UTV Software : Multibagger Recommendations : Long Term Stock

But with a substantial equity expansion post the issue of shares to Disney and the promoters, the stock price is likely to remain subdued. At the current market price of Rs 817, the stock trades at expensive valuations of about 35 times its consolidated FY 09 per share earnings, on a fully expanded equity base. Presence in highly scalable segments, a business model focused on the global market, an ability to strike the right partnerships and an improving track record in execution are among the factors that support rich valuations.

With a strong pipeline of movie releases in 2008, movie production will continue to be a key driver of revenue and earnings growth in FY 09. However, the company is yet to consolidate the financials of its broadcasting business, which is just getting off the ground. A higher than anticipated loss in the broadcasting business is a risk to earnings estimates. In the near-term, the open offer at Rs 860 offers some support to the stock. Shareholders can hold on to the stock for now. Long-term investors may, however, be better off using steep declines linked to broad market weakness to accumulate the stock.

3 Month and 1Year Charts

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Disney hikes stake

Mr Ronnie Screwvala, Chairman and MD.

With an investment of Rs 805 crore, Disney has increased its stake in UTV to 32.1 per cent from about 14 per cent earlier. The promoters will be issued warrants to consolidate their stake at 32.1 per cent as well. Disney’s stake increase has triggered an open offer at Rs 860 for an additional 20 per cent. However, an agreement with the promoters ensures that Disney’s effective stake in the company is limited to 32.1 per cent over the next four years. The promoters have an option to buy out any additional shares that Disney may mobilise through the open offer. Disney’s voting rights too will be limited to 32.1 per cent. Management control continues to rest with the promoters of UTV.

Disney has also invested an additional Rs 119 crore for a 15 per cent stake in UTV Global Broadcasting, valuing the business at close to Rs 800 crore. UTV will have a 75 per cent stake in the business, while the remaining 10 per cent is to be owned by its promoter, Mr Ronnie Screwvala.

For Disney, access to the Indian film and television market is the clear incentive. For UTV, the synergies are considerable. Besides a strong financial partner in Disney, UTV will also be able to leverage Disney’s knowledge in film marketing and distribution. It might also be able to use Disney’s international distribution network for distribution of its home productions. According to the Walt Disney Fact Book, Walt Disney generated $15 billion from its studio business in fiscal 2007, when it distributed 911 full-length live action features and 79 animated feature films under the banner of Walt Disney Pictures, Pixar, Touchstone Pictures and Miramax, to name a few.

Movie pipeline

UTV’s own motion pictures business (UMP) happens to be its most mature vertical. The AIM-listed UMP is a 77 per cent subsidiary of UTV Software. The company has met with early success in its studio model of film production and has successfully tied up with leading Hollywood names. One of the most anticipated movies of the year will be its co-production with Twentieth Century Fox of M Night Shyamalan’s The Happening.

UMP just released a Hindi epic Jodhaa Akbar which has done reasonably well at the box office. With a pipeline of 11 movies this year, the movie business is likely to be the strongest driver of growth in the medium term. UMP accounted for over 50 per cent of the consolidated revenues in the first nine months of FY 08 and enjoyed a margin of 37 per cent.