We observed questionable Corporate Governance practices while analyzing a company operating in Indian media industry. Historically, this company has had a strong dominance in its core market which aided high margins and strong cash flow generation. However the minority shareholders have got a short end of the stick due to management’s favorable treatment to the promoter group. In this blog, we throw light on some of the company’s questionable activities and practices.
The promoter along with his wife draw a huge annual remuneration from the company which always skirts around the maximum permissible legal limit each year (salary of 5% of profits individually and 11% of profits combined). Effectively over 50% of annual employee cost is being paid out to the promoters (the promoters have also announced that for FY19, their remuneration would be limited to the level of FY18).
|As % of total employee cost||55%||67%||61%||57%||55%||53%||53%||57%||56%|
|As % of PBT||9%||13%||11%||11%||11%||11%||10%||10%||10%|
2.Purchase of Aircraft:
The company has been repeatedly engaging in the purchase and sale of aircrafts. However, the rationale for owning an aircraft in regional broadcasting business could not be understood. From 2008 up until now, the company has purchased four aircraft & sold three of them with the recent one being bought in 2017 for Rs. 3,652mn.
The company has previously reported some revenues under aircraft charter services. However, all of this revenue came from related parties and the quantum of such revenue is insufficient to even cover the depreciation charge.
|Gross Block of aircraft|
|Aircraft 2||2,641||2,641||2,641||2,641||> sold|
|Aircraft 3||2,952||2,952||2,952||2,952||> sold|
|Total Gross Block|
|Net Block of aircraft||903||2,534||2,358||2,182||2,005||2,945||2,748||2,552||–||3,647|
|Proceeds on sale of aircraft||–||1,065||–||–||–||1,898||–||–||2,600||–|
|Gain / (loss) on sale of Aircraft||–||163||–||–||–||54||–||–||180||–|
Aircraft Investment as % of Networth
|Aircraft charter service income||–||43||65||57||44||23||3||–||–||–|
3.Reduced Dividend Pay-out:
The company abruptly reduced the dividend in FY17. In a subsequent investor call, the management had assured that the pay-out will be higher in range of 65-70% in FY18. However, this did not come to fruition and the pay-out percentage actually declined. No clarification has been provided for this. For Q1 FY19, the company did increase the quarterly interim dividend from Rs.2.5 per share to Rs.5 per share. But in Q2 FY19, the same was again reduced to Rs.2.5 per share without any clarification. The company had Rs. 20,800 mn. of cash and bank balances as of September 2018.
|Dividend Per Share||136.1||1.3||2.5||2.5||7.5||8.8||9.5||9.5||9.5||11.3||15.5||10.0||10.0|
|Dividend Payout Ratio||2650%||20%||30%||28%||57%||53%||54%||54%||50%||57%||68%||38%||35%|
4. Advances and Investments in Related Parties:
The company has given certain loans and advances to related parties. It has also invested substantial amounts in radio companies through 0.1% convertible preference shares. These preference shares have not been converted for a long time and conversion terms have also not been disclosed. Currently, these investments earn no return for the company.
|Advances to Related Parties||380||358||363||351||351||345||385||81||45|
|0.1% Convertible Preference shares||398||881||1,354||1,487||1,907||2,302||2,291||2,257||2,767|
|Trade receivables from Related Parties||1,693||1,693||1,667||1,662||1,662||1,660||2,659||2,335||2,335|
|As a % of Net Worth||13%||16%||18%||19%||21%||23%||28%||25%||27%|
5. Additional Credit Period to Related Party:
The company broadcasts its channel through distributors including one related party which is in the DTH business in South India. The credit period offered to this related distributor is significantly higher than that offered to other customers. There is a risk of impairment of receivables due from this related distributor since they have a hugely negative net worth and have been constantly raising capital.
|Revenue from Related DTH Player|
|% of total revenue|
|Receivables from Related DTH Player|
|Receivables as % of sales|
|Related DTH Player|
6. Investigations Against the Promoter:
In 2015, the company’s applications for new FM Radio frequencies were rejected on the grounds of lack of necessary security clearance on the pretext of CBI investigations involving the promoters. Courts subsequently allowed the company to participate in the auction and allowed extension of existing licenses. However, the Supreme Court is currently hearing another PIL filed against the grant of license. Similarly, the company has previously faced issues when applying for security clearances of its 33 TV channels.
In 2015, certain assets of the company and its subsidiary were attached by the Enforcement Directorate in connection with an investigation involving the promoter. Those were subsequently released on court order but the hearing in the case is still underway.
Thus, court judgments against the promoters can significantly impact the company in the future.
7. Pre-IPO Dealings:
The promoters paid large dividend pre-IPO aggregating Rs. 2,110 mn. by borrowing Rs.1,880 mn under the company. The company also made two acquisitions in 2007 by issuing shares at par (Rs.10) when in the same year shares were issued to the public (IPO) at nearly Rs. 440 per share.
We believe that management’s competency influences upside returns while integrity is essential to protect from downside risk. The above issues with the media company clearly highlight lapses in corporate governance and capital allocation on part of the management.
(SEBI Registered Portfolio Manager – Registration No. INP000002965)
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