CMP:
Rs. 228.90; Buy at current levels.
Medium to Long term Target – Rs. 265; STOP LOSS – Rs. 210.00; Market
Cap: Rs. 2,105.26 Cr; 52 Week High/Low: Rs. 243.80 / Rs. 106.75
Total
Shares: 9,19,73,190 shares; Promoters : 6,88,33,290 shares –74.84 %; Total
Public holding : 2,31,39,900 shares – 25.16 %; Book Value: Rs. 96.59; Face Value: Rs. 10.00; EPS: Rs. 12.34;
Dividend: 15.00 % ; P/E: 18.54 times; Ind P/E: 34.02; EV/EBITDA: 7.63.
Total
Debt: 384.08 Cr; Enterprise Value: Rs. 2,326.53 Cr.
EROS INTERNATIONAL
MEDIA: EROS
INTERNATIONAL MEDIA was incorporated as in 1977 and is based in Mumbai, India.
It was started by Mr. Arjan Lulla. It was earlier known as Rishima
International Private Ltd and changed its name to Eros Multimedia Private
Limited on July 25, 2000. Company again changed its name to Eros International
Media Private Ltd on Nov 20, 2008, On Nov 18, 2009 company again changed its
name to the present Eros International Media Ltd. It is subsidiary of Eros Worldwide FZ Llc. Eros International Media
Limited operates in the media and entertainment sector in India and
internationally. It engages in sourcing content through acquisition,
co-production, or production; the theatrical distribution network operation;
licensing films for cable, satellite, and terrestrial television; and the
distribution of Tamil film content in Western Europe through its own television
station. The company came out with an IPO of about 2 Cr shares in September
2010 at Rs. 175 totaling to Rs. 350 Crs at the price of Rs. 175 and got listed
at Rs. 213.35 on 6 Oct 2010. The purpose of the issue was to acquire and
co-produce Indian films. The company also distributes content through physical
formats, such as DVD, VCD, and Blu-rays, as well as the digital mediums
comprising Video On Demand, Direct To Home, Internet, mobile, and in-flight entertainment; and
involved in music publishing and distribution activities. In addition, it
provides production planning and visual effects services for films; engages in
the acquisition, production, and distribution of Tamil films worldwide; and
involved in cable or DTH licensing, as well as trading and exporting
international film rights. The company owns approximately 1,100 films
comprising Hindi, Tamil, and other regional languages & has aggregated
rights to over 1,900 films plus additional 700 films for which the company
holds digital rights only. In the year 2006, Eros International Plc, the
holding company of the Eros Group, became the first Indian company to list on
the Alternative Investment Market (AIM) of the London Stock Exchange. On November 13, 2013, Eros International got listed on New York Stock Exchange at $11.10 a share, post NYSE listing, the company has cancelled its shares from Alternative Investment Market (AIM) london. Eros International PLC, is the Ultimate Holding Company based at Isle of Man, Eros Worldwide FZ-LLC is the holding company based in UAE and the subsidiaries include - Eros International Films Pvt Ltd, Copsale Ltd, Big Screen Entertainment Pvt Ltd, EyeQube Studios Pvt Ltd, EM Publishing Pvt Ltd, Eros Animation Pvt Ltd, Eros Digital Pvt ltd, Eros International Ltd (UK), Digicine PTE Ltd, Ayngaran International Ltd (Isle of Man). It
distributes content through retail outlets and it’s Website under the Eros and
Ayngaran labels. Eros International Media can be locally compared with PVR Ltd, Prime
Focus ltd, Reliance Broadcast Network Ltd, Balaji Telefilms ltd, Media Matrix
Worldwide Ltd, Shree Ashtavinayak Cine Vision Ltd, Tips Industries Ltd and
globally compared with Walt Disney Co of US California, Time Warner Inc of USA,
IG Port Incorporated of Japan, Twenty First Century Fox, Inc of New York, Lions
Gate Entertainment Corp of California, UTV Media PLC of UK, Dreamworks
Animation Skg Inc of California.
