By Anand Shah, Chitrangda Kapur (Angel Broking)

Performance Highlights

- Weak traction in advertising revenue drags Top-line: For 2QFY2010, TV Today posted de-growth of 3.5% yoy in its Top-line to Rs64.5cr (Rs66.9cr); this includes subscription revenues of Rs4.5cr during the quarter. The economic slowdown is reflected in the slowdown in the ad-inventory utilisation, which has gone down significantly for all media companies. There is also a trend of decline in viewership across all Hindi News channels; despite this, Aaj Tak, the company’s flagship channel, continues to maintain its leadership position in the Hindi News genre, with an 18% market share during the quarter. Tez registered a market share of 4% during the quarter, while Headlines Today has been gradually inching up, registering average viewership share of 12% in the English News Genre.

- Multifold increase in Other Income drives a strong Bottom-line: In line with our expectations, TV Today continued its performance in 1QFY2010 and posted a robust Bottom-line growth of 39.6% to Rs10.6cr (Rs7.6cr), aided by Margin expansion of 140bp and a multifold increase in Other Income (up 107.1% yoy to Rs7.9cr), on account of gains from maturity of FMPs (to the tune of Rs4cr).

- Sharp drop in overheads aids Margin expansion: TV Today posted a Margin expansion of 140bp yoy to 19.6% (18.2%), aided largely by a sharp fall of 740bp in other expenses to Rs8.8cr (Rs14.1cr) and a 270bp fall in advertising and distribution cost (decline in carriage fees) to Rs15.2cr (Rs17.6cr). However, a significant rise in employee cost, up 776bp to Rs21.4cr (Rs16.9cr), kept a check on Margin expansion.

Outlook and Valuation

After the 2QFY2010 results, we have marginally tweaked our FY2010E Earnings estimates to account for - 1) lower advertising expenses (reduction in carriage fees) and 2) Higher Other Income. We estimate TVTN to post CAGR of 13.8% in its Top-line over FY2009-11E. Advertising Revenue is expected to post CAGR of 13% over FY2009-11E to Rs305cr. We estimate Subscription Revenues to contribute a mere 6% to the Top-line in FY2011E. We have factored in overall Subscription Revenue (domestic and international) of Rs14.9cr and Rs18.7cr for FY2010E and FY2011E, respectively. On the Operating front, we expect Margins to improve by 560bp to 23.2% during FY2009-11E, driven by a low base, lower carriage fees (reflected in this quarter), higher operating leverage and savings in rental costs to the tune of Rs8-10cr (owing to the shifting of office premises to Noida in FY2011E). Despite higher Depreciation (estimated capex of Rs70cr in FY2010-11E, including shifting to the new office complex over the mentioned period), we expect Earnings to post a modest CAGR of 27.4% over FY2009-11E.

While improved traction in terms of viewership of its channels and higher subscription revenues remain the key growth drivers for the company, uncertainty in Ad-revenues and the heavy dependence on a single channel (85% revenues from Aaj-Tak) remain causes of concern. However, At the CMP of Rs93, TVTN is trading at valuations of 9.9x its FY2011E EPS of Rs9.4, which is attractive, given its strong 27% Earnings CAGR (upside risk – if advertising revenues revive in 2HFY2010) and a surplus cash balance of Rs140cr+. Hence, we maintain a Buy, with a Target Price of Rs111.