KPMG ID Report v3.1



Project MilestoneDraft Valuation Report21 February 2012Valuation of Multi Screen Media Private Limited B S R & Co.21 February 2012Draft Valuation ReportContents TOC \o "1-1" \t "Appendix Heading,1" 1Background PAGEREF _Toc312835260 \h 22Scope and Limitations of Work PAGEREF _Toc312835261 \h 43Sources of Information PAGEREF _Toc312835262 \h 64Historical Financial Information PAGEREF _Toc312835263 \h 75Forecast Financial Information PAGEREF _Toc312835264 \h 116Valuation Methodology and Approach PAGEREF _Toc312835265 \h 287Valuation PAGEREF _Toc312835266 \h 298Conclusion PAGEREF _Toc312835267 \h 35 BackgroundOverview Sony Pictures Entertainment, Inc. (“SPE” or “the Client”) is based in Culver City, California. SPE produces and distributes films and television programming content. It also engages in operation of studio facilities for production services. Multi Screen Media Private Limited (“MSMPL” or “the Company”) is an indirect subsidiary of SPE. SPE, through SPE Mauritius Holdings Limited (Mauritius) and SPE Mauritius Investments Limited (Mauritius), owns 42 per cent and 20 per cent equity stake in MSMPL respectively.MSMPL operates as a television channel operator in India and internationally. Atlas Equifin Private Limited (“Atlas”), an Indian private limited company, holds 12.11 per cent of the shares in MSMPL.SPE (directly or through its subsidiaries) intends to buy 12.11 equity stake in MSMPL from Atlas (“Transaction”). This involves transfer of shares from a resident to a non-resident Indian which is governed by the Guidelines issued by RBI and shall be in accordance with the Notification No. FEMA 20/2000-RB dated 3 May 2000.In this connection, SPE has requested B S R & Co., Chartered Accountants (“B S R”), to carry out a valuation of equity shares of MSMPL as on 31 July 2011 (“Valuation Date”) based on the new pricing guidelines with respect to issue of shares including preferential guidelines vide Notification No. FEMA 205/2010-RB dated 7 April 2010 and RBI circular RBI/2009-10/445 A. P. (DIR Series) Circular No.49 dated 4 May 2010 (“FEMA Guidelines”) (“Valuation”).Company OverviewMSMPL was formerly known as Set India Private Limited. The Company was founded in 1995 and is based in Mumbai, India.MSMPL operates the following five television channels: Sony Entertainment Television (“SET”), a Hindi general entertainment television channel.MAX, a channel that airs Hindi movies and special events such as cricket matches, film award functions, etc.SAB, a Hindi channel focused on comedy programs.PIX, a channel that airs Hollywood movies. MIX, a Hindi music channel.MSM Satellite (Singapore) Pte Ltd (“MSM Singapore”) is a 100 per cent subsidiary of MSMPL. The intellectual property rights of all the programming content (films, television serials, special events) is owned by MSM Singapore. MSMPL functions as an agent of MSM Singapore. The services provided by MSMPL to MSM Singapore include marketing of advertising spots, distribution of the five television channels and collection of advertising and subscription revenue. MSMPL get commission for providing these services to MSM Singapore. MSMPL is a part of the network of channels distributed by MSM Discovery Private Ltd (“MSM Discovery”), a joint venture between MSMPL and Discovery Communications India (“DCI”). MSMPL and DCI are partners in 74:26 ratio in MSM Discovery.MSM Discovery distributes satellite channels for the following:MSMPL - SET, MAX, SAB, PIX and MIXDCI - Discovery, Discovery Travel & Living, Animal PlanetOther third parties - AXN, ANIMAX, MTV, VH1, NICK, NDTV 24X7, NDTV India, NDTV Profit, Headlines Today, AajTak, Tez and COLORS. Subscription revenue of MSM Discovery after paying third parties is shared between MSMPL and DCI in the ratio of 69:31 for CAS and Non CAS platform and in the ratio of 83:17 for Direct to Home (“DTH”) platform.Basis of ValuationFor the proposed Transaction, a valuation of MSMPL as at 31 July 2011 is carried out. To comply with FEMA Regulations, the Valuation is carried out using Discounted Cash Flow (“DCF”) method.The Management has provided us the consolidated business plan of MSMPL for the period 1 August 2011 to 31 March 2016 (“Forecast Period”). The Consolidated Income Statement and the Consolidated Balance Sheet of the following entities is provided by the Management (“Consolidated Financial Statements”) for the Forecast Period:Multi Screen Media Private Ltd.MSM Satellite (Singapore) Pte Ltd.MSM Discovery Private Ltd. (to the extent of 74 per cent share of MSMPL)These financial statements are presented in section 5.3.Scope and Limitations of WorkB S R has been appointed by SPE to carry out a valuation of the equity shares of the Company as at 31 July 2011 (“Valuation Date”) based on the pricing guidelines with respect to issue of shares including preferential guidelines vide Notification No. FEMA 205/2010-RB dated 7 April 2010 and RBI circular RBI/2010-11/13 A. P. (DIR Series) Circular No.49 