I P O N O T E Midvalley Entertainment Ltd. January 07, 2011 Price Band : `64-70per share Minimum Bid Lot Size : 95 Equity Shares Maximum Bid Lot Size : 2850 Equity Shares IPO open during : January 6-12, 2011 Book Running Lead Managers : Aryaman Financial Services Ltd. To list on : NSE & BSE IPO Grading : 1 / 5 (Brickworks) Market Cap post-listing : `240Cr (based on the cap price) Market Cap of Free-Float : `150Cr (based on the cap price) IPO of 8.6mn equity shares of `10 each, aggregating to `60Cr or $13.45mn (at the cap price). Shareholding Pattern Shareholder Categories Pre-Issue Post-Issue No. of Shares % Holding No. of Shares % Holding Promoters & Promoters Group 12803807 49.91 12803807 37.41 QIBs excl. Mutual Funds 0 0 } Mutual Funds 0 0 21420762 62.59 Non-Institutional Investors 0 0 Public 12849333 50.09 Total 25653140 100.00 34224569 100.00 Executive Summary Midvalley Entertainment Ltd. (MVEL) is engaged in the media and entertainment business like film production, distribution and exhibition in South India. MVEL present across the value chain of media and entertainment which includes concept to completion i.e. from script to screen. It produces, distributes and exhibits movies both in Indian and foreign languages. According to a joint report of KPMG and an industry chamber, the Indian Media and Entertainment (M&E) industry pegged at $12.9bbn in 2009 registering a 14% growth over last year and is projected to grow at a CAGR of 13% to reach the size of $24.04bn by 2014. MVEL forayed into the exhibition business by entering into screening agreements with theaters. All its screens are located in B & C category towns, where quality theatres are absent. Hence the company is in a position to take the advantage by providing better movie viewing experience through improved and hygienic conditions. The promoters and core-management team of MVEL has global business experience and reputed qualifications in various fields and the same would enable it to develop strong business models and execute plans effectively. Due to experience in content selection and programming for many theatres and a deep understanding of different film genres, MVEL is well-placed to exploit each film available in the market. Company Background Midvalley Entertainment Ltd. (MVEL) was incorporated as CTV Entertainment Private Limited in July 1989. MVEL was converted into a public limited company in February 2000 and changed its name to Midvalley Entertainment Ltd. in December 2005. MVEL is mainly engaged in the media and entertainment business like film production, distribution and exhibition in South India. Keynote Capitals Research (+9122-30266000-3) Keynote Capitals Institutional Research is also available on Bloomberg KNTE <GO>, Thomson One Analytics, Reuters Knowledge, Capital IQ, TheMarkets.com and securities.com Keynote Capitals Institutional Research - winner of India s Best IPO Analyst Award 2009" by MCX-Zee Business
Midvalley Entertainment Ltd. Promoters and Management Mr. Datuk K. Ketheeswaran is the Non- Executive Chairman of MVEL. He promoted various companies which have varied businesses viz; plantations, investments, entertainment related businesses etc. In the year 2006, Mr. Datuk K. Ketheeswaran, through his companies acquired the shares of MVEL from the then existing promoters to focus on production, distribution and exhibition of movie business in India. Mr. K. Murugavel is the Chief Operating Officer of the Company (COO) of MVEL and is in charge of overall management of day-to-day activities, including managing finance and business development. Industry Overview According to a joint report of KPMG and an industry chamber, the Indian Media and Entertainment (M&E) industry pegged at $12.9bbn in 2009 registering a 14% growth over last year and is projected to grow at a CAGR of 13% to reach the size of $24.04bn by 2014. Film Entertainment According to the Annual Report of Central Board of Film Certification (CBFC) in 2009, India is the world s largest producer of films. In 2009, India produced a total of 2961 films on celluloid including a staggering figure of 1288 feature films. The provision of 100% foreign direct investment has made the Indian film market attractive for foreign enterprises such as 20 th Century Fox, Sony Pictures, and Warner Bros. The growing size of Indian film market has also propped up prominent Indian enterprises such as Zee, UTV, Adlabs and Sun Network s Sun Pictures who have started participating in producing and distributing films directly. Out of the total 1288 films permitted by CBFC India, Hindi films form a major part of the market with 235 films, closely followed by Telugu, Tamil, Kannada, Marathi and Malayalam Film markets, which contribute 218, 190, 177, 99 and 94 films respectively. Hence, it is evident that regional (especially southern) films command more than 50% of the total Indian feature film market with the rest being commanded by Hindi films. According to a joint report by KPMG and an industry chamber, the film industry