Project Rainbow II - WikiLeaks India/Project...Project Rainbow II 30 April 2012 Reliance restricted...

Project Rainbow II

30 April 2012Reliance restrictedDraft report

Atul MehtaPartner

Transaction Advisory Services Tax and Regulatory Services T +91 22 6192 0210 TM +91 9820 396010 MF +91 22 6192 1000 FE [email protected] E

Sitaram PeddibhotlaAssociate Vice President

Transaction Advisory ServicesT +91 40 6736 2067 TM +91 9177 000317 MF +91 40 6736 2200 FE [email protected] E

Narendra RohiraPartner

Tax and Regulatory Services – Direct tax+91 22 6665 5000+91 98926 00677+91 22 6192 1000

[email protected]

Tr SivakumarAssociate Vice President

Transaction Advisory Services+91 22 6192 1496+91 98207 56638+91 22 6192 1000

[email protected]

Divyesh LapsiwalaDirector

Tax and Regulatory Services – Indirect taxT +91 22 6192 0000M +91-98204 42913F +91 22 6192 1000E [email protected]

mailto:[email protected]





05 June 20122

Reliance Restricted

Dear Sir:

� This note has been prepared in accordance with the instructions ofSouth Asian Regional Investment Inc. and as per our engagementletter in connection with the proposed investment in MAA TelevisionNetwork Limited (the “Transaction”). As our draft engagement letterhas not yet been signed by you, we are prepared to provide a copy ofthe summary of the due diligence observations to you only on thebasis that you agree that:

� Ernst & Young Private Limited (including its partners, employees,agents, subcontractors and employees of its wholly owned company,Ernst & Young Services Limited) accepts no responsibility and shallhave no liability to you or any other third party in relation to thecontents of the summary of observations;

� Any use you make of the summary of observations is entirely at yourown risk; and

� Save as set out in the section headed “Confidentiality waiver inrelation to tax” in section 12 of Appendix C, General Terms ofBusiness you will not provide copies of the status report to any party(i) other than your professional advisers acting in that capacityprovided that they accept the same terms as set out herein or (ii)unless required by court order or a regulatory authority, without ourprior written consent.

Draft

� Any use you make of the summary of observations is entirely at yourown risk; and

� Save as set out in the section headed “Confidentiality waiver inrelation to tax” in section 12 of Appendix C, General Terms ofBusiness you will not provide copies of the status report to any party(i) other than your professional advisers acting in that capacityprovided that they accept the same terms as set out herein or (ii)unless required by court order or a regulatory authority, without ourprior written consent.

05 June 20123

AbbreviationAct Income-tax Act ,1961Ad AdvertisementAP Andhra PradeshAPALYA Apalya Technologies Private Limited APVAT Andhra Pradesh Value Added Tax BS Balance sheetc. / approx. ApproximatelyCapex Capital expenditureCEO Chief Executive OfficerCF Cash flowCOO Chief Operating OfficerCPRP Cost per rating pointCr CroreCS / C&S Cable & SatelliteCTC Cost to companyDNM Digital and new mediaDT Direct taxDTH Direct to homeE&Y / EY / 'we' / 'us' Ernst & Young Private LimitedEBITDA Earnings/Profit before Interest, Tax, ESI Employee State InsuranceESOPs Employee Stock OptionsFCT Free commercial timeFY Financial YearFYxx Financial Year for the year ended March 31, GEC General Entertainment ChannelGRPs Gross rating pointsHR Human ResourcesHUL Hindustan Unilever LimitedIDT Indirect taxIPTV Internet Protocol TelevisionIRD Integrated receiver and decoderIT Information technologyITA Income Tax AuthoritiesITR Income Tax ReturnITV Internet Television K Thousand

AbbreviationsDraft

AbbreviationLCO Local cable operatorm Million MAA / MAA TV / Company / Target MAA Television Network LimitedMIB Ministry of Information and BroadcastingMIS Management Information SystemMn / m MillionMOU Memorandum of understandingMSO Multi system operatorNA Not applicableNPT Non prime timeNQ Not quantifiablep.a. Per annumPAT Profit after taxPBT Profit before taxPF Provident fundPL / P&L Profit and lossPLI Performance linked incentivePM Per monthPT Prime timepts Per ten secondsRODP Rest of the day partRs Rupees SAFE South Asian Family EntertainmentSARI South Asian Regional Investment Inc.SMS Short messaging serviceTAR Tax Audit Report Target Maa Television Network LimitedTDS Tax Deducted at Source TG Target groupThe Management Management of MAA TVTRP Television rating pointTV Television u/s under section VAS Value added servicesWDV Written Down ValueYTD Year to date

Summary of key findings

Subject FindingsRevenue ► Historical revenue growth driven by increase

movies channel

► Growth of Rs 25 crore in FY10 was dueSaleable Ad inventory gradually increasedImprovement in realization is also on account

► Growth of Rs 23 crore in FY11 was mainlyfrom Rs 2,730 pts to Rs 3,108 pts while the

► Growth of Rs 48 crore in FY12 was drivenmain channel. Prime time utilization on mainincreased from 73% to 83%.

EBITDA growth drivers ► EBITDA (adjusted) increased from Rs.12.7

► Launch of Movies channel in FY11

► Consistent increase in realizationprimarily Balika vadhu and CID. For

Increased reliance ondubbed serials in FY12

► Revenue from dubbed serials increased fromtwo serials - CID and Balika Vadhu. Gross

► Success of dubbed fiction has resulted inoriginal content were significantly lower compared

► Management believes that good Fiction contentthe regional space. Accordingly, there shouldbecomes stronger in the Fiction space going

Dependence on relatedparties

► MAA’s key shareholders include Mr.ChiranjeeviDirectors. We understand from the Managementrespect of all the new films associated with

► SARI is recommended to ensure continuitycontinues to avail the benefits that it has availed

Draft

increase in utilization and realization on main channel and the impact of new

due to increase in utilisation (Rs 9 crore) and realisation (Rs 9 crore).increased from 300 seconds per half hour to 450 seconds per half hour.

account of decrease in the CPRP mix from 31% in FY09 to 17% in FY10.

mainly due to improvement in ad realizations. Prime time realization improvedthe non prime time realization increased from Rs 1,167 pts to Rs 1,579 pts

driven by full year impact of movies channel and improvement in utilisation onmain channel increased from 81% to 91%, while non prime time utilization

7cr in FY09 to Rs.52.5cr in FY12. Key drivers for the growth are:

11 resulting in monetization of the existing movies library

and utilization of ad inventory and Impact of dubbed serials in FY12 –For detailed discussion, refer subsequent bannersfrom Rs.1.2 cr in FY10 to Rs. 19.2cr in FY12, which is primarily driven by

Gross margins from the dubbed serials is c.70% in FY12.

in decline in original content spend in FY11 and FY12. Margins from thecompared to margins dubbed content.

content is essential for the success of a GEC channel in the long-run inshould be a specific long-term strategy to be developed to ensure that MAAgoing forward.

Chiranjeevi, Mr.Nagarjuna and Mr.Allu Arvind who are also on the Board ofManagement that the company has advantage of getting first right of refusal in

with the above shareholders.

continuity of relationship with the celebrity directors to ensure that the Companyavailed in the past.

Summary of key findings

Subject FindingsESOPs ► The Company issued 9.2 lac ESOPs to

outstanding as at Mar12 (net of forfeitedexercisable.

► No ESOP cost has been booked for Grantcost of c Rs 3.6 lacs has been recordedRs.17.02 per share. We understand that the

► Additional proposed grant of 229,100 optionsapproved by the BOD and shareholders. Consideringrecorded in the future periods on accountto cost recorded in the historical period.

► Further the ESOP Plan 2010 provides thatevent of amalgamation, merger, reconstitution

Adjusted EBITDA ► Reported EBITDA is Rs.28.1 cr and Rsconsidering quantifiable adjustments is Rs

► Significant adjustment resulting in increaseserials/ programs.

► Key non-quantifiable adjustments includediscussed above and (2) additional costincrement and attrition etc.

Subscription ► Subscription revenue from MSOs is beingthat collections have been in the range of 90

► c.8% of total collections from MSOs are in

► SARI should insist upon minimizing collection

Draft

its employees by way of two grants during FY11 and FY12. ESOPsforfeited and exercised options) amount to 8.3 lacs of which 1.5 lacs are

Grant I as the exercise price is higher than the fair value of Rs.14.62. ESOPrecorded in FY12 for options granted under Grant II based on the fair value of

the fair value is determined based on intrinsic value.

options are proposed to be issued to its employees. is pending to beConsidering the proposed valuation under this transaction, the cost to be

account of deferred ESOP amortization would be significantly higher compared

that the unvested options shall immediately vest and become exercisable inreconstitution or upon change of control.

Rs.48.3 cr for FY11 and FY12 respectively. Adjusted EBITDA afterRs.31.8 cr and Rs.52.5 cr.

increase of reported EBITDA is on account of accounting policy change for the

include: (1) additional cost that needs to be considered for ESOP cost astowards gratuity due to change in underlying assumptions for salary

being recognized on collection basis since FY09. Historical trends indicate90%-95% of invoiced amounts.

in the form of cash leaving a scope for potential revenue leakage.

collection in cash to minimize possibility of any revenue pilferage.

