IPO Note Eros International Media Ltd Recommendation Subscribe by lqa17524


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									IPO Note                                                                                        Eros International Media Ltd

Recommendation                                     Subscribe            Background
Price Band                                    Rs.158 – Rs.175           Eros International Media Limited (Eros) is a part of the
Bidding Date
                                              th     st
                                           17 - 21 Sept., 2010          Eros Group, a global player within the Indian media and
                                                                        entertainment sector having a track record of around
Book Running Lead Manager                  Enam, Kotak, MS, RBS
                                                                        three decades. Eros Group is in the business of sourcing
Sector                                              Media               Indian & other film content and exploiting it worldwide
Retail Application- Detail At Cut off Price                             through its offices in India, UK, USA, UAE, Singapore,
Number of Shares                                                 560    Australia, the Isle of Man and Fiji. Eros has various rights
Application Money                                              98000    to over 1,000 films which include Hindi, Tamil and other
Amount Payable                                                 98000    regional language films which is its competitive
Valuation                                                               advantage. Eros plc, the holding company of Eros Group,
Diluted EV/S (U/L)*                                         2.74/2.55   is the promoter of Eros & is listed on the Alternative
Diluted P/E (U/L)*                                        19.44/17.96   Investment Market of the London Stock Exchange.
                                                                        Eros sources content primarily through acquisitions from
No of Equity Shares Offered                                    2.0 Cr   third parties & through co-productions and occasionally,
Post Issue Promoter Holding                                   78.12%    through its own productions. The company acquires
Offer structure for different categories                                films from third party producers at various stages of a
QIB                                                              60%    film‘s production for an agreed contractual value, & also
Non-Institutional                                                10%    co-produce films from inception with certain producers
                                                                        for a pre-agreed fixed budget. Eros distributes Indian
Retail                                                           30%
                                                                        film content within India, Nepal & Bhutan through
Lot Size                                                           40
                                                                        multiple formats such as theatres, home entertainment,
Post issue Equity (Rs. in crore)                                91.41   principally in the form of DVDs, VCDs and audio CDs and
Issue Size (Rs. in crore)                                 316.0-350.0   licenses the broadcasting rights to major satellite
Face Value (Rs.)                                                   10   television broadcasting channels and cable television
Shareholding pattern (Post issue)                                       channels. Eros also exploits and distributes content via
Promoter & Promoter Group                                     78.12%    digital new media such as mobile ring tones, wallpapers
Public Shareholding                                           21.88%    and downloads, IPTV, DTH and other internet channels
                                                                        and also licenses films to airlines for in-flight viewing.
Sunil Jain, V.P. Equity Research                                        In 2007, Eros set up a visual effects facility, EyeQube.
Ph –(022)-3027 2377                                                     Renowned visual effects expert Charles Darby who has
E-Mail: sunil.jain@nirmalbang.com
                                                                        been associated with films like Matrix, Harry Potter and
                                                                        the Prisoner of Azkaban and Harry Potter & the Goblet of
Niraj Garhyan, Research Associate
Ph –(022)-3027 8215                                                     Fire, is the Creative Director of EyeQube. Eros Music
E-Mail: niraj.garhyan@nirmalbang.com                                    Publishing, a wholly owned subsidiary, signs up artists
                                                                        and composers and it has a strategic tie-up with EMI, for
*(U/L) Upper and lower band                                             the administration & collection of music publishing
                                                                        royalties for EMI‘s catalogues in India. Eros has entered
                                                                        into a joint venture agreement with Universal Music
                                                                        India through which it intends to discover and manage
                                                                        new acting and singing talent and provide them film and
                                                                        music platforms to showcase their talent.
IPO Note                                                                   Eros International Media Ltd
                   The broad structure of the business is:

                           Sourcing Content
                           •Indian Content Library
                           •Acquisition/Output Deals

                           End-to-End Distribution
            Eros            •Theatrical
                            •Home Entertainment / Digital New Media
           India            •Satellite, Terrestrial & Cable Television
           Group            •Music
                           •International Sales (licensing thorugh the relationship agreement)

                           New Initiatives
                           •EyeQube Studios (Production Planning and VFX facilitiy)
                           •Universal JVA
                           •EMI tie-up (through Eros Music Publishing)

                   Objects of the Issue

                   The issue compromises of issue of 2.0 Crs equity shares of face value of Rs.10
                   within a price band of Rs.158 and Rs.175. The issue size is Rs.316.0 Crs at the lower
                   price band and Rs.350.0 Crs at the upper price band. Post issue the holding of
                   promoter will reduce to 78.12% from the current holding of 100%.

