Summary: The present situation of Balaji is a product of two opposite forces. You pick one and you know whether to invest or not. 88% of the stock price is the cash the company owns. That makes the stock VERY cheap. But there is a contingent liability that can take the whole company down. That makes the stock dangerous to invest.

My Holdings:

My Present Holdings
Avg. Purchase Price	Holding period	Highest Purchase Price	Lowest Purchase Price	Unrealized Profit/Loss
33.9	LT  1 Year	35.9	29.5	(6,94%)

About BALAJI:

 The company is into production of television serials for various Hindi and other regional channels in India. The company also has a fully owned subsidiary as Balaji Motion Pictures which is into Motion Pictures.

BALAJI’s Ecosystem:

Indian entertainment industry is a fast growing industry that is also highly fragments. In the past years, growth of the industry is propelled less by established players by more by new ones and the trend seems to continue for now.

BALAJI’s Position in its Ecosystem:

Balaji may have been one of the pioneers of the Indian television industry, but its bargaining power has reduced a lot due to the advent of new players (Page 19). The company’s size has been reducing continuously in the past few years as it is finding more difficult to air newer programs. As per the latest annual balance sheet, the company had not got any significant shows in main channels like Colors and none of its shows were in top 15 of Indian television ratings. That is a sharp contract from a few years ago when it has 20 out of the top 50 shows.

Revenue wise Balaji did clock average of 200 cr. per year in gross sales in the last 3 FY. However, this figure is misleading as the actual sales came down sharply from 330+ Cr 3 years ago to about 193 Cr in last FY. Revenue in the last 2 quarters in this FY was lesser than the same period last FY.

It can be said that Balaji is a middle tier company with dwindling fortunes.

 

Consolidated or Standalone:

Balaji Motion Pictures is a 100% subsidiary of Balaji Telefilms. Each and every line item of the subsidiary is 100% integrated into the balance sheet/P&L/Cash flow of the parent company. It makes sense to use the consolidated statements as they are presented.

 

Reported Financial Performance:

The in the last FY2010-11, the company’s total revenue increased and PAT decreased on a YoY basis. Upon investigating, one can see that this is due to increased inventories and sundry debtors that had reduced the cash flow from operations to a great extent. In terms of company itself, the previous recession lasted longer for its clients.

Below is a high level view of the company’s finances as reported in its annual report (consolidated)

FY	2008-09	2009-10	2010-11
Net Sales (Rs. Cr)	337.48	158.74	193.64
Reported pat (Rs. Cr)	0.48	6.29	-1.08
Average Net Worth (Rs. Cr)	371.98	373.07	373.77

 Free Cash Flows to Equity Owners:

 Along with the above finances, one can look at the below measures from the company’s annual financial statements (consolidated).

FY	2008-09	2009-10	2010-11
Cap Ex	31.29	-6.9	1.58
Dep + Amortization	23.55	10.37	11.22
Absolute change in Non-Cash W/C	51.52	-42.01	15.11
Total Increase in Debt	0	0.52	-0.51
Total Increase in Deferred Tax Liability	-8.6	5.2	-0.96

 One can see that the company took a Capex exercise 2 years ago where as it did not have any expense on Capex in the last 2 years. In order to do an equitable distribution of the expense, I have normalized CapEx over the last 6 years.

On the debt side, the big positive is that the company is a zero debt company for now. In fact the company took some debt 2 years ago but paid it back in full the next year.

When I normalized the above factors and calculated the FCFE, I get the following data (all amounts in Rs. Cr and for consolidated statements):

Average last 3 FY Sales	229.95
Net Profit (latest)	-1.08
Cash Value	181.20
Latest FCFE after Normalization of Debt and Capex	6.86
Latest FCFE before Normalization of Debt and Capex	18.53
Average FCFE after normalization for the past 3 years	-18.07
Average FCFE before normalization for the past 3 years	9.98

Clearly for BALAJI, one can see that the performance has been consistently poor for the last 3 years. The average free cash flows have been negative and that is not excusable.

