UTV Software has chosen an interesting time to go public. With the markets continuing to hit new highs, demand for initial public offerings also continues to be high.
But as a company, UTV's operating performance is currently amongst its worst. In the six months to September 2004, its EBITDA margin had shrunk to just 6.99 per cent, compared to 12.56 per cent in FY04.
In fact, UTV's profitability has shrunk even in the previous years -- in FY01, its EBITDA margin was as high as 22.48 per cent.
Profitability has been hit this fiscal because of start-up costs relating to the setting up of a domestic and international movie distribution network, and also the shift from co-production of movies to in-house production.
All these start-up costs were amortised last year, and as a result UTV was barely profitable at the pre-tax level (on a consolidated basis) in the six months till September 2004.
Net profit was higher at Rs 3.91 crore (Rs 39.1 million), but only because of a deferred tax asset of Rs 3.89 crore (Rs 38.9 million). Consequently, it doesn't make much sense to value UTV using FY05 numbers.
Based on consolidated FY04 numbers, UTV had an EPS of Rs 3.2. The price band of Rs 115-130 set for the IPO discounts these earnings between 36 and 41 times.
If such high valuations are to sustain, UTV's new businesses such as its kids channel, Hungama, and its movie production and distribution business must do well.
The problem is some of these businesses are high-risk ones. At the same time, its other businesses like television content, air time sales, dubbing, ad films, etc. could provide a buffer.
On the whole, UTV's revenue growth has been flat over the past four-five years, but what's important is that it was despite a fall in its exposure to Doordarshan (which used to account for as high as 60 per cent of its revenues).
But in order to justify a high valuation, what's more important is that revenue and earnings growth going forward are much higher than historic levels.