ETC Networks Ltd merged Management Discussions

ETC NETWORKS LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS Investors are cautioned that this discussion contains forward looking statements that involve risks and uncertainties including, but not limited to, risks inherent in the Companys growth strategy, acquisition plans, dependence on certain businesses, dependence on availability of qualified and trained manpower and other factors. The following discussion and analysis should be read in conjunction with the companys financial statements included herein and the notes thereto. 1. INDUSTRY OVERVIEW Food and Grocery, Education and Entertainment make up the Top 3 middle class expenditures in India. A CLSA late 2007 report surveying 1616 households showed that 9% of monthly expenditure of a middle class household is on Education while 8.3% is on Entertainment. With the Middle Class (higher than 2 lacs per annum income) set to grow from 14.5 million households to 64 million households by 2015, Education and Entertainment markets are on a strong growth trajectory. Whats more, there is a dearth of quality schools in India and there is an expected shortage of about 15000 schools by 2015. Pre-schools are still a nascent segment with only 16-18% penetration in Urban India. The Government is encouraging public private partnership in schools and colleges - a trend that bodes well for your Company. Entertainment continues to be a staple of Indian lives. The entertainment industry has witnessed an era of Big Corporate Houses now turning prod ucers of Bollywood films. The industry has also witnessed a demand for better film/entertainment and thus demand for better viewing/ cinema halls/ multiplexes. We have also witnessed Films being made at 70 crore budgets and thus the pressure to promote these films is even stronger. Bollywood will witness more number of films releasing, growing at a pace of 15%. There will be an increase in requirement for television promotion/advertising. The Punjabi entertainment industry also promises great growth opportunities in the coming years, with more players vying for a place in the Punjabi entertainment industry market, the competition is bound to get stiffer resulting in the production of better content thus contributing to the overall growth of Punjabi genre. 2. COMPANY OVERVIEW ETC Networks Limited (BSE: 532958 and NSE: ETC EQ) is probably the only company in India with interest in the areas of Education and Entertainment- two of the most exciting growth sectors in the Indian economy. The Education division, Zee Learn is in the business of Improving Human Capital from cradle to career. With interests in Early Childhood Development & Education, School Education and Youth Vocational Institutes & Testing Services, Zee Learn is one of the few integrated education players in the country. The Entertainment division runs two channels - ETC Music and ETC Punjabi. ETC Music is Indias premier Bollywood channel that is a must have for any Bollywood release. ETC Punjabi is a premier Punjabi channel known for its great mix of music, religious and interactive programming. 3. BUSINESS OPERATIONS a) Education division - Zee Learn Zee Learn - the Education division of ETC is an integrated education entity specializing in design of pedagogical content, running, franchising and consulting brick and mortar pre-school, schools and vocational institutes and teacher training services. It has presence in 3 business verticals: KIDZEE Kidzee is Asias No. 1 chain of pre-schools. As on March 31, 2009, there were 644 Kidzee pre-schools in more than 300 cities. Out of these 480, were already operational. Kidzee is a pioneer in the space of organized pre- schooling in India with the 1st Kidzee coming up in 2003. Till date, more than 100,000 children have passed through a Kidzee and onwards to successful growth in good, prestigious schools. In FY 2009, more than 30,000 children enrolled in a Kidzee. Consistent with our strategy to lead innovation in the category, Kidzee introduced a new child centric memodology iLLUME(TM) in October, 2008 under Project Dolphin. Project Dolphin is a game changing innovation in the Pre- school segment with a new business model thats a win-win for the Franchisee and the Franchisor and the new iLLUME(TM) methodology. iLLUME (TM) is unique to Kidzee and gives us a competitive advantage as the only TM pedagogy in the preschool segment. During the year, 414 existing Kidzee centers successfully transitioned to the new Dolphin model. ZEE SCHOOLS Zee Schools clocked impressive growth in expanding its footprint across India. As on March 31, 2009, there were 31 schools who had signed up to be Zee Schools and out of these, 25 schools are already operational. The Company cracked the tough south zone market with 10 school signups. Leading much needed innovation in the school segment, the Company developed and rolled out a unique methodology- Litera Octave(TM). Litera Octave (TM)ensures a childs best understanding of a concept through his/her own unique learning style. It is a holistic approach to the achieving real understanding vs. the current state of rote learning. During the year the education division has entered into an arrangement for rendering infrastructure, content and other services for a school in Mumbai. YOUTH VOCATIONAL INSTITUTES The Company caters to the Youth Segment through its vocational training institutes Zee Institute of Creative Arts (ZICA) and Zee Institute of Media Arts (ZIMA). The Company has successfully developed and implemented franchisee model of its ZICA institute at Bhubaneswar and plans to add more such