HUHTAMAKI PPL LTD: POWER PACK STOCK !!!

Scrip Code: 509820 / PAPERPROD

CMP:  Rs. 240.30; Market Cap: Rs. 1,747.26 Cr; 52 Week High/Low: Rs. 326.45 / Rs. 176.00

Total Shares: 7,27,11,934 shares; Promoters : 3,99,79,253 shares – 63.78 %; Total Public holding : 2,27,07,937 shares – 36.22 %; Book Value: Rs. 84.71; Face Value: Rs. 2.00; EPS: Rs. 12.36; Dividend: 140.00 % ; P/E: 19.44 times; Ind. P/E: 22.66; EV/EBITDA: 7.77.

Total Debt: Rs. 528.64 Cr; Enterprise Value: Rs. 2,136.06 Cr.

HUHTAMAKI PPL Ltd: Huhtamaki Paper Products Limited was founded in 1935 and is headquartered in Thane, India. The company was formerly known as The Paper Products Limited and changed its name to Huhtamaki PPL Limited in May 2014. Huhtamaki PPL Limited is a subsidiary of Huhtavefa B.V. from Netherlands. The company have given bonuses in two tranches the first was in September 1987 in the ratio of 1:4 and second in September 1993 in the ratio of 1:2, Company also declared splits in the face value of its shares from Rs. 10 to Rs. 2 in January 2007. Huhtamaki PPL Limited provides packaging solutions in India. Its packaging solutions include flexible packaging products, including film, foil, and paper based laminate structures; labelling technologies, which include shrink sleeves, heat transfer, pressure sensitive, metalized paper, and wrap-around; and specialized cartons for packaging of powders and solids. The company also offers packaging machines comprising sleeve application machinery and shrink tunnels, heat transfer applicators, and support on labelling equipment for wrap around and self-adhesive labels; holographic options; metalized films; co-extruded blown films; extrusion coated materials; gravure cylinders; and polyethylene films. It serves various product groups, such as soaps and detergents, shampoos, noodles, biscuits, baby foods, chocolates, coffee, tea, milk powder, and juices. HPPL also exports its products to 5 continents. In 1999, PPL became a member of the Huhtamaki Packaging Worldwide, a global leader in consumer packaging. Huhtavefa BV is the holding company of Huhtamaki Netherlands BV, Netherlands. Huhtamaki is a global consumer & Speciality packaging company with a wide range of packaging products & other paper forming technology. In February 2014, Huhtamaki group increased its stake from 60.77 % to 63.78 % by acquiring 1,88,48,087 shares or 3.01 % stake from Mr. Suresh Gupta, Chairman of HPPL, at a total consideration of Rs. 169.63 Cr or Rs. 90 per share. Further, 1,00,24,744 equity shares were allotted to Huhtamaki group at Rs. 134.08 on 20th August 2014 totalling to Rs. 134.41 Cr, thereby increasing Huhtamaki’s stake from 63.78 % to 68.8 %. PPL has three state of the art & fully integrated manufacturing facilities at Thane, Silvassa and Hyderabad with highly skilled and experienced staff. HPPL is capable of working with the customer from product inception to the super market and with complete control and confidentiality. HPPL has an impressive client list that includes, Levers, Nestle, Cadbury, Britannia, Glaxo Smithkline, Coca Cola, Perfetti, Dabur, Marico, P&G. HPPL has presence across 4 continents: South Asia, Africa, Middle East, Europe and Central America & provides service to over 50 customers worldwide. As of March 31, 2014, HPPL has 51 % stake in its subsidiary based in India named Webtech Labels Pvt. Ltd, which was acquired in Nov 2012 for a consideration of Rs. 37.70 Cr, in an all cash deal. Webtech Labels is specialized in manufacturing high-end pressure sensitive labels, especially to pharmaceutical customers. Huhtamaki PPL can be locally compared with Uflex Ltd, Glory Polyfilms Ltd, Xpro India Ltd, Essel Propack Ltd (Packaging India Pvt. Ltd. - part of Essel Propack group), Shree Rama Multi Tech Ltd, Cosmos Films Ltd, Nahar Poly Films Ltd & from some unlisted players like Uma Polymers, Umax Packaging & Parikh Packaging and globally compared with Avery Dennison Corporation of USA, Ball Corporation of USA, Berry Plastics Group Inc of USA, Crown Holdings Inc of USA, Packaging Corporation of America of USA, Seal Air Corporation of USA, British Polythene Industries PLC of UK, Huhtamaki Oyji of Finland, Smurfit Kappa Group Plc of Ireland, Vetropack Holding AG of Switzerland, Polyplex (Thailand) Public Company Ltd of Thailand, The Pack Corporation of Japan, Lock & Lock Co., Ltd of South Korea, Greatview Aseptic Packaging Company Ltd of China, CPMC Holding Ltd of Hong Kong, Mpact Ltd of South Africa, Nampak Ltd of South Africa.