Investment
Rationale:
EROS INTERNATIONAL MEDIA LTD is a leading
global company in the Indian films and entertainment industry. It acquires
co-produces and distributes Indian language films in multiple formats. Eros continues its
emphasis on non-theatrical revenue streams. Eros has two advertising free TV
channels HBO Defined and HBO Hits along with HBO, these channels are doing
pretty well. These channels are currently available on most of the DTH
operators. The Online entertainment portal-EROS NOW is expected to pick up
going ahead, as the broadband connectivity in India improves with 3G/4G
networks becoming more affordable. In August, 2013 Eros announced that it is
partnering with A.R. Rahman to produce a movie with the music legend. The
company continues to get its movie selection right, and which is evident from
its presence in five out of top 10 box office releases in the year gone by. Movies
such as "Goliyon Ki Rasleela-Ram Leela, Jai Ho, R…Rajkumar, Grand Masti, One Nenokkadine (Telugu), Raanjhanaa, Singh Saab the Great, Krrish 3 (Overseas), Yeh Jawaani Hai Deewani (Overseas)" turned out to be the good bets
for the company. In addition, Eros also enjoys a competitive advantage in terms
of a strong international presence owing to its parent company EROS PLC. Eros, for high budget movies, generally recovers whole production
cost even before theatrical release in the form of sale of music and satellite rights
and 39 % guaranteed cost recovery from its parent for international distribution. In addition, monetisation of its huge movie library will over pay TV,
innovative box office performance linked satellite rights and preview over
premium TV (HBO Defined and HBO Hits) will further reduce its dependence on
theatrical revenues, which currently stand at 40 %. It is expected that its revenues
from TV licensing can grow at 14 % CAGR in FY14-16 to reach Rs. 352.7 crore in
FY16E. The company is expanding its regional presence with a number of releases
in the Telugu, Tamil and other regional markets. The year for EROS ended with
about 32 regional films, which currently accounts for about 20-25 % of its revenues.
The company expects the same to reach about 30-35 % of revenues. India has varying
entertainment tax rates across the states, and this impacts the EBITDA margins
of EROS. With the implementation of GST would immensely reduce entertainment
tax, which in turn helps EBITDA margins to grow by 1 % to 2 %. The listing of the parent company in the
international markets will help Eros with necessary capital inflow and will
also help it to increase its investments in good quality content. In addition,
the good grasp of its parent in the international markets helps Eros to command
a relative advantage in the international distribution space. Parent company’s
top management downplayed the street concerns about significant changes in
respect of terms for sharing overseas films rights on deal renewal in October
2014. Under the current deal, Parent Company i.e. Eros International Plc will
pay 39 % of film cost for overseas rights to Eros International Media Ltd. It
is believed that the clarity from Parent Company will remove major overhang on
the stock.
Outlook and
Valuation:
Eros is a leading
producer/distributor and has one of the largest film libraries of over 1200
films. Eros International has exhibited strong growth in the number of movie
releases by releasing 77 movies in FY13 and 69 in FY14 across Hindi,
Tamil/Telugu and other languages. The company continues to get its movie
selection right, evident from its presence in five out of top 10 box office
releases in the year gone by. The recent FICCI-KPMG report anticipates the market size of Indian Film Indusrty is set to grow at a compounded annual rate of 11.5 % from 2013 to touch Rs. 19,330 Cr by 2017. But the television industry is set to grow at a much faster pace of 18 % over the same period and touch Rs. 84,760 Cr by 2014. Players such as EROS would benefit from this trend as they increasingly look to tap the small screen for monetising films. There is increased
penetration in Indian markets, which is expected to even intensify further,
owing to a revolution brought in by digital technology. Wireless broadband,
growing internet usage, cable digitisation and higher DTH adoption would
further drive Indian M&E industry. The report also noted that smart phones,
tablets, gaming devices have laid the foundation of a new wave in the industry. Eros co-produces 60% of the movies while the rest are either acquired or
produced. The company has had long industry associations, a consistent track
record of releasing three to four movies of the top 10 movies in the box office
and a wide distribution network. Eros has been able to develop strong
relationships with key figures in the Indian film industry, which help it
secure key films and build a strong portfolio of movies. The results were
slightly better than the market expectations even though the number of movies
released was much lower. The cost of acquiring movies has been rising sharply
and the management indicated that the company would refrain from bidding
aggressively in line with its strategy of focusing on profitability. This
strategy would help margins, revenue growth of the company, until the content
price corrects, would be under pressure. The company has a good movie pipeline
for the next two years. Multiplexes like PVR have plans of aggressive
expansion, which would further benefit producers/distributors. The Catalogue
monetization led positive surprise at both revenue and margin front for EROS.