Draft

Key events since last diligence

Strategy and Management� Management change in

total stake in MAA to 65

� Change in senior managementNew COO is Mr. Shekar

� Launch of two new channelsperformance of ‘MAA Juniors’,

� Discontinuance of ‘News

Key operational metrics� Investment in movies increased

� Increase in revenue fromincrease in both realization

� Increase in reliance onchannel gross margin in

� Decrease in the CPRP revenue

Key accounting policies� Change in accounting policies

� Amortization policyyears period to 75FY12.

� Revenue recognitionbasis since FY09revenue on accrual

Draft

Managementin Oct09 – Mr.Prasad acquired the stake of promoter - Mr. Raju, taking his

65.28%

management – CEO exit - Sharrath Marar (Mar11) ; COO exit – Tapas (Nov09).Shekar effective Dec10.

channels – MAA Movies and MAA Juniors in Feb 2011. Due to non-Juniors’, it was replaced by a new GEC – ‘MAA Gold’ in Feb12.

‘News segment’ in Jun 2009.

increased from Rs 5 crores in FY08 to Rs 64 crores in FY12.

from Rs 78 crores in FY09 to Rs 173 crores in FY12 primarily driven byrealization and utilization and the impact of new channels

dubbed serials in FY12 – 18% of total revenue and 35% of total mainin FY12.

revenue from 33% of revenue in FY08 to 10 % of revenue in FY12.

policies

policy for Programs, serials and Events changed from 33% charge over 375 : 25 in FY10 and then to ‘100% charge in the year of telecast’ since

recognition policy for Analog subscription revenue changed from accrual to cash09 due to collection issues with the MSOs. However, collection as a % of

accrual basis is in the range of 90 – 95% since FY10.

Draft

Transaction overview___________________________________________

Draft

Draft

MAA operates four channels - two GEC channels, a music and a movies channel

Background

� MAA was incorporated inpromoted by Mr. Murali KrishnamChiranjeevi acquired shareholdingequity stake in the Company

� Key management personnelG Singa Rao (ManagementSomayajulu (Finance Head)

Facilities

� Headquartered in Hyderabad,and Kolkata.

Transaction rationale

� We understand that SARIregional language of ‘Telugu’FY12-FY14.

Current shareholding pattern

65%

20%

10%

1% 3%N Prasad & group

K Chiranjeevi & group

A Nagarjuna Rao & group

C Ramakrishna

Others

Historical channel wise GRP, TG cs4+, AP

Department wise head count as at Mar12

1,550

1,600

1,650

1,700

1,750

1,800

1,850

1,900

1,950

050

100150200250300350400450500

Q1FY

10

Q2FY

10

Q3FY

10

Q4FY

10

Q1FY

11

Q2FY

11

Q3FY

11

Q4FY

11

Q1FY

12

Q2FY

12

Q3FY

12

Q4FY

12

Top 4

GEC

GRP

s

MAA

GEC

GRP

Maa Top 4 GECs

DepartmentMain channel and common employeesTechnical & playoutProgrammingProduction & cameramenSupport functionDistributionAd-salesCommercial & schedulingNew business developmentMain channel and common employeesMaa gold/juniorMaa musicMaa moviesOther channelsTotal count

Draft

two GEC channels, a music and a movies channel

in Jun01 and launched the Main GEC channel in Apr02. The Company wasKrishnam Raju. Mr. N Prasad and prominent film personalities A Nagarjuna and K

shareholding in the Company in Jan07. As at Mar12, Mr.N.Prasad holds 65.28% ofCompany.

personnel of the Company include C Ramakrishna (whole time director), J Shekar (COO),(Management Head), Sai Prasad (Programming Head), M Ganesan (Sales Head), T R

Head).

Hyderabad, the Company has 5 marketing offices in Bangalore, Chennai, Delhi, Mumbai

intends to acquire 60% in MAA in a phased manner to increase its presence in the‘Telugu’. Further we understand that the valuation is based on a multiple of EBITDA for

Department wise head count as at Mar12

81%

5% 13%

1%

Main

Music

Movies

Gold/ Junior

Channel wise revenue share – FY12Head

countMain channel and common employees

875850424239186

Main channel and common employees 34226266

58400

Draft

Profit and loss overview

Revenue� Increase in revenue from

realization and utilizationfrom Rs 1,462 in FY09 toin FY12 coupled with increase3 years. For detailed discussion

� Discounts on advertisementin FY09-FY11. However,advertisement revenue andfor comparative purposes

Operating expenses� Increase in FY11/ FY12 is� Increase in the amortization

policy of programs/ serialsFor detailed discussion. refer

� Other costs represent transmissionyear impact of above costs

Personnel expenses� Personnel expenses mainly

been a decline in employeenews segment in FY10.increments given to the continuing

� Increase in personnel cost� increase in the employee

is due to launch of� Salary increments

Administration expenses� Administration expenses

expenses, repairs and maintenance� Increase in FY10 is on account

a part of one-time clean-up

.

Profit and loss statement

Segment wise revenue summary

Currency: Rs Cr FY09 FY10 FY11 FY12Revenue (net of service taxes) 76.9 102.1 125.1 172.5 Operating expenses

Amortisation - Movies (25.4) (32.0) (38.5) (56.7) Amortisatin - Programs/ Serials (11.2) (14.8) (21.5) (19.6) Others (5.1) (5.7) (5.8) (8.4)

Personnel expenses (12.9) (12.9) (15.5) (21.4) Administration expenses (6.7) (9.4) (6.0) (7.5) Selling & distribution expenses (3.8) (3.2) (9.6) (10.7) EBITDA 11.8 24.1 28.1 48.2 Other income 0.6 1.2 0.7 0.6 Financial expenses (4.2) (2.6) (2.9) (5.3) Depreciation (2.9) (5.1) (4.4) (5.1) Provision for Impairment - - - (1.1) PBT 5.3 17.6 21.5 37.3 Provision for Taxation (2.5) (6.1) (7.3) (12.1) PAT 2.8 11.4 14.2 25.1 KPIsRevenue growth % 44.2 32.7 22.6 37.9Personnel expenses% 16.8 12.7 12.4 12.4Selling & distribution expenses% 5.0 3.1 7.7 6.2EBITDA % 15.3 23.6 22.5 27.9PBT % 6.9 17.2 17.2 21.6PAT % 3.7 11.2 11.3 14.6Source: Audited Financials for FY09, FY10, FY11 and FY12Ref: Lead PL - Section Lead - Lead Schedules

Currency: Rs crores FY09 FY10 FY11 FY12Advertisement 58.8 79.8 95.7 135.7Subscription 16.1 21.0 25.3 30.9Digital and new media 0.6 0.2 3.0 5.3Ground event 0.9 0.1 - - IRD advance/sale 0.3 0.1 0.3 0.7Other sales - 0.2 0.2 0.2Unrearned revenue 0.3 0.7 0.5 (0.2)Total revenue 76.9 102.1 125.1 172.5

Draft

from Rs 77 Cr in FY09 to Rs 173 Cr in FY12 primarily driven by increase in bothutilization and the impact of new movies channel. While realization per ten seconds increased

to Rs. 2,225 in FY12, utilization of ad inventory increased from 69.2% in FY09 to 86%increase in the saleable inventory from 300 seconds in FY09 to 450 seconds in the last

discussion on revenue growth drivers, refer Transaction Considerations.advertisement revenue and shortfall in collection from MSOs has been netted of from revenues

However, in FY12, management reported the revenues gross, and the discounts onand shortfall in collection from MSOs (Rs 1.8 crore) was included in costs. However,

purposes we have netted of these costs from revenue of FY12 in the table alongside.

is driven by incremental amortization in respect of movies purchased in FY11/ FY12.amortization cost of programs/ serials till FY11 is primarily driven by change in amortization

serials etc from 33% over a period of 3 years to 100% in the year of telecast since FY12.refer subsequent banners.

transmission cost, electricity cost etc. Prime reason for increase in FY12 is due to fullcosts for the new channels – ‘Movies’ and ‘Gold’.

mainly include salaries, directors remuneration and staff welfare expenses. There hasemployee head count from 345 as at Mar09 to 274 as at Mar10 mainly due to closure of

Decrease in salary cost in respect of the employees of the news segment is offset bycontinuing employees.

cost of FY11 and FY12 is primarily due to:employee head count by 78 and 48 in FY11 and FY12 respectively. Increase in FY12of new channels

increments of c.21 % in FY11 and FY12.

expenses primarily comprises rent, legal and professional charges, telephone and internetmaintenance and bad debts written off.account of bad-debts written off of Rs.32m in respect of old subscription receivables as

up.