Investment Rationale:

Huhtamaki PPL Ltd. (HPPL) earlier known as The Paper Products Ltd. is India’s leading manufacturer of primary consumer packaging. HPPL supplies packaging materials for many of the top brands in India and commands about 60 % of market share in premium flexible packaging business. HPPL is India's leading Consumer Packaging Company offering a wide range of packaging solutions like Flexible Packaging, Labelling Technologies and Specialised Cartons and all this is supported by the Packaging Machine Division. HPPL provides the customer with Total packaging solutions. HPPL has very long and eminent clients list which includes all major players in FMCG sector. The company mainly caters to the premium segment of packaging and enjoys 60 % of market shares in premium segment. Its major clients include Britannia, Hector Beverages (Paper Boat), Cadbury, Castrol, Coca Cola, Dabur, Emami, Eveready, GSK, Godrej, Hindustan Unilever, ITC, Marico, Nestle, Pepsi, Perfetti, P&G, Tata Tea, TTK-LIG, Wipro etc. The top ten clients only accounts for 60 % of the HPPL’s revenues. Product-wise, Laminates and Converted, Coated & Uncoated Paper and Films category accounts for a major portion of HPPL’s total revenues. HPPL derives around 80 % of its revenues from the domestic market, while exports account for the balance 20 %. HPPL is like a one stop shop for FMCG companies for their packaging needs. HPPL is specialised in flexible packaging and with a growing trend of processed food market and with the penetration of untapped rural markets by personal care companies, there will be the increase in use of flexible packaging. HPPL is amongst selected few companies worldwide having expertise in holographic images in packaging medium. This makes the packaging look attractive, thus enhancing the product visibility for premium positioning. Holograms are also popular as a deterrent against counterfeits for product protection. The packaging industry in India is expected to reach $ 73 billion in 2020 from $ 33 billion in FY 16. In the coming years, Indian packaging industry is anticipated to register 18 % annual growth rate, with the flexible packaging and rigid packaging expected to grow annually at 25 % and 15 %, respectively. The Indian packaging industry constitutes about 4 % of the global packaging industry. The per capita packaging consumption in India is quite low at 4.3 kgs, compared to countries like Germany where it is 42 kgs and Taiwan where it is 19 kgs. However, organised retail and boom in e-commerce, which offer huge potential for future growth of retailing, is giving a boost to the packaging sector. Today, plastics are the material of choice in packaging for the sectors such as FMCG, food and beverages, pharmaceuticals etc. Globally, plastics comprise of 42 % of packaging with the combination of rigid and flexible plastics in packaging. Plastics are used heavily for packaging due to innovative visual appeal for customer attraction and convenience. Additionally, they improve the hygiene quotient and shelf-life of the products especially in food and beverages segment. As plastics possess versatile properties it can help us do more with less. One such property is light weight. As plastics are light in weight, they have a high product to package ratio which results in lighter weighed end product. For example, only 1.5 pounds of flexible plastics can deliver approximately 60 pounds of beverage; compared to three pounds of aluminium or 50 pounds of glass. Thus, plastic packaging enables in shipping more products with less packaging material. And also brings down the fuel consumption and the overall transportation cost. Huhtamaki PPL Ltd is setting up a new Flexible Packaging manufacturing unit in Assam which is likely to be commissioned during the first half of 2017, to better service its customers based in North East India. The Company's subsidiary, Webtech Labels Private Limited, is setting up a new label manufacturing unit in Sikkim, to service its customers based in North East India and likely to be commissioned during the first half of 2017. Further, the main Label manufacturing unit of Webtech Labels, located at Mahape, Navi Mumbai, primarily catering to Pharma companies will be relocated to a new state of the art facility in the Greater Mumbai Region by the end of 2017. The combined value of these investments/modernisation is expected to be appx. Rs. 65 crores. As the industry grows and matures, there is expected to be a trend towards consolidation as supply side companies merge and acquire smaller companies to increase scale, reduce competition, and improve bargaining power with customers. The main problems faced by MSMEs are: lack of available sources of credit, high cost of packaging materials, lack of skilled labour, irregular power supply, and an underdeveloped sense of how to market, brand, and distribute. Today, flexible packaging is the fastest-growing sector of India’s packaging industry. The shift from traditional rigid packaging to flexible packaging on account of its attractiveness, cost effectiveness, and strength is largely aided by increasing consumer demand for processed food. The future of the Indian packaging industry is very good, if investment materializes. The growth of the domestic market will be good and export potential is substantial, too, if it’s properly addressed. If organized retail takes off as expected, growth opportunities are substantial, and enormous potential exists in converting wasted food into valuable product.

