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Project Milestone

Draft Valuation Report

21 August 2012

B S R & Co.

Valuation of Multi Screen Media Private Limited

Draft Valuation Report

B S R & Co. 21 August 2012

B S R & Co.

Project Milestone Draft Valuation Report

Subject to internal review 21 August 2012

Page 1 of 30

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Contents

1 Background 2

2 Scope and Limitations of Work 4

3 Sources of Information 6

4 Historical Financial Information 7

5 Forecast Financial Information 11

6 Valuation Methodology and Approach 23

7 Valuation 24

8 Conclusion 28

B S R & Co. Project Milestone Draft Valuation Report


Page 2 of 30

1 Background

1.1 Overview

1.1.1 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.

1.1.2 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.

1.1.3 SPE (directly or through its subsidiaries) intends to buy 12.11 per cent 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.

1.1.4 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 March 2012 (“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”).

1.2 Company Overview

1.2.1 MSMPL was formerly known as Set India Private Limited. The Company was founded in 1995 and is based in Mumbai, India.

1.2.2 MSMPL operates the following six 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.

SIX, a sports channel.



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1.2.3 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 six television channels and collection of advertising and subscription revenue. MSMPL gets commission for providing these services to MSM Singapore.

1.2.4 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.

1.2.5 MSM Discovery distributes satellite channels for the following:

MSMPL - SET, MAX, SAB, PIX, MIX and SIX

DCI - Discovery, TLC, Discovery Science

Other third parties - AXN, ANIMAX, NDTV 24X7, NDTV India, NDTV Profit, Headlines Today, AajTak, Tez, COLORS, Neo Sports, Neo Cricket and Channel 8

1.2.6 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.

1.3 Basis of Valuation

1.3.1 For the proposed Transaction, a valuation of MSMPL as at 31 March 2012 is carried out. To comply with FEMA Regulations, the Valuation is carried out using Discounted Cash Flow (“DCF”) method.

1.3.2 The Consolidated Income Statement and the Consolidated Balance Sheet of the following entities is provided by the Management (“Consolidated Financial Statements”) for the period 1 April 2012 to 31 March 2017 (“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.



Page 4 of 30

2 Scope and Limitations of Work

2.1 B S R has been appointed by SPE to carry out a valuation of the equity shares of the Company as at 31 March 2012 (“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.

2.2 B S R has not independently verified the information based on which this report (“Report”) is prepared.

2.3 B S R has carried out a desktop review of the financial information and underlying management assumptions provided by the 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.

2.4 This Report is based on and relies solely on the management business plan prepared by the Management of SPE for the period 1 April 2012 to 31 March 2017 (“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.

2.5 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.

2.6 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.

2.7 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.

2.8 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.

2.9 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.

2.10 B S R has not considered any finding made by other external agencies in carrying out this Valuation.



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2.11 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.



Page 6 of 30

3 Sources of Information

This Report is prepared on the basis of the sources of information as follows:

3.1 Unaudited Consolidated Financial Statements for MSMPL for the period 1 April 2009 to 31 March 2012.

3.2 Management Business Plan of MSMPL for the period 1 April 2012 to 31 March 2017.

3.3 Publicly available information and information from secondary sources.

3.4 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 Ltd.

Pramod Nair – Senior Vice President – Finance and Accounting, Multi Screen Media Private Ltd.

Ashish Vardhan – Vice President - Finance, Multi Screen Media Private Ltd.

Deepak Oza – Associate Vice President – FP&A, Multi Screen Media Private Ltd.

Gurpreet Singh Phull, Manager – FP&A, Multi Screen Media Private Ltd.

The above information has been provided to us by the Management.



Page 7 of 30

4 Historical Financial Information

4.1 Consolidated Historical Income Statements of MSMPL

Source: Management

USD Thousand

FYE 31 March 2010 2011 2012Revenue

Advertising 238,253 237,864 405,897

y-o-y growth 0% 71%

Subscription 119,595 146,614 175,290

y-o-y growth 23% 20%

Others 5,033 11,139 11,278


Total Revenue 362,881 395,617 592,466

y-o-y growth 9% 50%

Expenses

Amortisation 138,425 92,486 172,064

y-o-y growth -33% 86%

Direct costs 95,906 112,346 132,736

% of advertisement revenue 40% 47% 33%

Employee costs 22,817 31,693 38,524


Operating & administration costs 45,627 50,509 59,477


Sales & marketing costs 41,350 41,444 49,820

% of revenue 11% 10% 8%

EBITDA 18,754 67,138 139,845

EBITDA Margin 5% 17% 24%

Depreciation 2,398 1,951 2,020

EBIT 16,356 65,187 137,824

EBIT Margin 5% 16% 23%

Finance costs/gains 19,984 7,378 3,754

Other income 4,631 2,323 4,080

PBT 1,004 60,132 138,151

PBT Margin 0% 15% 23%

Tax 18,096 32,923 62,743

PAT (17,092) 27,209 75,408

PAT Margin -5% 7% 13%

Minority Interest (MI) 1,249 1,063 1,068

PAT after MI (18,340) 26,146 74,340

PAT Margin -5% 7% 13%



Page 8 of 30

4.1.1 Advertising 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 sports events such as Indian Premier League (“IPL”), India-New Zealand series, English Premier League (“EPL”), etc.