                   Proceeds of the issue will be used for:

                   • Eros intends to use up to Rs.280.0 Crs for acquiring and co-producing Indian
                   films, including primarily Hindi language films as well as certain Tamil and other
                   regional language films which the company plans to release in fiscal 2011 and 2012

                   • Eros will utilize the balance proceeds for growth and expansion through organic
                   and inorganic route like acquisitions as well as general corporate purposes
IPO Note                                                    Eros International Media Ltd

           Investment Thesis

           Extensive content library of over 1,000 film titles

           The Eros India Library comprises of over 1,000 film titles which includes Hindi,
           Tamil and other regional language films. The diverse content library is constantly
           updated by the addition of Eros’ new releases as well as further library
           acquisitions. This extensive library is Eros’ key competitive advantage and enables
           it to exploit the increasing number of existing and new distribution channels in the
           Indian entertainment market. The Eros India Library also allows it to take
           advantage of technological developments and re-monetise the same films across
           different formats such as VCD, DVD, DTH, IPTV, cable, Blu-Ray as technologies
           advance over time.

           Widespread content distribution network

           Eros has a well developed distribution network which enables it to monetise on its
           film content without solely relying on sub-licensing to third parties. The company
           has a national theatrical distribution network, in-house music distribution
           capability having its own music record label, Eros Music, an in-house television
           syndication team as well as home entertainment distribution division. The
           company’s own distribution network enables it to have more control and greater
           flexibility over the distribution process and also provides higher revenue margins.
           Eros’s music and home entertainment distribution allows it monetise library films
           and new films across traditional and new formats as long as it holds the rights
           rather than limiting revenue to a one-off sale.

           Plans to strengthen the regional presence

           As of now, in addition to English and Hindi film titles, Eros India library has movies
           in few regional languages like Punjabi, Marathi and Tamil too in its content library.
           The company plans to enrich its content library by acquiring movies in other Indian
           regional languages as well as International languages other than English. The
           portfolio of films in Eros India Library generates diversified revenues and reduces
           reliance on the box-office success of individual films. Eros’ typically follows a
           ‘bundle’ model for distributing its films in television, home entertainment and
           digital new media wherein it bundles different categories of films including new
           releases and catalogue films.

           Sustained growth in performance

           Though the film distribution business is considered risky because of the inherent
           risk of some movies not doing well on the box office, Eros has shown a sustained
           performance over the last 5 years. For the period of FY 2006-10, Eros had a CAGR
IPO Note                                                   Eros International Media Ltd
           of 58.3% in revenues and a CAGR of 156.5% in the bottom line. This consistent
           performance results from the strategy of choosing profit driven film distribution
           model rather than hit film driven business model. Eros as a co-producer of films
           lowers the cost of production by asking the top stars to lower their professional
           fees in lieu of profit sharing after the release. Also, because of the wide number of
           projects in which Eros is involved, it reduces its dependency on a single movie and
           assures sustained profitability.

           Strong long standing relationships with talent within the industry

           The strong relationships Eros enjoys with various production houses and top acting
           talent, having worked with most of them, provides the company with sustained
           access to talent and content. To cite a few notable associations, Eros has ongoing
           relationship with talent such as Shah Rukh Khan and with production houses such
           as Nadiadwala Grandson Entertainment Private Limited and Venus Films Private
           Limited. In Indian film industry, which has been traditionally driven by talent and
           family-owned production houses, such relationships gives an edge to Eros.

           Investment Concerns

           Risk of a big budget movie not being a hit

           Even though, Eros at a time is involved in many projects, there is a risk that one or
           more of its big budget movies may not do well on the box office. It will negatively
           impact the profitability.

           Increasing Competition from larger players

           The company is facing increasing competition from both domestic and
           international players who have either entered the film distribution and/or
           production business or planning to do the same. Eros might lose its market share
           in such scenarios.

           Dependence on Indian Box Office

           Over 45% of revenues of Eros are derived by releasing the movies in Indian box
           offices. In case of events like forthcoming commonwealth games to be hosted by
           India, theatres may see a fall in the number of viewers. Also recurrence of past
           events like stand offs with multiplex owners will hamper the distribution and sales
           collection of new releases.
IPO Note                                                                         Eros International Media Ltd


           Peer Comparison

           We have compared Eros International Media Limited with UTV Software Communications and Shree
           Ashtavinayak Cine Vision Ltd as they operate in similar kind of business. Eros had the highest CAGR
           at 58.3% in revenues among its peers over the past five years. While UTV Software Communications
           had a CAGR of 33.60% in revenues, Shree Ashtavinayak Cine Vision had a CAGR of 41.7% in revenues
           during the same period. It has much better EBITDA margins than UTV Software Communications
           while bit lower than that of Shree Ashtavinayak Cine Vision.