Outlook and Valuation: 

Huhtamaki PPL Limited (HPPL) is a part of Huhtamaki Oyj, Finland and is known for packaging since the company was founded in 1935. Today, HPPL offers a wide portfolio of packaging solutions that include Flexible Packaging, including a variety of Pouching Solutions, Labelling Technologies, Shrink Sleeve solutions, Specialised Cartons, Cylinder Engraving and Specialised Films for high barrier. And all this supported by Packaging Machine Expertise, to provide you with Total packaging solutions. Today HPPL is like One Stop Shop in a true sense. HPPL has a thriving International business, an area of high focus across its technology groups. With 13 state of the art, fully integrated manufacturing facilities at Thane, Silvassa, Hyderabad, Rudrapur, Navi Mumbai, Parwanoo, Khopoli, Taloja, Ambernath, Banglore; a highly skilled and experienced team, HPPL is capable of working with you from product inception to the super market and with complete control and confidentiality. Through close collaborations with customers in developing innovative packaging solutions, HPPL delivers truly meaningful brand experiences for consumers. HPPL’s technical excellence and superior quality standards help its customers in improving aesthetics, increasing shelf life & handling transportation of their products. HPPL is a pioneer and the market leader in flexible packaging in India and has a market share of 60 % in premium flexible packaging business and about 9 % overall in the organized market, which is of about $2 billion by size. It has currently, installed capacity of for paper & films is about 52,000 MT and company’s capacity utilization rate is 75 % to 80 %. HPPL successfully meets the packaging needs of almost entire range of FMCG segments including personal products, personal wash, laundry, foods, sauces, beverages, bakery products, spices, chocolates and confectionery, dairy and also for seeds, specialized chemicals, electronics, healthcare and many other specific specialized uses including anti-spurious packaging. HPPL thus enjoys Competitive advantage due to use of its superior technology & capability. HPPL has an MNC Tag and with diverse products & Strategic acquisition of competitor, adds to its competitive advantage. India is a growing market for plastics and consumes about 12.8 million metric tonnes (MMT) of plastics annually against global consumption of 285 MMT per year. The plastics and polymer consumption is growing at an average rate of 10 %. About 30,000 processing units with 113,000 processing machines have created manufacturing capacity of 30 MMT per annum in India. This has been achieved with a 13 % CAGR of processing capacity during last 5 years. The industry has invested $5 billion in the machinery and it is expected to invest $ 10 billion more for increasing the capacity during the next 5 years. The per capita consumption of polymers in India during 2014-15 was just 10.5 kg as compared to 109 kg in USA, 45 kg in China and 32 kg in Brazil. India is expected to be among the top ten packaging consumers in the world by 2016. The low level of per capita plastics consumption in India is indicative of the massive growth potential of the plastic industry. Give n the rising consumerism and modern lifestyles, it is expected that per capita consumption will be doubled in the next five years. On financial side the company’s net profit stood at Rs. 16.79 Cr as against Rs. 15.97 Cr in the corresponding quarter ending of previous year, an increase of 5.13 %. Revenue for the quarter rose by 6.76 % to Rs. 557.47 Cr from Rs. 522.19 Cr, when compared with the prior year period. During the quarter, company reported EBIDTA of Rs. 59.94 Cr as against Rs. 55.33 Cr in the corresponding period of the previous year, up by 8.33 %. During Q3 CY16, Profit before tax up by 38.26 % to Rs. 29.09 Cr from Rs. 21.04 Cr in Q3 CY15. EPS of the company stood at Rs. 2.31 a share during the quarter, as against Rs. 2.20 over previous year period. During 9M CY16, Net sales up by 9.66 % to Rs. 1,655.26 Cr from Rs. 1,509.39 Cr in 9M CY15. During the nine months ended 2016, net profit was increased by 23 % to Rs. 69.33 Cr from Rs. 56.37 Cr over the nine months ended 2015. Net Sales PAT of the company are expected to grow at a CAGR of 23 % and 17 % over 2014 to 2017E, respectively. Huhtamaki PPL Ltd is setting up a new Flexible Packaging manufacturing unit in Assam which is likely to be commissioned during the first half of 2017. Huhtamaki PPL Ltd. is one of the most prestigious flexible packaging companies in India and is continuously taking up new initiatives to expand its presence overseas to tap the vast potential in the global markets. With the recent acquisition of Positive Packaging Ltd., the manufacturing capabilities of HPPL are expected to increase considerably which in turn will increase the revenues for the Company. The Company is a market leader in the flexible packaging industry in India and has reputed clients like HLL, Colgate, Nestle, etc. It is expected that the projected growth rate of 15 % in the flexible packaging industry will positively impact HPPL in the future. At the current market price of Rs. 240.30, the stock is trading at a PE of 19.66 x FY16E and 16.50 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 12.22 in FY16E and Rs. 14.56 in FY17E. 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.