4.1.2 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, advertising revenue for FY 2010 was higher than advertising revenue for FY 2011.

4.1.3 Revenue for FY 2012 includes revenue for the entire IPL season (74 matches) held in April 2011 and May 2011. Advertising revenue increased by 71 per cent in FY 2012 mainly on account of increase in revenue during IPL season and introduction of new shows on SET.

4.1.4 Subscription revenue comprises income from CAS, Non CAS and DTH operators in India and international regions such as UK, US, Canada, Australia, Africa and Middle East. Subscription revenues increased at a CAGR of 21 per cent from USD 119,595 thousand in FY 2010 to USD 175,290 thousand in FY 2012.

4.1.5 Other income comprises wireless income, service fee from Channel 8, distribution income, syndication income and international events income.

4.1.5.1 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.

4.1.5.2 Service fee is received for providing selling and accounting services to Channel 8, a regional Bengali channel.

4.1.5.3 Distribution income is for distribution of channels to SAARC countries.

4.1.5.4 Syndication income pertains to the revenue from syndicating movies and programs in the regional and international market.

4.1.5.5 International event income pertains to advertising and sponsorship revenue from international events like BAFTA awards.

4.1.6 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.

4.1.7 EBITDA margin increased to 24 per cent in FY 2012 on account of lower amortisation expenses as a percentage of revenue and decline in marketing cost as a percentage of revenue.

4.1.8 Finance costs comprise foreign exchange gain/loss and interest on term loan and working capital loan.



Page 9 of 30

4.2 Consolidated Historical Balance Sheets of MSMPL

Source: Management

4.2.1 Term loan includes dollar loan borrowed in Singapore, amounting to USD 270,974 thousand as on 31 March 2012 at interest rates ranging from 1.3 per cent per annum to 2.2 per cent per annum. The Company has also taken non refundable zero interest dollar loan amounting to USD 4,232 thousand as on 31 March 2012 from SPE, which is expected to remain constant during Forecast Period.

4.2.2 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.

4.2.3 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.

4.2.4 Intangible assets amounting to USD 10,210 thousand as of 31 March 2012 pertain to the goodwill on acquisition of SAB TV.

4.2.5 Investment pertains to an investment in BEN-SET Limited, a company incorporated in United Kingdom. Management has represented that the JV is on the verge of termination. Therefore the investment is considered at cost.

USD Thousand

FYE 31 March 2010 2011 2012Sources of funds

Share capital 2,245 2,245 2,245

Share premium 96,025 96,025 96,025

Reserve & surplus (100,296) (75,798) 190

Accumulated other comprehensive income/(loss) (6,038) (6,049) (27,244)

Loans 239,313 315,246 270,974

Minority Interest - - 1,868

Total 231,248 331,669 344,058

Application of funds

Fixed assets 3,175 2,953 7,280

Unamortised f ilms 62,400 76,900 79,283

Unamortised sports 100,000 86,199

Capital w ork in progress 2,786 1,688

Intangible assets 10,210 10,210 10,210

Investment 126 66 28

Net working capital

Current assets

Cash and bank balance 25,561 47,965 50,721

Inventory 19,703 28,261 19,675

Accounts receivable 126,876 76,515 79,789

Loans and advances 76,099 105,666 116,465

248,239 258,407 266,650

Less: Accounts payable 40,285 51,839 42,958

Less: Provisions 52,618 67,814 64,321

92,902 119,653 107,279

Net current assets 155,337 138,754 159,371

Total 231,248 331,669 344,058



Page 10 of 30

4.2.6 Inventory includes films and other programs which are not yet capitalised/ expensed. Inventory also includes blank tapes. Program inventory from FY 2010 to FY 2012 remained at approximately 20 per cent of programming cost.

4.2.7 Revenue for FY 2011 includes revenue from 31 IPL matches where as revenue for FY 2012 includes revenue from 74 IPL matches. Also year-end subscription revenue collection during FY 2012 was higher than usual collection. Hence, the number of days outstanding for debtors decreased from 71 days in FY 2011 to 49 days in FY 2012.

4.2.8 Loans and advances are mainly on account of advances to suppliers, fixed deposit with the High Court, prepaid expenses and security deposits.

