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ICICI bullish on entertainment

Surajeet Das Gupta | September 13, 2003

It was a perfect marriage. On one side was an equity fund with Rs 750 crore (Rs 7.5 billion) in its bulging wallet, on the prowl for a controlling stake in a media and publishing company. On the other was a giant business conglomerate that wanted to exit a non-core business.

The result was a megadeal that caught the corporate world by surprise. Last fortnight, ICICI Venture Funds Management Company (a subsidiary of ICICI Bank) snapped up 50 per cent equity stake in Tata Infomedia, a publishing company that's been spreading its wings and getting into everything from movie production to bringing out yellow pages. The price tag: Rs 100.7 crore (Rs 1 billion).

In the process ICICI Venture beat other determined would-be buyers like the India Today Group and Citicorp to the draw.

ICICI Venture will be spending even more to consolidate its latest buy. It has promised to pick up another 20 per cent through an open offer. That will cost another Rs 40 crore (Rs 400 million).

The takeover of Tata Infomedia is not an isolated, one-off move. ICICI Venture is betting big on the fast-growing media and entertainment sectors where others have feared to tread.

It is investing aggressively in publishing firms, television companies, TV software makers and even companies that own multiplexes.

Just look at the numbers. The company manages over $550 million(which includes the India Advantage Fund of over Rs 750 crore ) and as much as 10 per cent is invested in the media and entertainment sector.

That's up from 3 per cent two years ago. And the value of the over Rs 200 crore (Rs 2 billion) invested in this sector has already doubled in the last few years.

Says Renuka Ramnath, managing director, ICICI Venture: "Media and entertainment is amongst the top five sectors which we have identified for equity investment. And of course Tata Infomedia is the single biggest deal that we have made in our company."

The venture capital company's aggression is reflected in the deals it has pulled off in this sector.

Just a few months ago, the company's India Advantage Fund picked up a 30 per cent stake in multiplex company PVR Ltd for Rs 38 crore (Rs 380 million).

The cash plus another Rs 70 crore (Rs 700 million) from PVR's debt and internal accruals) will fund an ambitious expansion drive and also a move from Delhi to Mumbai and Bangalore.

PVR, which owns 19 screens, is embarking on a five-fold expansion plan and hopes to own over 100 screens in the next 12-36 months.

Says an upbeat Ajay Bijli, managing director, PVR Ltd: "We roped in ICICI to provide us with solidity to our business. And they were one of the few in the financial sector ready to put in money in the exhibition business and see an opportunity." Bijli hopes to virtually triple turnover from Rs 70 crore in the next few years.

ICICI has also been quick to spot opportunity in television. It has picked up a Rs 10 crore (Rs 100 million) stake in TV Today which controls the Hindi news channel Aaj Tak. Says G Krishnan, executive director, TV Today.

"When we were looking for a private placement for TV Today most investors were sceptical. But ICICI was aggressive and pro-active -- they saw the opportunity."

The daring investment has paid handsome returns. ICICI executives say that the company has made returns of 35 per cent to 50 per cent on the investment in TV Today and it won't be pulling out in the near future -- even though TV Today IPO would be the perfect opportunity to exit at a profit.

That's not the only small screen investment. Two years ago, ICICI took a 26 per cent equity stake in Delhi-based Miditech -- a TV software house that makes programmes like The Great Escape and Wheels.

ICICI Venture felt that the company had unique positioning in the market and backed its belief with cash. Says an executive: "They were the first to produce reality shows and make cross-border programmes for channels abroad."

But the equity and venture fund company is now scouting for newer opportunities.

For instance, it would like to invest a substantial amount in a large consolidated media player. Also, it has identified animation software with large export potential as a key growth area.

That's not all. ICICI executives see opportunities in companies that are able to tap the growing outsourcing business.

One example: in the film industry, shooting is only 20 per cent of a movie's cost. It believes that the production and post-production work can be shifted easily to India where costs are much lower.

But the big bet is on Tata Infomedia. ICICI Venture is now working with the company's board to put together a blueprint for the future.

For starters, ICICI plans to aggressively expand the company's yellow pages business (which brings in 40 per cent of revenues).

At the moment Tata Infomedia distributes over 21 lakh (2.1 million) directories in 12 cities. But there's room for more, especially since there aren't any mobile phone directories.

Says an ICICI executive: "There is opportunity in moving to more cities with yellow pages since in the existing cities Tata Infomedia already has over 90 per cent of the market share. Moreover, there are new opportunities being thrown up by private sector telecom industry which need to be leveraged."

Ramnath reckons that the business could grow by over five times if all these opportunities are pursued.

Also, Tata Infomedia has plans to introduce more niche magazines. What's more, it won't depend on advertisers and instead will ensure that high cover prices bring returns.

However, ICICI Venture is more cautious about Tata Infomedia's celluloid ambitions and it won't make big investments until it understands the industry clearly.