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	1,225.34	2,037.38	2,229.45	2,474.69
NET PROFIT (₹ Cr)	66.60	76.93	88.85	105.89
EPS (₹)	9.16	10.58	12.22	14.56
PE (x)	25.56	22.13	19.16	16.08
P/BV (x)	3.01	2.76	2.42	2.10
EV/EBITDA (x)	12.00	7.77	7.13	6.36
ROE (%)	11.02	12.78	13.12	13.44
ROCE (%)	28.69	32.07	32.00	32.42

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article. 

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RETURN ON CAPITAL 

SHEMAROO ENTERTAINMENT LTD: ENTERTAINING AT ITS BEST !!!

Scrip Code: 538685 / SHEMAROO

CMP:  Rs. 374.30; Market Cap: Rs. 1,017.43 Cr; 52 Week High/Low: Rs. 422.00 / Rs. 221.10

Total Shares: 2,71,82,239 shares; Promoters : 1,78,91,920 shares – 65.82 %; Total Public holding :  92,90,319 shares – 34.18 %; Book Value: Rs. 134.24; Face Value: Rs. 10.00; EPS: Rs. 21.52; Dividend: 14.00 %; P/E: 17.39 times; Ind. P/E: 34.80; EV/EBITDA: 9.36x

Total Debt: Rs. 212.39; Enterprise Value: Rs. 1,228.75 Cr.

SHEMAROO ENTERTAINMENT LIMITED: The Company was incorporated in 1962, Shemaroo Entertainment Ltd is Mumbai based integrated media content house with activities across content acquisition, value addition to content and content distribution. Shemaroo distribute entertainment content through television such as satellite, terrestrial and cable television; mobile, internet, direct to home and other ways. Shemaroo is also an official channel partner for Google and managing 32 channels. Shemaroo's content library consists of over 1000 titles across new Hindi films, Hindi films classics, and titles in other regional languages like Marathi, Gujarati, Punjabi, Bengali etc. and a variety of non-film content. The company came out with an IPO on September 16, 2014 offering 77,41,885  equity shares of Rs. 10 each for Rs. 170 per share with retail discount of Rs. 10 per share at Rs. 153 raising Rs. 131.62 Cr. The shares of the company got listed on October 1, 2014 at Rs. 180 making a high of Rs. 181 and low of Rs. 171.00 on listing day. The object of the issue was to fund working capital requirements, to fund expenditure for general corporate purposes, and listing of its equity shares will enhance visibility and brand name among existing and potential customers and business. Shemaroo Entertainment Limited is a holding company. The Company is an entertainment company engaged in the business of motion picture, video and television program distribution activities. Its business activities include content library; distribution platforms, including broadcast syndication, new media, home entertainment and other distribution platforms; content licensing, and other business activities. Its Content Library consists of over 3,400 titles spanning various Hindi films. The Company also has non-film content and titles in various other regional languages, such as Marathi, Gujarati, Punjabi and Bengali, among others. Its content is distributed over various Internet video platforms, such as YouTube, Hooq, Hotstar, Apple iTunes, Google Play and Spuul. Shemaroo Entertainment Ltd is locally compared to EROS International, ZEE Media Corporation Ltd, TV Today Network ltd, NDTV Ltd, TV 18 Broadcast Ltd, Sahara One Media, BAG Films, Raj Television, Diksat Transworld, Sun Tv Network, Sri Adikari Bros, Jain Studios, 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: 