Draft

Profit and loss overview

� Increase in FY12 is mainlyrepairs and maintenance

Selling and distribution expenses

� Selling and distributionon subscription and channel

� Increase in FY11 is dueaggregating Rs. 2 cr andsai aggregating to Rs.4

Other income, Finance charges

� Other income for FY12purchase of movies, Rsother income in FY10 ison subscription aggregating

� Finance expenses primarily

� Decline in financeof cash credit from

� Increase in FY12Rs 6 cr in FY11

� During the historicalfacilities has been

� Depreciation is providedmanagement's estimate

� Increase in depreciationassets includingcompanies act 1956in FY12 is mainly

� Management conductedBased on consultant’s reportwhich pertain to the News

Profit and loss statement

Currency: Rs Cr FY09 FY10 FY11 FY12Revenue (net of service taxes) 76.9 102.1 125.1 172.5 Operating expenses

Amortisation - Movies (25.4) (32.0) (38.5) (56.7) Amortisatin - Programs/ Serials (11.2) (14.8) (21.5) (19.6) Others (5.1) (5.7) (5.8) (8.4)

Personnel expenses (12.9) (12.9) (15.5) (21.4) Administration expenses (6.7) (9.4) (6.0) (7.5) Selling & distribution expenses (3.8) (3.2) (9.6) (10.7) EBITDA 11.8 24.1 28.1 48.2 Other income 0.6 1.2 0.7 0.6 Financial expenses (4.2) (2.6) (2.9) (5.3) Depreciation (2.9) (5.1) (4.4) (5.1) Provision for Impairment - - - (1.1) PBT 5.3 17.6 21.5 37.3 Provision for Taxation (2.5) (6.1) (7.3) (12.1) PAT 2.8 11.4 14.2 25.1 KPIsRevenue growth % 44.2 32.7 22.6 37.9Personnel expenses% 16.8 12.7 12.4 12.4Selling & distribution expenses% 5.0 3.1 7.7 6.2EBITDA % 15.3 23.6 22.5 27.9PBT % 6.9 17.2 17.2 21.6PAT % 3.7 11.2 11.3 14.6Source: Audited Financials for FY09, FY10, FY11 and FY12Ref: Lead PL - Section Lead - Lead Schedules

Draft

mainly on account of increase in bad debts written off by Rs. 0.7cr and increase inmaintenance charges by Rs. 0.5cr

expenses

expenses primarily comprises advertisement and publicity expenses, commissionchannel carriage fees.

due to increase in advertisement and promotion cost for the new channelsand increase in channel carriage fees paid to the distributors - Hathway and Venkat

.1 cr.

charges etc

12 primarily consists of Rs.0.2 cr from advance given to Suresh production forRs.0.1 cr of forex gain and other miscellaneous income of Rs.0.3 cr. Increase inis mainly on account of reversal of provision created on service tax and commission

aggregating to Rs.0.6 cr.

primarily consists of interest on term loan and working capital credit facilities.

finance expenses in FY10 is mainly on account of decrease in average daily utilisationfrom Rs 12 cr in FY09 to Rs 4.7 cr in FY10.

12 is mainly on account of increase in average daily utilisation of cash credit fromto c.Rs 24 cr in FY12.

historical period, the average interest cost of term loan and working capital creditbeen in the range of c.11% to 13% and c.12% respectively.

provided on a straight line basis at rates as per companies Act, 1956 or rates based onestimate of useful lives of assets.

depreciation cost in FY10 is mainly on account of change in depreciation rate ofincluding editing equipment , lighting equipment and air conditioners from the rate as per

1956 to the rates based on management’s estimate of useful life. Further increasemainly on account of addition of new assets.

conducted a physical verification of fixed assets as at Mar11 through an external consultant.report provision for impairment is created towards obsolete fixed assets (60% of

News segment, which was discontinued) and for assets not in working condition

Draft

Balance sheet overview

Lead Balance sheet of MAA Television Network limited � Gross block of fixed assetsfitting of Rs 5.3 cr, computeras at Mar11 and Mar12for new channels launchedswitchers and play out

� MAA has invested Rsaforesaid entity relates

� Inventory primarily comprisesunamortized cost of serials/Rs. 98.6 cr and the programs/primarily due to increasedin FY12. Also refer subsequent

� Sundry debtors as at Marand digital and new mediaas at Mar12 (Mar11) isis mainly on account of

� Cash and bank balancein FY11 and FY12 were

� Loans and advances asand other deposits of Rsthe balance as at Mar12cr to Geeta Arts for movies

� Current liabilities as at3.5 cr and provisionsubscription revenue aggregating

� Provision as at Mar1233 lacs

� Secured loan as at Marcrs . Increase in securedfacilities from Rs 14.5account of increase in working

Currency: Rs Cr Mar09 Mar10 Mar11 Mar12Gross fixed assets 30.9 32.9 42.9 48.3 Less: depreciation (10.4) (15.4) (19.7) (24.3) Net fixed assets 20.5 17.5 23.3 24.1 CWIP including capital advances 0.3 0.1 0.6 1.1 Investments 0.1 0.1 - - Current assetsInventory 44.9 52.3 70.1 101.0 Sundry debtors 25.6 25.7 28.0 40.0 Cash and bank 6.1 18.7 2.7 3.5 Loans and advances 13.6 13.6 28.0 18.1 Total current assets 90.3 110.3 128.9 162.7 Current liabilities and provisionsCurrent liabilities (11.2) (9.6) (11.9) (10.2) Provisions (0.4) (2.4) (1.8) (2.8) Total current liabilities and provisions (11.6) (11.9) (13.7) (13.0) Net current assets 78.8 98.4 115.1 149.8 Deferred tax asset 0.8 0.2 0.2 0.9 Total assets 100.4 116.2 139.2 175.9 Secured loan (25.6) (29.5) (38.3) (49.8) Total loan funds (25.6) (29.5) (38.3) (49.8) Net assets 74.8 86.7 100.9 126.1 Represented by Issued capital 58.9 59.3 59.3 59.3Share options outstanding amount - - - 0.0Share premium 19.2 19.3 19.3 19.3Reserves and surplus (3.3) 8.1 22.4 47.5Total equity 74.8 86.7 100.9 126.1 Source: Audited Financials for FY09, FY10, FY11 and FY12Ref: Lead BS - Section Lead - Lead Schedules

Draft

assets as at Mar12 primarily includes plant and machinery of Rs 38.4 cr, furniture andcomputer and accessories of Rs 3.1 cr and vehicles of Rs 0.4 cr. Increase in fixed assets

12 is mainly on account of addition of editing equipment , play out station and decoderslaunched. Capital advances as at Mar12 of Rs 1.1 cr is mainly towards purchase of

stations.

Rs. 5 lacs in Surya Kiran Entertainment Private Limited. We were informed that theto erstwhile promoter Mr. Raju. These investments were fully written off in FY11.

comprises unamortized movie rights at the end of each year and carried forward balance ofserials/ programs till Mar11. Balance as at Mar12 represents unamortised movies cost ofprograms/ serials which are yet to be telecast of Rs 1.9 cr. Increase in inventories is

increased spend by the Company in acquisition of movies from Rs.12.3 cr in FY09 to Rs. 70crsubsequent banners for detailed discussion on the movie amortisation.

Mar12 include debtors for advertisement of Rs 36.8 crores, DTH operators Rs 2.6 croresmedia (D&NM) receivables of Rs 0.5 crores. DSO for Advertisement and DTH receivables

90 days ( 87 days) and 95 days ( 78 days) respectively. Increase in debtors as at Mar12of increase in advertisement debtors due to increase in revenues.

balance as at Mar12 represents bank balance in current account. The increase in cash profitswere offset by increased spend by the Company in movie acquisition.

as at Mar12 primarily comprises advances for movie and serial rights of Rs 12.8 cr, rentalRs 1.6cr, cenvat receivable of Rs 1.7cr and prepaid expenses of Rs 1 cr. Decrease in12 is primarily driven by decrease in advances for movie rights. Advance paid of Rs. 8.5

movies were adjusted subsequently on awarding of the rights to the Company.

Mar12 comprise dues towards fiction / non fiction programs and movies aggregating Rsfor expenses of Rs 5.8 cr , customer advances towards advertisement sale and

aggregating to Rs 0.60 cr and deposit received from MSOs amounting to Rs 0.30 cr.

12 is primarily towards provision for income tax of Rs 2.4 cr and leave encashment of Rs

Mar12 consists of term loan of c.Rs 15 crs and working capital credit facilities of Rs 34.6secured loan from Mar10 to Mar11 is mainly on account of increase in working capital credit

crs as at Mar10 to Rs 21.2 crs as at Mar11. Further the increase in Mar12 is also onworking capital credit facility.

Draft

Cash flow overview

Table along-side

� Adjustment fordepreciation,

FY10

� Increase in cashincreased spendaggregating Rs

FY11

� Increase in cash

� Increasedaggregating

� Investment

FY12

� Increase in tradedebtors due to

� Increase in cashoffset by

� Increasedaggregating

� Investment

� Negative cashaggregating Rs

Cash flow statement of MAACurrency: Rs Cr FY10 FY11 FY12Cash flow from operating activities Net profit before tax 17.6 21.5 37.3 Adjustment for: Non cash expenses 54.2 66.8 87.4 Interest earned (0.4) (0.3) (0.3) Operating cash flows before WC changes 71.4 87.9 124.4 Adjustment for changes in:Trade receivables 0.7 (1.9) (11.9) Loans & advances 1.4 (0.2) 0.5 Liabilities and provisions (1.3) 2.0 (1.6) Income tax paid (4.5) (6.4) (11.6) Operating cash flow- before inventory purchase 67.6 81.4 99.8 Inventories (54.5) (93.2) (98.9) Operating cash flow- after inventory purchase 13.1 (11.8) 0.9 Fixed assets (2.4) (10.2) (7.1) CWIP 0.2 (0.6) 0.1 Sale of fixed assets 0.2 0.0 0.1 Interest received 0.4 0.3 0.3 Investments - - - Net cash used in Investing activities (1.7) (10.4) (6.6) Free Cash flows 11.4 (22.3) (5.8) Borrowings 3.9 8.8 11.6 Interest paid (2.7) (2.6) (5.2) Employee Stock options - - 0.0 Net cash flow from financing activities 1.2 6.3 6.5 Change in cash & cash equivalents 12.6 (16.0) 0.7 Cash & cash equivalents at the beginning of the year 6.1 18.7 2.7 Cash & cash equivalents at the end of the year 18.7 2.7 3.5 EBITDA 24.1 28.1 48.2 EBITDA to free cash flow conversion 0.5 (0.8) (0.1) EBITDA to net cash flow conversion 0.5 (0.6) 0.0 Source: Audited Financials for FY09, FY10, FY11 and FY12

Draft

side presents cash-flow for the historical period.

for non cash expenses comprise amortization cost of movies and serials,impairment loss and finance charges not relating to operating activities.

cash flows from operations aggregating Rs. 68 cr were significantly offset byspend in movies and expenditure towards fiction / non fiction contentRs. 54 cr.

cash flows from operations aggregating Rs. 81 cr were completely offset by

Increased spend in movies and expenditure towards fiction / non fiction contentaggregating Rs. 93 cr and

Investment in fixed assets of Rs. 10 cr driven by new channels launched.

trade receivables in FY12 is mainly on account of increase in advertisingto significant increase in revenue base.

cash flows from operating activities aggregating Rs. 100 cr were completely

Increased spend in movies and expenditure towards fiction / non fiction contentaggregating Rs. 99 cr and

Investment in fixed assets of Rs.7 cr.

cash flows in FY11 and FY12 were funded by net borrowings from banksRs. 6 cr and Rs. 7 cr respectively.