4.2.9 Accounts payable from FY 2010 to FY 2012 remained at approximately 79 days of total cost.

4.2.10 Accrued liabilities: Mainly include service tax payable, deposits, employee advances, agency commission payable, program and music license fee etc.

4.2.11 The accumulated other comprehensive income/ (loss) amounting to USD negative 27,244 thousand mainly pertains to exchange rate difference on consolidation of balance sheet.



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5 Forecast Financial Information

5.1 Historical and Forecast Financials

5.1.1 Historical and Forecast Consolidated Profit and Loss Statements of MSMPL

Source: Management

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017Revenue

Advertising 238,253 237,864 405,897 346,447 446,464 499,800 553,650 612,144

y-o-y growth 0% 71% -15% 29% 12% 11% 11%

Subscription 119,595 146,614 175,290 164,162 214,807 248,178 289,236 331,300

y-o-y growth 23% 20% -6% 31% 16% 17% 15%

Others 5,033 11,139 11,278 7,708 8,652 9,091 9,398 9,683

y-o-y growth 121% 1% -32% 12% 5% 3% 3%

Total Revenue 362,881 395,617 592,466 518,316 669,923 757,069 852,284 953,126

y-o-y growth 9% 50% -13% 29% 13% 13% 12%

Expenses

Amortisation 138,425 92,486 172,064 126,215 215,485 256,551 308,293 365,252

y-o-y growth -33% 86% -27% 71% 19% 20% 18%

Direct costs 95,906 112,346 132,736 135,010 150,373 167,245 182,978 201,567

% of advertisement revenue 40% 47% 33% 39% 34% 33% 33% 33%

Employee costs 22,817 31,693 38,524 38,177 42,833 46,907 51,380 56,295

y-o-y growth 39% 22% -1% 12% 10% 10% 10%

Operating & administration costs 45,627 50,509 59,477 69,315 76,480 82,430 89,281 92,850

y-o-y growth 11% 18% 17% 10% 8% 8% 4%

Sales & marketing costs 41,350 41,444 49,820 49,682 53,057 59,002 64,166 71,415

% of revenue 11% 10% 8% 10% 8% 8% 8% 7%

EBITDA 18,754 67,138 139,845 99,917 131,696 144,934 156,186 165,748

EBITDA Margin 5% 17% 24% 19% 20% 19% 18% 17%

Depreciation 2,398 1,951 2,020 4,463 6,702 5,566 5,072 3,693

EBIT 16,356 65,187 137,824 95,454 124,993 139,368 151,114 162,055

EBIT Margin 5% 16% 23% 18% 19% 18% 18% 17%

Finance costs/gains 19,984 7,378 3,754 3,890 4,130 3,384 2,304 765

Other income 4,631 2,323 4,080

PBT 1,004 60,132 138,151 91,564 120,864 135,984 148,810 161,290

PBT Margin 0% 15% 23% 18% 18% 18% 17% 17%

Tax 18,096 32,923 62,743 28,936 29,812 34,061 38,267 42,576

PAT (17,092) 27,209 75,408 62,628 91,052 101,923 110,543 118,714

PAT Margin -5% 7% 13% 12% 14% 13% 13% 12%

Minority Interest (MI) 1,249 1,063 1,068 - - - - -

PAT after MI (18,340) 26,146 74,340 62,628 91,052 101,923 110,543 118,714

PAT Margin -5% 7% 13% 12% 14% 13% 13% 12%



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5.1.1.1 Management has estimated that advertising revenue will grow at a CAGR of 9 per cent from USD 405,897 thousand in FY 2012 to USD 612,144 thousand in FY 2017. Advertising revenue is expected to contribute approximately 66 per cent of the total revenue during the forecast period.

5.1.1.2 Subscription revenue is estimated to grow at a CAGR of 14 per cent from USD 175,290 thousand in FY 2012 to USD 331,300 thousand in FY 2017.

5.1.1.3 Total revenue is estimated to grow at a CAGR of 10 per cent from USD 592,466 thousand in FY 2012 to USD 953,126 thousand in FY 2017.