Shemaroo Entertainment was incorporated in October 29, 1962 as a book library, Shemaroo Entertainment Ltd (Shemaroo) is a Mumbai based integrated media content house. It is involved in content aggregation, content acquisition, value addition to content and content distribution. Shemaroo's content library consists of over 1000 titles across new Hindi films, classic Hindi films, titles in other regional languages such as Marathi, Gujarati, Punjabi and Bengali, and a variety of non-film content. It has three subsidiaries, of which two are foreign companies. Together with film based copyrights and other entertainment rights, the brand "Shemaroo" is synonymous with quality entertainment. In 1979, they set up India's first video rental business and thereafter in 1987, they forayed into distribution of content through the home video segment in the video home system (“VHS”) format. Over the years, this Company has successfully adapted to changing content consumption patterns by expanding into content aggregation and distribution for broadcasting on television platforms. Shemaroo’s  content library consists of more than 2,800 titles spanning new Hindi films like The Dirty Picture, Kahaani, OMG: Oh My God!, Black, Ishqiya, Slumdog Millionaire, Ajab Prem Ki Ghazab Kahani, Omkara, Dil Toh Baccha Hai, Chandni Chowk to China, Bheja Fry 2, amongst others. Hindi films classics like Zanjeer, Beta, Dil, Disco Dancer, Mughal-e-Azam, Amar Akbar Anthony, Namak Halaal, Kaalia, Madhumati etc., titles in various other regional languages like Marathi, Gujarati, Punjabi, Bengali among others as well as non-film content. Shemaroo is also India’s one of the largest independent content aggregators in Bollywood. Currently, Shemaroo distribute content over which they have either complete ownership rights or limited ownership rights. Titles over which we have complete ownership rights are referred to as “Perpetual Rights”, which allows Shemaroo to distribute content worldwide for a perpetual period across all mediums. Titles over which they have limited ownership rights are referred to as “Aggregation Rights”. Aggregation Rights are restricted by either period of usage, distribution platforms, medium and geography or combination thereof. Titles where Shemaroo have Perpetual Rights or Aggregation Rights are known as our “Content Library”. Shemaroo also distribute their content through various mediums such as television such as satellite, terrestrial and cable television; new media platforms consisting of mobile, internet, direct to home (“DTH”) and other applications; home entertainment; and other media. The Indian media and entertainment industry is estimated at Rs 1.10 trillion as of 2016. Television and print (primarily newspapers) account for more than 70 % of the industry's revenue. Shemaroo’s recent initiatives include tying up as an official channel partner for Google Inc.’s You Tube where it is managing 32 channels. It is also moving beyond providing just content, to providing content management solutions to partners including Reliance Communications Re 1 WAP store and Airtel digital television in connection with an interactive devotional service, namely “iDarshan”. The Indian Media and Entertainment (M&E) industry is projected to grow at a CAGR of 15 % between 2012 and 2017 to reach Rs 1.66 trillion. This industry has been on a steady growth trajectory over the past five years barring 2009 due to an economic slowdown. Continuous expansion into different segments, steady growth in television and print, and emergence and rapid expansion of new segments such as digital have been key growth drivers. The industry’s revenue is expected to grow at 13 % CAGR over the next five years. Growth would be driven by a revival in advertising spends. Advertising revenue is estimated to increase 13 to 14 % in 2015, as companies hike spends across major advertising channels. The film industry’s revenue is projected to record 11 % CAGR, driven by increasing number of multiplexes, higher average ticket prices and expansion into tier II and tier III cities. While radio could see steady revenue growth, the much awaited FM Phase III auctions would provide a fillip. The number of Cable and Satellite (C&S) households in India base is expected to grow to 17.3 Cr by 2017, representing 91 % of TV households. With the mandatory Digital Access System (DAS) getting implemented in the four metros of Delhi, Mumbai, Kolkata and Chennai is seen as a revolutionary step in the media industry. The Subscription revenue for broadcasters is