Draft

Transaction considerations___________________________________________

Draft

Draft

Historical revenue growth mainly driven by increase in utilization and realization on main channel and the impact of new movies channel

FY10 - Growth of Rs .25 crores

� Gradual increase in ad inventoryIncrease in ad seconds billed

� Average realization on mainin realization partly attributablepercentage of total ad inventory

� Increase in subscription revenueRs 30 lacs. Increase in DTHFY09 was the first year of operationbase.

� Decline in DNM revenue contributedbeen scaled down to increase

� Increase in revenue from musiclac seconds in FY10. The rates

76.9 9.2

9.1 3.5 3.4 102.1 (1.9)

17.2 4.4 1.3 1.5

60

80

100

120

140

160

180

FY09

Rev

enue

Ads-

Utilis

ation

Ads -

Reali

satio

n

Subs

cript

ion

Mus

ic

FY10

Rev

enue

Ads-

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ation

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D&NM

Mov

ies an

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Curre

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Rs C

r

Increase in blended realization by 25%

Monetization of the movies library in the Movies channel

for full year in FY12

Draft


crores

inventory from 300 seconds per half hour to 450 seconds per half hour in FY10.billed increased from 36 lacs in FY09 to 41 lacs in FY10.

main channel increased from Rs 1,462 pts in FY09 to Rs 1,711 in FY10. Improvementattributable to change in mix of ad sales in favor of fixed type contracts. CPRP billing as a

inventory declined from 31% in FY09 to 17% in FY10.

revenue driven by increase in DTH revenue by Rs 3 crores and overseas revenue byDTH contributed by Sun (Rs 1.8 crores), Reliance (Rs 60 lacs) and Airtel (Rs 40 lacs).

operation for Sun and increase during FY10 is driven by increase in its subscriber

contributed by decline in SMS revenue from contests etc. which we understand hasincrease the sale of FCT by replacing time consumed for promoting SMS related contests.

music channel is driven by increase in utilization from 8.2 lac seconds in FY09 to 19rates have however declined from Rs 293 pts to Rs 263 pts.

1.5 0.5 125.1

21.8 11.3 2.5 5.2 3.0 1.9 1.1 0.7 172.5

Mov

ies an

d Gold

Othe

rs

FY11

Rev

enue

Mov

ies

Ads-

Utilis

ation

Ads -

Reali

satio

n

Subs

cript

ion

D&NM

Mus

ic

Gold/

Junio

rs

Othe

rs

FY12

Rev

enue

Monetization of the movies library in the Movies channel

for full year in FY12

Draft


FY11 - Growth of Rs 23.1 crores

� Prime time realization improvedincreased from Rs 1,167

� Increase in subscription revenueRate per subscriber collected

� Launch of the two new channels1.5 crores.

FY12 - Growth of Rs 47.5 crores

� Monetization of the moviesrevenue of Rs 21.8 crores

� Prime time utilization onutilization on main channelutilization in FY12 is Rs 11

� Prime time realization increasedimprovement in channel GRPs

� Increase in subscription revenuefrom Dish and Videocon (Rs

� Increase in DNM revenue3.3 crores). The business

Draft


crores

improved from Rs 2,730 pts to Rs 3,108 pts while the non prime time realizationpts to Rs 1,579 pts.

revenue is primarily driven by increase in MSO (Analog) collection by Rs 3.1 crores.collected from MSO was increased from Rs 5 to Rs 6 since Jan10.

channels – Movies and Juniors – in Feb11 contributed to increase in revenue by Rs

crores

movies library in the Movies channel for full year in FY12 resulted in incrementalcrores.

on main channel increased from 81% in FY11 to 91% in FY12. Non prime timechannel increased from 73% in FY11 to 83% in FY12. Combined impact of increase in

11.3 crores.

increased from Rs 3,108 pts in FY11 to Rs 3,374 in FY12 main on account ofGRPs driven by popularity of dubbed serials such a Chinnari Pelikuturu and CID.

revenue is driven by increase in revenue from DTH (Rs 3 crores) which was mainly(Rs 1.1 crores each) which paid for the new channels for the first time in FY12.

revenue is driven by revenue from slots sold to Cellcast on Main and Music channel (Rsbusiness with Cellcast has been discontinued from Dec11

Draft

EBITDA growth in the historical period is driven by consistent increase in realization, utilization and subscription revenue.Increase in FY12 is primarily due to monetization of movies inventory through Movies channel and dubbed serials

� We have presented the above

Key drivers - FY10

� Increase in utilization fromFY09 to Rs 1,711 pts in FYof FY10 EBITDA.

� Subscription revenue increase

� News segment that was partNews segment was Rs 3.5expenditure in FY10 to the extent

� MAA Music EBITDA increasedMusic channel is low since

12.7

17.1 3.5 (3.6) 2.2 1.9 1.8 35.6 4.7

4.4 2.1 (9.3)(2.9)

010203040506070

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Draft


above EBITDA bridge based on the adjusted EITDTA for each year.

69% in FY09 to 78% in FY10 and increase in realization from Rs 1,462 pts inFY10, have contributed to the extent of 53% and 22% respectively, for the increase

increase is primarily due to increase in the DTH revenue from all the DTH players.

part of the GEC channel, was discontinued in June 2009. Total expenditure from the5 crores and Rs 1.6 crores in FY09 and FY10 respectively. Reduction in newsextent of Rs 1.9 crores has a positive impact on EBITDA for FY10.

increased significantly primarily driven by increase in utilization. Incremental cost forthe content is primarily sourced from existing Movie library.

(2.9) 1.6 (4.4)31.8

12.2 9.1

5.5 4.5 (2.0) (2.9) (4.5)

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Draft


Key drivers - FY11

� Increase in realization fromincrease of FY11 EBITDA by

� Subscription revenue increasedriven by increase in rate per

� Increase in the spend of thecertain new non-fiction programsthere are more film-based programs,e.g.: Revenue from ‘Magadheera’

� Cost of movies acquired in FYFY11. Consequently, the amortisationRs 11.7 crores in FY11. However,thereby resulting in negligible

� Promotion cost of Rs 1.6 crores70 lacs for the 2 months period

Key drivers - FY12

� Key contributors for increase

� Monetization of the movies

� Increase in PT and NPT

� Gross margin from movies increasedthe Movies channel. Increaseamortization of first-time telecastRs 43.9 crores in FY11 to Rssubsequent telecast of moviesmovies from FY11 onwards,

� Gross margin from dubbed serialsis c.70% on a total revenue of

Draft


Rs.1,711 in FY10 to Rs.2,140 in FY11 for the main channel contributed to theby Rs 16 crores.

increase is primarily due to increase in the Analog revenue by Rs 3.1 crores which isper subscriber from Rs.5 to Rs.6 for main channel.

the programs/ serials by Rs 9.3 crores in FY11 as compared to FY10 is due toprograms like ‘Challenge’ series, Gharshana etc, while in FY10, we understand that

programs, cost in respect of which is significantly lower with higher revenue (For‘Magadheera’ film based program is Rs 60 lacs with marginal cost associated with it)

FY11 increased significantly from Rs 14.6 crores in FY10 to Rs 43.9 crores inamortisation of movie cost in respect of first-time telecast of movies increased byHowever, revenue from the movies genre also increased by the similar amount

negligible impact on EBITDA due to additional movies acquisition.

crores for the new channels launched in FY11 and incremental carriage fee of Rsperiod of FY11 resulted in increase of advertisement and promotion cost.

increase in FY12 EBITDA as highlighted in the chart are due to:

movies library through the Movies channel without incremental cost

NPT utilization by 10% each

increased by 9.1 cr primarily due to monetization of the movies library throughIncrease in gross margin from movies is after considering the impact of incremental

telecast movies by Rs 5.7 crores (cost of movies acquired in FY12 increased fromRs 62.9 crores in FY12) and incremental amortization cost of movies for the

movies is Rs 5.2 crores. Since the Company started increasing investment inthe impact of incremental cost is high in FY12 as compared to FY11.

serials (primarily three serials – Chinnari Pellikuturu, CID and Vasantha Kokila),of Rs 19.9 crores, which is the key driver for increase in FY12 EBITDA.

