According to the Consolidated - Audited financial statement for the Year 2011, total net operating revenues increased

3.28%, from INR 192.38 tens of millions to INR 198.69 tens of millions. Operating Results decreased from INR 11.25 tens of millions to INR -7.1 tens of millions. The net income of the period reached INR -1.08 tens of millions at the end of the period against INR 5.69 tens of millions last year. Return on equity (Net income/Total equity) went from 1.52% to -0.29%, the Return On Asset (Net income / Total Asset) went from 1.51% to -0.29% and the Net Profit Margin (Net Income/Net Sales) went from 2.96% to -0.54% when compared to the same period last year. The Debt to Equity Ratio (Total Liabilities/Equity) was 100.00% compared to 100.24% the previous year. Finally, the Current Ratio (Current Assets/Current Liabilities) went from 4.86 to 4.95 when compared to the previous year.

Results of oPeRAtions For the year ended March 31, 2011, the Company earned total revenue of 16,848.76 Lacs, a decrease of 9.41% over the previous years 18,599.57 Lacs. As per the consolidated accounts, the total revenues have increased by 9.70% from 19,190.54 Lacs to 21,052.27 Lacs in the year under review. The Company incurred net loss of 340.38 Lacs during the year under review as compared to a net profit of 1,519.09 Lacs in the previous year. Dividend In accordance with the provisions of Companies (Declaration of Dividend out of Reserves) Rules, 1975, the Directors recommend a final dividend of 0.20 per share (10 per cent on a par value of 2 per share) for the approval of the members. The final dividend, if declared as above, would involve an outflow of 130.42 Lacs towards the dividend (previous year ` 195.63 Lacs) and ` 21.66 Lacs towards dividend tax (previous year 33.26 Lacs), resulting in a total outflow of 152.08 Lacs. Transfer to Reserves Since the Company has incurred losses during the year, no amount has been transferred to the General Reserve. Dividend has been declared out of the accumulated profits available for distribution. Post proposed dividend, an amount of 18,935.07 Lacs has been retained in the Profit and Loss Account. fy 2011: PeRfoRMAnce oVeRVieW of the gRouP Income from operations increased by 22%, growing from ` 15,873.50 Lacs in 2010 to ` 19,363.85 Lacs in 2011 The commissioned programmes had contributed ` 12,913.80 Lacs in 2011 compared to ` 12,836.16 Lacs in 2010. However, revenue from the sponsoredshows declined from ` 2,444.25 Lacs in 2010 to ` 2,280.34 in 2011. The film segment achieved exponential growth of more than 600%, increasing from ` 591.09 Lacs in 2010 to ` 4,169.71 Lacs in 2011

Summary: The present situation of Balaji is a product of two opposite forces. You pick one and you know whether to invest or not. 88% of the stock price is the cash the company owns. That makes the stock VERY cheap. But there is a contingent liability that can take the whole company down. That makes the stock dangerous to invest. My Holdings: My Present Holdings Highest Purchase Lowest Purchase Unrealized Price Price Profit/Loss 35.9 29.5 (6,94%)

Avg. Purchase Price 33.9 About BALAJI:

Holding period LT 1 Year

The company is into production of television serials for various Hindi and other regional channels in India. The company also has a fully owned subsidiary as Balaji Motion Pictures which is into Motion Pictures. BALAJIs Ecosystem: Indian entertainment industry is a fast growing industry that is also highly fragments. In the past years, growth of the industry is propelled less by established players by more by new ones and the trend seems to continue for now.

BALAJIs Position in its Ecosystem: Balaji may have been one of the pioneers of the Indian television industry, but its bargaining power has reduced a lot due to the advent of new players (Page 19). The companys size has been reducing continuously in the past few years as it is finding more difficult to air newer programs. As per the latest annual balance sheet, the company had not got any significant shows in main channels like Colors and none of its shows were in top 15 of Indian television ratings. That is a sharp contract from a few years ago when it has 20 out of the top 50 shows. Revenue wise Balaji did clock average of 200 cr. per year in gross sales in the last 3 FY. However, this figure is misleading as the actual sales came down sharply from 330+ Cr 3 years ago to about 193 Cr in last FY. Revenue in the last 2 quarters in this FY was lesser than the same period last FY. It can be said that Balaji is a middle tier company with dwindling fortunes.

Consolidated or Standalone: Balaji Motion Pictures is a 100% subsidiary of Balaji Telefilms. Each and every line item of the subsidiary is 100% integrated into the balance sheet/P&L/Cash flow of the parent company. It makes sense to use the consolidated statements as they are presented.

