UMP Plc: Investing in Bollywood II

August 21, 2008 at 12:01 am

UMP Plc is is an Indian media and entertainment company with global operations. It is involved in producing films in Hindi and other Indian regional languages, in co-producing with Hollywood, in animation and gaming, as well as in global distribution through various networks and across platforms. It is the company behind recent box office epic hit Jodha Akbar (2008), the acclaimed Rang De Basanti (2006), Mira Nair’s America-set The Namesake (2006) and M. Night Shyamalan’s most recent offering The Happening (2008). The driving force behind most projects of is producer and company director Ronnie Screwalla, one of India’s film entrepreneurs that has been enjoying high profile internationally, even if with occasional controversies involved.

Registered on the Isle of Man, the UMP Plc is the holding company of UTV Motion Pictures (Mauritius) Limited and related to the Mumbai-based UTV.* It floated about 23% of its value on London’s AIM in July 2007 with the ticker UTVM, trading in US dollars. With shares priced at US $2.90 each, the IPO raised capital of US $70 million gross (US$65.7 million net); it allowed the company to reach market capitalization of $302M. The company then changed its name to UMP Plc. in February 2008.

Prior to the AIM admission, UMP was the wholly owned subsidiary of UTV Software Communications Limited (UTV India), a media and entertainment company with interests and subsidiaries in the US, UK and South-East Asia engaged in TV content production, motion pictures, interactive (animation & gaming), broadcasting, advertising production, multi-language dubbing and post-production.

According to Investors Chronicle (January 2008), house broker Jermyn has forecast cash profits before tax of £21m for full-year 2008, and predicts compound annual growth of 40 per cent up to 2010, with a target price of $4.50. A more recent IC article (14 August 2008) is also optimistic, listing several bull points for UMP: high-growth Indian film industry; strong industry relationships, and successful overseas expansion. The bear points, however, include the lack of financial history and tightly held shares.

Having traded now slightly over a year, UMP Plc.’s shares have moved between $3.50 and $1.85 at their lowest point, and at the moment of this writing are at $2.25. The market capitalization in August 2008 is at $263.34M, with 117.04M shares outstanding. The Highlights of the company’s first and only so far Annual report (2007-2008) set the revenue at $40 million, the net profit after tax at $16 million, and the EPS at 0.158.** The statement on shareholding indicates that 77% of the 104,137,931 shares are owned by Promoter and Promoter Group while public shareholding stands only at 23% (24,137,931). Of these, the largest public shareholders include Amoeba Capital Asia Fund 3,448,276 (3.3%) and Deutsche Bank AG, London (3.3%). In addition, during the company’s annual meeting in August 2008, a Special Resolution was passed, which authorizes the directors (without the need for further sanction) to allot and issue up to 21,000,000 ordinary shares of US$0.05 each to such persons and on such terms as they think fit and to grant options to various persons performing services for the benefit of the Company; an arrangement that is to be revisited at the next annual meeting.

Like other Indian players, UMP is working on expanding its interactions with Hollywood, and it has done quite well so far. They have clearly shown that they do not intent to stick to the Bollywood recipe; the general pattern in their work so far has been to make Western style pictures while capitalizing on connections with the large Indian diaspora (writer Jhumpa Lahiri, directors Miar Nair and M. Night Shyamalan, etc.) It has acquired rights to distribute Miramax’s library in South East Asia. Building on the recent success of films such as Jodha Akbar, UMP claims to be among the top 20 distributors operating within the US. They also claim to be the only Indian studio to have projects with major Hollywood studios. Indeed, they co-produced Mira Nair’s The Namesake (which was distributed internationally within the art house circuit) with Fox Searchlight and, with 20th Century Fox, M Night Shyamalan’s The Happening (2008) starring Mark Wahlberg in which UTV reportedly invested over $27 million (about half of the film’s $57M budget). The Happening was hyped up as the most high profile Hollywood co-production by an Asian studio but on release it was considered to have underperformed in comparison with other Shyamalan films (it still made its budget two and a half times over). Most recently, UMP was engaged with the production of a low-budget Hollywood film ($2 million), Ex-Terminators, a Texas-based dark comedy starring actress Heather Graham. There has also been talk of an agreement with Hollywood actor Will Smith’s Overbrook Entertainment to produce two more Hollywood films. Having also co-produced Chris Rock’s I Think I Love My Wife (2007), the UMP are clearly prepared to move on to become a Hollywood player.