Its Revenue grew by 17 % YoY to Rs. 433 crore in Q3 FY14. This positive surprise
at revenue front was led due to huge spurt in catalogue monetization which
increased by around 75 % YoY to Rs. 60 crore in Q3 FY14. Revenue from other
main streams such as theatrical rights were Rs. 170 crore which is 39 % of
revenue and satellite rights of Rs.110 crore which is 25 % of revenue in Q3
FY14. The EBITDA margin of EROS improved by 6.79 % QoQ to 31.3 % in 3Q FY14
which is significantly better. Higher than expected EBITDA margin was primarily
led by catalogue monetization as minimum expenditure is incurred for earning
the same and hence top-line directly flows to bottom-line. Movies lined-up for
FY15E looks promising. The company is planning to release in FY15E eight movies
of category “A” of which 4 will be in Hindi and 4 in regional languages such as
Tamil & Telugu. Big movies lined up for release in H1 FY15E such as Happy
Ending starring Saif Ali, Action Jackson starring Ajay Devgan and Sonakshi
Sinha and already released Kochadaiyaan starring mega star Rajnikanth, Deepika
Padukone and music composed by A R Rehman. The management expects EBITDA margin
to be around 25 % in FY14E and FY15E as compared to historical average of 22 %,
this will be supported by revenue flow from catalogue monetization which has
relatively higher margin as compared to other revenue streams. The company’s
net debt at the end of Q3 FY14 stood at Rs. 280 crore which is more or less at
the same level in Q3 FY13. Also with the tie-up with Tata Sky in December 2013,
Eros has covered around 80 % of 80 million DTH homes. The company is witnessing
significant traction for HBO premium channels and expect momentum to pick up
further once it starts marketing services aggressively. The production cost
during 9M FY14 stood at Rs. 600 crore and for FY14E is likely to be in the
range of Rs. 750 crore to Rs. 800 crore. In FY15E, production cost will be in
the range of Rs. 800 crore to Rs. 900 crore. It is believed that with the strong
movie slate lined-up for release in FY15E will support the mid-teen growth rate
in the coming year. Further, clarity from Parent Company in respect of terms
for sharing overseas films rights on agreement renewal will remove major
overhang on the stock. The content pipeline of the company is exciting but timely release of
content remains a doubt. It is expected
that the company’s surplus scenario is likely to continue for the next three
years keeping its growth story in the coming quarters also. Eros is trading at
a significant discount to other media businesses. Factoring in
revenue and PAT CAGR of 17.4 % and 14.3 %, respectively, in FY13-15, Eros could
be a good buy at a Current Market Price of Rs. 228.90 and at this price, stock is trading at a P/E of 9.45x FY15E and 8.32x FY16E. The company can post EPS of Rs. 24.20 for FY15E and Rs. 27.50 for FY16E. One can buy EROS INTERNATIONAL MEDIA LIMITED with a target price of Rs. 265.00 for Medium to Long term investment.
| KEY FINANCIALS | FY13 | FY14 | FY15E | FY16E |
|---|---|---|---|---|
| SALES (₹ Crs) | 1,068.00 | 1,135.00 | 1,344.00 | 1,490.00 |
| NET PROFIT (₹ Cr) | 154.00 | 200.00 | 223.00 | 253.00 |
| EPS (₹) | 16.80 | 21.70 | 24.20 | 27.50 |
| PE (x) | 11.30 | 8.80 | 7.90 | 6.90 |
| P/BV (x) | 1.80 | 1.40 | 1.20 | 1.00 |
| EV/EBITDA (x) | 8.70 | 6.60 | 6.00 | 5.60 |
| ROE (%) | 15.70 | 16.50 | 15.60 | 15.00 |
| ROCE (%) | 15.90 | 18.50 | 18.00 | 17.30 |
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