Reported Financial Performance: The in the last FY2010-11, the companys total revenue increased and PAT decreased on a YoY basis. Upon investigating, one can see that this is due to increased inventories and sundry debtors that had reduced the cash flow from operations to a great extent. In terms of company itself, the previous recession lasted longer for its clients. Below is a high level view of the companys finances as reported in its annual report (consolidated) FY Net Sales (Rs. Cr) Reported pat (Rs. Cr) Average Net Worth (Rs. Cr) 2008-09 2009-10 2010-11 337.48 158.74 193.64 0.48 6.29 -1.08 371.98 373.07 373.77

Free Cash Flows to Equity Owners: Along with the above finances, one can look at the below measures from the companys annual financial statements (consolidated). FY Cap Ex Dep + Amortization Absolute change in NonCash W/C Total Increase in Debt Total Increase in Deferred Tax Liability 2008-09 2009-10 2010-11 31.29 -6.9 1.58 23.55 10.37 11.22 51.52 0 -8.6 -42.01 0.52 5.2 15.11 -0.51 -0.96

One can see that the company took a Capex exercise 2 years ago where as it did not have any expense on Capex in the last 2 years. In order to do an equitable distribution of the expense, I have normalized CapEx over the last 6 years.

On the debt side, the big positive is that the company is a zero debt company for now. In fact the company took some debt 2 years ago but paid it back in full the next year. When I normalized the above factors and calculated the FCFE, I get the following data (all amounts in Rs. Cr and for consolidated statements): Average last 3 FY Sales Net Profit (latest) Cash Value Latest FCFE after Normalization of Debt and Capex Latest FCFE before Normalization of Debt and Capex Average FCFE after normalization for the past 3 years Average FCFE before normalization for the past 3 years 229.95 -1.08 181.20 6.86 18.53 -18.07 9.98

Clearly for BALAJI, one can see that the performance has been consistently poor for the last 3 years. The average free cash flows have been negative and that is not excusable. Fit vs Flab: Balaji is struggling. CLEARLY! Unless it improves upon its revenue performance, it will not be able to improve its financial condition. A look at companys annual report shows that the company is pining too much hopes on the upcoming motion pictures it is producing. That, is a sign of desperation. Ownership Structure: 40.75% of the company is in the hands of its promoters. This to me is great as if the company performs poorly consistently; it can be bought by someone who can run it better. Return on Net Worth: The PBIT/Avg. Net Worth for BALAJI was 41% 4 years ago. It dipped to 2% 3 years ago and has been negative since then. Value Judgment: So a company that has consistently been doing terribly in the last few years and is showing signs of desperation has to be neglected right! WRONG!!!!! CASH IS KING: One critical element of the balance sheet of Balaji has been the amount of Cash and Cash equivalents it has in the last FY. At the end of last FY, the total amount of Cash + the amount of marketable securities = 181 Cr. That translates to 27.8 Rs per share.

Basically we have a case where if someone buys the company at a rate of 31.5 Rs per share (todays rate), that person will get 27.8 Rs. immediately. Therefore the marked is paying 3.8 Rs a share for all of the rest of Balaji combined! Let us see if this is ok. I remove this cash amount from the share price of today, and compare the free cash flows to the share price. By doing so, we get the following nos: Company Balaji Tele. Latest BSE closing Price 31.5 P/E Reported -190.2 P/FCFE Updated (After Normalization Latest) 3.5 P/FCFE Updated (Before Normalization Latest) 1.3 P/FCFE Updated (After Normalization Last 3 FY Avg) -1.3 P/FCFE Updated (Before Normalization Last 3 FY Avg) 2.4 P/Trailing 4 Qtr Earnings 1.7 P/Bv 0.55 Current Assets > Current Liabilities TRUE Interest Coverage NA The profit of the company this FY was near 0 and so the present years P/E multiple is through the roof. If one looks at this FYs normalized Free cash flow, the company is trading at 3.5 times the multiple which is low. The company is also trading at 45% discount on its book value. On the basis of this, in terms of its future stock price:

If the company posts even slightly better results in the coming months, then the price will go up drastically.

So looked this way, Balaji should be a sure shot investment opportunity right? WRONG! Cash is King So fight tooth and nail to preserve it There is a sword that is hanging over Balaji. If this were not the case, I would have concluded that there is no better time to invest in it. The issue is that in this FY, suddenly there are new contingent liabilities (possible future liabilities) of 316 Cr. This is because Govt. depts have slapped notices on the company for payment of taxes worth 316 Cr. The company is fighting that battle. If the company loses these tax appeals, it will have to pay this amount. That means all he cash will be gone, all assets will be sold and we will have no Balaji to speak of!

Such appeals drag on for years and so Balaji has time for redemption and may be get away without paying anything so much. Verdict: Investing in Balaji is like answering a trick question. Prima facie, the company is in poor state. Peel of one layer, then it has enough cash to get away from any trouble. Moreover, the market seems to be ignoring this aspect. Peel one more layer, and there is one risk that is big enough to take the whole company down in case it materializes. The way I see it, for an investor with a conservative mindset this is not the company to invest. For someone else who is more optimistic in life and is willing to accept the risk, the company is great. Me I am the latter.