5.1.1.4 The EBITDA margin is expected to stabilize at 17 per cent by FY 2017.

5.1.1.5 The average income tax rate during Forecast Period is 27 per cent.

5.1.2 Projected Consolidated Balance Sheet of MSMPL

Source: Management

5.1.2.1 The management expects to incur the following capital expenditures during the Forecast Period:

USD 21,993 thousand for purchase of computers, decoders and other plant & machinery. This expenditure is included in fixed assets.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017Sources of funds

Share capital 2,245 2,245 2,245 2,245 2,245 2,245 2,245 2,245

Share premium 96,025 96,025 96,025 96,025 96,025 96,025 96,025 96,025

Reserve & surplus (100,296) (75,798) 190 62,818 153,870 255,792 366,336 485,050

Accumulated other comprehensive income/(loss) (6,038) (6,049) (27,244) (27,244) (27,244) (27,244) (27,244) (27,244)

Loans 239,313 315,246 270,974 270,974 262,732 212,232 142,232 53,232

Minority Interest - - 1,868 1,868 1,868 1,868 1,868 1,868

Total 231,248 331,669 344,058 406,686 489,497 540,920 581,463 611,177

Application of funds

Fixed assets 3,175 2,953 7,280 8,881 6,855 5,072 3,693 3,776

Unamortised f ilms 62,400 76,900 79,283 17,551 24,776 42,282 55,389 58,996

Unamortised sports 100,000 86,199 196,511 220,290 212,784 186,874 155,267

Capital w ork in progress 2,786 1,688 1,688 1,688 1,688 1,688 1,688

Intangible assets 10,210 10,210 10,210 10,210 10,210 10,210 10,210 10,210

Investment 126 66 28 28 28 28 28 28

Net working capital

Current assets

Cash and bank balance 25,561 47,965 50,721 31,082 51,664 76,347 110,850 146,488

Inventory 19,703 28,261 19,675 27,237 30,336 33,740 36,914 40,664

Accounts receivable 126,876 76,515 79,789 117,091 151,339 171,026 192,536 215,317

Loans and advances 76,099 105,666 116,465 115,892 117,420 119,098 120,663 122,512

248,239 258,407 266,650 291,301 350,759 400,211 460,963 524,981

Less: Accounts payable 40,285 51,839 42,958 55,162 60,787 67,034 73,060 79,447

Less: Provisions 52,618 67,814 64,321 64,321 64,321 64,321 64,321 64,321

92,902 119,653 107,279 119,483 125,109 131,356 137,382 143,768

Net current assets 155,337 138,754 159,371 171,818 225,651 268,855 323,581 381,212

Total 231,248 331,669 344,058 406,686 489,497 540,920 581,463 611,177



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USD 363,420 thousand is expected to be spent on account of acquisition of new film rights for SET, MAX and PIX channels. This expenditure is included in unamortised films.

USD 957,158 thousand is expected to be spent on account of acquisition of rights for IPL and English Premier League. This expenditure is included in unamortised sports.

5.1.2.2 Management expects the working capital as a percentage of revenue to be approximately 26 per cent based on the average working capital as a percentage of revenue from FY 2010 to FY 2012. Average working capital as a percentage of revenue for comparable companies is approximately 23 per cent.



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5.2 Key assumptions that form the basis for the Projected Financial Statements are given below.

Revenue assumptions:

5.2.1 Advertising revenue

Source: Management

5.2.1.1 Advertising revenue for Domestic:

Domestic advertising revenues pertain to advertising for telecast of programmes and cricket events.

Management has estimated that domestic advertising revenue will grow at a CAGR of 8 per cent from USD 395,930 thousand in FY 2012 to USD 594,887 thousand in FY 2017. Domestic advertising revenue is expected to contribute approximately 97 per cent of the total advertising revenue during the Forecast Period.

Advertising revenue is expected to decrease by 15 per cent in FY 2013 on account of lower utilisation of advertisement inventory and lower advertisement rates during the IPL matches held in April 2012 to May 2012.

Management expects that the advertisement revenue in FY 2014 will increase by 29 per cent on account of higher utilisation of advertisement inventory and higher advertisement rates during the next IPL season.

5.2.1.2 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.

Advertisement revenue increased by 34 per cent in FY 2012 mainly on account of expansion of distribution network in US and UK. Increase in subscriber base resulted in increase in advertisement revenue.

Management has estimated that international advertising revenue will grow at a CAGR of 12 per cent from USD 9,967 thousand in FY 2012 to USD 17,256 thousand in FY 2017.

The US, UK and Middle East business centre are expected to contribute on an average 44 per cent, 24 per cent and 25 per cent respectively to the total international advertising revenue during the Forecast Period.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Advertising Revenue

Domestic 232,110 230,410 395,930 334,664 433,184 485,317 537,846 594,887

y-o-y growth -1% 72% -15% 29% 12% 11% 11%

International 6,143 7,454 9,967 11,782 13,280 14,483 15,804 17,256

y-o-y growth 21% 34% 18% 13% 9% 9% 9%

Total Advertising Revenue 238,253 237,864 405,897 346,447 446,464 499,800 553,650 612,144

y-o-y growth 0% 71% -15% 29% 12% 11% 11%



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5.2.2 Subscription revenue

Source: Management

5.2.2.1 Domestic subscription revenues

Cable and DTH are expected to contribute 48 per cent and 52 per cent respectively to the total domestic subscription revenues.