estimated to grow at a CAGR of 26 % by 2017. Increase in the declared subscriber base and aggregation of distribution on behalf of broadcasters is expected to drive up the share of subscription to total broadcaster revenue from 36 % in 2012 to 48 % in 2017. Hindi and regional General Entertainment Channels (GECs) account for major portion of the total viewership for over 50 % of the total viewership. GECs are the key drivers of television viewership, accounting for 65 % to 75 % of Hindi and regional markets. Hindi GEC and Hindi movie genres consolidated their position with a viewership share of 30 % and 11.9 % in 2016, compared to 26.5 % in 2014. Movie acquisition costs continued to soar as broadcasters retained their strategy in using block-buster movies to sustain viewer interest and buzz. Star Network is reported to have invested approximately Rs. 300 Cr on movie acquisitions in the past year. Zee Entertainment on the other hand is reported to have invested Rs. 200 Cr to acquire 10 movies during the year. New media continues its growth trajectory in 2016, with growth in advertising revenues of close to 40 % over last year. Coming in at approximately Rs. 2200 Cr in revenue in 2016, digital ad spends reached approximately 6.7 % of the total M&E industry advertising revenue. As expected, mobile and wireless connections continued to drive the growth of internet penetration in India. By the end of 2016 there were 14.4 Cr internet connections in India, a rise of 41 % over last year. Online streaming is a major growth engine for the music industry, both globally and in India. According to Strategy Analytics, globally, online streaming revenues will grow at nearly 5 times the rate of growth for download revenues in 2015, at 40 % versus 8.5 %. Until recently there were few legal sources for buying media content in India. In 2012 the Indian digital music industry saw the debut of Flipkart’s Flyte and Apple’s iTunes stores featuring comprehensive selection of local and international music from all the major labels and thousands of independent labels. Shemaroo Entertainment (Shemaroo) is India’s leading media content house. Shemaroo sports a content library of 3,011 titles, with 781 perpetual (complete) rights and 2,230 aggregated (limited) rights. The company benefits from the strong relationships with producers and the expertise and brand name associated with high consumer recall and media visibility. On the distribution side, Shemaroo is aligned with big names such as SONY, Star, Colors, etc. On the New Media side, it sells its movies to media platforms such as YouTube, Hooq, Apple iTunes, Hotstar through their pacts with telecom operators like Airtel, BSNL, Vodafone, RCom, Tata Teleservices etc. These business relationships are enabling Shemaroo to cash in on the developing trends in technology. Post the first stage of film cycle Shemaroo enters into the fray due to which the risk related with the success of the film reduces significantly, due to higher visibility of performance vis-à-vis the first cycle of launch. It has been observed that the subsequent stages of film cycle are growing at a good rate due to increasing advertisement spends and onset of digitization. The risk of piracy also reduces to a great extent as maximum piracy occurs in the first cycle of films. Increasing internet penetration, proliferation of smartphones, and 4G roll out, National Optical Fibre rollout programme may benefit Shemaroo along with the advent of new global media platforms like Netflix coming to India. As SEL generates revenues from distribution of content, diverse and wealthy content library bodes well for its top line growth. Shemaroo’s flagship business has been to buy content from production houses, producers etc and to sell this content to broadcasting channels, cable TV companies, home entertainment purpose. Indian television industry has six genres and movies genre is the second largest genre after General Entertainment Channels (GEC). Furthermore, the company continuously reported increase in its inventory levels, which represents ongoing addition of content to support the future growth opportunities. SEL’s rich content library is complemented by its presence across the traditional and new distribution platforms. During the past several years, the company has invested heavily to further enrich its content library. With a strong foothold in Indian media space, possession of some of the well-known movie titles, and rich content library, Shemaroo is an eminent brand in the Indian media space.  