contracted 14% in 2009 wherein the film industry is projected to grow at a CAGR of 9% to touch an estimated amount of $3.02bn over the next five years. Growth drivers for the sector would include expansion of factors like an increase in the number of multiplex screens, digital screens facilitating wider releases, higher cable and satellite revenues, improving collections from the overseas markets and supplementary revenue streams like DTH, digital downloads, etc, which are expected to emerge in future. Television Industry There has been a phenomenal increase in the number of channels beamed on the TV screen viewers in India. The number of channels has increased from 45 channels in 2001 to 439 in 2009. There has also been a rapid growth in the number of channels in news and other niche segments such as lifestyle, kids and infotainment apart from general entertainment. The growth in the number of channels can be seen in the graph below. 2 Keynote Capitals Institutional Research
500 439 400 372 300 261 200 100 45 89 93 130 154 191 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 The number of Non-News & Current Affairs TV channels has grown to 203 and that off News & Current affairs TV channels has grown to 236 during the same period. News & Current Affairs TV channels constitute 54% and Non-News & Current Affairs TV channels constitute 46 % of total permitted 439 TV channels under up linking guidelines. The year-wise growth of channels for up linking from India is depicted in the graph below. 250 200 150 100 50 0 236 202 203 158 170 116 89 79 68 ` 105 35 65 75 51 10 25 13 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 News & Current Affairs Non-News & Current Affairs The average number of permissions granted per year for new Channels is about 40, it can be seen that there were as many as 111 Channels permitted in 2008 due to heightened economic activity leading to a huge growth in the electronic media in India while 2009 saw a bit of decline in the number of permissions as only 67 Channels permitted in 2009 because not many bidders came forward to apply for new channels due to global recession. The new bid for channels has surged in 2010 as a large number of bidders have been seeking permissions for new Channels. The Ministry decided to make a reference to Telecom Regulatory Authority of India (TRAI) about the total number of Channels that can be permitted in the country keeping in view the available spectrum and transponder capacities. In addition to this, Ministry has also sought recommendations of TRAI on several other relevant issues like eligibility criteria for the applicant companies etc. Keynote Capitals Institutional Research 3
Midvalley Entertainment Ltd. Radio Industry The Indian Radio Industry is mainly dominated by the State-owned All India Radio (AIR) which covers 91% of India s area and reaches 99% of the population. However, the turning point for the radio industry came with the Phase-II privatization reforms when the Government rationalized the licensing fee by fixing it at 4% of the gross revenue (or 10% of the reserve OTEF, whichever is higher). This, for the first time, made the business model viable for the companies. Consequently many large corporate houses entered the private FM business. Out of 337 channels put up for auction, 245 channels in 87 cities were successfully allocated. As on date 251 private FM channels (including 21 from Phase-I) are functioning. Growth of radio stations in the future is likely to continue due to Phase-III licensing, further liberalization of regulation as well as better ability of the radio stations to sell advertisement space. Government has been examining the recommendations of TRAI for Phase-III licensing of FM Radio. Some of the most important recommendations of TRAI are as follows: increasing FDI Limits, allowing networking within the radio stations under same company permitting tradability of licenses, and ownership of multiple frequencies. Government Initiatives and Support for Media and Entertainment Industry The Government has initiated the following measures: The government has allotted $50.13mn in the current Five-Year Plan (2007-2012) for various development projects for the film industry. The funds will be utilized to set up a centre for excellence in animation, gaming and visual effects To offer better audio quality and sharper picture to millions of its viewers, public broadcaster Doordarshan plans to go completely digital by 2017 Business Operations Midvalley Entertainment Ltd. (MVEL) is engaged in the media and entertainment business like film production, distribution and exhibition in South India. MVEL is having its presence in the media and entertainment activity from concept to completion i.e. from script to screen. It produce, distribute and exhibit movies both in Indian and foreign languages. MVEL also hold the music, video and television rights of movies, television serials for sales to TV channels and other emerging media sources. It intend to emerge as one of the leading theatre chain in Southern India and has currently entered into screening agreements with 46 theatres in distribution territories of Andhra Pradesh, Karnataka and Tamil Nadu. Services MVEL currently focuses on the following business areas: Exhibition of movies MVEL forayed into the exhibition business by way of entering into screening agreements with theatres in B & C category towns. It has already entered into screening agreements with 46 screens and is in the process of entering into similar agreements with more such screens. 4 Keynote Capitals Institutional Research
