EROS INTERNATIONAL MEDIA LTD : WILL HAVE BLOCKBUSTER PERFORMANCE !!!

Scrip Code: 533261 / EROSMEDIA

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. Here, Eros de-risk its business by pre-selling the overseas right to overseas entities that have significant presence. Through this, Eros has generally been able to recover nearly 40 % of its cost of acquisitionof a film, thus, significantly reducing the risk associated with a film's offtake as well as ensuring cash flows. The company also recovers 35 % to 40 % of its costs by selling movie rights to channels such as Colors, Zee TV and Star Plus. Together, with such strategies helps to reduce the risk inherent in the film production and distribution business. Thus, Eros has been able to gain from multiple revenue streams and limit the losses quite significantly in case movies do not perform well in theatre screens. Eros also gains from satellite, After the telecom regulator mandated digitising cable networks in metros and top cities, DTH players and digital cable companies have been able to substantially increase the number of subscribers to their networks. This has led to growth in subscription revenues for satellite channels. It is also increasingly helping them broadcast new movies soon after after their release.

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

I would buy EROS INTERNATIONAL MEDIA LTD for Medium to Long term for target of Rs. 265.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 210.00 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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