dated 4 May 2010. B S R has not independently verified the information based on which this report (“Report”) is prepared. B S R has carried out a desktop review of the financial information and underlying management assumptions provided by the management of SPE (“Management”) for the valuation analysis of the Company. The financial information and underlying assumptions also form part of the representation letter signed by SPE. This information has been solely relied upon by B S R for the Valuation of the Company.This Report is based on and relies solely on the management business plan prepared by the Management of SPE for the period 1 August 2011 to 31 March 2016 (“Management Business Plan”). B S R has read, analyzed and discussed but not independently verified the financial projections and underlying data and assumptions in the preparation of the Management Business Plan and accordingly provides no opinion on the factual basis of the same. If there were any omissions, inaccuracies or misrepresentations of the information provided by the Management, this may have a material effect on our findings.Our work did not constitute an audit of the financial statements and accordingly, we do not express any opinion on the truth and fairness of the financial position as indicated in this Report. Our work did not constitute a validation of the financial statements of the Company, and accordingly, we do not express any opinion on the same. If there were any omissions, inaccuracies or misrepresentations of the information provided by the Management, this may have a material effect on our findings.The realisation of the projections in the Management Business Plan, based on which the Report has been prepared, is dependent on the continuing validity of the assumptions on which they are based. The Report cannot be directed to provide an assurance about the achievability of these financial projections. Since these projections relate to the future, actual results are likely to be different from the forecast results because events and circumstances do not occur as forecast, and the differences may be material.Although we have read, analysed and discussed the information relating to the Company, prepared and provided to us by the Management for the purpose of making the Report, we have not commented on the appropriateness of or independently verified the assumptions or information provided to us, for arriving at the financial projections of the Company.For our analysis, we have relied on published and secondary sources of data, whether or not made available by SPE. We have not independently verified the accuracy or timeliness of the same.Neither B S R nor any of its affiliates are responsible for updating this Report because of events or transactions occurring subsequent to the date of this Report. B S R has not considered any finding made by other external agencies in carrying out this Valuation.This Report is prepared on the basis of the sources of information listed in section 3. B S R has relied upon written representation provided by the Management that the information contained in the Report is materially accurate and complete, fair in its manner of portrayal and therefore forms a reliable basis for the Valuation.Sources of InformationThis Report is prepared on the basis of the sources of information as follows:Unaudited Consolidated Financial Statements for MSMPL for the period 1 April 2009 to 31 March 2011.Provisional un-audited Consolidated Financial Statements for MSMPL for the period 1 April 2011 to 31 July 2011.Management Business Plan of MSMPL for the period 1 August 2011 to 31 March 2016.Publicly available information and information from secondary sources.In addition to the above information, we also held discussions with the following key members of the Company based on the instruction from SPE:Nitin Nadkarni – Chief Financial Officer, Multi Screen Media Private LtdPramod Nair – Senior Vice President – Finance and Accounting, Multi Screen Media Private LtdAshish Vardhan – Vice President - Finance, Multi Screen Media Private LtdDeepak Oza – Senior Manager – FP&A, Multi Screen Media Private Ltd The above information has been provided to us by the Management.Historical Financial InformationConsolidated Historical Income Statements of MSMPL Source: ManagementAdvertising revenue comprises advertising income from programs and films broadcasted in India and in international regions such as UK, US, Canada, Africa and Middle East. Advertising revenue also includes advertising income from cricketing events such as Indian Premier League (“IPL”), India-New Zealand series, etc.IPL matches for FY 2010 were held in April 2009 and May 2009 (total 60 matches) and IPL matches for FY 2011 were held in March 2010 (29 matches) and April 2010 (31 matches). Therefore FY 2010 includes revenue from 89 matches and FY 2011 includes revenue from only 31 matches. Due to this situation, revenues for FY 2010 were higher than revenues for FY 