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basant
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Quote basant Replybullet Topic: Adlabs: Another spin off play.
    Posted: 01/Jan/2007 at 8:58am

Adlabs: Another spin off play.

 

Adlabs (CMP Rs 430) is a ADAG group company having interests in film processing, exhibition, media content development and Radio. Recently the company approved a plan to demerge its radio business into a separate company . The total market cap of Adlabs is around Rs 1725 crores. ENIL trades at a market cap of Rs 1254 crores so after the demerger Adlabs could be available at a market cap of 725 crores assuming BIG 92.7 FM to list at round Rs 1000 crores. (around 75% of ENIL’s market cap).

 

 

If we are to go by radio stations ENIL is surely ahead of Big 92.7 FM. While I am sure that in the longer run both these companies would exist the revenue of Big 92.7 FM should start showing momentum by Fy 09 once it has rolled out all its stations.

 

Many might argue whether the marathon Ambani is as dependable as the recklessly diversifying Ambani but the sheer demerger trigger of  the radio business in Adlabs makes me bullish on this stock. Now let us assume that the radio business which is not contributing anything to the profits right now gets listed at Rs 1000 crores market cap. That means that the other businesses of Adlabs would be available at a market cap of Rs 725 crores or a PE of 12 times FY 08.  

CMP

Rs 433

Number of shares

3.98 crores

Market capitalization

Rs 1725 crores

Market capitalization of ENIL

Rs 1254 crores

EPS FY 07 (E)

Rs 14.00

RoE

15.2%

EPS FY 08(E)

Rs 18.00

Sustainable growth (3 years)

35% plus

 

 

 

 

 

 

 

                                                                           * Brokerage estimates

 
The company’s RoE is low compared to its better peers across the media space. This is because the fresh infusion of funds through preferential allotment to promoters is yet to be effectively deployed.

 

There are a few fundamental pros and cons running for the radio business the biggest advantage is that a radio set can be bought for Rs 250 only and hence is the best way to penetrate at the bottom of the pyramid. Compared to a TV broadcasting company a radio company does not have subscription revenues and will have to rely on advertisement revenues only. SO that is a draw back.

 

Adlabs also plans to convert some 150 single screen halls into multiplexes over the next one year. Additionally the company’s film processing business should see increased activity because of the flood of multiplexes across the country.

 

Even without the spin off trigger the company remains a good bet but it is just that the spin off makes the investment case more attractive. Shareholders of Adlabs shall get two shares of the radio company for each held. The capital structure of the radio company is not known but going by what Anil Ambani does it should not be small.

 



Edited by basant - 23/Jan/2007 at 10:44am
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nikhil090
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Quote nikhil090 Replybullet Posted: 01/Jan/2007 at 10:18am
Dear Basantjee,
I have my doubts about the 75% value tag for Big FM. They have recently started operating radio stations, but I think they will take time to turn in positive numbers.Also as fixed costs are high(including license fees) they may even report losses for some quarters.
Besides radio, Adlabs is venturing into film distribution and production also and the multiplex business besides the steady film processing business. Over a period of time Adlabs multiplex busines may compete effectively with PVR (50 vs 78 screens). Also they own one property, own 50% in 5 multiplex while the rest are on lease. In case of PVR they have only one property which they are owning. So in due course of time Adlabs will become more attractive than the radio business.
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Quote basant Replybullet Posted: 01/Jan/2007 at 10:39am
I have mentioned that Radio will become effective in Fy 09 only but markets are never patient with fast growing companmies in emerging sectors Though this is not the only reason to invest it does create a trigger.
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Quote nikhil090 Replybullet Posted: 01/Jan/2007 at 10:57am
Can we put it above PVR in the priority list?
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Quote basant Replybullet Posted: 01/Jan/2007 at 11:11am
For the short term yes, the triggers are more in Adlabs. But over a period of time difficult to choose one between the two.Look Adlabs has a market cap which is 3 times PVR so valuations are discounting something.
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Quote RAKESH Replybullet Posted: 01/Jan/2007 at 11:32am
so for short term adlabs is good like htmt playing for demerger story........
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Quote deveshkayal Replybullet Posted: 02/Jan/2007 at 12:06pm
Adlabs is managed by Manmohan Shetty and his daughter.It is at an initial stage of growth.Recently,ET reported that Ambani Jr was ready to pay Rs 58/share for buying out Shringar Cinemas while the promoters agreed the major shareholder Temasek was not ready to pull out.If this deal materialises someday,Adlabs will have huge synergies.It has bagged 45 licences for radio,largest by any player.We will have to wait for profitability but Tarun has indicated that they intend to break-even by April.
 I am posting an article from Hindu Business Line which sums it all:

We are re-initiating coverage on Adlabs Films with a `buy' on the stock. With strong financial backing from its promoter, the Anil Dhirubhai Ambani group (ADAG), Adlabs has the makings of a media conglomerate. It is making the transition from being a company focused on film processing and a budding interest in film exhibition to one that is involved in everything from production and distribution of films to multiplexes.

