UTV Ltd –Reduce- Kotak Securities
FY10 revenues up 9.5% for the full year, reports a positive EBITDA for the full year largely on back of cost realignments & prior revenue recognition in the Q4. Q4 results highlight the lumpiness of different revenue streams making only year-on-year comparisons meaningful.
While we expect FY11E to see margin gains as investments likely mature and the Interactive segment starts contributing, we point out that likely risks exist to our estimates from any overruns in gaming content and weaker than estimated execution, across businesses.
Low return ratios to persist over the medium term; increasing leverage (Rs8.7 billion of net debt in FY10 v/s Rs.3.5bn in FY09) to imply higher interest outgo even as margins may improve meaningfully. Interactive business- performance of gaming releases in FY11E holds the key and will be a crucial variable to monitor, in our opinion.
Despite an estimated 59% y-o-y growth in revenues and sharp recovery in the margins and reported recurring profit, we find valuations ample at 21x FY11E EPS. We maintain our REDUCE rating, noting limited upside to our target price of Rs.450 (Rs.500 earlier).
The stock has under-performed peers and broader market, over the last three months on concerns of capital allocation towards long gestation businesses, likely downside risks to earnings and ample near term valuations. We await favorable risk reward before turning more positive on the near term. FY10 highlights, revenues grow 9.5% y-o-y; margins recover given higher reported profitability in the movies segment. Broadcasting and interactive segments drag profitability for the full year.
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