2011. Revenues for period ended 31 July 2011 include revenues for the entire IPL season (72 matches) held in April 2011 and May 2011. Subscription revenues comprises income from CAS, Non CAS and DTH operators in India and international regions such as UK, US, Canada, Australia, Africa, Middle East and Pakistan. Subscription revenues increased by 18 per cent from INR 5,678 million in FY 2010 to INR 6,682 million in FY 2011.Other income comprises wireless income, service fee from Channel 8, distribution income, syndication income and international events income.Wireless income pertains to income generated from messages, calls received during telecast of reality shows like Kaun Banega Crorepati, X-Factor etc. It also includes income from download of videos and clips of shows from You Tube.Service fee is received for providing selling and accounting services to Channel 8, a regional Bengali channel. Distribution income is for distribution of channels to SAARC countries.Syndication income pertains to the revenue from syndicating movies and programs in the regional and international market.International event income pertains to advertising and sponsorship revenue from international events like BAFTA awards. EBITDA margin was 5 per cent in FY 2010 and increased to 17 per cent in FY 2011. This is mainly on account of lower amortisation expenses as a percentage of revenue in FY 2011. Amortisation expenses were lower in FY 2011 mainly because IPL matches for FY 2011were partly held in FY 2010.Finance costs comprise foreign exchange gain/loss and interest on term loan and working capital loan. There is a gain in period ended 31 July 2011 mainly on account of foreign exchange fluctuation. Consolidated Historical Balance Sheets of MSMPL Source: ManagementTerm loan includes a dollar loan amounting to INR 575 million as on 31 July 2011 from Standard Chartered Bank in India. The Company has availed this loan at an interest rate of 4.95 per cent and plans to repay the loan by the end of FY 2012. Other term loans amounting to INR 12,589 million as on 31 July 2011 pertain to the loan borrowed in Singapore. The Company has availed this dollar loan at an interest rates ranging from 2.0 per cent per annum to 3.9 per cent per annum. The Company has taken non refundable zero interest dollar loan amounting to INR 511 million as on 31 July 2011from SPE. The loan is expected to remain constant during forecast period.Fixed assets comprises computers, decoders, leasehold improvements other plant and machinery. Decoders are installed with cable operators for decoding the satellite signal. Other plant and machinery consists of uplinking/ downlinking equipments and other studio equipments. Unamortised films and sports pertains to amount paid by MSMPL to acquire licence to broadcast films/ sports events which will be amortised in future as and when they are broadcasted. Unamortised sports balance decreased from INR 4,485 million in FY 2011 to INR 1,964 million for period ended 31 July 2011 primarily due to part of the licence fees for IPL held in April 2011 – May 2011 was not paid as on 31 July 2011. Intangible assets as of 31 July 2011 pertain to the goodwill on acquisition of SAB TV. Program inventory includes films and other programs which are not yet capitalised/expensed. Inventory also includes blank tapes.Cash and bank balance and sundry debtors increased for the period ended 31 July 2011 as compared to FY 2011 mainly on account of cash received/receivable for IPL season of FY 2012 that ended in May 2011. The number of days outstanding for debtors remained at 86 days of total revenue in FY 2011. The advances to suppliers remained at 6 per cent of programming & production cost and film acquisition cost during FY 2010 and FY 2011.The program inventory remained at approximately 16 per cent of total programming and production cost excluding programming cost for IPL series during FY 2010 and FY 2011.Accounts payable remained in the region of 90 to 105 days of expenses incurred for non IPL business during FY 2010 and FY 2011.Provisions increased from INR 3,042 million as on 31 March 2011 to INR 6,968 million as on 31 July 2011, primarily due to IPL Licence fees payable at the end of the IPL season. Forecast Financial Information Historical and Forecast FinancialsHistorical and Forecast Consolidated Profit and Loss Statements of MSMPL Source: ManagementThe Management has estimated that advertising revenue will grow at a CAGR of 22 per cent from INR 10,841 million in FY 2011 to INR 29,023 million in FY 2016.Advertising revenue is expected to increase by 69 per cent in FY 2012 mainly on account of increase in revenue during IPL season and introduction of new shows on SET. Further, the revenue growth is expected to decline to 7 per cent in FY 2013 as the Management expects that the number of matches in IPL season will reduce to 60 matched in FY 2013 as compared to 72 matches in FY 2012 on account of legal issues with new IPL teams, Kochi and