The division has already produced one film (Aitbaar) but Ramnath and her team say that they will study various options of film funding.

One approach that might be adopted for film financing is the portfolio management route. Under that system ICICI Venture will put together a consortium to back a movie and, thus, spread the risks.

Explains a top ICICI Venture executive: "You put in Rs 2 crore (Rs 20 million) and get four others also to put in the same amount. So then you have a Rs 10 crore corpus which can be used to finance say five movies instead of you financing just one movie. So the risk you take per movie goes down dramatically."

But why is ICICI bullish on media and entertainment sector? Especially when most investors have shied away because of the long gestation periods.

Ramnath says it is apart of a broader strategy, which involves wooing the 18-35 generation.

"There has been a quantum shift in the aspiration levels of the 18-35 age profile. They have disposal income, they want choice of new brands, new retail environments to shop and more variety in the TV channels," she says.

"It is companies which address this aspiration group that we are concentrating on."

But the enthusiasm for media and entertainment also stems from the fact that ICICI Venture has earned good money from these fields.

Take a look at how much it earned by investing in TV18 a few years ago. ICICI invested Rs 5.8 crore (Rs 58 million) in the company and exited after the IPO.

In the process it earned a stupendous Rs 42.2 crore (Rs 422 million) -- more than seven times its initial investment.

The fact is that earnings in media and entertainment can be extraordinarily high -- if you've made the right bets. For one, revenue growth in this sector can be well above 20 per cent per annum and that compares favourably with other high-growth areas like retailing.

ICICI executives point out that both media and entertainment are underdeveloped so the growth potential is phenomenal.

Inevitably, the returns are better if you've made an early entry. And that's where ICICI has an advantage -- because it made some good investments at an early stage.

For instance, in start-up companies, returns on investment could be as high as 30 per cent to 40 per cent if the venture capitalist decides to exit after five years (this depends, of course, on the company performing well).

In some cases, analysts reckon that the numbers are even more attractive. For instance, they reckon that the return on capital employed in TV channels like Aaj Tak could be as high as 50 per cent to 60 per cent.

They also argue that even in the print medium where the ROCE fluctuates wildly, top publishers can offer returns of around 30 per cent to 40 per cent.

But even in mature companies like Tata Infomedia, ICICI is pegging for an aggressive return of around 20 per cent -- a figure that's considered ambitious by industry analysts.

Says an ICICI executive: "In mature companies investors do not expect a return which is 3 per cent to 4 per cent more than debt instruments. So they would be happy with 13 per cent to 15 per cent return."

Added to that, price earning multiple in the media sector could range from 15 to 20 for a leader. ICICI executives say that these numbers are attractive when you look at the infotech sector where -- excluding the top five companies -- PEs are in the 10-12 region.

But do analysts share the same optimism as ICICI Venture in the media and entertainment arena?

Cautions Subhabrata Majumdar, equity analyst, Motilal Oswal Securities: "I think if they are looking for a two-three year perspective the price they paid for Tata Infomedia is overvalued. They can get value only after 10 years when they turn it around."

Majumdar adds that while there are opportunities in the yellow pages business, the growth potential in specialised magazines is limited while the printing business is stagnant. And a foray into films is always risky.

Others, however, disagree. Says Richard D'Souza, analyst, Sunidhi Consultants: "Tata Infomedia has a potential which couldn't be exploited properly. With an established brand name, presence in print media and long line of customers especially for its Yellow Pages. It is a good buy."

Adds another analyst who has closely watched ICICI's investments: "They have many dud investments like Creative Eye for instance, whose initial dependence on mythological serials has not worked."

However, Creative Eye sees a bright future in television and is planning to expand operations.

Says Sunil Gupta, chief financial officer of Creative Eye, "We may look at them for further funding when we are in an expansion mode."

But ICICI Venture has learnt from past experiences. One change is that it won't invest in a company unless it has a say in management.

Says Ramnath: "Earlier we were okay with 10 per cent to 12 per cent equity stakes. Now we must have at least a 26 per cent stake and a say in the management."

So, before putting in money ICICI Venture makes it clear that it must endorse all key strategies, before they are executed.

Also, the equity fund has changed strategies from the past. It will not invest less than Rs 30 crore (Rs 300 million) to Rs 40 crore (Rs 40 million) in any company. It won't be putting too many bets on start-up companies as it did before in most cases.

The reason of course is simple: the mandate to investors of the new India Advantage Fund is clear: money will not be invested in start-ups but in on-going proven concerns.

Moreover, ICICI is also looking at long-term relationships before it moves out of the investment. Executives point out that they prefer to stay with the investment for a range of five to seven year and realise the full value before exiting.

ICICI Venture hit the jackpot with TV18. Now the question is whether it can repeat the performance once again.

Additional reporting: Nandini Lakshman


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