Eros International IPO Review

Investors with a high risk appetite can subscribe to the initial public offering of Eros International Media, a company that sources and distributes Indian films, given the diversified revenue stream from its business and the strong growth trajectory it has managed over the years.



At the upper end of the price band (Rs 158-175), the offer demands a value of 19 times its FY-10 per share earnings on a post-offer equity base. The offer could, perhaps, be priced at the lower end of the price band for a more desirable price earning multiple of about 17.

A library of film content monetised through multiple media, a de-risked business model in its lucrative overseas distribution business and a pipeline of big-star-cast movies in the pipeline, which Eros is co-producing, are key positives. For a three-year period leading to 2009-10, Eros' revenues grew at a compounded annual rate of 42.5 per cent to Rs 655.5 crore in FY-10, while net profits grew at 83.7 per cent over the same time-frame to Rs 82.3 crore.

Given the inherent risks in the entire value-chain of the movies business, susceptible as it is to viewer reception to films , this track record appears reasonably sound.

Monetising content

Eros is predominantly a film distributor, though there are films that it has co-produced as well, with many more in the pipeline.

Over the last few years, the revenues earned from sale for overseas theatrical viewership has accounted for 59-61 per cent of the company's overall revenues.

Given the trend of releasing Hindi films early in the lucrative overseas market (countries with significant Indian expatriate presence such as the US, Canada, the UK and the UAE), this proportion bodes well.

Here, Eros has sought to de-risk its business by pre-selling the overseas rights to related companies, Eros PLC and Eros Worldwide, given their significant presence overseas.

Through this, Eros has generally been able to recover nearly 40 per cent of its cost for acquiring the film, thus significantly reducing the risk associated with a film's offtake as well as ensuring cash flows.

The company also distributes Tamil films through Ayangran International, where it holds a 51 percent stake.

Apart from overseas theatrical distribution, Eros also has other revenue streams such as Indian theatrical distribution and sale of satellite television and music rights to various channels.

Besides, the company has a digital film library of over 1,000 films, mainly Hindi and Tamil. Its portfolio includes popular and successful movies such as Love Aaj Kal, Om Shanthi Om and Namastey London.

With the penetration of DTH expanding rapidly and GEC channels seeking to garner top TRPs by screening popular movies, the market is ripe for distributors such as Eros.

The company sells the movies in its portfolioto several channels to be screened in a specific order, thus providing a sustainable revenue stream. This arrangement helps, especially when films don't do well at the box-office.

In co-production, Eros has de-risked its business model to some extent by not having any revenue-sharing arrangement with the other co-producer(s) till it recovers a significant portion of its investment.

That said, this segment has still been a mixed-bag for the company with some hits such as Love Aaj Kal, but many misses such as Veer, Kambakkht Ishq and Housefull. Also, its only fully-owned production movie Aa Dekhen Zara was not received well at the box-office.

Though such negatives are to an extent set off by revenues from the sale of satellite television rights, it may not be enough, especially for big-budget movies.

The company is seeking to raise Rs 350 crore from the offer, of which Rs 280 crore is to be allocated towards co-production and acquisition of films with big star casts (the likes of Shahrukh Khan, etc) which are at various stages of production and are to be released over the next couple of years.

In exchange, Eros would get the rights to these movies typically for a period of five years.

via BL