Pune.Subscription revenue is estimated to grow at a CAGR of 5 per cent from INR 6,682 million in FY 2011 to INR 8,611 million in FY 2016. This is based on feedback from MSM Discovery team and uncertainty around the growth potential of the DTH platform.The year on year revenue growth rate is expected to stabilize at 15 per cent during FY 2015 and FY 2016.The EBITDA margin is expected to increase from 17 per cent in FY 2011 to 20 per cent in FY 2016 on account of lower direct cost and amortisation as a percentage of revenue.The average income tax rate during Forecast Period is 35 per cent.Projected Consolidated Balance Sheet of MSMPLSource: ManagementThe management expects to incur the following capital expenditures during the forecast period:INR 1,236 million for purchase of computers, decoders and other plant & machinery. This expenditure is included in fixed assets.INR 4,478 million in FY 2012 on account of IPL license fees paid to BCCI. The same is expected to increase to INR 7,576 million per annum by the end of FY 2016. This expenditure is included in unamortised sports.INR 2,180 million in FY 2012 on account of acquisition of new film rights for MAX and PIX channel. The same is expected to increase to INR 3,902 million per annum by the end of FY 2016. This expenditure is included in unamortised films.Loans and advances are mainly on account of advances to suppliers, fixed deposit with the High Court, prepaid expenses and security deposits.The accumulated other comprehensive income/ (loss) amounting to INR negative 1,049 million mainly pertains to exchange rate difference on consolidation of balance sheet.Investments pertain to the investment in BEN-SET Limited, a company incorporated in United Kingdom. Management has represented that both the JVs are on the verge of termination. Therefore these investments are considered at cost.Key assumptions that form the basis for the Projected Financial Statements are given below.Revenue assumptions:Advertising revenue Source: ManagementAdvertising revenue for domestic: Domestic advertising revenues pertain to advertising for telecast of programmes and cricket events. Domestic advertising revenues are estimated to increase by 146 per cent in FY 2012 primarily on account of the following reasons.Revenue for FY 2011 is from 31 IPL matches and revenue from FY 2012 is from 72 IPL matches.New shows like Kaun Banega Crorepati, Bade Achchhe Lagte Ho, Saas Bina Sasural are expected to perform well in FY 2012 based on their GRP. MSMPL launched the MIX channel in September 2011 which is expected to contribute INR 237 million to the advertising revenue in FY 2012.The Management has assumed that the number of matches from FY 2013 onwards will reduce to 60 matches per season.The year on year growth in domestic advertising revenues is expected to stabilise at 15 per cent in FY 2015. Advertising revenue for International: International advertising revenues pertain to revenue from international markets such as USA, UK, Canada, Africa and Middle East. The average agency commission considered for international markets is 12.5 per cent of gross advertising revenue.The US, UK and Middle East business centre are expected to contribute 37 per cent, 18 per cent and 38 per cent respectively to the total international advertising revenue in FY 2012. The year on year growth in international advertising revenue is expected to stabilise at 8 per cent in FY 2013.Subscription revenueSource: ManagementNon CAS and DTH are expected to contribute 43 per cent and 45 per cent respectively to the total domestic subscription revenues.Management expects subscription revenues from DTH and Non-CAS to grow at a CAGR of 7 per cent and 3 per cent respectively during FY 2012 to FY 2016. UK business centre and US business centre are expected to contribute 32 per cent and 49 per cent to the total international subscription revenue.In FY 2012, the Hindi general entertainment channel “Colors” has been added to the subscription pack for US and Canada. This will contribute to the increase in international subscription revenues by 16 per cent in FY 2012. The subscription revenue growth in the international market is expected to stabilize at a year on year growth rate of 5 per cent from FY 2014 to FY 2016.Other income Source: ManagementOther IncomeAs discussed earlier in the Report, other income comprises wireless income, service fee from Channel 8, distribution income, syndication income and international events income.Wireless income is expected to grow at 10 per cent per annum during Forecast Period.Service fee from Channel 8 is expected to grow at 14 per cent per annum during forecast period. Distribution income from SAARC countries is expected to grow at a CAGR of 13 per cent from FY 2011 to FY 2016.Syndication income is expected to grow at a CAGR of 4 per cent from FY 2011 to FY 2016.Expense RecoveryThe Company also carries out marketing and sales of AXN and ANIMAX. The expense recovery income is a percentage