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Bollywood breaks loose

Until recently, private equity firms have shied away from investing in the Indian media sector – it was heavily restricted by regulations on foreign investment and was an untidy and disorganised sector. VG Kulkarni of the Asian Venture Capital Journal discusses the sector's phenomenal growth and the opportunities now abounding.

The first Lord Thomson of Fleet Street once said: 'Owning a TV station is a license to print money.' That was a couple of generations ago when television hadn't quite come of age and Marshall McLuhan's 'Global Village' was still a distant vision. 

In today's totally wired world, media moguls such as Rupert Murdoch and CNN's Ted Turner (in the new incarnation of AOL Time Warner) call the shots. Although they still have to hassle with government regulators, global media plays have become an entrepreneurs' and deal-makers' arena.

Even in the remote parts of India, villagers watch MTV's gyrating pop-stars, Star TV's soaps and Bollywood movies. And the newsstands on urban sidewalks are full of Western magazines, not to mention the plethora of native life-style and other popular periodicals. ‘Seven out of the top ten global entertainment companies are active in India,' says Rajesh Jog, Managing Partner of Mumbai-based Waygate Capital.

For these global players, TV is the chosen medium; its growth in India has been nothing but phenomenal. From barely two state-owned Doordarshan channels until a decade ago, the TV scene has mushroomed to a whopping 100 channels. While private TV channels have proliferated, the revamped Doordarshan with its nationwide reach and several channels continues to command about 60 per cent of the audience. But the rise of private channels, particularly cable TV, is likely to be the real growth story for coming decade.

The growth of TV has also mirrored the rise in the Indian media sector in general, including cable TV, print, film, radio, animation and music. The media sector, which had a turnover of under $2bn in 1995, has grown to about $5bn today and is set to rise to an estimated $14bn by 2005, according a study by Mumbai's Economic Times Intelligence Group (ETIG).

So far, much of this growth has been fuelled mainly by domestic investment, with foreign participation making minor contributions and foreign private equity lagging way behind. Reason: it was only a few months ago that the Indian government lifted most of the restrictions on foreign investment in TV and films. Foreign investors who had found entry points even before the restrictions were removed are likely to be more interested from now on, says Jog, who has been actively promoting private equity in the sector.

Shall we dance? Fine, but with who?
Although the Indian media is obviously hungry for capital, the prime reason holding back foreign interest so far has been the state of the industry itself, which in Indian parlance is an ‘unorganised sector' - the players are too many, most of them small, and hardly any of the thousands of media businesses are listed on the country's equity bourses.

Of the 46 mostly small media stocks listed on the Bombay Stock Exchange, fewer than half are actively traded, says Ronnie Screwvala, CEO of UTV, an unlisted but diversified media company involved in TV content, movies and animation. ‘For researchers and industry analysts, the situation is a statistician's nightmare,' chimes another industry insider. (All the same, 20 of the major listed media stocks have outperformed the Sensex index in the past two years, according to Waygate Capital.)

For some peculiar reasons, even the Indian government does not record foreign VC or private equity investments as foreign investment, nor does it include foreign subsidiaries' retained earnings as foreign direct investment (FDI). For instance, Murdoch's Star TV has invested some $200m in its Indian cable TV operations but that's not shown in the Indian FDI statistics. Similarly, of its $273m Asian operations, Star TV is known to derive $200m in ad revenues from India. As these ads are booked abroad, they are not accounted for in India.
Some VC/private deals in Indian media this year recorded by AVCJ's research are:

• CDP Asia, the Canadian government's pension fund's Asian private equity arm invested $102.4m in Sony   Entertainment Television, the sole Japanese investment in Indian TV.

• Warburg Pincus and other VC funds invested $20.2m in Zee Telefilm's, the country's largest listed media group. (Zee's market cap is $1.1bn)

• CDPQ, Canada's Quebec provincial pension fund bought 30 per cent of UTV for $9.41m, bringing its stake to 33 per cent. (Other investors in UTV are: NewsCorp 17 per cent; institutional investors including Mitsui of Japan, IL&FS/ IVC and Century Direct Fund ten per cent; the company's promoters 40 per cent). UTV's CEO Screwvala is mulling a stock exchange listing: ‘Say, in a couple of years or so when the time is right.'

• Undisclosed foreign institutional investors snapped up 10.1 per cent of Balaji Telefilms for $13.3m.

• A $2m investment by GE Capital Mauritius in TV Today Network, headed by Aroon Purie.

ETIG researchers estimate that between 1999-2001 about  $35m were poured in by foreign VCs into Indian media firms.

Shubham Majumdar, Media Analyst at Motilal Oswal Securities, points out that foreign interest in media has been lagging because of the fragmented nature of the sector. As the foreigners realise the growth potential, they will come in, he adds.

Popcorn profits: Bollywood cleans up
Feature films are another area of burgeoning growth, poised to record a 21 per cent CAGR during 2000-05, to a turnover of $2.1bn by then. After all, Bollywood has for long been the largest producer of feature films in the world.

Until about a decade or so ago, Bollywood had a rather unsavoury reputation. Most of its funding used to come from men of untaxed wealth. Film distributors and the thousands of owners of cinema houses were also adept at keeping the taxman at bay. Matinee idols demanded mega-payments in cold cash. And it was not uncommon for income tax enforcers to do highly publicised raids to confiscate hidden hordes of cash and jewelry from movie stars' homes.

But that is a thing of the past. The films business is corporatising in a big way. Account books have become (more) transparent. (For instance, the producers of the recent blockbuster movie Lagaan, the first Indian film to be nominated for an Oscar, made all their payments by check ,says an industry insider.) Exports have grown thanks to the rising milieu of expatriate Indians in the West and because export income is free of tax in India.

Last year, the Indian government granted the movie sector an official ‘industry' status, enabling it to obtain finance from banks. The Industrial Development Bank of India (IDBI) has committed Rs 635m to seven Bollywood companies. Reputed business houses such as Tata, United Brewery and Escorts among others, have announced plans to enter the feature film business. AOL Time Warner is poised to start movie production in India. ‘Some other foreign houses are considering to do likewise,' says Jyoti Jaipuria, Head of Research at DSP Merrill Lynch in India.

With its accounting act cleaned up, the feature film sector - which has always reeked of money - is unlikely to face a capital crunch. Another lucrative media segment is animation, which could see a CAGR of 55 per cent to 2005. With the backing of skilled and low-cost Indian talent, animation is a pure export play of much interest to foreign investors. ‘Animation firms tend to be small and the successful ones will be those who develop client relationships abroad and deliver on time,' comments UTV's Screwvala, whose firm is a leading player in animations.

‘But the real big investments are likely to be in the satellite and cable TV,' predicts Kinjal Mehta, Senior Manager of Research at ET Intelligence Group. Her research outfit envisages investment in at least six or seven satellite uplinking stations in the next few years at a cost of $20m. More important is cable TV, which has consolidated itself into a few major networks. According to Mehta's estimates, the cable TV segment needs to spend close to $1.2bn ‘for last-mile connectivity and to offer various internet and pay-per-view solutions for pay-TV.'

Waygate Capital's Jog expects between 22 per cent and 27 per cent CAGR for media sector. The worst-case scenario could be about half of that. But even at the low end, there is plenty of scope for investment growth and opportunity for foreign and domestic investment in the Indian media sector.

Copyright © 2002 AVCJ

VG Kulkarni is a journalist with the AVCJ.

This article first appeared in the Asian Venture Capital Journal, September 2002.