Technofunda Opportunity- Balaji Telefilms CMP 68, A 1:5 Risk Reward Trade

June 16, 2020

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Strategic Alpha

This is what I shared with my JV Partners some 6 Month Back when Balaji was Hovering around 50 Odd.

Balaji Telefilms- A Low-Risk Opportunity in digital media space

Balaji Telefilms owned by Shobha Kapoor and Ekta Kapoor. They had a good few years earlier but they did some mistakes and they ran out of money and the company went into losses.

Now the realized their mistake in 2016 that they have misallocated the funds and of this continue like this then we will once go bankrupt. They closed down many ventures and reduced the burden and Ekta Kapoor started focusing on Alt-Balaji which is similar to Amazon Prime or Netflix. In 2017 end I came to know about this story, but I was not convinced that they can beat Netflix, and Hotstar share price was around 170 then and I dropped this idea of buying this stock.

As expected soon they started burning cash in Alt Balaji, but the platform was being built with their in-house content.

Reliance industries at the same point of time entered the Telecom space through JIO and as Mukesh said Data is New Oil. Now they wanted to own every bit from data to content to have a Monopoly in the future. They bought a stake in Tv18. They have invested 4000 Crores in Tv18, for a company that has invested 1.8Lakh crore in Telecom 4000 crore is nothing.
At some point in time, Balaji Telefilms was running out of cash and Mukesh found it, he saw a big opportunity here. Reliance Industries bought a 25% Stake via a preferential issue in Balaji Telefilms at Apx 400Cr at 140 RS per share.

So Equity got diluted for Balaji Telefilms and Promotors Kapoor Family now owns 34% and reliance industries own 25%.
All Cash that they received they invested in liquid funds and used only when required for scaling Alt Balaji. The deal took place in mid-2018.
Management of Balaji Telefilms was confident that it will require 2 years to break even for Alt Balaji. The company was doing a loss earlier.

Just today I was seeing all the results of many companies and I stumbled upon Balaji Telefilms also, because as I had already researched about them a lot some 3 years back. I was stunned to see the progress in the past few quarters it posted a quarterly profit of 14Cr.

Now current Marketcap is 540Cr Apx and Cash in mutual funds are around 260 Cr. It has become a debt-free company already. So Enterprise value is just 280Cr so we are getting the whole company at a 60% discount to what Mukesh Ambani paid.

I would have not been interested if Mukesh wasn’t backing this story, not for Mukesh also. But now Jio has an active customer base of 35Cr with nearly all smartphones.

So now Alt Balaji is not to be worried about the promotion of its content and app.

[2/13, 3:01 AM] StrategicAlpha: Reliance Industries made a bold bet in the content business on Thursday, by picking up a 24.9% stake in TV and film production house Balaji Tours for Rs 413 Cr.

This follows the company’s acquisition of media company Network18 for around Rs 4,000 crore in 2014.

The key factor in this deal appears to be digital video production. In April, Balaji Telefilms had launched a subscription-based video-on-demand service called ALT Balaji. The service went live with a line up of 8 original shows and has introduced a few more shows in the following months.

The company said it plans to use the funds raised to “speed up its content development, especially for ALT”. Here are some implications from the deal:

Original content investment

In April, ALT Balaji CEO Nachiket Pantvaidya had said that they would be expanding the show lineup from 8 to 32 original shows this year and had committed a budget of Rs 50 crore.

“We are looking to launch 30 to 35 shows. Besides Hindi and English, we have also shot a show in Tamil, one in Punjabi is being shot right now and we have two concepts in Bengali that are in the works,” said Pantvaidya

However, creating content at such a scale would’ve needed a significantly large budget. Also, for a service that depends entirely on subscriptions, it’s critical to have a good lineup of original exclusive titles that will get people to purchase paid subscriptions since licensed video content eventually gets commoditized after a period of time.

In Reliance, Balaji Telefilms now has a deep-pocketed strategic investor that will help them create original content for ALT Balaji at scale with better budgets. It will also get some room to take riskier bets and develop more expensive & high-quality original titles.

An improved content lineup will also help Balaji gain a better standing against rivals Hotstar, Netflix and Amazon Prime Video who are also aggressively ramping up their content spend in the country.

What does Reliance get?

From Reliance’s perspective, the conglomerate will get access to one of Asia’s largest production house along with a steady stream of original content developed by them, which can be used by Reliance’s telecom & digital services venture Reliance Jio.

Note that Reliance Jio already has a free video on demand app in the form of Jio Cinema and a live TV streaming app Jio TV which has already broken into the top 10 Android apps in the country.

The telco will also benefit from the increased uptake of video content that will result in more data consumption on its network leading to subscribers eventually opting for higher-priced data plans.

Source: ET
[2/13, 3:07 AM] StrategicAlpha: In 2008 Balaji Telefilms Company made an OPM of 36% And Net Profit of 90Cr.

Just imagine in the next 5 years from now with Alt Balaji they can easily do an OPM above 40% and Sales of 2000Cr+, net profit possibility of equivalent to the current Marketcap of the company.

Stock is a Potential 20 Bagger.

It’s a Low Risk, Low uncertainty Opportunity now.

I have already put this in my vision 2025 basket.

Prospects at an all-time high, and Price at 10 year low.

Excellent, I couldn’t have got such a great opportunity.

And just that u know, it’s not that I am talking after a few hours of research, some 2 years back I did complete research but that time I was not convinced. I am now convinced because Alt Balaji has broken even and they are a profitable company now plus reliance on Jio connection with them is giving me big confidence.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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