of fees received for providing these services to AXN and ANIMAX. The Company offers AXN and ANIMAX channels along with bouquet of its own channels. It incurs some sales & marketing, salaries & incentives, general & administration expenses for providing these services. The Company recovers these expenses, from AXN and ANIMAX, by adding approximately 10 per cent mark-up on all expenses incurred.Discounts/ Bad debts: It is calculated as percentage of revenues. It also includes some discounts offered to agencies on advertising revenue. The discounts/ bad debts are expected to remain stable at approximately 0.6 per cent of revenue during Forecast Period. This is in line with the average discounts/ bad debts as a percentage of revenue for FY 2010 and FY 2011.Expense assumptions:Amortisation Expense Amortisation expense includes amortisation on films and sports (cricket, football cup).Film amortisation expense:Amortisation of films acquired for MAX is calculated based on amortisation policy of the Company as follows:Category A - Cost of film more than USD 500,000: 45 per cent of the film cost is amortized in first six months and balance amount is amortised over the remaining life of the license agreement.Category B - Cost of acquisition between USD 100,000 to USD 500,000: 25 per cent of the film cost is amortized in first six months and balance amount is amortised over the remaining life of the license agreement.Category C - Cost of acquisition less than 100,000 USD: Cost of the film is amortised over the remaining life of the license agreement.Films for PIX channel are amortised within one year of their acquisition.Cricket amortisation expense: Cricket amortisation is mainly on account of licence fees paid to BCCI for telecast rights of the IPL series.Direct costs: Source: ManagementDirect costs comprise programming cost, events cost, on-air promotion and post production cost. These costs are expected to increase at a CAGR of 13 per cent from FY 2011 to FY 2016.Costs pertaining to SET are expected to contribute around 63 per cent to the total direct costs in FY 2012. Beyond FY 2013, there will be higher direct costs on account of IPL (introduction of HD technology), SAB and MIX. Therefore contribution of SET to the total direct cost will reduce to 54 per cent in FY 2016. The programming and production cost is expected to remain at an average of 25 per cent of total revenue during forecast period. This is in line with the past years. Operating & administration costs Source: ManagementBroadcasting expenses:Broadcasting expenses pertains to fixed rent paid for transponder and uplinking and downlinking of programmes through satellite.Broadcasting expenses are expected to increase by 23 per cent in FY 2012 on account of 12 additional matches to be held in IPL series and launch of the channel MIX.Carriage expenses:Carriage expenses are expected to increase by 42 per cent in FY 2012 due to launch of the MIX channel. From FY 2014 to FY 2016, carriage expenses are expected to grow at 10 per cent per annum. General & administration expenses:The general and administration expenses pertain to expenses incurred for cricket insurance, bank guarantee charges, establishment expenses, communication expenses, staff cost and other office administration expenses.These expenses are expected to increase by 30 per cent in FY 2012 on account of higher number of IPL matches as compared to FY 2011. Beyond FY 2013 these expenses are expected to grow at 8 per cent per annum.Sales & marketing costs Source: ManagementMarketing costs: The sales & marketing expenses are expected to remain stable at 9 per cent of total revenue from FY 2012 to FY 2016, which is in line with the past years.As per an agreement with AXN and ANIMAX, the Management recovers the expenses incurred on account of marketing, promotion, general & administration and salaries for these channels by adding 10 per cent mark-up on total expenses incurred.Dealer incentives: The dealer incentives are expected to remain at 2 per cent of revenue during forecast period in line with the past years.Employee costs Source: ManagementThe salaries are expected to increase on an average by 11 per cent during the Forecast Period.The incentives pertain to the bonus and other monetary incentives provided to the employees. The year on year growth of incentives is in line with the year on year growth of salary cost.Working capital: Working capital is forecasted based on the following assumptions:Source: ManagementDebtor days outstanding are expected to decrease from 86 days in FY 2011 to 75 days in the Forecast Period based on Management focus on implementing a better collection policy. All debtors for IPL are expected to be received during the same financial year.Loans and advances mainly includes prepaid expenses, fixed deposit with High Court, security deposit etc. The loans and advances are expected to remain stable during forecast period.Advances to supplier are considered as 6 per cent