Sea TV,Network

Sea TV Network has entered the capital market on 27^th September 2010 to raise Rs. 50.2 crore via a fresh issue of 50 to 56 lakh equity shares of Rs.10 each, depending on the price discovered. The issue, priced in the band of Rs. 90 to Rs. 100 per share, constitutes 41.8% to 44.3% of post-issue paid up capital of the company. The issue closes on 29^th September 2010.

The company provides Multi System Operator (MSO) services to various local cable TV operators in Agra, Uttar Pradesh. It is one of the three existing MSOs in Agra. Although it has a network of 150 franchisees, its operations are restricted only to Agra alone. Besides this, it also has its own local channels, programmes of which are produced by its own production team, which are broadcasted free of charge to the TV subscribers.

The company is a very small local (not even regional) player, trying to grow bigger, by taking a big leap. It plans to raise funds to finance its massive expansion plans, to set-up:

1.       Complete digital head end and network for implementation of Conditional Access System (CAS) worth Rs. 27.5 crore

2.       20 branch offices in Agra with investment of Rs. 15.55 crore

3.       Own cable distribution network worth Rs. 6.56 crore

4.       IPTV solution network for Rs 5.3 crore

However, these costs seem to be over-estimated. For instance, establishment cost of Rs. 77.75 lakh per branch office, measuring 750 square feet, seems very high, despite the capital intensive nature of the business.

The company's IPO has been graded 1 on a scale of 5 indicating 'below average fundamentals'. Such a poor grading is a very rare occasion, a first even in this very busy IPO season! For FY10, it reported operating income of Rs. 9.3 crore and PAT of Rs. 1.5 crore. On equity of 7 crore, its net worth, as on 31^st March 2010, stood at Rs. 9.8 crore while debt was Rs. 7 crore. Post issue, promoter holding will decline to about 56-58% from the present almost 100% holding.

The company operates in a highly competitive industry, as can be seen from its rising debtors. As on 31^st March 2010, debtors were Rs. 6.6 crore, representing about 260 days or 8.6 months of sales. Entry of a new MSO in the market in November 2008 forced company to increase the credit period it offered for advertisement and carriage fees from 3-4 months to almost 6 months. This only indicates the pressure on collections as well as adds to the concern that the company may find it very difficult to maintain market share and margins, as competition intensifies in the future.

Moreover, the industry in which the company operates, also faces the challenge of technological obsolescence. Hence, it is required to undertake both operating and capital expenditure (running and fixed costs) at constant intervals.

At the upper and lower end of the price band, the company is expecting a pre-money equity valuation of Rs. 63 crore and Rs. 70 crore respectively and a PE multiple of 41.9 and 46.5 times FY10 earnings respectively, which is very aggressive for its size and scale of operations.

We give a thumps down to the issue, given the very limited geographic presence, huge competitive nature of the industry and steep pricing.