Management has estimated that domestic subscription revenue will grow at a CAGR of 15 per cent from USD 144,234 thousand in FY 2012 to USD 291,436 thousand in FY 2017. Domestic subscription revenue is expected to contribute on an average 85 per cent of the total subscription revenue during the Forecast Period.

Domestic subscription revenue increased by 31 percent in FY 2011 as Neo Sports was added to the subscription pack in FY 2011. The contract with Neo Sports is terminated in FY 2013 therefore the domestic subscription revenue is expected to decrease by 10 per cent.

As per the Management, IPL and EPL matches will be broadcasted on SIX, the new sports channel from FY 2014. As a result of this the Management expects that the domestic subscription revenue will increase by 38 per cent in FY 2014.

5.2.2.2 International subscription revenues

UK business centre and US business centre are expected to contribute 28 per cent and 51 per cent to the total international subscription revenue.

The Management expects that the international subscription revenue will increase by 9 per cent in FY 2013 on account of increase in the subscriber base in UK and US.

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 2015 onwards.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Subscription Revenue

Domestic 89,793 117,710 144,234 130,387 179,954 211,734 251,124 291,436

y-o-y growth 31% 23% -10% 38% 18% 19% 16%

International 29,802 28,904 31,056 33,774 34,852 36,443 38,112 39,864

y-o-y growth -3% 7% 9% 3% 5% 5% 5%

Total Subscription Revenue 119,595 146,614 175,290 164,162 214,807 248,178 289,236 331,300

y-o-y growth 23% 20% -6% 31% 16% 17% 15%



Page 16 of 30

5.2.3 Other income

Source: Management

Other Income

As discussed earlier in the Report, other income comprises insurance claim, wireless income, service fee from Channel 8, distribution income, syndication income and international events income.

5.2.3.1 The Company received an insurance claim in FY 2012 for the rain curtailed matches during IPL.

5.2.3.2 Wireless income is expected to grow at a CAGR of 10 per cent during Forecast Period.

5.2.3.3 Service fee from Channel 8 is expected to grow at a CAGR of 8 per cent during Forecast Period.

5.2.3.4 Distribution income from SAARC countries is expected to grow at a CAGR of 10 per cent during the Forecast Period.

5.2.3.5 Syndication income is expected to grow at a CAGR of 10 per cent during the Forecast Period.

Expense Recovery

5.2.3.6 The 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.

5.2.3.7 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.

5.2.4 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 from FY 2010 to FY 2012.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Other Income

Other income 5,033 7,943 10,093 6,736 7,377 7,712 7,911 8,243

y-o-y growth 58% 27% -33% 10% 5% 3% 4%

Expense Recovery - 3,195 1,185 972 1,275 1,379 1,487 1,439

y-o-y growth -63% -18% 31% 8% 8% -3%

Total Other Income 5,033 11,139 11,278 7,708 8,652 9,091 9,398 9,683

y-o-y growth 121% 1% -32% 12% 5% 3% 3%



Page 17 of 30

Expense assumptions:

5.2.5 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:

5.2.5.1 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.

5.2.5.2 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.

5.2.5.3 Category C - Cost of acquisition less than 100,000 USD: Cost of the film is amortised over the remaining life of the license agreement.

5.2.5.4 Films for PIX channel are amortised within one year of their acquisition.

Cricket amortisation expense:

5.2.5.5 Cricket amortisation is mainly on account of licence fees paid to BCCI for telecast rights of the IPL series.

5.2.6 Direct costs:

Source: Management

5.2.6.1 Direct costs comprise programming cost, events cost, on-air promotion and post production cost. These costs are expected to increase at a CAGR of 9 per cent from FY 2012 to FY 2017.

5.2.6.2 Costs pertaining to SET and SAB TV are expected to contribute around 65 per cent and 25 per cent respectively to the total direct costs.

5.2.6.3 The programming and production cost is expected to remain at an average of 34 per cent of advertisement revenue during Forecast Period. This is in line with the past years.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Programming & Production 95,906 112,346 132,736 135,010 150,373 167,245 182,978 201,567

% of advertisement revenue 40% 47% 33% 39% 34% 33% 33% 33%



Page 18 of 30

5.2.7 Operating & administration costs

Source: Management

5.2.7.1 Broadcasting & carriage expenses:

Broadcasting expenses pertains to fixed rent paid for transponder and uplinking and downlinking of programmes through satellite.

Broadcasting & carriage expenses are expected to grow at 8 per cent per annum during the Forecast Period.

5.2.7.2 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 40 per cent in FY 2013 on account of launch of the new sports channel, SIX.