of programming & production cost and film acquisition cost in-line with FY 2011.Program inventory is estimated at 16 per cent of total programming and production cost excluding programming cost for IPL in line with the past years.Programs & Tapes on hand includes blank tapes and some programs not capitalized. The same is expected to remain constant during forecast period.Account payables are estimated to be 75 days of the expenses excluding expenses incurred for IPL business in line with FY 2010 and FY 2011.Accrued liabilities: Mainly include provision for IPL and NZ cricket license fee, service tax payable, deposits, employee advances, agency commission payable, program and music license fee etc. The same is expected to remain constant at the FY 2011 level during forecast period.Depreciation/Amortisation calculationDepreciation as per companies act: Straight line method for the purpose of calculating book depreciation as per the Companies ActSource: ManagementSource: ManagementThe fixed assets comprise computers, decoders, other plant & machinery, furniture fixtures, motor vehicles and office equipments.The depreciation rate for all assets is considered at 25 per cent as provided by the Management. This is in line with the Company’s accounting policy.Amortisation of cricket rightsOpening balance comprises rights to broadcast matches of IPL and India versus New Zealand series. Amount paid every year pertains to the amount expected to be paid in accordance with the BCCI contract.Amortisation of film rightsOpening balance comprises unamortised balance of films for MAX and PIX. Additions pertain to the amount expected by the Management to be spent on acquiring new films for MAX and PIX.Amortisation policy for films is discussed in section 5.2.5. Valuation Methodology and ApproachBasis of ValuationThe Valuation has been prepared using the DCF method as per FEMA Regulations and values 100% equity stake in Multi Screen Media Private Limited as at 31 July 2011.Valuation MethodologyAn overview of the DCF method is presented below:Value is future oriented and accordingly the theoretically correct manner to assess value is to consider the future earnings potential.Under the DCF method, forecast cash flows are discounted back at an appropriate discount rate to the present date, generating a net present value for the cash flow stream of the Company. A terminal value at the end of the explicit Forecast Period is then determined and that value is also discounted back to the valuation date to give an overall value of the Company. We have used the free cash flows to firm (“FCFF”) to capture the value of the Company. In a DCF analysis, the Forecast Period should be of such a length to enable the business to achieve a stabilized level of earnings, or to be reflective of an entire operational cycle for more cyclical industries.The rate at which the future cash flows are discounted (“the discount rate”) should reflect not only the time value of money, but also the risk associated with the business’ future operations. This means that in order for a DCF to produce a sensible valuation figure, the importance of the quality of the underlying cash flow forecasts is fundamental. The discount rate most generally employed for satellite channel broadcasting and distribution companies is the Weighted Average Cost of Capital (“WACC”), reflecting an optimal as opposed to the actual financing structure, which is applied to leveraged cash flows and results in an Enterprise Value. In calculating the terminal value, regard must be had to the business’ potential for further growth beyond the explicit Forecast Period. The “constant growth model”, which applies an expected constant level of growth to the cash flow forecast in the last year of the Forecast Period and assumes such growth is achieved in perpetuity, is a common method.ValuationThe valuation of equity shares of the Company in accordance with the DCF method is explained in the following paragraphs. We have used the cost of capital to discount the FCFF and then adjusted for the debt and contingent liability component in order to arrive at the equity value using the DCF method. The equity value of the Company arrived at under the DCF method is adjusted for cash and bank balance (as per Consolidated Historical Balance Sheet).Discount Rate and Terminal Growth RateWeighted average cost of capital (WACC)In order to determine the discount rate, we have used the WACC methodology as set out below:WACC=Ke * ( E/(D + E)) + Kd * (1-T) * ( D/(D + E))Where:Ke=cost of equityE=market value of equityKd=cost of debtD=market value of debtT= corporate taxation rateThe cost of equity is derived using the Capital Asset Pricing Model (“CAPM”) as follows:Where:Ke=R(f) + ? * (R(m) – R(f)) + R(f)=the current return on risk-free assetsR(m)=the expected average return of the market(R(m) – R(f)) =the average risk premium above the risk-free rate that a “market” portfolio of assets is earning? =the beta factor, being