Outlook and Valuation:

Shemaroo Entertainment Limited, is today an established integrated media content house in India with activities across content acquisition, value addition to content and content distribution. Over the years, the Company has successfully adapted to changing content consumption patterns by expanding into content aggregation and distribution for broadcasting on television platforms. It is continuing its expansion into New Media platforms. Shemaroo acquires content only after the movie is released from its first copyright holders (usually TV broadcasters). So essentially, Shemaroo is a trading company which buys content, re-packages and markets it to various Exhibitors. Besides this Shemaroo has other smaller business like the Home Entertainment Business which has a product presence of 1,300 titles across over 2,000 retail stores across India like Planet M, Music World, Crossword etc. This business sells DVDs and Blue Ray Discs in line with the emerging industry trend of shifting from physical to digital formats. Other Media business includes media platforms like Airborne rights for in-flight entertainment, international film festivals and overseas markets such as USA, UK, Singapore, Fiji, UAE, Australia, East Europe and North Africa. The company has launched a first of its kind movie premiere service named ‘Miniplex’ on Airtel Digital TV and Tata Sky. Miniplex is an ad-free, subscription based service which would premiere one movie every week for the first time on Indian television. Miniplex is a cross platform service and in addition to DTH it will be launched across various other platforms like digital, cable etc in phased manner. In line with this recently Shemaroo entered into an agreement with Dish TV based on the subscription fee model. The Miniplex will premiere latest blockbuster movies every Friday. So, in this manner Shemaroo makes a mark on the digital TVbusiness. The subscription fees are fixed at Rs. 60 per month while the service will give a theatre like feeling to customers at home. This business is actually at a nascent stage. As the company moves ahead with more tie-ups, the Miniplex business may attract a huge potential to become a substantial revenue stream for Shemaroo. Very recently the company has secured a new tie-up with Dish TV which is expected to build-up in a big way. Management aims to buy 75 to 100 titles per annum hereon and enhance its movie library. The company benefits from the strong relationships with producers like RK Films, Tips Industries, Red Chillies Entertainment etc. and the expertise and brand name associated with high consumer recall and media visibility. On the distribution side, the company is aligned with big names such as SONY, Star, Colors, etc who regularly buy movies from Shemaroo. On the New Media side, the company sells its movies to media platforms such as YouTube, Hooq, Apple iTunes, Hotstar through their pacts with telecom operators like Airtel, BSNL, Vodafone, RCom, Tata Teleservices etc. These business relationships are enabling Shemaroo to cash in on the developing trends in technology. The company acquires forward content rights, with either complete ownership (perpetual rights) or limited ownership (aggregate rights), which are then sold on a forward rights basis for a period of 5-7 years to broadcasters. In the life span of a movie release, majority revenues like is 90 % to 95 % are generated through domestic and overseas theatricals and television release. The first cycle is typically 5 to 7 years, post which Shemaroo enters the fray. Subsequent movie cycles are typically of 5 year duration. Since Shemaroo is absent in the first cycle, the risk reduces somewhat, due to higher visibility of performance vis-à-vis the first cycle of launch. It has been observed that the subsequent stages of film cycle are growing at a good rate due to increasing advertisement spends and onset of digitization. Shemaroo takes utmost care and due diligence while buying a content depending on its success in the first phase of film cycle. The company strives to buy the perpetual rights of a film wherever possible but also tries to strike a balance by spreading its acquisition to aggregate titles too with cost of perpetual rights is 3x to 4x the cost of aggregate rights. Shemaroo’s absence in the first phase of film cycle reduces the risks associated with piracy too. The company intends to monetize their movie content across all media platforms within the digital ambit. As mentioned above, Shemaroo has tie up with almost all of the media platforms be it YouTube, Hooq, Spool etc. More than 50 % to 55 % of the digital media revenues for Shemaroo come from the advertising revenues from YouTube channels. In a way, more the number of media platforms, more will Shemaroo benefit out of