5.2.8 Sales & marketing costs

Source: Management

5.2.8.1 Marketing costs:

The sales & marketing expenses are expected to remain stable at 6 per cent of total revenue from during the Forecast Period, 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.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Operating & admin cost

Broadcasting and carriage expense 31,432 36,098 43,761 47,347 51,215 55,442 60,129 61,144

y-o-y grow th 15% 21% 8% 8% 8% 8% 2%

General & admin expenses 14,196 14,411 15,716 21,968 25,265 26,988 29,152 31,706

y-o-y grow th 2% 9% 40% 15% 7% 8% 9%

Total Operating & admin cost 45,627 50,509 59,477 69,315 76,480 82,430 89,281 92,850

y-o-y grow th 11% 18% 17% 10% 8% 8% 4%

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Sales & marketing cost

Marketing expense 32,560 30,919 38,092 38,509 39,599 43,459 46,190 50,577

% of revenue 9% 8% 6% 7% 6% 6% 5% 5%

Dealer incentive 8,790 10,525 11,728 11,173 13,457 15,542 17,976 20,837

% of revenue 4% 4% 3% 3% 3% 3% 3% 3%

Total Sales & marketing cost 41,350 41,444 49,820 49,682 53,057 59,002 64,166 71,415% of revenue 11% 10% 8% 10% 8% 8% 8% 7%



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5.2.8.2 Dealer incentives:

The dealer incentives are expected to remain at 3 per cent of revenue during Forecast Period in line with the past years.

5.2.9 Employee costs

Source: Management

5.2.9.1 The employee costs include salaries and incentives paid to employees. The incentives pertain to the bonus and other monetary incentives provided to the employees. The Management expects the incentive to be approximately 42 per cent of total salaries during the Forecast Period.

5.2.9.2 Employee cost decreased by 1 per cent in FY 2013 on account of lower incentive payout. This was mainly because there was lower utilisation of inventory and lower advertisement rates for IPL in FY 2013.

5.2.9.3 The employee costs are expected to increase on an average by 10 per cent during the Forecast Period.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Employee cost 22,817 31,693 38,524 38,177 42,833 46,907 51,380 56,295

y-o-y grow th 39% 22% -1% 12% 10% 10% 10%



Page 20 of 30

5.2.10 Working capital: Working capital is forecasted based on the following assumptions:

Source: Management

5.2.10.1 Management expects debtor days outstanding to be 82 days during the Forecast Period based on the average debtor days outstanding from FY 2010 to FY 2012.

5.2.10.2 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.

5.2.10.3 Advances to supplier are considered to be 10 per cent of programming cost in line with the average for FY 2011 and FY 2012.

5.2.10.4 Program inventory is estimated at 20 per cent of total programming cost in line with the average from FY 2010 to FY 2012.

5.2.10.5 Programs & Tapes on hand includes blank tapes and some programs not capitalized. The same is expected to remain constant during Forecast Period.

5.2.10.6 Account payables are estimated to be 79 days of total expenses in line with the average from FY 2010 to FY 2012.

5.2.10.7 Accrued liabilities: Mainly include 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 2012 level during Forecast Period.

USD Thousand

FYE 31 March 2010 2011 2012 2013 2014 2015 2016 2017

Current Assets

Debtors 126,876 76,515 79,789 117,091 151,339 171,026 192,536 215,317

days outstanding 128 71 49 82 82 82 82 82

Advances to suppliers 10,498 14,002 13,429 14,957 16,635 18,200 20,049

% of programming cost 9% 11% 10% 10% 10% 10% 10%

Loans and Advances 76,099 95,168 102,463 102,463 102,463 102,463 102,463 102,463

y-o-y growth 25% 8% 0% 0% 0% 0% 0%

Program Inventory 19,703 28,261 19,675 27,237 30,336 33,740 36,914 40,664

% of programming cost 21% 25% 15% 20% 20% 20% 20% 20%

Total Current Assets 222,678 210,442 215,929 260,219 299,096 323,864 350,113 378,493

Current Liabilities

Accounts payable 40,285 51,839 42,958 55,162 60,787 67,034 73,060 79,447

days outstanding of total cost 80 93 65 79 79 79 79 79

Provisions 52,618 67,814 64,321 64,321 64,321 64,321 64,321 64,321

y-o-y growth 29% -5% 0% 0% 0% 0% 0%

Total Current Liabilities 92,902 119,653 107,279 119,483 125,109 131,356 137,382 143,768

Net Working Capital 129,776 90,790 108,650 140,736 173,987 192,508 212,731 234,725

Increase/(Decrease) in working capital 42,822 (38,986) 17,861 32,086 33,251 18,521 20,223 21,994

% of revenue 36% 23% 18% 27% 26% 25% 25% 25%



Page 21 of 30

5.2.11 Depreciation/Amortisation calculation

Depreciation as per companies act: Straight line method for the purpose of calculating book depreciation as per the Companies Act

Source: Management

Source: Management

5.2.11.1 The fixed assets comprise computers, decoders, other plant & machinery, furniture fixtures, motor vehicles and office equipment.