the measure of the systematic risk of a particular asset relative to the risk of a portfolio of all risky assets=Company specific riskFor purposes of our analysis, the forecast cash flows have been computed on a nominal basis. Therefore, we have used a discount rate based on nominal rates of returns. Each element of the formula is considered below:Cost of equity:Risk free rate: The nominal risk-free rate of return is derived with reference to 10 year benchmark Government of India Securities as on 31 July 2011. Based on such yield rate, we have considered risk free rate of 8.46 per cent per annum as on 31 July 2011 (Source: Bloomberg, as on 31 July 2011).Market risk premium: The historical market rate of return of the BSE Sensex for 20 year period as at 31 July 2011 was 14.67 per cent based on one year moving average of Sensex. The historical return has been considered as the expected average return of the market (R(m)) over the long term. Based on above an equity risk premium (R(m) – R(f)) is 6.21 per cent.Beta: Beta is a measure of the risk of the shares of a company. ? is the co-variance between the return on sample stock and the return on the market (say, Sensex). In other terms, ? measures the sample stock’s volatility relative to the entire market. In order to determine the appropriate beta factor for each project, consideration must be given either to the overall market beta of the Company or betas of comparable quoted companies. Based on the Annexure 1, we have considered a beta of 0.85.Discount rateThe Weighted Average Cost of Capital (“WACC”) is estimated at approximately 13.6 per cent.Source: B S R analysisWe have considered an alpha of 1 per cent to calculate the cost of equity to account for the following uncertainty:MSMPL incurred losses in FY 2010 and had an EBITDA margin of 17 per cent in FY 2011. The Management has estimated that MSMPL will maintain an EBITDA margin of approximately 17 per cent going forward. There is no historical track record available of such EBITDA margins.MSMPL has the right to broadcast IPL matches up to FY 2017. There is an uncertainty on whether MSMPL will be able to re-acquire the right to broadcast IPL matches after FY 2017 and the price it will have to pay to re-acquire these rights. Terminal ValueAt the end of the forecast period, a normalized year has been considered and hence the corresponding cash flows generated by MSMPL are estimated to continue indefinitely.The most common approach in calculating terminal value is to apply a constant growth model, utilising the following formula:FV of terminal value = FCFn / (r-g)PV of terminal value = FV of terminal value / (1+r)n ( r = discount rate)In undertaking our analysis of MSMPL we have applied a nominal growth factor of 4 per cent, which we considered reasonable given the sector in which the company operates, its position therein, and growth prospects.Surplus Assets, Preference Capital and Contingent LiabilitiesThe Management has confirmed that there are no surplus assets or contingent liabilities that need to be considered to carry out the Valuation.Valuation of MSMPLValuation of MSMPL using DCF method: Source: B S R analysisConclusionWe have arrived at the equity value of Multi Screen Media Private Limited using the DCF method as required for the purpose of complying with FEMA Regulations in connection to the Transaction.Based on the Scope and Limitations of our work as mentioned in Section 2, Sources of Information in Section 3, the valuation methodology in Section 6, the calculations in Section 7 and explanations therein, the fair value of the equity of MSMPL as at 31 July 2011 per DCF method is INR 24,935 million (approximately). The value per share is around INR 2,729.Note: The number of shares as of 31 July 2011 are 9,138,579 equity shares of INR 10 each. Annexure 1: Comparable Companies dataThe re-levered Beta of the comparable companies in the education and training industry is 0.85 as indicated below:Beta Calculation???????S.panyDebt/EquityLevered BetaTax RateUnlevered BetaTarget's Debt EquityTarget's Tax RateRe Levered Beta1New Delhi Television Ltd42%0.9432.45%0.7318%32.45%0.822Sun TV Network Ltd0%0.7832.45%0.780.1832.45%0.873TV Today Network Ltd17%0.9032.45%0.810.1832.45%0.904Zee Entertainment Enterprises Ltd0%0.8532.45%0.850.1832.45%0.955Television Eighteen India Ltd78%1.1432.45%0.740.1832.45%0.836Zee News18%0.7132.45%0.630.1832.45%0.71?Average26%0.85?Median18%0.85Source: Bloomberg, Company filingsGlossaryBSEBombay Stock ExchangeCoCoComparable CompaniesCoTransComparable TransactionsDCFDiscounted Cash FlowEBITEarnings Before Interest &TaxEBITDAEarnings Before Interest, Tax, Depreciation and AmortisationEVEnterprise ValueFCFFFree Cash Flow for FirmFYFinancial YearINRIndian National RupeemnmillionNAVNet asset valuePaPer annumPATProfit after taxPVPresent ValueTGTerminal GrowthTVTerminal ValueWACCWeighted Average Cost of Capital ................
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