ETC Networks Ltd merged Directors Report

ETC NETWORKS LIMITED ANNUAL REPORT 2008-2009 DIRECTORS REPORT To The Members of ETC Networks Limited Your Directors take pleasure in presenting the Tenth Annual Report together with the Audited Accounts of the Company for the year ended March 31, 2009. RESPONSIBILITY STATEMENT In terms of and pursuant to Section 217 (2AA) of the Companies Act, 1956, your Directors, in relation to the Annual Statement of Accounts for financial year 2008-2009, state and confirm that: a) The Accounts had been prepared on a going concern basisand in such preparation the applicable accounting standards had been followed with proper explanation relating to material departures. b) Your Directors had selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year, and of the profit of the Company for that year; and c) Your Directors had taken proper and sufficient care for maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities. FINANCIAL RESULTS The Financial Performance of your Company for the year ended March 31, 2009 is summarized below: (in Rupees) Particulars Year ended Year ended 31.03.2009 31.03.2008 Revenue from Operations 666,627,819 778,173,025 Other Income 59,961,802 41,709,142 Total Income 726,589,621 819,882,167 Total Expenses 592,274,547 650,732,411 Profit before Tax 134,315,074 169,149,756 Deferred-Tax charge/ (benefit) 43,177,811 (68,059,373) Provision for Taxation 19,131,130 22,272,182 Mat Credit entitlement (14,137,368) (18,700,340) Profit after Tax 86,143,501 233,637,287 Add: Balance brought forward 180,272,599 (3,615,672) Less: Transfer pursuant to - 3,615,672 Scheme of Amalgamation Amount available for 266,416,100 233,637,287 appropriations Appropriation: Proposed Dividend 24,361,140 24,361,140 Tax on Dividend 4,140,176 4,140,176 General Reserve 10,000,000 25,000,900 Excess provision for - (136,628) Dividend in earlier years Debenture Redemption Reserve 29,700,000 - Balance carried to Balance Sheet 198,214,784 180,272,599 BUSINESS OVERVIEW Your Company performed creditably during the year ended March 31, 2009 in the face of a challenging environment, both internally and externally. After amalgamation, your Company spent the year in preparing a strong platform for profitable growth through a combination of business innovation and strategic investments. The Education Division pro-actively initiated a transition process to move its existing 545 pre-schools and 14 schools to a new business model that was a win-win for both your Company which its franchisees. This transition was critical to set the stage for future growth of your Company and meant that we compromised short-term topline growth for long-term profitable growth. The Entertainment Division faced the market slowdown and a management changeover via aggressive innovation on programming and new initiatives to protect our core audience. Every film released in 08-09 was on the ETC platform. The Entertainment Division continue to lead the market with new innovations such as ETC Bollywood Business, ETC Extras, Garma Garam Dus Hazaar and Masti Da Funda in additional to perennial favourite Kahani Kismet Ki. ETC Bollywood Business saw the biggest of names from Shah Rukh Khan, Aamir Khan on the slow to chat about their films. It has created a pull with Bollywood trade fraternity (producers/ distributors/ starcast), thereby creating a pull for the channel in advertising plans. Kahani kismet ki, has its loyal viewer ship and continues to be the most popular programme in its time-band featuring astrology. Rising Star, Star giraftaar had the biggest of bollywood stars feature on the shows. ETC extras showcases bollywood news updates every 2 hours capturing the latest bollywood buzz. Garma Garam Dus Hazaar was televised daily (mon-fri) for two hours, to connect with the masses that not only entertains but also offers a prize of 10000 to its valued viewers- Launched in September 08 the show has grabbed the attention of Punjabi viewers nation-wide-data enclosed: 160000 (sms), 60000 (calls) and 4000 (e-mails). Masti Da Funda is a campus-show connecting the Youth of Punjab. Education division continued relentlessly towards becoming the leader in child development and education for toddlers to tweens. Kidzee continued to be the No. 1 chain of pre-schools by far with 680 signed up, 540 operational pre-schools and more than 30,000 children. We added 190 new pre-schools in the year ended March 31, 2009. Zee Schools, our K-12 chain of schools, rose rapidly to be among the top few chain of schools in India with 25 schools. ZICA, expanded beyond its base in Mumbai with a new institute in Bhubhaneswar. Your Company made two strategic investments in the year ended March 31, 2009 to fuel future growth. We created an important source of future growth and image by gaining rights to providing educational infrastructure, content, services and consulting to an International School in Mumbai. This needed an investment of Rs. 75 crores in gaining these rights for 30 years (extendable by mutual agreement for another 50 years). The Company also gained a foothold in the lucrative animation production business through its investment in Cornershop Entertainment Pvt. Ltd. With education and entertainment as two prime needs of the consumer in slowdowns, your Company is uniquely positioned for profitable growth. With constant innovation, strong expansion and cost control, we will continue to deliver consumer delight and shareholder value. DIVIDEND Your Directors ars aeased to recommend a dividend of Rs. 2.5/- per equity share of Rs. 10/- each, for the financial year 2008-09. The total outflow for this purpose would be Rs. 285.01 lacs which includes a dividend of Rs.243.61 lacs and tax on dividend of Rs. 41.40 lacs. CORPORATE GOVERNANCE Your Company is strict compliance with Clause 49 of the Listing Agreement. In line with yours Board commitment to excel in following the best Corporate Governances practices, the Board has approved and implemented a Corporate Governance Manual of the holding company which serves as guide to every business activityldecision making for Companys businesses. A separate report on Corporate Governance together with Auditors Certificate on compliance is attached to this Annual Report and also a Management Discussion and Analysis statement. DEBENTURE ISSUE To meet the funding requirements and meet its contribution towards construction and development of proposed