5.2.11.2 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 rights

Source: Management

5.2.11.3 Opening balance comprises rights to broadcast matches of IPL and India versus New Zealand series.

5.2.11.4 Amount paid every year pertains to the amount expected to be paid in accordance with the BCCI contract and contract for EPL.

USD Thousand

FYE 31 March 2013 2014 2015 2016 2017

As per Companies Act

Gross Block

Opening Gross Block 22,153 28,217 32,893 36,676 40,370

Additions 6,065 4,676 3,783 3,693 3,776

Sale 0 0 0 0 0

Closing Gross Block 28,217 32,893 36,676 40,370 44,146

Accumulated depreciation

Opening balance 14,872 19,336 26,038 31,604 36,676

Depreciation 4,463 6,702 5,566 5,072 3,693

Closing balance 19,336 26,038 31,604 36,676 40,370

Net Block 8,881 6,855 5,072 3,693 3,776

Depreciation Rates

Companies Act Rates

Computers 25%

I R Ds 25%

Plant & Machiney 25%

Furniture and Fitting 25%

Motor Vehicles 25%

Office Equipments 25%

USD Thousand

FYE 31 March 2013 2014 2015 2016 2017Opening Block 86,199 196,511 220,290 212,784 186,874 Additions 115,213 184,514 189,761 214,074 253,596 Amortisation 4,901 160,735 197,267 239,984 285,203

Closing Block 196,511 220,290 212,784 186,874 155,267



Page 22 of 30

Amortisation of film rights

Source: Management

5.2.11.5 Opening balance comprises unamortised balance of films for MAX and PIX.

5.2.11.6 Additions pertain to the amount expected by the Management to be spent on acquiring new films for MAX and PIX.

5.2.11.7 Amortisation policy for films is discussed in section 5.2.5.

USD Thousand

FYE 31 March 2013 2014 2015 2016 2017Opening Block 79,283 17,551 24,776 42,282 55,389

Additions 59,583 61,975 76,791 81,415 83,656

Amortisation 121,314 54,750 59,285 68,309 80,049

Closing Block 17,551 24,776 42,282 55,389 58,996



Page 23 of 30

6 Valuation Methodology and Approach

6.1 Basis of Valuation

6.1.1 The 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 March 2012.

6.2 Valuation Methodology

An overview of the DCF method is presented below:

6.2.1 Value is future oriented and accordingly the theoretically correct manner to assess value is to consider the future earnings potential.

6.2.2 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.

6.2.3 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.

6.2.4 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.

6.2.5 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.



Page 24 of 30

7 Valuation The 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).

7.1 Discount Rate and Terminal Growth Rate

7.1.1 Weighted 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 equity

E = market value of equity

Kd = cost of debt

D = market value of debt

T = corporate taxation rate

The cost of equity is derived using the Capital Asset Pricing Model (“CAPM”) as follows:

Where: Ke = R(f) + ß * (R(m) – R(f)) +

R(f) = the current return on risk-free assets

R(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

ß = 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 risk

For 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:



Page 25 of 30

Cost of equity:

7.1.1.1 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 March 2012. Based on such yield rate, we have considered risk free rate of 8.60 per cent per annum as on 31 March 2012 (Source: Bloomberg, as on 31 March 2012).

7.1.1.2 Market risk premium: The historical market rate of return of the BSE Sensex for 30 year period as at 31 March 2012 was 15.92 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 7.32 per cent.

7.1.1.3 Beta: Beta is a measure of the risk of the shares of a company. ß is the co-variance between the return on sample stock and the return on the market (say, Sensex). In other terms, ß 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 0.82.

7.1.2 Discount rate

7.1.2.1 The Weighted Average Cost of Capital (“WACC”) is estimated at approximately 15.2 per cent.

Source: B S R analysis

We have considered an alpha of 1 per cent to calculate the cost of equity to account for the following uncertainty:

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.

7.1.3 Terminal Value

At 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.

Calculation of Cost of Capital

Risk Free Rate of Return 8.60%

Market Rate of Return 15.92%

Risk Premium 7.32%

Beta (levered to target D/E ratio) 0.82

Alpha 1%

Cost of Equity 15.6%

Cost of Debt 11.0%

Tax Rate 32.5%

After Tax Cost of Debt 7.4%

Total 100.0%

Debt to Capital % 5.6%

Equity to Capital % 94.4%

Debt to equity 0.06

Weighted Average Cost of Capital 15.2%



Page 26 of 30

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.