institutes in India. It has also developed, new and contemporary courses such as 1 year Diploma in Animation, 6 month certificate in VFX, 6 month certificate in Gaming and 6 months certificate in Animation keeping in minds the need of industry and students. These courses will be rolled out in ZIMA and ZICA over the next year. b) Entertainment division ETC Hindi Indias leading Bollywood entertainment channel saw over 150 films entertain the viewers, the flagship show ETC Bollywood business (formerly known as bbiz) saw the biggest of names from Shah Rukh Khan, Aamir Khan on the show to chat about their films. ETC dominated and led the space of Bollywnod promotion. Every film released in 08-09 was on ETC platform. Movie budgets saw a good growth in advertising budgets in 08-09. The Bollywood industry saw Big corporate firms like UTV, Studio 18, EROS, Percept Picture Company, Ashtavinayak, Ksera Sera promoting their films very aggressively compared to the previous year. ETC showcased itself to be a perfect amalgamation of Bollywood, Music, and Entertainment thereby winning the confidence of Producers in the film industry. ETC Channel Punjabi ETC Channel Punjabi boasts an array of original programs across a range of entertainment genres - religious, food-travel shows, kid show, women shows, music shows, film trailers, Punjabi movies, comedy, fiction, youth, lifestyle and interactive shows. Practically a Punjabi GEC - that touches every life of a Punjabi. ETC Punjabi continued with the dazzling events providing ample opportunities for our advertisers vis a vis ground and on-air activities providing them the value for money; in addition to the diverse bouquet of entertainment and religious programming. Key Programmes: Garma Garam Dus Hazaar A massive PR exercise; televised daily (Monday-Friday) for two hours, to connect with the masses that not only entertains but also offers a prize of Rs.10,000/- to its valued viewers. Masti Da Funda A weekly campus-show connecting the Youth of Punjab. Step Forward: As the market leader we intend to step forward in giving a fistful fight to the Hindi GECs in this Punjabi market. There has been a conscious introspection to raise the bar of Punjabi Programming to a new high, for its informed and esteemed Target Groups The Company is implementing SAP as its operating software. This will improve the response time of the Company and will enable it to take advantages in procuring, planning and negotiating, The blue printing exercise has been completed during the year ind he implementation will take place during he first half of FY10. 4. BUSINESS STRATEGY The key elements of ETC Networks Ltd. strategy during the year was to: (1) Consolidate pre-school business, (2) Expand education portfolio and (3) continue the growth trajectory of Entertainment business. a) Consolidate Pre-School Business The key parts of consolidation were to expand into new territories, improving capacity utilization and driving innovation. During the year, we expanded our footprint from 550 to 644 pre-schools even after accounting for those that were shut down due to non-compliance. We are developing new initiatives and programs to improve capacity utilization at the pre-school. Project Dolphin - our game changing innovation was implemented during the year. b) Expand education portfolio The key parts to expanding education portfolio was to make Kidzee High an important contributor to topline. During the year, the company changed the brand name to Zee School with two different models - Mount Litera Zee Schools catering to Metros and state capitals and Litera Valley Zee Schools catering to smaller towns. The Company created a complete school package through strategic tie-ups and in-house development. Focus on ZICA was renewed with new course content and the opening of the first ZICA outside of Mumbai in Bhubaneswar. c) Continue the growth trajectory of Entertainment business ETC music shall continue to be the leading platform for bollywood promotion and music launches. With four new Punjabi channels the competition in the Punjabi market has heated up, its survival for the fittest now, a perfect setting for the growth of the Punjabi genre. ETC Channel Punjabi is all geared up to meet new challenges and is in the process of strengthening its content. The production of new inter-active and informative shows along with the stand-up comedy shows are already in the pipe line. 5. FUTURE STRATEGY With education and entertainment being 2 of the top 3 expenditures of Indian Middle class, the Company is uniquely positioned to ride the growth curve on the basis of the ride of the middle class and its incompe. Further, the huge demand - supply gap in quality education means that innovators will stand to gain. The Company aims to continue its focus on providing quality education from cradle to career through Kidzee, Zee Schools, ZICA & ZIMA and provide quality entertainment through programming innovation in ETC Music and ETC Punjabi. Further, well aim to drive profitable growth through proactive cost management and strong internal controls. Our key focus areas looking ahead would be: a) Sustainable annuity based growth on education business Education business will gradually shift from a reliance on signing up new franchises to a more balanced portfolio of enrolments revenue from current centres and revenue from signing up new franchises. This is expected to give more visibility of future earnings and also create a more sustainable revenue stream. b) Improve margins on entertainment business ETC Music will focus on its core audience of Bollywood to drive profitable revenue. ETC