MVEL is in the process of creating a chain of theatres under its management and operational control. It has embarked on a project to acquire right to screen movies by entering into screening agreement with theaters in B & C category towns of south Indian states and convert the same into a pleasant viewing experience for movie watchers. MVEL intend to upgrade the infrastructure in select theatres and install digital projection equipments on selective basis with an objective to take movies to the Indian masses in these centers. Distribution of movies To have the presence across all segments, MVEL distribute movies from all banners and production houses based on its relationships with producers and also based on trial screenings. MVEL, in the past have acquired territorial distribution rights for various movies. MVEL currently acquire and distribute movies in territories where it has an exhibition presence. MVEL s aim is to distribute movies throughout Southern Peninsula in the same territories where its theaters are located and South East Asian Countries. Further, the company has a library of 651 movies in various languages. This consists of 417 Tamil movies, 107 Telugu movies, 52 Kannada movies and 75 Malayalam movies. Production of movies MVEL, in the recent past has produced several movies. In the year 2006 it produced Thambi, a Tamil movie while in 2007 its home production hit the screen. Another movie Alanganallur Kalai is in production and is expected to hit the screens in 2010. Further, MVEL has executed various theatrical distribution agreements with different distributors. Strengths Strategic location of theatres MVEL forayed into the exhibition business by entering into screening agreements with theaters. All its screens are located in B & C category towns, where quality theatres are absent. Hence the company is in a position to take the advantage by providing better movie viewing experience through improved and hygienic conditions. Global business experience and qualifications of promoters and coremanagement team The promoters and core-management team of MVEL has global business experience and reputed qualifications in various fields and the same would enable it to develop strong business models and execute plans effectively. Capital-efficient project design and execution The projects are planned and conceived by MVEL in a manner that each property is profitable on a standalone basis. The company assesses the location and demographics and decides on capital expenditure accordingly. The properties on which the company operates are not owned by it. MVEL manage these properties pursuant to agreements entered into with the respective owners of the properties. Selection of content Due to experience in content selection and programming for many theatres and a deep understanding of different film genres, MVEL is well-placed to exploit each film Keynote Capitals Institutional Research 5
Midvalley Entertainment Ltd. available in the market. A standard acquisition procedure is in place and films are stringently reviewed before a decision to invest is taken by its management. Presence from Script to Screen MVEL has presence in the entire value chain of the film industry, i.e. production, distribution and exhibition. Objects of the Issue The objects of the Issue are: Entering into screening agreements with 300 cinema theatres Renovation and Up-gradation of cinema infrastructure with Digital Equipment and other related assets for a select 100 screens Acquisition of company or acquisition of screening rights of company having similar line and objects of business To meet general corporate expenses Meeting the IPO expenses Investment Risks (Please refer to the RHP for a complete listing of risk factors) The business of MVEL is dependent on the popularity of the films. Any mid-term or ad-hoc cancellation of lease agreements entered into with the theater owners will affect MVEL business and financial results. Digital projection technologies may render its traditional film projection equipment obsolete, requiring the company to incur significant capital expenditure. Piracy and home-viewing may reduce the number of foot-fall in theaters, hence affecting the business and profitability of the companies engaged in the film business. MVEL has not paid Income Tax dues aggregating to `9.14Cr which is undisputed as on date. 6 Keynote Capitals Institutional Research