Scope for growth

Forays into providing television content, animation and home videos provide the company scope for broadening the revenue profile. ADAG's aggressive entry into the media space, which includes plans in the Direct-to-Home (DTH) and cable network spaces, is likely to provide an impetus to Adlabs' own growth plans. The de-merger of the radio business will free up Adlabs' balance sheet from the heavy investments in this space, besides unlocking value for the shareholders, who will get to hold a direct stake in the radio business.

Over the next two years, revenue and earnings growth is likely to be driven by rapid expansion of multiplexes. The stock now trades at about 30 times its annualised FY-07 earnings, on a fully expanded equity base (post conversion of foreign debt). This is at a discount to peers, such as PVR and Inox Leisure. 

The commercial risks of the new segments such as production and theatre exhibition are, however, higher than that in film processing(where Adlabs has a stronghold), asthe revenue stream is more dependent on the box office success of films. Earnings could, as a result, display a lumpy pattern. This makes it an investment option for those with an appetite for risk. However, as film processing is likely to continue to be a source of steady cash flow, the company remains a less risky alternative to pure-film or pure-exhibition plays in the sector. Exposures can be considered from a two-year perspective.

Good show in Q2

Adlabs turned in a spectacular performance in the second quarter and also in the first half. Revenues more than doubled, and profits expanded three-fold in the September quarter.

There was a massive expansion in operating margins from 46 per cent to about 60 per cent. It has been a blockbuster year for the Indian film industry. A series of box office hits buoyed revenues of its exhibition business, which witnessed a rapid addition of properties over the past year. Revenues from the segment expanded three-fold. Adlabs is investing heavily in building multiplexes in metros and the smaller cities and towns. It expects to have more than 100 screens by 2008, thus retaining its size advantage, even as its competitors are putting through heavy expansion plans.

With the onset of the multiplex era, the success of a film is decided in the first couple of weeks of screening. This has increased the demand for more prints.

Hence the continued buoyancy in its processing business, which, till FY-06, contributed more than 60 per cent of the revenues.

Changing revenue mix

With the scaling up of the multiplex business, however,Adlabs' revenue mix has undergone a change. Revenues from the exhibition segment accounted for a third of revenues in the first half of the fiscal, while the share of processing fell to about 30 per cent. Production, content and distribution accounted for the remaining third, where Adlabs is a recent entrant.

Adlabs has set up offices in the UK and the US for overseas distribution . Overseas markets now contribute at least 10 per cent to a film's revenues, and offer better margins to distributors. Adlabs also has plans to expand its distribution presence in the domestic market.

Umrao Jaan and Jaan-e-man mark its entry into the domestic distribution market. The initial response to these films at the box office has been lacklustre. But the heavily marketed Umrao Jaan appears to have had a warmer reception overseas . The distribution segment is likely to act as a captive source of content once the exhibition business assumes scale.

Adlabs is also stepping up funding of films through co-production deals with reputed filmmakers such as Mr Ram Gopal Varma and Mr Prakash Jha. Its investments in production are not expected to exceed 15 per cent of its networth and will be spread over four to five films at least. Upcoming productions include Sarkar 2 and the Amitabh Bachchan-starrer Nishabd. It recently entered into a deal with Mr Ashok Amritraj's Hyde Park Entertainment — this marks its foray into Hollywood productions. While these are high-growth businesses, they expose the company to box office performances to a greater degree.

With multiplexes likely to lead revenue growth over the next couple of years, these risks are higher. Moreover, given the scale of expansion across multiplex-operators, there can be overcrowding in some pockets, and this can affect occupancy rates and therefore, profitability. Adlabs might be able to reduce some of these risks through the sale of satellite TV rights and the proposed entry into the home video segment.

Other ventures

The company is also trying to diversify into television content. It recently acquired a majority stake in Mr Siddharth Basu's Synergy Communications, the creators of the famous Kaun Banega Crorepati, and the popular reality-dance, Jhalak Dhikla Jha.

Given the significant resources at its disposal, Adlabs is likely to make forays into other segments as well.

It is likely to snap up some of the small fish in the business, which could fast-track growth across segments.  

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett
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Quote vnstks Replybullet Posted: 02/Jan/2007 at 12:48pm
Originally posted by basant

 Shareholders of Adlabs shall get two shares of the radio company for each held.

 
Basantji - Has demerger ratio been finalized?
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