7.2 Surplus Assets, Preference Capital and Contingent Liabilities

The Management has confirmed that there are no surplus assets or contingent liabilities that need to be considered to carry out the Valuation.



Page 27 of 30

7.3 Valuation of MSMPL

7.3.1 Valuation of MSMPL using DCF method:

Source: B S R analysis

USD Thousand

FYE 31 March 2013 2014 2015 2016 2017 TVTotal Revenue 518,316 669,923 757,069 852,284 953,126 991,252

y-o-y growth -13% 29% 13% 13% 12% 4.0%

EBITDA 99,917 131,696 144,934 156,186 165,748 172,378

EBITDA Margin 19% 20% 19% 18% 17% 17%

Less: Tax on EBIT 30,165 30,830 34,909 38,859 42,777 44,489

Add: Amortisation 126,215 215,485 256,551 308,293 365,252 337,252

Less: Capital expenditure - Films & Cricket 174,795 246,489 266,552 295,489 337,252 337,252

Less: Capital expenditure - Other f ixed assets 6,065 4,676 3,783 3,693 3,776 3,776

Less: Increase/(Decrease) in Net w orking capital 32,086 33,251 18,521 20,223 21,994 9,389

Free cash flows to the firm (16,978) 31,934 77,720 106,214 125,200 114,724

Period factor 0.50 1.00 2.00 3.00 4.00 4.50

Discount factor 0.93 0.87 0.75 0.65 0.57 0.53

Present value of cash flows to the firm (15,820) 27,727 58,592 69,524 71,156 60,756

USD Thousand

Primary value 211,179

Terminal value 543,797

Enterprise Value 754,976

Less: Debt 270,974

Add: Cash and cash equivalents 50,721

Add: Investments & Surplus assets 28

Less: Minority Interest for MSM Discovery JV 1,868

Equity Value 532,883

No. of outstanding equity shares 9,138,579

Equity Value (USD per share) 58.3

Equity Value (INR per share) 3,024

Implied Multiples

2012

EV/Revenue 1.3x

EV/EBITDA 5.4x

EV/EBIT 5.5x

CoCo Multiples

Mean Median

EV/Revenue 2.3x 1.6x

EV/EBITDA 8.2x 8.3x

EV/EBIT 14.1x 11.0x

532,883 2.0% 3.0% 4.0% 5.0% 6.0%

13.2% 600,305 652,979 717,138 796,999 899,129

14.2% 523,871 565,729 615,817 676,827 752,767

15.2% 459,303 493,070 532,883 580,522 638,550

16.2% 404,075 431,666 463,790 501,665 546,986

17.2% 356,331 379,124 405,377 435,944 471,983

Equity Sensitivity Analysis - USD Thousand

WA

CC

Terminal Growth



Page 28 of 30

8 Conclusion

8.1 We 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.

8.2 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 March 2012 per DCF method is USD 532,883 thousand and the value per share is around USD 58.3.

The value per share is around INR 3,024 based on an exchange rate of INR 51.85 per USD.

Note: The number of shares as of 31 March 2012 are 9,138,579 equity shares of INR 10 each.



Page 29 of 30

Annexure 1: Comparable Companies data

The re-levered Beta of the comparable companies in the media and entertainment industry is 0.82 as indicated below:

Source: Bloomberg, Company filings

Beta Calculation

S.No. Company Debt/EquityLevered

Beta Tax RateTarget's Debt

EquityTarget's Tax Rate

Re Levered Beta

1 New Delhi Television Ltd 0.8 1.0 32.45% 0.06 32.45% 0.68

2 Sun TV Netw ork Ltd 0.0 0.8 32.45% 0.06 32.45% 0.85

3 TV Today Netw ork Ltd 0.1 1.0 32.45% 0.06 32.45% 0.96

4 Zee Entertainment Enterprises Ltd 0.0 0.8 32.45% 0.06 32.45% 0.83

5 Zee New s 0.1 0.8 32.45% 0.06 32.45% 0.82

6 Raj Television 0.1 0.8 32.45% 0.06 32.45% 0.77

Average 0.2 0.82

Median 0.1 0.82



Page 30 of 30

Glossary

BSE Bombay Stock Exchange

CoCo Comparable Companies

CoTrans Comparable Transactions

DCF Discounted Cash Flow

EBIT Earnings Before Interest &Tax

EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation

EV Enterprise Value

FCFF Free Cash Flow for Firm

FY Financial Year

INR Indian National Rupee

mn Million

NAV Net asset value

Pa Per annum

PAT Profit after tax

PV Present Value

TG Terminal Growth

TV Terminal Value

WACC Weighted Average Cost of Capital

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