it. This is it shelf signifies that Shemaroo is a platform agnostic company. The entry of Netflix in India through a tie-up with Shemaroo in a subscription based model will mean a lot for the company. Netflix would get access to the vast movie library of Shemaroo and in return offer Shemaroo with another huge platform for distributing and monetizing its content. Shemaroo implements different types of business models while dealing with various platforms depending upon the frequency of usage, costing etc. With Google Play, it is a subscription model, wherein users can rent or purchase movie for a fee. Shemaroo is currently showcasing 10 movies on this platform and many more are in the pipeline. Tie-up with Facebook entails pay per download model. There are already five movies live on FB from Shemaroo’s stable and there are four more to hit this platform shortly. Both these tie-ups are based on revenue sharing models. The tie-up with Apple iTunes is also a revenue sharing model in which Apple keep 30 %of the fee while its partner like Shemaroo in the case of this tie-up gains 70 %. While, for every dollar Google Play is making, Shemaroo makes almost 50 to 55 cents out of it. Shemaroo being the only listed player in second stage of film cycle stands an advantage on the back of its expertise, strong relationships with industry players and a wide variety of movie library. The company’s business risk is minimized due to its absence in theatrical release phase thus relatively insulating it from issues like piracy and high competitive intensity. The company has showed consistent performance for the quarter with revenue growing at 20 % YoY and 18 % sequentially on standalone front. On consolidated front the revenue grew by 21.4 % YoY and by 18.4 % sequentially. Revenue from digital media continued the upward curve with 52 % growth rate when compared to corresponding quarter of previous year. On sequential basis the revenue from digital media division grew by 19 %. Share of new media to revenue improved to 21.2 % vs. 17.0 % in corresponding quarter of previous year and stood steady sequentially. Traditional media too continued to grow at a healthy growth rate of 15 % YoY for the quarter under review and sequentially the revenue grew by 19 %. Share in revenue for traditional media stood at 78.8 % vs. 83.1 % YoY and stood steady sequentially. The improving share of digital media continued to drive up the operating margins for the company. EBITDA margin inclined to 29.8 % for the quarter under review against 25.2% in the corresponding quarter of the previous year. However margins stood flat sequentially. Higher operating margins of the company lead to improving profitability. Net profit for the quarter under review came in at Rs 16.9 Cr vs. Rs 11.4 Cr in the corresponding quarter of the previous year climbing by 48 % YoY. However, on sequential basis it was down by 1.8%. On consolidated front net profit grew by 35.5 % YoY to Rs 15.2 Cr and by 8 % sequentially. Higher advertising revenues from platforms like YouTube will lead to a rich pricing mix for the company. Availability of Shemaroo content over all the major digital platforms and quick monetization also leads to better margins. Furthermore, advent of Netflix in India will further enhance margins as it will be based on subscription model and Shemaroo will be paid according to international standards. The company targets 18 % Internal Rate of Return at the portfolio level, thus helping it to decide the cost of content acquisition. This augurs well for the margin growth. 4G rollout and entry of global companies like Netflix will lend a better bargaining power at the market leaders like Shemaroo’s hands thus increasing sales along with margins. Management has guided us for a northward movement in margins from here given the operating leverage they will be getting from the New Media Business with new players entering India and better pricing scenario. On the Traditional Media Business, the company expects margins to remain stable. At the current market price of Rs. 374.3, the stock is trading at a PE of 14.91 x FY17E and 11.80 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 25.10 in FY17E and Rs. 31.70 in FY17E. 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.

KEY FINANCIALS	FY16	FY17E	FY18E	FY19E
SALES (₹ Crs)	374.90	438.60	517.90	613.60
NET PROFIT (₹ Cr)	52.10	68.00	86.00	106.20
EPS (₹)	22.10	25.10	31.70	39.20
PE (x)	14.90	13.10	10.30	8.40
P/BV (x)	2.40	2.10	1.70	1.40
EV/EBITDA (x)	8.40	7.10	6.00	5.00
ROE (%)	15.30	17.10	18.20	18.70
ROCE (%)	29.50	29.40	29.40	29.50

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*As the author of this blog I disclose that I do not hold  SHEMAROO ENTERTAINMENT LTD in my any of the portfolios.

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