Restated Profit & Loss Statements (`Cr) For the period ended 30-Apr-06 30-Apr-07 30-Apr-08 30-Apr-09 30-Apr-10 31-July-10 INCOME Production Export of Serials and Films 0.07 0.00 0.00 0.00 0.00 0.00 Sale of Programs / Feature Films 12.82 2.99 14.24 0.00 0.00 0.00 Distribution Distribution of Films 0.00 9.40 11.97 5.83 2.50 2.57 Sale of Rights 0.00 0.00 0.00 0.00 2.97 0.00 Exhibition Theatre Collection 0.46 36.37 47.38 15.28 7.47 2.27 Theatre Stall Income 0.00 0.05 0.02 0.00 0.00 0.00 Other Income 0.05 0.02 0.02 0.06 0.01 0.03 Total 13.41 48.82 73.63 21.16 12.95 4.87 EXPENDITURE Cost of Production/ Distribution/ Purchase of Films 9.20 35.95 52.99 9.64 6.53 1.80 Administrative Expenses 0.61 0.86 1.39 1.37 0.47 0.22 Total expenditure 9.81 36.81 54.38 11.01 6.95 2.02 PBDIT 3.60 12.01 19.25 10.16 6.00 2.85 Depreciation 0.27 0.27 0.26 0.23 0.16 0.03 Amortization of Satellite Rights 0.52 0.48 0.48 0.48 1.74 0.90 Provision towards diminution in value of inventories 0.12 0.12 0.11 0.16 0.15 0.01 Amortization of Distribution Rights 0.76 4.73 8.21 3.28 0.68 Preliminary Expenses Written off 0.23 0.12 0.30 0.12 0.49 0.00 PBIT 2.46 10.28 13.38 0.96 0.17 1.22 Interest 0.01 0.05 0.04 0.01 0.01 0.00 Profit before taxation and exceptional items 2.45 10.23 13.34 0.95 0.16 1.22 Add/(Less): Exceptional Items Surplus on OTS with Bank 1.04 0.00 0.00 0.00 0.00 0.00 Profit on Sale of Land 0.74 0.00 0.00 0.00 0.00 0.00 Profit after exceptional items and before taxation 4.22 11.60 13.34 0.95 0.16 1.22 Less: Provision for Tax Current Tax (including relating to earlier years) 1.38 4.17 3.51 0.11 0.73 0.57 Deferred Tax / (reversal) -0.04 0.15 0.95 1.31-0.60-0.78 Fringe Benefit Tax 0.01 0.01 0.02 0.00 0.00 0.00 Profit after Tax 2.87 7.27 8.87-0.47 0.04 1.43 Weighted average number of Shares 16,939,504 23,363,695 25,653,140 25,653,140 25,653,140 25,653,140 EBITDA margin (%) 26.9% 24.6% 26.1% 48.0% 46.3% 58.6% EPS (`) 1.7 3.11 3.46-0.18 0.01 0.56* Book Value (`) 19.77 19.62 21.26 20.98 21.19 21.75 * not annualised. Keynote Capitals Institutional Research 7
Midvalley Entertainment Ltd. Restated Balance Sheets (`Cr) As at, 30-Apr-06 30-Apr-07 30-Apr-08 30-Apr-09 30-Apr-10 31-July-10 ASSETS Fixed Assets: Gross Block 7.87 8.58 8.58 8.23 23.73 23.63 Depreciation & Amortization 1.35 1.62 1.87 1.78 1.94 1.91 Amortization of Satellite Rights 1.32 1.80 2.28 2.76 4.50 5.40 Net Block (A) 5.20 5.17 4.43 3.69 17.29 16.32 Investments (B) 0.01 0.00 0.00 0.00 0.00 0.00 Current Assets, Loans and Advances: Inventories(Net of Provision for diminution in value) 20.03 20.40 22.89 16.86 11.54 10.85 Sundry Debtors 4.90 4.25 18.58 26.44 19.01 22.04 Cash and Bank Balances 0.96 3.49 1.80 0.01 0.00 0.01 Loans and Advances 5.29 23.07 17.85 19.59 19.43 19.58 Total (C) 31.18 51.21 61.12 62.90 49.98 52.48 Liabilities and Provisions: Secured Loans 0.17 0.18 0.09 0.07 0.04 0.00 Unsecured Loans 0.51 2.93 0.00 0.00 0.00 0.00 Deferred Tax Liability 0.15 0.30 1.25 2.56 1.95 1.18 Current Liabilities 0.70 1.63 0.63 0.99 1.05 1.40 Provisions 1.36 5.52 9.04 9.15 9.88 10.45 Total (D) 2.90 10.55 11.01 12.77 12.93 13.02 NET WORTH (A+B+C-D) 33.50 45.83 54.55 53.82 54.35 55.78 Net Worth: Represented by Share Capital (Issued, Subscribed and paid up) 21.03 25.65 25.65 25.65 25.65 25.65 Reserves and Surplus -Share Premium 9.22 9.73 9.73 9.73 9.73 9.73 -Surplus as per P & L a/c. 3.26 10.53 19.40 18.93 18.97 20.40 Miscellaneous Expenditure (to the extent not w/off) 0.01 0.08 0.23 0.49 0.00 0.00 NET WORTH 33.50 45.83 54.55 53.82 54.35 55.78 8 Keynote Capitals Institutional Research
Keynote Capitals Ltd. Member Stock Exchange, Mumbai (INB 230930539) National Stock Exchange of India Ltd. (INB 010930556) Over the Counter Exchange of India Ltd. (INB 200930535) Central Depository Services Ltd. (IN-DP-CDSL-152-2001) Registered Office 4th Floor, Balmer Lawrie Building, 5, J. N. Heredia Marg, Ballard Estate, Mumbai 400 001. Tel Nos. 022-2269 4322 / 24 / 25 Disclaimer This report by Keynote Capitals Ltd. is purely for information purpose and is based on the Red Herring Prospectus for the public issue of the company under coverage, published financial statements, public information and the recent analyst meeting of the company. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell the securities mentioned herein. Directors, officers, clients or employees of Keynote Capitals or its affiliates may have positions in securities covered in this report or in related investments. Keynote Capitals Ltd may also have proprietary trading positions in securities covered in this report or in related investments. Opinions and estimates mentioned herein, if any, are based on workings of Keynote Capitals only. Investors in the issue are advised to read the RHP carefully before subscribing to the issue. Keynote Capitals Ltd. or any of its directors, officers or employees shall not in any way be responsible for any loss arising from the use of this report. Investors are advised to apply their own judgment before acting on the contents of this report. Keynote Capitals Institutional Research 9