Punjabi will continue to focus on its Punjabi audience through programming innovation. c) Enter high growth segments to compliment current business The Company will continuously strive to enter new segments that compliment existing business in both education and entertainment. FINANCIAL AND FINANCIAL POSITION Revenue During the year under review the Companys revenue was generated from Broadcasting of satellite television channels and Education. The Total Income of the Company was Rs. 7,266 lacs. The net profit before tax of the Company was Rs. 1,343 lacs. The Total income includes Rs.4,647 lacs from Broadcasting Business and Rs.2,619 lacs from Education Business. The Profit before tax of the company from Broadcasting was Rs.1,441 lacs and Rs. (98) lacs from Education Business. Expenditure During 2008-09, Operating costs of the Company were Rs.1770 lacs. The Administration expenses and Personnel costs were Rs.1402 lacs and Rs.1471 lacs respectively and selling and distribution costs were Rs.931 lacs. Financial costs were Rs.7 lacs. Amortization cost was Rs.341 lacs. Operating costs of the company includes Rs.957 lacs from Broadcasting Business and Rs.813 lacs from Education Business. Administrative expenses include Rs.789 lacs from Broadcasting Business and Rs.613 lacs from Education Business. Personnel costs include Rs.759 from Broadcasting Business and Rs.712 lacs from Education Business. Selling and Distribution costs of the company include Rs.436 lacs from Broadcasting Business and Rs.495 lacs from Education Business. Financial Costs include Rs.5 lacs from Broadcasting Business and Rs.2 lacs from Education Business. Amortization Cost includes Rs.259 lacs from Broadcasting Business and Rs.82 lacs Education Business. Working Capital and Financial Management With strong cash flows, treasury management was a key area of focus for the management. The operating cash flows were directed towards effective working capital management. GROUP Human Resources The Company considers itself to be a service provider in the entertainment and education industry and believe that the employees are at the core of achieving it objectives. They are the key to achieve its vision and ar the primary source of competitive advantage. Keepin with this belief, the Company is proposing an ESO program subject to shareholders approval. Internal Controi System and their adequacy The Company has an elaborate documented system of internal controls to ensure proper checks and balance of various processes. Internal Audit team of Essel grou with qualified chartered accountants, conduct audit these systems and procedures every quarter and repo to the Audit Committee of the Board. The Company i fully committed to ensure an effective internal contro environment so as to provide assurance to efficien operations and security of assets. The Company look at internal audit as eyes and ears to the management. The Audit Committee reviews the quarterly and annual financial statements and adequacy of disclosures, treatment of various items involving accounting judgments and internal audit reports. RISK FACTOR The Company operates in a highly competitive industry that is attracting a raft of new players and is subject to technological and regulatory changes. ***** With increasing number of players entering the Broadcasting Industry, more specifically Entertainment and music channels, compet:tier is ever increasing. Even for Educational Busine~ s, ii : last few years has seen the entry of host of np%k< < -e- s :hoof. Technological and regulatory changes havc spa vned new platforms of delivery. The Company will nc ad to stay ahead of the came in developing content ~ nd business models to compete favourably with competition and new technological scenarios. New product launches might not be successful in the marketplace Recent launches as well as future launches may not be accepted by viewers or parents. For Entertainment Business it could be because of quality of programming, concept, marketing etc. while for Education Business it could be because of quality of content and delivery. The Company depends significantly on its senior management and other skilled personnel and may find it difficult to replace them in todays competitive scenario in case of separation. The Companys success in large part depends on the abilities and continued services of its senior management, as well as other skilled personnel, including content development and sales personnel. There can be no assurance that the Company will be able to locate or employ similar qualified persons on acceptable terms in case current people choose to separate themselves from the Company. The Company relies on intellectual property that might not be adequately protected under current laws. The Companys services are largely comprised of content which it owns or has licenses to use. The company relies on copyrights or trademark or other intellectual property laws to establish and protect its right in these products. There can be no assurance that the Companys right will not be challenged, invalidated or circumvented or that the Company will successfully renew its right or licenses. Third parties might be able to copy, infringe or otherwise profit from the Companys right without its authorisation. Real estate prices might make the business model unattractive for the Franchisee Although the Company has developed an attractive Franchisee model to encourage distribution of wealth and enable rapid expansion, real estate prices can have an impact on the returns of the Franchisee. This may lead to erosion of the Companys competitiveness as a Franchisor.