Draft


� Since 3 key dubbed serialsc.50% of prime time, therethe cost of the non-dubbed

� Since the Junior/ Gold is aEBITDA by Rs 2 crores isFY12.

� Annual carriage fees of Rsdistribution cost.

� Personnel cost increase in FY

Draft


are run during prime time in FY12 which accommodates about 2.5 hours i.e.is reduced spend on the non-dubbed serials in FY12 resulting in decrease incontent by Rs 4.5 crores in FY12.

a new channel, there is a loss of Rs 2.9 crores in FY12. Decline in Musicdriven by decrease in realization from Rs 226 pts in FY11 to Rs 176 pts in

Rs 4.1 crores paid for the new channels is the prime driver for increase in the

FY12 is driven by increase in head-count by 48 and increments by c.21%.

Draft

Dubbed content driving increase in margins in FY12. Increase is offset by incremental amortization of movie costs due to increased movie purchase costs in FY11 and FY12

� Table 1 above representsgenre. Revenue has significantly

� Significant increase

� Increase in revenue

Dubbed content

� Increase in revenue andcontributing to 64% of thepresents TRPs, Cost per episode

� Success of dubbed fictionmargins (advertising revenueto margins dubbed content

� Based on our discussionsregional market have performedFiction content is essential

� Continued dependence onViacom18 considering recentrevenue and 60% of the gross

Table 2: Top Fiction / Non fiction in FY12

Currency: Rs CrAverage

TRP

Cost Per Episode

(Rs) Revenue Margin %Dubbed fictionCID 2.80 70,584 6.0 70.8 Chinnari Pelli Kuthuru 3.34 44,140 6.2 81.3 Vasanta Kokila 2.20 42,097 2.2 67.1

Original fictionYedureetha 0.92 100,000 1.1 0.7 Anna Chellalu 2.06 74,833 2.0 33.0

Non fiction Modern Mahalakshmi 2.18 195,888 5.2 2.2 Challenge 3 3.28 581,318 3.6 8.4 Bhale Chansule 4.09 206,396 3.4 62.9 Maa Voori Vanta 0.97 36,401 3.1 64.1 Source: Program details and Management information

Table 1: Revenue and gross margin by genre

Currency: Rs Cr FY10 FY11 FY12 FY10 FY11 FY12Movies - Main channel 30.0 40.6 44.1 57 40 29 Movies channel - 0.9 17.1 - 72 68 Fiction - Dubbed 1.2 2.3 19.2 50 41 70 Fiction - Original 10.4 9.8 6.9 (2) 9 (2) Non Fiction 30.3 33.6 34.3 59 36 43 Events 1.1 3.8 4.9 16 14 (3) Slots 5.6 4.8 9.6 98 100 100 News 0.8 - - - - - Total 79.4 95.8 136.1 52 38 45 Source: Financial statements and Management information

All channelsRevenue Gross margin %

Draft


represents the revenue and gross margin (advertisement revenue less direct costs) bysignificantly increased in FY12 driven by the following factors:

increase in fiction revenue due to significant increase in dubbed content, and

revenue from movies due to launch of MAA Movies.

and gross margin of dubbed content in FY12 is driven by CID and Balika Vadu,the dubbed content revenue and 70% of dubbed content margin. Table 2 to the left

episode and margins from key serials in FY12.

fiction has resulted in decline in original content spend in FY11 and FY12. Historically,revenue less content costs) from original content were significantly lower compared

content.

discussions with the Management, we understand that, historically the Competitors in theperformed better than MAA in ‘Fiction content’. Management believes that good

essential for the success of a GEC channel in the long-run.

on dubbed content poses certain risk, especially of content purchased fromrecent acquisition of Eenadu TV by Network18. 56% of the dubbed contentgross margin were from content purchased from Viacom18.

FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY1230.0 40.6 44.1 57 40 29 1,933 2,270 2,607

- 492 464 1.2 2.3 18.9 50 59 72 636 1,429 2,094

10.4 9.7 6.9 (2) 10 5 1,401 1,576 2,023 25.4 28.9 26.0 45 30 33 1,657 2,105 1,610

1.1 3.8 4.9 16 14 (3) 7,956 7,489 8,625 3.6 3.8 3.8 96 100 100 NA NA NA0.8 - - (13) - - NA NA NA

72.5 89.2 104.5

MAA Main channelRevenue Gross margin % Average realisation (Rs pts)

Draft


� Based on the reading ofChinnari Pelli Kuthuruthese additional episodescommitment of certainepisodes contracted, minimum

Movies

� Increase in FY11 is drivensignificant declined in FY11.7 crores.

� Increase in revenue fromenabled MAA monetize

� Increase in revenue fromthe impact of incremental14.6 crores in FY10amortization in the year

Non fiction

� Non fiction revenue compriseprograms. Decrease inMAA. These programsinvolved significantly lower

� In FY12, launch of anGRPs in NPT.

Key terms of serials purchased from Viacom18Chinnari Pelli

KuthuruVasanta

KokilaAgreement dt 9-Dec-10 5-May-11No of episodes 0 - 260 0 - 390Cost per episode 35,000 30,000Minimum commitment(no. of episodes)

260

Amendment dt 11-May-11No of episodes 261 - 780Cost per episode 35,000Minimum commitment(no. of episodes)

260

Amendment dt 1-Dec-11 1-Dec-11No of episodes 781 to 988 391 - 512Cost per episode 35,000 30,000Minimum commitment(no. of episodes)

260 Not mentioned

Validity of latest amendment

Source: Agreements of Serials

From January 1, 2014 or 1st telecast of any additional

episode (whichever is later) to 18 months from start date

Point of view

We recommend SARI to consider the impact of continuity of dubbed content and MAA’s ability to develop/ source original fiction content to improve the overall performance of MAA in the longfor the regional channel is good Fiction content.

We recommend SARI to also consider the impact of minimum commitments extended to Viacom18 for purchase of dubbed content and its related implications in the financial model.

Draft


of the sample agreements we note that there were certain additional episodes ofand Vasanta Kokila have been contracted in Dec11. The validity of telecast of

episodes contracted extends up to June 2015. These contracts include a minimumnumber of episodes. Table to the left summarizes the key terms on number of

minimum commitment and cost per episode.

driven by higher realization of advertisement inventory. However, margins haveFY11 due to significant increase in first year amortization costs aggregating to Rs

from movies in FY12 is driven launch of MAA Movies (from Q4 of FY11), which hasmonetize the movie content at a faster pace.

from MAA Movies has not resulted in increment in gross margin of movies due toincremental first year amortization. Purchase of movies by MAA has increased from Rs

to Rs 43.9 crores in FY11 and Rs 62.9 crores in FY12 resulting in higheryear of first telecast.

comprise of revenue from interactive programs, game shows and devotionalin gross margins in FY11 was due to various interactive programs launched by

programs contributed lower margins compared to film based programs in FY10 whichlower investments.

interactive program ‘Modern Mahalakshmi’ contributed to significant increase inPoint of view

We recommend SARI to consider the impact of continuity of dubbed content and MAA’s ability to develop/ source original fiction content to improve the overall performance of MAA in the long-run, since Management believes that the key driver for the regional channel is good Fiction content.

We recommend SARI to also consider the impact of minimum commitments extended to Viacom18 for purchase of dubbed content and its related implications in the financial model.

Draft

Dependence on related parties for purchase of movies and serial rights.

� Based on the information receivedpurchase of movie and serial rights

Purchase of movies and serials

� MAA purchases movies/ serialsAravind, Chiranjeevi, Nagarjuna,

� We understand that in respectmay get a first right of refusalbenefits are not always available

� Purchase of movies and serialsRs 6.9 crores respectively; while45.1 crores.

Currency: Rs crCommon directors/

MoviesA Naga Chaitanya A Naga ChaitanyaA. Aravind Babu Allu Aravind BabuAnjana Productions ChiranjeeviAnnapurna Studios Pvt Ltd Akkineni NagarjunaGeetha Arts Allu Aravind BabuK Ram Charan Tej K Ram Charan TejMovies - TotalSerialsAnnapurna Productions P Ltd Akkineni NagarjunaAnnapurna Studios Pvt Ltd Akkineni NagarjunaMovies - TotalRentAnnapurna Studios Pvt Ltd Akkineni NagarjunaGrand Total

Draft


received from Management on the transactions with related parties in respect ofrights and rental expense.

serials

serials from the production houses owned or related to certain directors – AlluNagarjuna, Naga Chaitanya and Ram Charan Tej

respect of movies in which some of the existing Directors have starred, the Companyrefusal for purchase of respective movie. Management however indicated that suchavailable due to certain business & operational limitations of the Directors.

serials from the above related parties during the last 4 years is Rs 34.4 crores andwhile the total cost for movies and serials acquired is Rs. 153.3 crores and Rs

Common directors/ relationship FY09 FY10 FY11 FY12 Total

A Naga Chaitanya - 3.5 - - 3.5Allu Aravind Babu - - - 0.2 0.2Chiranjeevi - - 5.2 - 5.2Akkineni Nagarjuna - - - 5.0 5.0Allu Aravind Babu 2.3 5.5 8.5 - 16.3K Ram Charan Tej 4.3 - - - 4.3

6.5 9.0 13.7 5.2 34.4

Akkineni Nagarjuna 0.9 3.5 0.3 - 4.7Akkineni Nagarjuna 1.0 - - 1.3 2.2

1.9 3.5 0.3 1.3 6.9

Akkineni Nagarjuna 0.4 0.2 0.2 0.5 1.3 8.7 12.7 14.2 6.9 42.6

Draft


� Accordingly, c.22% and 15in the last 4 years.