                                                            Eros          UTV Software           Shree
                                                       International    Communications       Ashtavinayak
                   Particulars (FY 2010) (Rs in Crs)     Media Ltd             Ltd          Cine Vision Ltd
                   Sales                                   640.9              664.1             243.3
                   EBITDA                                  111.0              69.2               48.3
                   EBITDA Margins                          17.3%              10.4%             19.9%
                   EPS                                      9.00              13.13              0.30
                   Networth (Post issue)                   587.5              772.3             482.5
                   Book Value (per share)                   64.3              190.1              6.1
                   Price (as of 17 September 2010)         175.0              554.2              27.7
                   Diluted Equity Shares (Nos)               9.1               4.1               79.7
                   M. Cap                                 1,599.6            2,251.5           2,208.8
                   Debt                                    271.6              962.7             341.3
                   EV                                     1,755.9            3,123.0           2,543.4
                   P/BV                                     2.72              2.92               4.58
                   EV/Sales                                 2.74              4.70              10.45
                   EV/EBITDA                               15.82              45.12             52.62
                   P/E                                     19.44              42.20             92.33
                   Source:RHP,Nirmal Bang Research


           Based on price of Rs 175 (upper end of the price band) and company’s FY 2010 earnings the
           company will trade at a P/E multiple of 19.44x which is lower than its peers. Also, company looks
           attractive in terms of P/BV and EV/Sales multiple given that company is expected to grow at a rapid
           pace as compared to its peers. The pipeline of movies to be released by Eros over the next two years
           will contribute to its top line growth as well as enrich its existing content library. The company is in a
           strong position to maintain a sustained financial performance by leveraging its business model as
           well as its extensive content library and looks attractive as compared to its peers. Therefore, we
           recommend SUBSCRIBE to this issue.
IPO Note                                                                            Eros International Media Ltd


Income Statement

             Particulas (Rs in crs.)           FY 2008     FY 2009        FY 2010      Q1 FY 2011
             Sales and Service Income           474.7        626.5         640.9         126.3

             Operating Expenses                 366.2        422.0         446.8          84.1
             Employee Remuneration               8.5         15.5          19.7           5.8
             Administrative Expenses            44.9         75.2          63.3           12.2
             Total Expenditure                  419.6        512.7         529.9         102.1
             EBITDA                             55.1         113.8         111.0          24.2
             Depreciation                        1.8          5.0           4.4           0.8
             Amortization of Goodwill            0.0          0.1           0.0           0.0
             EBIT                               53.3         108.7         106.6          23.4
             Other income                       15.5          1.3          14.7           1.7
             Finance Costs (Net)                 2.8          6.1           9.0           2.0
             EBT                                66.0         103.9         112.2          23.0
             Tax                                23.3         29.1          29.5            8.4
             PAT (before Minority Interest)     42.7         74.8          82.8           14.6
             Share of Minority Interest          1.6          1.4           0.5           -1.0
             PAT after Minority Interest        41.1         73.3          82.3           15.5
             Source:RHP,Nirmal Bang Research

             Profitability Ratios              FY 2008     FY 2009        FY 2010      Q1 FY 2011
             EBITDA                            11.6%        18.2%          17.3%         19.1%
             PAT                                8.7%        11.7%          12.8%         12.3%
             RONW                              50.5%        46.4%          34.7%         6.1%
             Source:RHP,Nirmal Bang Research

             Growth Ratios                     FY 2008     FY 2009        FY 2010      Q1 FY 2011
             Sales                             117.8%       32.0%          2.3%          -21.2%
             EBITDA                            239.6%       106.5%         -2.5%         -12.9%
             PAT                               210.1%       78.3%          12.2%         -24.6%
             (Annualized figures for Q1 FY2011 considered while calculating the Growth Ratios)
             Source:RHP,Nirmal Bang Research
IPO Note                                                                        Eros International Media Ltd

Balance Sheet

                Particulas (Rs in crs.)           FY 2008   FY 2009   FY 2010     Q1 FY 2011
                Share Capital                       5.1       5.1      71.4          71.4
                Stock Options Outstanding           0.0       0.0       1.3           2.5
                Reserve & surplus                  76.3      152.9    164.7         181.8
                Net Worth                          81.4      158.0    237.5         255.7
                Secured Loans                      123.4     211.4    217.5         235.6
                Unsecured Loans                     0.5       0.4       0.0           0.0
                Deferred Tax Liability (Net)        8.8      28.1      49.9          54.9
                Minority Interest                   2.2       4.0       4.2           3.3
                Capital Employed                   216.4     401.9    509.1         549.4

                Gross Block                        466.3     772.3    1,004.7       1,065.5
                Less: Depreciation                 324.5     552.9    732.7         783.4
                Net Block                          141.9     219.5    272.0         282.1
                Capital Work in Progress            0.0       0.0       0.3           0.8
                Investments                         6.0       8.0       8.0           8.0
                Deferred Tax Assets (net)           0.0       0.1       0.1           0.1
                Current Assets
                Inventories                        69.5      97.8      40.9          40.7
                Sundry Debtors                     104.6     158.8    130.3         158.3
                Cash & Bank Balances               118.2     36.1     107.2          40.5
                Loans and Advances                 364.7     600.5    446.6         496.6
                Current Liabilities                586.4     714.9    485.6         465.3
                Provisions                          2.3       4.0      10.6          12.4
                Net Current Assets                 68.4      174.4    228.7         258.4
                Capital Deployed                   216.4     401.9    509.1         549.4
                Source:RHP,Nirmal Bang Research
IPO Note                                                                          Eros International Media Ltd


This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The
information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been
obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This
document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang
Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal
Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this
connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang
Research, its affiliates and their employees may from time to time hold positions in securities referred to herein.
Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other
services for any company mentioned in this document

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