Besides Ronnie Screwvala (50) who is also the founder of the UTV Company, UMP’s other directors include Andrew James Carnegie (44) a specialist in corporate finance and CEO of the media advisory firm India Media Partners Ltd, Charles Vanderpump (58) a financial specialist who acts as a director of various Isle of Man-based companies, and the CEO Siddharth Roy Kapur (33) who has prior experience in advertising, marketing, PR and corporate communications from Newscorp’s Star Network television operations in India, Middle East and Hong Kong. Carnegie and Vanderpump are also on the board of directors of UTV Mauritius, and hold respectively 90,000 and 10,000 shares in UMP.

So what is my two minutes narrative on what I think of UMP as a possible investment? Hmmm… On the one hand it looks promising. It is a company that clearly aims to expand by going beyond the narrow Bollywood niche and seeks to enter more dynamic relations with Hollywood and diversify. Energetic Ronnie Screwalla is most likely a plus. Unlike the IFC, the UMP is clearly looking beyond the typical Bollywood formula for entertainment, and thus it has better chances for growth.

On the other hand, however, the lack of transparency is staggering. The volume at which this stock is traded is small, with little liquidity. The target price of $4.50 sounds over optimistic to me. The authorization to issue a 21 million extra shares at a fraction of the share market price is worrying, it would likely impact the capitalization and the cashflow. A search for Indian Media Partners on the Internet produces only a log-in portal with no public information or an accessible site whatsoever. Less than 25% of the shares are publicly traded, which means that shareholders have next to no say in the affairs of the company and cannot possibly influence the way it is run.

Unlike the Indian Film Company the shares of which have never risen beyond the price of their IPO, the UMP has seen a rise of $0.60 or nearly 22% at their highest point. On the other hand, UMP’s EPS after a year of trading stand at $0.158 which compares negatively with the EPS reported by the IFC at 3.56p. But at the end of the day, it comes down to accountancy standards, and it is difficult to judge where only one annual report is available for each company so far. Neither company pays dividend.

According to information from Investors Chronicle’s, UMP comes out ahead of other Indian film related companies due to its advancement in diversifying its operation, and this indeed may be the case. Over a year the shares have made a loss of -23.5% ($2.95; -$0.68) but there have been shorter term gains of +8.10% over 3 months ($2.10 ; +$0.17) and of +4.37% over 6 months ($2.17; +$0.10). This suggests that if timed correctly, an investment in UMP could be profitable. Only it is difficult to say what impacts the timing for purchase into this company, as there seems to be no clear link between their films and the share price: the shares have tumbled by more than 35% precisely during the period when their most profitable film up to date (Jodha Akbar) was enjoying the biggest ever release given to an Indian film in February 2008.

Thus UMP may be a good purchase for insiders who would get the tip when to buy but not for retail investors.

© Dina Iordanova
21 August 2008

* Related companies: UTV Motion Pictures (Mauritius) Limited is an India-based global movie operation which was incorporated in the Republic of Mauritius on 12 October 2004 and houses the movie production business of the entire UTV group. UTV-Mauritius initially carried on the business of movie distribution in regions outside North America, UK and India; however, it has recently acquired the rights to exploit Bollywood, Hollywood, Indian regional language and animation movies throughout the world. The Mumbai-based operation, UTV India, began as a television content company in 1990 and has developed into an integrated entertainment content production and distribution company with three business streams: content (movies and television), new media (animation and gaming) and broadcasting. It is an established corporate entity in Indian movie making and it is listed on the NSE and the BSE. In the financial year ended 31 March 2006 it had gross revenues of Rs 2,130 million (approximately $48 million).

** According to the IC’s January 2008 article, the meantime, UMP expects to generate $250m in gross box office revenues in the 2008-2009 financial year.

The Indian Film Company (IFC): Investing in Bollywood I

August 6, 2008 at 10:39 am

I believe that the market for Indian film is significant and have been interested in investing in some of the companies that recently listed at AIM in London. When I tried to research, tough, I realized that most of the writing I see on these companies seems to be done by financial journalists who have very little knowledge of (nor interest in) the actual product that these companies produce/distribute and almost no understanding of the dynamics of the specific market for this type of filmed entertainment. Quite often I found myself disputing things that journalists claimed, simply on the basis of my closer familiarity with Bollywood product and my interest in the transnational exposure of this cinema over the years. This made me to want to carry out my own scrutiny on the publicly traded companies, a matter on which I am planning to write a series of articles, especially as I see that the coverage on these matters is on the increase with new developments that bring Hollywood and Bollywood closer together.