� Management indicated thatpurchase movies or otherwise(Director), C. RamakrishnanSomayajulu (Vice President),Manager) and Junaid Siddiqui

Geeta arts:

� Geeta arts is the productionGeeta arts in the last 4 years

� The average costs of theproduced by Geeta arts werevalidate the price at which

� Based on the informationcast produced by other production

Rent

� Annual rent paid for lease

Draft


15% of Movies and Serials respectively, were purchased from the related parties

that all the related party transactions are at arms length and the decision tootherwise is taken by MAA’s Film Acquisition Committee which includes Allu Arvind

Ramakrishnan (Director), J. Sekar COO, K. Sai Prasad (Sr. Vice President), T.R.President), G. Singa Rao (Sr. General Manager), K. Siva Adinarayana (Sr. General

Siddiqui (Sr. General Manager).

production banner owned by Allu Aravind Telecast rights of all the movies produced byyears have been purchased by MAA.

movies purchased from Geeta arts are c. Rs. 4 crores. Since all the movieswere purchased by MAA there is no direct market data that was available tothese movies were purchased.

tracked by the Management, we understand that the movies with similar starproduction houses have been purchased by competitors at the same price range.

of Annapurna Studios for in-house programmers.

Point of viewSARI is recommended to ensure continuity of relationship with the celebrity directors to ensure that the Company continues to avail the benefits that it has availed in the past.

Draft

ESOP cost accounted in FY12 appears to be low; fair value of share considered is Rs 17.02 per option

ESOPS 2010 � MAA has Employeesummarizes ESOPsare at an exercise

� The Company hasGrant I and Granthas considered RsGrant II respectively

� No ESOP cost hashas recorded ESOP

� The Company hasapproved by the BODbe recorded in thesignificantly higher

� ESOP 2010 detailsreconstituted andshall immediately

Point of viewWe recommend SARI to get revised valuation and consider the ESOP cost appropriately in the historical and forecast model.

Further, the impact of accelerated vesting of ESOPs in the event of change in control as per planned acquisition of Sony may need to be factored in computing diluted share

Eligibility criteria:Category of employees Period of service to

be completed General Managers and above On completion of one

year of serviceExecutives to Deputy General manager On completion of three

years of service

Below Executives Not eligibleSource: Management InformationRef: ESOP 2010 - Section BS - Balance Sheet Analy sis

ESOP - 20101st

Vesting2nd

Vesting3rd

VestingTotal

SharesGraded vesting % 35% 35% 30%

Grant -IDate of vesting 05-May-11 05-May-12 05-May-13No. of options 185,325 185,325 158,850 529,500

Grant -IIDate of vesting 20-Jun-12 20-Jun-13 20-Jun-14No. of options 135,590 135,590 116,220 387,400Less: Options lapsed (74,625)Options exercised (16,800)Sub total 825,475

Proposed Grant II I 229,100Total Options 1,054,575Total Options approved 1,000,000Source: ESOP 2010 plan copy and annual report of FY12

Draft

ESOP cost accounted in FY12 appears to be low; fair value of share considered

Employee Stock Option Plans to incentivize its employees. Table along-sideESOPs approved and granted by MAA. The options under the ESOP 2010 plan

exercise price of Rs 15 per option.

has considered intrinsic value method to account for ESOPs granted underGrant II. Based on valuation provided by a chartered accountant, the Company

Rs 14.62 and Rs 17.02 as the intrinsic values of the option under Grant I andrespectively.

has been booked for Grant I as the exercise is higher than the fair value. MAAESOP cost of c Rs 3.6 lacs in FY12 for options granted under Grant II.

has proposed to grant 229,100 options to its employees which is pending to beBOD and by shareholders meeting. Considering this transaction, the cost tothe future periods on account of deferred ESOP amortization would be

higher compared to cost recorded in the historical period.

details that in the event of company being amalgamated, merged andupon change of control, all unvested options in force on the relevant datevest and become exercisable.

Point of view:

We recommend SARI to get revised valuation and consider the ESOP cost appropriately in the historical and forecast model.

Further, the impact of accelerated vesting of ESOPs in the event of change in control as per planned acquisition of Sony may need to be factored in computing diluted share-holding.

Draft

Adjusted EBITDA

Table along sidefollowing proposedof the Company.

1. In FY10 and FY11the subsequenttelecast. Basedtelecast in subsequentreasonable. Thecosts deferred toFY11.

2. The adjustmentsFY11. Based ondue to low TRP ratings

3. The company haslimited and VenkatNov11 and Dec11made by the Companyrespectively, in theto the period FYin FY11 and FY12

4. Represents theINSAT2E to IS17period of 3 monthssatellite as well.expenditure.

5. The Company startedMSOs relating toone time write offscharged we propose

Adjusted EBITDACurrency: Rs Cr Notes FY09 FY10 FY11 FY12Reported EBITDA 11.8 24.1 28.1 48.2Reported revenue 76.9 102.1 125.1 172.5Reported EBITDA % 15.1 23.6 22.5 28.0Adjustements:Inventory amortisation

Programs / serials 1 - 8.5 0.6 2.0Movies - one time write offs 2 - - 0.1 1.5

Channel carriage fees 3 - (0.2) 3.0 0.1Uplinking costs 4 - - - 0.6Bad debts written off 5 0.9 3.2 - -

Non quantifiable adjustmentrsESOP costs 6 - - NQ NQProvision for gratuity 7 NQ NQ NQ NQAdjusted EBITDA (to the extent quantifiable)

12.7 35.6 31.8 52.5

Adjusted EBITDA % 16.3 34.9 25.4 30.4

Proforma adjustmentsCelcast revenue 8 - - (1.6) (2.1)COO salary cost 9 - (0.2) (0.4) - Source: Management information

Draft

side presents reported EBITDA and adjustments for FY09 to FY12. Impact ofproposed adjustments may be considering when evaluating the historical performance

. These adjustments have been discussed in detailed below.

11, the Company amortized serials at 75% in the year of first telecast and 25% inyear. In FY12, the policy was changed to amortize 100% in the year of first

Based on historical trends, we note that no significant revenue accrued from repeatsubsequent years. Hence amortization of serial costs at 100% appears to beThe adjustment in FY11 relates to deferral of unamortized costs from FY10 net of

to FY12. The adjustments in FY12 represents unamortized costs deferred from

adjustments represents certain one time write offs of dubbed movies that were purchased inon the discussions with the Management, we understand that these were written off

ratings and low realizations.

has entered into channel placement agreement with Hathway Cable & DatacomVenkat Sai Media Private Limited in FY11 and FY12 for the period covering Dec 10 to

11 to Nov12 respectively. However Company has charged off the total paymentCompany aggregating to Rs 4.3 crores and Rs 4.6 crores in FY11 and FY12the year of payment. Further c. Rs 18 lacs paid to Hathway in FY11 is pertaining

FY10. We propose a positive adjustment for the prepaid expense wrongly charged12 and negative adjustment of c. Rs18 lacs in FY10 .

uplinking charges of satellite INSAT2E. Company has changed the satellite from17 in FY12. During the shifting period, the Company had to pay uplinking cost for a

months for MAA TV and 2 months for Music , Movies and Gold channel for the old. We propose a positive adjustment for the same as it in the nature of one time

started accounting for subscription revenue from FY09. Balances recoverable fromto earlier years were written off in FY09 and FY10. Since these are in nature ofoffs and also do not relate to the revenues of period in which they have been

propose an adjustment to EBITDA

Draft

Adjusted EBITDA

6. ESOPs are beingearlier, the Company17 per share forconsidered appearsSony and hence an2.4 Cr and Rs. 3.6and 20% for FY12

7. Leave encashmentassuming salary incrementhistorically the increment13%. As we cannotadjustment for the

8. The Company hadairing “Cinema Sandadi”discontinued sincefor Main Channelother slot sales. Sinceadjustment to the reported

9. Represents the salary

Point of viewWe recommend SARI to consider the impact of the proposed adjustments to the reported EBITDA.

Adjusted EBITDACurrency: Rs Cr Notes FY09 FY10 FY11 FY12Reported EBITDA 11.8 24.1 28.1 48.2Reported revenue 76.9 102.1 125.1 172.5Reported EBITDA % 15.1 23.6 22.5 28.0Adjustements:Inventory amortisation

Programs / serials 1 - 8.5 0.6 2.0Movies - one time write offs 2 - - 0.1 1.5

Channel carriage fees 3 - (0.2) 3.0 0.1Uplinking costs 4 - - - 0.6Bad debts written off 5 0.9 3.2 - -

Non quantifiable adjustmentrsESOP costs 6 - - NQ NQProvision for gratuity 7 NQ NQ NQ NQAdjusted EBITDA (to the extent quantifiable)

12.7 35.6 31.8 52.5

Adjusted EBITDA % 16.3 34.9 25.4 30.4

Proforma adjustmentsCelcast revenue 8 - - (1.6) (2.1)COO salary cost 9 - (0.2) (0.4) - Source: Management information

Draft

offered to employees at an exercise price of Rs 15 per option. As discussedCompany has recognized cost based on intrinsic value of Rs 14.6 per share and Rs

Grant I and Grant II against exercise price of Rs 15. The intrinsic valueappears to be significantly lower as compared with valuation for the transaction with

an NQ adjustment. Indicative additional cost to P&L for FY11 and FY12 is Rs.6 Cr respectively (by discounting the current transaction price by 40% for FY11respectively).

encashment and gratuity actuarial valuation as at Mar09 till Mar12 has been doneincrement of 4%, and attrition rate of 8% (2% as of March 2012). However,

increment rate has been c.21% and attrition rate has been in the range of c.7% tocannot quantify the impact of these changed assumptions, we propose an NQ

same.

had entered into an agreement with Cellcast Interactive India P Ltd. for slot sale forSandadi” (morphed images program) in FY11. The arrangement has been

since Dec11. The per slot revenue from this program was relatively high at Rs 75kand Rs 60k for Music Channel, when compared to average of Rs 15k-20k for

Since the program was discontinued since Jan12, we have proposed a pro formareported EBITDA.

salary cost of vacant position of COO for a partial period in FY10 and FY11.

