCTV18 has just started making losses but CNBC Awaaz and associate company IBN18 (CNN IBN, IBN Lokmat, IBN7) have always been losing money.

This will only get worse as ET Now adds to competitive pressures. ET Now has been a disaster till now (for instance, its Dow and S&P500 closing price was running a day old in early July; it is not available on DTH and it does not have a website yet!). We don’t think ET Now will take away CNBC’s leadership position but that is irrelevant. Business-news broadcasting has just got more competitive in an insidious way. CNBC TV18 will be a leader with neither price nor cost advantage.

Until now NDTV Profit and UTVi have not been able to dent CNBC TV18 because they couldn’t compete on the sheer muscle power of money, nor did they have a domineering presence in the media space with powerful brands like Times of India and The Economic Times. ET Now has both these strengths (money and powerful presence).

The Times group works like a giant machine sucking up the entire ad budget of a client, if possible, according to the CEO of one mutual fund company. This raises the stakes much higher for TV18. It means two major problems for it, both permanent. One, ET, Times, ET Now present a formidable offering for advertisers that will eat into the revenues of TV18. Two, with lots of money to blow up on talent, ET Now will make sure that TV18’s cost structure remains permanently bloated – staff costs make up 39% of revenues. We simply cannot see how the flagship business of the TV18 group can ever get back into profits that would service its continuously widening equity base.

The competition will probably get more intense. Very soon, UTVi may announce its tie-up with Bloomberg TV. For a long time, fund mangers have bet on CNBC TV18 as a leader in a niche genre that is relatively safe from competitive pressures. But the cost of maintaining that leadership has just become too high.

Finding New Cash?
The big issue for TV18 is exactly what hit NDTV a few quarters earlier: how to keep funding the losses? One way out is taking on more debt hoping that the businesses would revive. But TV18 is already groaning under large debt. Its net debt of Rs850 crore is 20 times and interest cost is 2 times the expected operating profit of 2010. Meanwhile, money has to be found to fund the losses of other businesses. The option? More equity capital. The game of musical chairs starts again. But will institutional investors bite or will it be only retail investors? TV18 is talking of making a rights issue of Rs500 crore. That’s fair, in a way. Raghav Bahl and others who have a large stake (51.77%) in the company will have to bring in their share of the rights issue funds. Will the stock shoot up to make the rights attractive? It would be a great time to exit.

There is one other way to fund the losses, a route NDTV took a few quarters ago, when the going was good: get foreign media companies to buy your story. NBC Universal has pumped in hundreds of crores into London-based NDTV Networks. The money has made its way into Indian units of the group.

Like NDTV, is there any value that CNBC TV18 can unlock to get out of the current mess? We don’t know where investors can find value. Certainly not in the Web properties. Web 2.0 seems to be going the same way Web 1.0 – very useful for the users but burning up money for the owners, because nothing is a pay-per-use model. Even if there is any value in some parts of the group, Raghav Bahl has locked up that value in a complicated group structure that got created when he funded these businesses as a network of entities, not independent businesses. So, squeezed between competition on one side and cash crunch on the other, the endgame for TV18 begins.

More Light, Please
While the CNBC TV18 is often exercised about management practices, market regulator’s role and government policies, it has taken a giant leap backward in its disclosure for the March quarter 2009. It has not published the March quarter results and, even for the annual results, there are no segment-wise details of broadcasting, web businesses, print and newswire. It has got an exemption from segment-wise details, arguing that all these businesses fall under the broad category of ‘media’. This makes a mockery of ‘segments’.

According to one research report, one– time expenditure during the quarter includes Rs20 crore towards ESOP re-pricing and Rs10 crore towards bad debt. None of this is visible to the investors looking at the printed results. The accounts have also attracted qualifications from the auditors. Most remarkably, other operating income includes loans and receivables of Rs27.22 crore, repaid by a subsidiary. This huge amount was earlier written off. Writing off a loan, that too from a subsidiary company, is not an easy decision. It is taken only when the parent company is convinced that the amount is really irrecoverable. Having taken that decision (and presumably got an income tax benefit) how did TV18 manage to get it back? There is no disclosure about this subsidiary company and how could such a large amount miraculously become a good loan.

Self-Goal in Valuation Game
TV channels are a glamour business. Businesses like these may lose money but these are always kept alive and kicking by retail investors and equity placements to dumb institutional investors. When they run out of cash, like in a game of musical chairs, more dumb institutional investors step in to take their seats. Promoters like Raghav Bahl and Prannoy Roy know this and so they are ever ready to spin a new story: a new round of expansion, frenetic acquisitions and, when things go wrong, restructuring. It is called the valuation game. As long as you can spin a yarn to keep the market value high, you can get intelligent people from smart business schools fooled for a long time.

But what if the promoter himself believes in this game and tries to play it? Indeed, one of the key elements of the valuation game is that promoters are trying to make money by the preferential allotment route. They do this by issuing themselves warrants to buy shares at a certain price. The expectation is that the market price would go beyond a certain level and they can cash in on their warrants and get shares cheaper. This route was quickly turned into ‘heads I win, tails I don’t lose’ by ingenious Indian promoters. If the market price goes up, they convert their warrants into shares. If it doesn’t, they let them lapse. The regulator stepped in last year and plugged this abuse by asking promoters to put some cash upfront for the warrants. If they let the warrants lapse, the cash paid upfront is forfeited. The rule has had a tragicomic outcome for TV18 group. In the March quarter, for instance, a big element of loss for TV18 was Rs12 crore as provision against lapsed warrants in Infomedia18. Translated, this means that TV18’s (unnecessary) valuation punt on Infomedia went wrong and it had to forfeit the betting amount. Sadly it is the shareholders of TV18 who had to pay for this gamble, instead of the promoter alone.