Fit vs Flab:

Balaji is struggling. CLEARLY! Unless it improves upon its revenue performance, it will not be able to improve its financial condition. A look at company’s annual report shows that the company is pining too much hopes on the upcoming motion pictures it is producing. That, is a sign of desperation.

Ownership Structure:

40.75% of the company is in the hands of its promoters. This to me is great as if the company performs poorly consistently; it can be bought by someone who can run it better.

Return on Net Worth: 

The PBIT/Avg. Net Worth for BALAJI was 41% 4 years ago. It dipped to 2% 3 years ago and has been negative since then.

Value Judgment:

So a company that has consistently been doing terribly in the last few years and is showing signs of desperation has to be neglected right! WRONG!!!!!

 CASH IS KING:

One critical element of the balance sheet of Balaji has been the amount of Cash and Cash equivalents it has in the last FY. At the end of last FY, the total amount of Cash + the amount of marketable securities = 181 Cr. That translates to 27.8 Rs per share.

 Basically we have a case where if someone buys the company at a rate of 31.5 Rs per share (today’s rate), that person will get 27.8 Rs. immediately. Therefore the marked is paying 3.8 Rs a share for all of the rest of Balaji combined! Let us see if this is ok.

 I remove this cash amount from the share price of today, and compare the free cash flows to the share price. By doing so, we get the following nos:

Company	Balaji Tele.
Latest BSE closing Price	31.5
P/E Reported	-190.2
P/FCFE Updated (After Normalization – Latest)	3.5
P/FCFE Updated (Before Normalization – Latest)	1.3
P/FCFE Updated (After Normalization – Last 3 FY Avg)	-1.3
P/FCFE Updated (Before Normalization – Last 3 FY Avg)	2.4
P/Trailing 4 Qtr Earnings	1.7
P/Bv	0.55
Current Assets > Current Liabilities	TRUE
Interest Coverage	NA

The profit of the company this FY was near 0 and so the present year’s P/E multiple is through the roof. If one looks at this FY’s normalized Free cash flow, the company is trading at 3.5 times the multiple which is low. The company is also trading at 45% discount on its book value.

On the basis of this, in terms of its future stock price:

• If the company posts even slightly better results in the coming months, then the price will go up drastically.

So looked this way, Balaji should be a sure shot investment opportunity right? WRONG!

Cash is King… So fight tooth and nail to preserve it

There is a sword that is hanging over Balaji. If this were not the case, I would have concluded that there is no better time to invest in it. The issue is that in this FY, suddenly there are new contingent liabilities (possible future liabilities) of 316 Cr. This is because Govt. depts have slapped notices on the company for payment of taxes worth 316 Cr. The company is fighting that battle.

If the company loses these tax appeals, it will have to pay this amount. That means all he cash will be gone, all assets will be sold and we will have no Balaji to speak of!

Such appeals drag on for years and so Balaji has time for redemption and may be get away without paying anything so much.

Verdict:

Investing in Balaji is like answering a trick question. Prima facie, the company is in poor state. Peel of one layer, then it has enough cash to get away from any trouble. Moreover, the market seems to be ignoring this aspect. Peel one more layer, and there is one risk that is big enough to take the whole company down in case it materializes. The way I see it, for an investor with a conservative mindset this is not the company to invest. For someone else who is more optimistic in life and is willing to accept the risk, the company is great. Me… I am the latter.

Personal Note on BALAJI:

I consider myself to be a decent judge of movie fortunes and when Balaji was coming with Shor In The city and Ragini MMS, I thought here is was chance. I believed the movies will do well and then he earnings will pick up. That belief, accoding to me, gave me an edge w.r.t. others in the way that I thought I was seeing an opportunity where others weren’t. As it happened, the movies were released and were profitable for the company. The earnings picked in Q1 but again subsided in Q2. Price of stock remained more or less where it was.

Lessons learnt:

• A company’s earnings is seldom dependent on sporadic success. One needs to find evidence of repeatable success to assume that the future will be good for the company.