Today I am looking at The Indian Film Company.

The Indian Film Company seems to have been created especially for the purposes of trading at LSE’s AIM market, where it listed in June 2007 for an IPO placed at 100p, which allowed it to raise about £55 million (£53mil. after adjustments). Since then prices have been moving between 93 and 44p. The current market capitalization is below £30m and the stock sells at 52.7 p on August 6.

Akshay Kumar and Katrina Kaif in Welcome.

The company, which is engaged in film production, is registered in Guernsey and has subsidiaries in other off-shore heavens such as Cyprus and Mauritius (Film Investment Managers Ltd). Chairman is well-known Bengali film director Shyam Benegal and CEO is Sandeep Bhargava. Over 21% of the shares are owned by 47-year old Raghav Bahl, one of the company’s directors and an Indian media mogul, linked to Network 18 and Studio 18. The IFC is part of a complex conglomerate of companies: It is linked to Viacom 18, a joint venture with Sumner Redstone’s Viacom (VIA), which has been in in existence since May 2007. The other arms are Network 18, a conglomerate of media and filmed entertainment companies, and the film-focused Studio 18. The company does not have employees but outsources all the work. It seems that they mostly have investment in production (with a portfolio of just below 20 films) and not so much stake in distribution.

The catalogue of Studio 18 includes several blockbusters, all starring the up-and-coming megastar Akshay Kumar (who the IFC does not appear to hold on a contract), often relying on the interest in stories involving cultural transplantation between India and the West. Their first hit was the jingoistic Namastey London (2007), followed by box office hit Welcome (2007), which climbed up to a third place on the list of top-grossing Bollywood films last year. The much-anticipated Singh Is Kinng (2008), co-produced with Australia, is about to open on 8 August 2008 and promises very good box office potential, with significant hype created in advance.

IFC’s first annual report was released on July 24, 2008 and is available from the company’s web-site. It reveals that the main planned area of activity is to acquire, co-produce, or produce more of the same type of films and keep exclusive worldwide distribution rights to these. The reported revenues for the first year are £11.45 million, the profit – £2.18 million, the EPS – 3.56, and the P/E – 21.8.

The company’s own estimate of the size of the Indian film market worldwide is at £1bn annually, growing at 16% per annum.

Investors Chronicle covered the IFC twice. In January 2008 it made a recommendation for a speculative buy, when the price was at 76p, but then later in the year, in July, the same analyst said that shares were actually fairly priced at 60p. At the moment of this writing shares are at 52.70 (August 6).

In assessing the IFC, I could not help remembering Peter Lynch‘s recommendation to try to come up with a two minute-long narrative on the reasons for which you would like to buy into a certain company. In this particular case, I could not really deliver a narrative which would make a convincing case for buying into the IFC. My narrative contained more reservations than exciting promises. The company is mostly engaged in production, it is not clear how they relate to the major distribution players in a field where it is distributors and not the producers that call the shots. The films that the IFC is engaged with are films of blockbuster potential yet they are also films of limited appeal as they are typical products of formulaic Bollywood that is yet to be seen crossing over and capturing audiences beyond NRIs (Non-Resident Indians). Thus while the market may be sizable, it is also self-contained, and it is highly unlikely that these films would sell successfully in territories without substantial Indian diasporic presence. It may well be that with the release and potential success of Singh Is Kinng we will see a temporary leap upwards in share price. But on the long run I see investing in this company as a risky proposition.

© Dina Iordanova
6 August 2008

Short Selling Getting Center Stage

June 21, 2008 at 12:13 am

The practice of short selling and spreading rumors in order to boost better returns and the effects caused by invisible short sellers is in the media more and more often in recent months. It has become almost a fixture on the pages of Financial Times, for example.

