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Monday, November 26, 2007

ETC Networks:"A worthy merger story"

Scripscan-ETC Networks
Traded in:NSE-BSE
Story:Merger story

Business:ETC Networks derives its revenues mostly from commercials and trailers advertisements.The company has couple of free to air satellite television channels: ETC-the music channel and ETC Punjabi(ETC Punjabi was launched on June 2000) –a general channel.ETC Punjabi has forayed into Event Oriented Programs and produces all programs in-house.ETC Punjabi has also bagged exclusive rights for 11 years to telecast Gurbani Live from the Golden Temple,Amritsar.All these developments should significantly boost the revenues for the company in the years to come.

Industry Overview:Shifting consumer preferences, evolving technology and convergence of traditional and new media has brought resurgence in the entertainment and media industry.The recent estimates show that TV penetration has crossed the 110 million household mark, of which 61% homes have cable & satellite connection. This massive reach attracts new players into all segments of media to seize on the multi-million opportunities.

Opportunities in the Entertainment Sector:The introduction of CAS and DTH has come as a boon to the whole industy.The television advertising revenue estimated at Rs. 6600 Crores is expected to grow to Rs. 12,300 Crores by the year 2011.The subscription revenues are expected to touch Rs. 37,800 Crores by the year 2011.The media and entertainment industry expects to touch the landmark figure of Rs. 1,00,000 Crores by 2011. As per FICCI - PwC Annual Media Report, the year 2006 was the turning point for the media industry and it is estimated to be worth Rs. 43,700 Crores.

Recent financials:In Q2FY08,ETC has reported a topline of Rs. 13.50 cr vs Rs. 9.57 cr, a growth of 41.1% y-o-y.It reported a PAT of Rs. 3.42 cr (up 232% y-o-y) and an EPS of Rs. 2.46 versus Rs. 0.69 in the corresponding quarter.Lower programming costs,icreasing advertising revenue from ETC Punjabi and increased exposure time on ETC Music(increased broadcasting of songs,trailers for an additional one hour time)attributed significant jump in sales.

Merger:Very recenly,( November 2, 2007)the merger of ETC with ZILS has been approved by both the companies shareholders.The exchange ratio will be 1 equity share of Rs. 10 each of ZILS for 2 equity shares of Rs. 10 each of ETC.All formalities are expected to be completed by February-march 2008.

"Zee Interactive Learning Systems Limited'(ZILS)"

Business:Zee Interactive Learning Systems Limited'(ZILS) an ISO 9001 certified education provider company and is the education arm of Zee Network. The company was formed in 1999 to create a learning network and deliver a variety education content and solution for range of career and vocation through multiple delivery platforms.ZILS delivers learning solutions and training to various segments of society through its divisions:-

1)Zed CA:Zed Career Academy

2)ZIMA:Zee Institute of Media Arts

3)Kidzee:Play group,Nursery,Activity Center

4)ZICA:Classical and Digital Animation training Academy

5)E-Learning:online education

Aggresive Expansion:ZILS presetly is planing to tap semi-urban and rural centres aggresively with a `grahmin' model Kidzee school.The company is also working on promoting Kidzcare, a daycare facility, and Kidzee High, a full-scale school with CBSE curriculum.ZILS already has signed up for starting 25`Kidzee High' schools and eight of them are going to operate this year.The company had also started a Kidzcare centre in Bangalore and would open one in Hyderabad soon.The annual fee for the kids admitted to Kidzee would be between Rs 6,000 and Rs 36,000 depending on the centres where they are located.With the launch of the company's first Kidzee play school in the city,ZILS hope to start at least 10 such schools in the Coimbatore region over the next 9 months.ZILS has already set up 550 play schools in 260 locations accounting for an annual student strength of 50,000 and these schools employed about 2,000 trained teachers.

Tax Benefits:The merged entity will also avail tax benefits for another few years due to accumulated losses of about Rs.40 cr in ZILS books.Though they would be liable to pay MAT pegged at 11.3%.ETC networks has already provided for tax on a conservative basis in the first two quarters of FY08,which could be reversed later.

Conclusion:It would be prudent to note that,ETC has surplus cash on its balance sheet, to the tune of about Rs. 20 crores which can be utilized for ZILS's business, where the potential is immense.The merged entity is expected to post revenues of around 95crs in 08 with a Profit after tax of around 17crs.Equity would be around 10crs so Eps comes at 17rs for 08.Now for every 2 shares of etc networks one would get 1 shares of ZILS.So real effective price would be 300rs(Etc is quoting at 150rs and one would get 1 shares for every 2 shares held).Even at that price its quoting at just 17.7 times its estimated fy08 earnings.Stocks in the similar category,Computer – Education,like Educomp Solutions, Everonn Systems are quoting at P/E multiples in excess of 60-70 times expected earnings.Even IF we give a P.E of 35 to the merged entity,its coming as a doubler.Well lets leave the valuation to you guys to decide."Altogether a great buy".

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