Eros International IPO Analysis

Eros International Media (EIML), promoted by Eros Worldwide, a 100% subsidiary of Eros plc, purchases, sells, assigns film distribution rights for Hindi and regional language and also undertakes co-production.. It exclusively sources all Indian film content for the Eros Group and exploits such content across formats within India, Nepal and Bhutan. Currently, its focus is predominantly on Hindi and Tamil language film content. However, it is foraying into other regional language films such as Marathi and Punjabi, both new releases and catalogue.



It has various rights to over 1000 films which include Hindi, Tamil and other regional language films including Mughal-e-Azam, Om Shanti Om, Lage Raho Munnabhai and Love Aaj Kal, which is a key competitive advantage and an integral part of its business model. It also owns rights to certain English language films for home entertainment distribution within India.

It earns revenue through end-to-end exploitation and distribution of Indian film content in India, Nepal and Bhutan through multiple formats such as theatres, home entertainment, principally in the form of DVDs, VCDs & audio CDs, television syndication, which primarily involves licensing the broadcasting rights to major satellite television broadcasting channels, cable television channels & terrestrial television channels, mobile ring tones, wallpapers & downloads, internet protocol television (IPTV), direct-to-home and other internet channels. It also licenses films to airlines for in-flight viewing.

It primarily sources content through acquisitions from third parties and through co-productions and, occasionally, through its own production. It mainly acquires films from third party producers at various stages of a film‘s production for an agreed contractual value, and also co-produces films from inception with certain producers for a pre-agreed fixed budget. Typically in an acquisition model, between 35% and 50% of a film‘s cost is payable when the film is delivered by the producer near its release date, by which time it would usually have already started the pre-sales process for that film. In co-production, it will secure all worldwide distribution rights for a specified period, pre-agreed production fees for co-production services and minimum 50% share in the IPR of the film in exchange of film co-production. It is also entitled to an additional distribution commission of between 10%-20% of investment

The international rights for distribution of Indian film content for the entire world excluding India, Nepal and Bhutan are licensed to the Eros International Group (comprising Eros plc, Eros Worldwide and the Group Entities, Eros UK, Eros Network, Eros Pacific, Eros Australia, and Eros USA) for a minimum guarantee fee of 30% of the production costs with an additional mark-up of 30%. This reduces the up-front cost of a project and frees up capital to bid, acquire or co-produce other films for EIML.

Gross proceeds received by the Eros International Group for exploitation of such rights outside the specified territory are shared between the Eros International Group and the Eros India Group (including EIML and its subsidiaries but excluding Ayngaran) in a 70:30 ratio, subject to the Eros International Group retaining its minimum guarantee fee, a commission of 20% of the gross proceeds and any distribution expenses incurred by it. The Eros India Group shall be entitled to reimbursement from Eros Worldwide on behalf of the Eros International Group for any distribution expenses incurred by it and pre-agreed by the Eros International Group and a 30% markup on such expenses.

In the past, group companies have been providing interest free advances for acquisition & co-production activities to EIML, which resulted in lower dependence on external borrowing. The advances from the group companies are offset against the international rights sold to them.

EIML directly acquires all Hindi and regional language films other than Tamil language films, while most of the co-production and production activities are conducted through its wholly owned subsidiary, Eros International Films, and it distributes all Indian rights of such films across formats as well as licenses the international rights of such films to the Eros International Group. It occasionally also acquires films in particular catalogue and overseas-only rights, through its wholly owned subsidiary, Copsale.

Big Screen Entertainment, which is 64%-owned subsidiary, undertakes production projects that are initiated by its minority shareholder and approved and distributed by it.

Ayngaran and its subsidiaries conduct all of activities relating to Tamil language films in India and internationally. Copsale holds a 51% stake in Ayngaran International.

EIML's visual effects facility EyeQube Studios, worked on 3 films during 2009 including Aladin, which was released in October 2009. It also provided production-planning services.

It holds a 50:50 JV with Universal Music India, which will seek to identify, nurture and manage new acting and/or singing talent and provide them with film and music platforms to showcase their talent. The project has not yet commenced operations.

Consolidated net sales for the June quarter was Rs 126.3 crore, while net profit was at Rs 15.5 crore. For FY 2010, net sales increased by just 2% to Rs 640.88 crore due to loss of three months on dispute between multiplex operators and film production companies, resulting in no new release of films during that period. Net profit has grown by 12% to Rs 82.29 crore on back of increase in other income.

The company wants to enter the capital market through an initial public offering (IPO) to raise capital amounting to Rs 350 crore at an price band of Rs 158–175 per share of face value Rs 10. The funds amounting to Rs 280 crore will be used for acquiring and co-producing Indian films including primarily Hindi language films as well as certain Tamil and other regional language films, while the remaining will be spent on general corporate purpose.

Strengths

It has various rights to over 1,000 films including Hindi, Tamil and other regional language films, including films in Hindi such as Mother India, Devdas, Hum Dil De Chuke Sanam, Rangeela, 1942 Love Story, Om Shanti Om, Heyy Babyy, Namastey London, Lage Raho Munna Bhai and Love Aaj Kal, and Tamil titles such as Alaipayuthey, Kandukondain Kandukondain, Boys, Sivaji, Billa, Aegan and Aadhavan.

Its television syndication strategy is driven by licensing new film releases and making available films from the Eros India Library to television channels as a "bundle". This helps it to generate revenue from the exploitation of films from its library and also earn high margin because a substantial proportion of the cost of the film is written down in the first few years following their theatrical release.

The extensive distribution network enhances its ability to monetise film content without substantially relying on sub-licensing to third parties. It is one of the few companies to have an end-to-end (all format) distribution capability through a national theatrical distribution network; in-house music distribution capability with its own music record label, Eros Music; an in-house television syndication team; and own home entertainment distribution division.

Weaknesses

Revenues will be largely impacted by the success or otherwise of new films at box office. Also the financial position and operations fluctuate from period to period due to film delivery schedules.

It faces intense competition from Indian and foreign players, which can ramp up content price, restricting its ability to source content or talent at reasonable cost.

Valuation

At the lower price band of Rs 158 per equity share of Rs 10 face value, the P/E works out to 18 times the EPS of Rs 8.8 (on post-IPO equity) for FY 2010. At the upper band of Rs 175, P/E works out to 19.4 times the EPS of Rs 9 (on post-IPO equity) for FY 2010. The nearest comparable company is UTV Software Communications, having PE of 41.9 times consolidated EPS of FY 2010.

via CM