Back in March 2008 it was the banking sector. It was front page news in financial publications and even made it through to mainstream news on the BBC. The banking sector was badly hit by a sharp decline in share price, followed by fluctuations that seemed to have gotten out of control (and which were explained with the moves of short sellers). The sell off was attributed to a panic created artificially by short sellers who reportedly spread rumors about an impending crisis at certain banks, which made the share price plunge down. The short sellers (and, alongside, all those watching the markets closely) then picked up shares in the companies they had ruined on the cheap (there was frantic buying into the same banks just a few days afterwards, just about the time that the short sellers would have committed to buy). It was reported that the practice was to be investigated by the FSA (which is still on the case, as more and more instances of massive short selling moves keep coming about).

More recently, in June 2008, similar fluctuations occurred with the housebuilding companies in Britain. A 13 June 2008 article entitled Wild Fluctuations at Housebuilders in the FT opens with the observation:

Speculators, short-sellers and market rumours were held responsible for wild swings in housebuilders’ share prices on Thursday, with Barratt Developments gaining ground for only the second time in four weeks.

The swings were so hectic, that dealing into shares (which moved 50 points up and down within a single day) was even suspended for a short while, so that the computing systems could cope with the amount of trades going through. The article is illustrated with an extraordinarily choppy chart of the intra-day movements in Barratt’s (BDEV) price on June 12th, showing such drastically swinging movements that the chart could be used as a teaching tool for day traders.

“This isn’t a case of fund managers suddenly liking the stock,” according to Will Duff Gordon of Data Explorers, which monitors short-selling interests. “The moves come from short-sellers taking profits while they can.”

The ‘short sellers’ are invisible. Even though the people who attribute the problems of various banking or building companies stock to the behind-the-scenes activities of short sellers, do not name names — rather, the say, it is known who the ‘culprits’ are. The interesting issue is that lately the short selling theme is taking the shape of a morality discourse, and there will be more to come as the tendency seems to be toward making it morally unacceptable. Morality, however, does not have a straightforward place in the rational world of finance, so they want measures that would regulate and probably even outlaw it.

Short selling is usually the domain of those in the know. Ordinary novices like myself still stick to the idea that in order to sell something, you would need to have bought it first. Not so, apparently, as when you ‘short’ you do not need to owe what you sell, and you do not even need to put up the money for this virual transaction until a later point in time when you need to ‘buy’ what you have ‘shorted’. A very different concept from the one of prudent buying low and selling high. It is more about boldness and daring speculation, as we learn from the interesting chatty City Slickers: Make a Million from the Declining Market by Anil Bhoyrul. This cheaply published paperback is not a book that will make you a significantly better investor, it is not analytical enough. But it is an interesting glimpse into the reality of short-sellers, into the daily life of the City, and into the behavior of day traders. And these are things that are worth knowing more about, especially as for people like myself, in the absence of the ‘mastermind circle’ recommended by Andrew Carnegie and Napoleon Hill, investing is a lonely pursuit. Mr. Market, in Benjamin Graham’s terms, may be the temperamental guy whose mood swings we never come to fully understand or predict. Not so, however, when one reads Bhoyrul’s book: helps to get to know at least one of Mr. Market’s aspects — the logic of the ‘moods’ related to short-selling frenzy.

© Dina Iordanova
21 June 2008

Game and video rental stock overview

June 5, 2008 at 12:10 am

At the beginning of the year, Fortune magazine was recommending the stock of Electronic Arts (ERTS) as a secure bet. It was clear that the games market will sustain growth, but it was difficult to say which company precisely will do the best — there are some Japan-based that seem to be doing very well (Konami, Nintendo), and there are a range of others, like Take Two (TTWO), THQ Inc. (THQI), and so on.

I put my bet on Activision Inc. (Nasdaq: ATVI), and for now things are going really well. It went up from $27 to a point near $34, a nearly 25% growth within about a month. Their forthcoming merger with the French Vivendi (VIV), who own Blizzard, and the ever popular World of Warcraft franchise, got the approval of the European bureaucracy, so this is going ahead and may bring even further growth.

Electronic Arts (ERTS) is down about $10 since the beginning of the year (from $58 to $48 at the moment of writing), THQ Inc. (THQI) is down from $28 to about $21. Take Two (TTWO), however, is up $10, from about $17 to about $27, which makes it the leader in the sector as this is a growth of over 50% year to date.

Netflix (NFLX), another company that is on my watch list (as I believe the DVD by mail rental market still has the potential to grow for the time being), has not gone up very much by now. It started the year at about $27 and gradually rose up to nearly $40 in April, to then drop down to about $30 where it still lingers.