Point of view:

We recommend SARI to consider the impact of the proposed adjustments to the reported EBITDA.

Draft

Subscription revenue from MSOs is being recorded on collection basis. c. 8% of collections are made in cash. No material growth in Analog subscribers count in the last 2 years

Overall subscription revenue

� Subscription revenue fromindicate that collections have

� Management has informedfollow ups, improved relationspayments by the MSOs.

Collections made in cash

� Management informed that collectionsmade in periods prior to FYcollections mainly happen in

� Management indicated that theof the Company regularly followpayment of subscription feeimmediately be identified based

Subscriber count during historical

� Average monthly subscriberWe understand from Managementaccount of following:

� Management has notincreased from Rs 5 to

� Reduction on costs ofreach and acquiringMSOs.

Summary of cash collections

Collection from MSOs

Note: Amounts billed and collected indicated above are net of service tax

Currency: Rs lacs AmountJan12 11Feb112 11Mar12 21Total Q4FY12 42Prorated for FY12 169Total FY12 collection 2,199% of cash collection 7.7Source: Management information

Currency: Rs crores FY09 FY10 FY11 FY12Amount billed 14.9 15.9 19.2 19.4Amount collected 14.1 14.2 17.4 18.2% collection 94.7 89.6 90.4 93.6Source: Distribution Reports.x lsx

Draft

Subscription revenue from MSOs is being recorded on collection basis. c. 8% of collections are made in cash. No material growth in Analog subscribers count in the last 2 years

revenue collection

MSOs is being recognized on collection basis since FY09. Historical trendshave been in the range of 90%-95% of invoiced amounts.

us that improvement in collections in FY12 has been on account of aggressiverelations with MSOs and increase in channel strength in the market resulting in prompt

collections in cash have significantly reduced when compared to cash collectionsFY08 and that they continue to put in efforts to reduce cash collections. Cash

case of MSOs with small subscriber base and MSOs in non urban areas.

the possibility of any revenue leakage by distributors is very low as the employeesfollow up with the MSOs in case of shortfall in collections. Also in case of non

fee by an MSO the connection is deactivated and hence any pilferage wouldbased on discussions with MSO.

historical period

count was 26 lacs, 27 lacs and 27 lacs during FY10, FY11 and FY12 respectively.Management that the subscriber count has remained flat during historical period on

not negotiated for increase in subscriber count as the per subscriber fee wasto Rs 6 in Jan10 and further increase of Rs 3 is planned in Apr12.

of Optical Fiber Cable has resulted in large MSOs expanding their geographicalsmaller MSOs which in turn resulted in stronger negotiating power with these

Point of viewSARI should insist upon minimising collection in cash to minimize possibility of any revenue pilferage.

Draft

Internal audit and other matters

Internal audit� The Company has engaged

function. The internal audit

� Based on the sample reading

� The scope and coveragepayments, aging ofpayments, etc.

� The internal audit report

� Issues relating to oldinternal audit repeatedly

Management audit� The Company has appointed

procedures on certain specific

� In the last 2 years, the areasnew media, film acquisition

� We understand that Managementof the Management.

� Based on reading of sampleand extensive as compared

� Further, the Management auditreport.

Agreements with distributors

� MAA has appointed variousLCOs and collection of subscriptionof 5% to distributors in urbancollected by these distributors

� SARI is recommended to streamlineagreements in place.

Draft

engaged Rao & Ravi, an external firm of chartered accountants to perform internal auditaudit is performed on a monthly basis.

reading of the internal audit reports of FY12, we note the following:

coverage of transactions includes verification of cash and bank balances, statutorydebtors and creditors, purchase of movies/ serials/ programs and the related

report does not capture Management comments on the issues highlighted

old advances given by the Company and overdue creditors were highlighted in therepeatedly with no remediation plans.

appointed Praturi & Sriram, an external firm of chartered accountants to performspecific areas and report directly to the Management.

areas covered by the management includes advertisement revenues, digital andand utilisation, and G&A expenses.

Management audit is not conducted on a regular basis and is done based on the need

sample reports, we note that the coverage of these audits were much more operationalcompared to the internal audit.

audit reports had Management action plan regarding the issues highlighted in the

distributors

various distributors in Andhra Pradesh for the purpose of co-ordination with MSOs/subscription revenues. During the historical period the Company paid a commission

urban areas and 7.5% to distributors in other areas on the amounts actuallydistributors.

streamline the arrangements with all distributors and enforce upon having formal

Draft

Internal audit and other matters

Change in Control clauses:� The debt agreements

holding/capital structureDecoders and smart cards � Currently, depreciation

years. However, we understandConsequently these need

Reliance

� Sundry debtors as at Marto Rs 56 lacs, of whicha one time delay fromReliance has come underhas requested MAA for

Draft

Point of viewWe recommend SARI to:

- robus internal audit procedures covering all key areas is put in place on a go-forward basis

- ensure that formal agreements are in place in respect of the arrangements with all distributors.

- prior written permission is obtained from lenders before consummation of transaction

- accounting policy for decoders and smart cards is provided at 100% going forward

Change in Control clauses:entered by the Company require prior written permissions for change in share

structure of the Company.Decoders and smart cards – Fixed assets:

depreciation is charged by the company on decoders and smart cards over a period of 6understand that the cost of decoders and smart cards together is less than Rs 5kneed to be depreciated at 100% in the year of purchase.

Mar12 includes receivable from Reliance Big TV for subscription fee amountingwhich Rs 29 lacs is more than 60 days old. Management has informed us that this isfrom Reliance. As Star has changed its accounting year from Jun to Mar this year,

under unplanned pressure to clear dues to Star at year end and hence Reliancefor time to clear its dues. Management expects these dues to be cleared soon.

Draft

Transaction Foundations___________________________________________

Draft

Draft

Increased movie budgets in FY11 and FY12 has resulted in significant increase in movie library from

Movies categorisation� MAA categorizes its movies

� Maha movies: Movies

� Blockbuster movies: Movies

� Regular movies: movies

� We understand that from theincreased from Rs. 15 cr inlibrary significantly.

� Further, we understand thatdynamic. In the first year ofsubsequent years, it may be‘Maha movies’ is more a marketingbe aired in a particular year.coining a movie as a ‘Maha’

Breakdonwn of movies by costCurrency: Rs lacs MH BBM Others Total %0 - 25 - 2 546 548 80.5 26 - 50 - 2 34 36 5.3 50 - 100 - 13 24 37 5.4 100 - 300 3 20 15 38 5.6 300 - 500 8 6 - 14 2.1 > 500 8 - - 8 1.2 Total 19 43 619 681 100.0Source: Mov ie inv entory register

Breakdown of movies by validity period

Currency: Rs lacsNo. of

movies Cost% of

total cost0 - 5 123 714 3.3 5 - 10 104 5,629 25.8 10 - 15 80 4,896 22.5 15 - 25 39 959 4.4 25 - 50 31 342 1.6 50 - 75 16 51 0.2 75 - 90 3 8 0.0 > 90 285 9,209 42.2 Total 681 21,807 100.0 Source: Mov ie inv entory register

Maha movies3%

Blockbuster

Others91%

Movies count % by category

Draft

Increased movie budgets in FY11 and FY12 has resulted in significant increase in movie

into 3 different categories:

Movies with star cast of big heros.

Movies other than maha movies which are expected to be super hit.

movies other than maha movies and blockbuster movies.

the Management that the budgets for the movies have significantlyFY09 to Rs. 60 cr in FY12. This has increased the company’s movie

that the categorization of movies into ‘Maha-movies’ and ‘Blockbuster’ isof acquisition, a movie may be classified as a ‘Maha-movie’ and in the

be classified as a ‘Blockbuster’ movies. Management informed thatmarketing term which is used to describe the most latest movie which will

Further, the revenue potential of a movie also will be considered whenor a ‘Blockbuster’.