International School at Bandra, your Company had issued on a private placement basis 16% Secured Redeemable Dehentures aggregating to Rs. 50 crores. The said Debenture were rated as Care A by CRISIL, signifying adequate safety for timely servicing of debt obligations and these Debentures are listed on Wholesale Debt Market Segment of National Stock Exchange of India Limited. CORPORATE SOCIAL RESPONSIBILITY Essel Group, and all constituents thereof, including your Company believes that Business cannot succeed in a society that fails. It is therefore imperative for business houses, especially those in developing countries like India, to invest in the future by taking part in socialbuilding activities. Corporate Social Responsibility (CSR) is a very broad concept and includes an obligation by the corporate to consider the interests of the society by taking responsibility for the impact of its activities on customers, suppliers, employees, shareholders, communities and other stakeholders. With a view to make maximum effective contribution, the CSR activity of all Essel Group Company has been unified and centralized at the group level. During the year under review the employees and corporate entities of Essel Group had participated in various community based activities including, adoption of school(s)/ village(s) in tribal areas through the Ekal Vidyalaya Foundation, awareness generation about the work being done by Ekal which is the biggest nongovernmental education movement in the country, involvement in the construction and administration of the Giobal Vipassana Pagoda which is an international collaborative effort, introduction of vocational courses through Taleem Foundation, contribution in the form of time and expertise to the Global Foundation for Civilizational Harmony and so forth. EMPLOYEES STOCK OPTION SCHEME With a view to reward the present and future employees of the Company for their contribution, encourage value creation and sharing, attract and retain best talents, your Board has, subject to your approval, approved introduction and implementation of an Employee Stock Option Scheme, for allotment of options of upto 5% of paid-up capital to the employees of the Company. Detailed proposal, in this regard, seeking Members approval, forms part of notice of ensuing Annual General Meeting. PUBLIC DEPOSITS During the year under review, your Company has not accepted any deposits within the meaning of Section 58A of the Companies Act, 1956 and rules made thereunder. DIRECTORS During the year under review, your Board had appointed Mr. Sanjay Jain, as an Additional Directorwith effectfrom October 16, 2008. Further your Board had also appointed Mr. Surjit Banga as an Additional Director in the category of Non-Executive Independent Director, with effect from January 16, 2009. Pursuant to the provisions of Section 260 of the Companies Act, 1956, Mr. Sanjay Jain and Mr. Surjit Banga holds office only upto the conclusion of the forthcoming Annual General Meeting of the Company. The Company has received notice under Section 257 of the Companies Act, 1956 along with requisite deposits, proposing the appointment of Mr. Sanjay Jain and Mr. Surjit Banga, as Directors of the Company liable to retire by rotation. Resolution seeking your approval for the appointment of Mr. Sanjay Jain and Mr. Surjit Banga as Directors of the Company has been incorporated in the Notice of the forthcoming Annual General Meeting along with their brief profile. Mr. Subhash Chandra and Mr. V.V. Ranganathan, resigned as Directors of the Company with effect from October 16, 2008 and December 25, 2008 respectively. Your Board places on record its deep appreciation for contributions made by Mr. Subhash Chandra and Mr. V.V. Ranganathan during their tenure as on the Board. Dr. Manish Agarwal, Director of your Company is liable to retire by rotation at the ensuing Annual General Meeting and, being eligible, have offered himself for reappointment. AUDITORS Statutory Auditors, M/s. MGB & Co., Chartered Accountants, Mumbai, retire at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNING AND OUTGO The Companys business operations comprises of Education Division and Broadcasting Division. Since both these does not involve any manufacturing activity, most of the Information required to be provided under Section 217(1)(e) of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988, is not applicable. However the information as applicable are given hereunder: Conservation of Energy: ETC, being a service provider, requires minimal energy consumption and every endeavour has been made to ensure optimal use of energy, avoid wastages and conserve energy as far as possible. Technology Absorption: In its endeavour to obtain and deliver the best in all its business operations, the Cornpany has been constantly active in harnessing and tapping the latest and best technology in the industry. Foreign Exchange Earnings and Outgo Particulars of foreign currency earnings and outgo during the year are given in Note No.14(b) of Schedule 16B to the Notes to the Accounts forming part of the Annual Accounts. PARTICULARS OF EMPLOYEES Information as required under Section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, its given as an annexure forming part of this report. ACKNOWLEDGEMENTS Your Directors take this opportunity to place on record their appreciation of the dedication and commitment of employees at all levels, Franchisees and Business Partners that have contributed to the success of your Company. Your Directors thank and express their gra itude for the support and co- operation received from the Central and State Governments including Ministry of Information & Broadcasting and the Department of Telecommunication and other stakeholders including viewers, producers, vendors, financial institutions, banks, investors, service providers as well as regulatory and government authorities. For and on behalf of the Board Punit Goenka Chairman Place: Mumbai Date : June 16, 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 is 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, competition is ever increasing. Even for educational business, the last few years has seen the entry of host of new pre-schoos. Technological and regulatory changes have spawned new platforms of delivery. The Company will need to stay ahead of the game in developing content and 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.