Blockbuster movies

6%

Maha movies35%

Blockbuster movies

29%

Others36%

Movies cost % by category

Draft

Average annual cost recovery in respect of the movies purchased between FY08 and FY12 is c.26%

� MAA TV amortizes movie

� 40% of the movie

� Remaining balanceevery subsequentis split equally over

� Movies rights renewed

� Table above representstelecast after Apr 2007.four years averaging betweenyear 5 for movies purchasedand certain movies purchased

� Table along-side presents

� (i) Maha and Blockbuster

� (ii) Regular and

The annual recovery trendhave followed similar trendappears to be consistent

Table 1: Movie realization by year of telecast (movies purchased after 01 April 2007)Revenue (relative to year of telecast) Revenue as % of cost

Currency: Rs crores Count Cost Y1 Y2 Y3 Y4 Y5 Y1 Y2FY08 31 5.3 0.9 2.0 1.8 2.1 2.5 17 38FY09 28 12.6 2.7 2.9 2.5 3.0 - 22 23FY10 23 14.6 5.0 4.8 4.2 - - 34 33FY11 49 43.9 12.0 11.0 - - - 27 25FY12 170 62.9 17.9 - - - - 28 - Total 301 139.3 38.6 20.8 8.4 5.1 2.5 28 27Source: Rev enue by mov ie telecast and mov ie inv entory registerNote: Y1 to Y5 are relativ e to the y ear of telecastTable 2: Maha and Blockbuster movies realization %

Revenue as % of costCurrency: Rs crores Count Cost Y1 Y2 Y3 Y4 Y5FY08 1 1.1 28 68 54 58 66FY09 3 7.2 22 25 24 29 - FY10 2 4.9 36 29 21 - - FY11 11 32.4 29 27 - - - FY12 20 49.4 27 - - - - Total 37 95.0 28 28 26 33 66Source: Rev enue by mov ie telecast and mov ie inv entory registerNote: Y1 to Y5 are relativ e to the y ear of telecast

Table 3: Regular and dubbed movies realization % Revenue as % of cost

Currency: Rs crores Count Cost Y1 Y2 Y3 Y4 Y5FY08 30 4.2 14 30 28 34 42FY09 25 5.4 21 21 13 17 - FY10 21 9.8 34 35 32 - - FY11 38 11.5 22 19 - - - FY12 150 13.4 34 - - - - Total 264 44.3 28 26 26 24 42Source: Rev enue by mov ie telecast and mov ie inv entory registerNote: Y1 to Y5 are relativ e to the y ear of telecast

Draft

Average annual cost recovery in respect of the movies purchased between FY08 and

movie cost on the following basis:

movie cost is amortized in the year of first telecast, and

balance is amortized over a period of 6 years, i.e.., 10% of movie cost is amortizedsubsequent year. If the period of movie right is less than 7 years, subsequent amortization

over the remaining period of movie right.

renewed are amortized on a straight line basis over the period of the contract.

represents the advertisement revenue earned from movies in each year for movies. As presented in the table, revenue generated has been consistent in the first

between 26% and 28% of purchase cost of movie rights. The revenue trend inpurchased in FY08 have shown a sharp increase primarily driven by movie ‘Stalin’purchased from Suresh Productions.

presents the advertisement revenue for movies split into two categories

Blockbuster movies and

dubbed movies.

trend for both the above categories have averaged between 26% and 28% andtrend of overall movies. This analysis indicates that the trend of movie realization

consistent across categories.

Revenue as % of cost Telecast count (nos) Average per telecast (Rs 000s)Y3 Y4 Y5 Y1 Y2 Y3 Y4 Y5 Y1 Y2 Y3 Y4 Y5

33 39 47 42 76 58 86 155 213 264 304 240 15920 24 - 54 54 83 145 - 506 545 296 207 - 28 - - 53 102 169 - - 952 472 247 - - - - - 115 255 - - - 1,040 431 - - - - - - 544 - - - - 329 - - - - 26 28 47 808 487 310 231 155 477 426 271 219 159

Draft

Average annual cost recovery in respect of the movies purchased between FY08 and FY12 is c.26%

28 27

26 28

47

40

10 10 10 10 0

10

20

30

40

50

60

70

Y1 Y2 Y3 Y4 Y5

%

Maha and blockbuster Regular and dubbed

Overall Amortisation rate

Source: Revenue by movie telecast and movie inventory register

� Based on discussions withamortization policy from 25years to the current policyadequately supported by revenue

� Chart along-side presentsthe various categories discussedtelecast and lower amortizationhistorical period.

� However, as noted from theconservative since there is

Draft

Average annual cost recovery in respect of the movies purchased between FY08 and

with the Management, we understand that the Management had changed the25% in the first year of telecast current policy and balance over a period of 8

policy in FY09. However, neither the earlier policy or the current policy arerevenue generated from telecast of movies.

comparison of amortization policy and average annual revenue trend fromdiscussed in the previous slide. The incremental amortization in the first year of

amortization in subsequent years are not reflective of the revenue trend in the

the cost recovery trends, the amortization policy followed by the Company isan accelerated charge to the P&L in respect of the movies acquisition cost.

Draft

Sources of Information

► The primary source of numbers for our analysis include► Audited financial statements of MTNL for FY09,FY10 , FY11 and FY12► Trial balance, groupings and schedules supporting the financial statements► Supporting documents provided to us by the management between April 9, 2012 and

April 27, 2012

► Representation from the management during various discussions. The representatives of the management with whom we interacted include:► Mr. C.Ramakrishna ► Mr. K Sai Prasad ► Mr. Ganesan Munuswamy ► Mr. Suresh M ► Mr. T.R. Somayajulu ► Mr. Singa rao ► Mr. J Sekhar

► We have not verified the above information or documents to any source or supporting documents or independently corroborated representations made by the management

► Accounting procedure and book closure► Company maintains its books of accounts in Tally accounting system.► We understand that the Company hard close its books on a quarterly basis

Draft

The primary source of numbers for our analysis includeAudited financial statements of MTNL for FY09,FY10 , FY11 and FY12Trial balance, groupings and schedules supporting the financial statementsSupporting documents provided to us by the management between April 9, 2012 and April 27, 2012

Representation from the management during various discussions. The representatives of the management with whom we interacted include:

Mr. C.Ramakrishna – Managing DirectorMr. K Sai Prasad – Senior VP ProgrammingMr. Ganesan Munuswamy – AVP Sales and marketingMr. Suresh M – Senior General manager Distribution and eventsMr. T.R. Somayajulu – VP FinanceMr. Singa rao – General ManagementMr. J Sekhar – Chief Executive officer

We have not verified the above information or documents to any source or supporting documents or independently corroborated representations made by the management

Accounting procedure and book closureCompany maintains its books of accounts in Tally accounting system.We understand that the Company hard close its books on a quarterly basis

Draft

Significant accounting policies

Revenue► Advertising income and broadcast fees are recognised when the related commercial or

programme is telecast, and► Subscription income from DTH service providers are recognised in the period during which

service are rendered and is subscription fees.

Inventories► Inventories of raw stock (tapes and cassettes, etc), television programs under production,

stock of television programs, movie rights, serial rights, events etc are valued at cost, Movies amortisation► Movies purchase costs are amortised on the following basis:

► 40% of the movie cost is amortized in the year of first telecast, and remaining is amortized over a period of 6 years, i.e.,10% of movie cost is amortized every subsequent year. If the period of movie right is less than 7 years, subsequent amortization is split equally over the remaining period of movie right.

► Movies rights renewed are amortized on a straight line basis over the period of the contract.

Fiction / non fiction content amortisation► Fiction / non fiction content purchase costs are amortised fully in the year of telecast.

Depreciation / amortisation of fixed assets and intangibles► The depreciation policy followed by the Management for key assets is summarized in the table

along-side.Retirement benefits► Contribution to defined contribution plans (provident fund ) are charged to the Profit and Loss

Account of the year when the contributions to the funds are due. ► Provision for gratuity and leave encashment has been provided based on actuarial valuation

made by qualified actuary at the end of each financial year.

Rates of depreciation / amortisationEstimated

Useful LifeDecoders 4 yearsSmart cards 6 yearsEditing equipment 8 yearsLighting equipment 4 yearsComputers & Accessories 4 yearsLogo charges / software licences 5 years

Depreciation rates

Draft

Advertising income and broadcast fees are recognised when the related commercial or programme is telecast, andSubscription income from DTH service providers are recognised in the period during which service are rendered and is recognised on collection basis in respect of the Analog subscription fees.

Inventories of raw stock (tapes and cassettes, etc), television programs under production, stock of television programs, movie rights, serial rights, events etc are valued at cost,

Movies purchase costs are amortised on the following basis:40% of the movie cost is amortized in the year of first telecast, and remaining is amortized over a period of 6 years, i.e.,10% of movie cost is amortized every subsequent year. If the period of movie right is less than 7 years, subsequent amortization is split equally over the remaining period of movie right. Movies rights renewed are amortized on a straight line basis over the period of the

Fiction / non fiction content amortisationFiction / non fiction content purchase costs are amortised fully in the year of telecast.

Depreciation / amortisation of fixed assets and intangiblesThe depreciation policy followed by the Management for key assets is summarized in the table

Contribution to defined contribution plans (provident fund ) are charged to the Profit and Loss Account of the year when the contributions to the funds are due. Provision for gratuity and leave encashment has been provided based on actuarial valuation made by qualified actuary at the end of each financial year.

Draft

Disclaimer

This presentation pack necessarily represents only part of the informationwhich we considered to be most relevant to our understanding of your needs,

The information in this presentation pack will have been supplementedshould be considered in the light of this additional information.

If you require any further information or explanations of our underlying work,

The information in this presentation pack is confidential and contains proprietaryprovided to anyone other than the intended recipients without our written

Anyone who receives a copy of this presentation pack other than in thethe first two points above, and that we shall not have any responsibilitycontained in this document.

Draft

information which we considered in carrying out our work, being thatneeds, in the light of this engagement.

supplemented by matters arising from any oral presentation by us, and

work, you should contact us.

proprietary information of Ernst & Young. It should not bewritten consent.

the context of our oral presentation of its contents should noteto anyone other than our client in respect of the information

Thank youThank you

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