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Tuesday, December 17, 2013

Eros International

Eros International
Recommendation: Buy
Price target: Rs220
Current market price: Rs165
Improved business visibility, better days ahead
Key points
  • Back to basics, acquiring 'A' category movies to improve business visibility: After a lean phase of going slow on content acquisitions, the management has now turned the tide and upped the ante for acquiring 'A' category movies (movies with big budgets above Rs60 crore), with efforts to release at least seven 'A' category movies in FY2015E as compared to five to six 'A' category movies in the earlier years. The concentrated effort of management for content acquisitions is reflected in some of the recent movie acquisitions like, Jai Ho (Salman Khan starrer), '1' (Telugu - Mahesh Babu starrer) and 2 States (Dharma Production). 
  • HBO alliance, expect some meaningful contribution in FY2016E: In the EIML-HBO alliance, the company is making inroads with further participation from the direct to home (DTH), multiple-system operators (MSO) and local cable operators (LCO). Since its launch, the company has added around 1.8 lakh subscribers with an average revenue per user (ARPU) of Rs70-80. The channel has already secured the platform of two DTH players and six cable operators. In addition it has already signed an MoU with most of the remaining operators and expects to launch it in their platform in the coming months. The management is targeting 3-4 million subscribers by FY2016E, which gives a potential net income of Rs73 crore in our FY2016 (our earnings estimates), translating into an EPS of Rs7.9 per share, with a potential upside of 28% to our current FY2016E estimates (we have not incorporated earnings from the HBO alliance in our estimates).
  • Success of recent movies and strong movie slate, allays concerns of revenue de-growth in FY2014E: As the big budget movie, Ranjikanth starrer 'Kochadaiyaan', has been pushed to FY2015E and will now be released by end of March to early April 2014, there were concerns on the de-growth in the revenues for FY2014E. However with the success of recent releases and Q4FY2014 releases of 'Jai Ho' (Salman Khan starrer) and '1' (Telugu - Mahesh Babu starrer), it seems like EIML will manage to post a decent growth in revenue for FY2014E. The management has indicated at Rs1,200 crore revenues for FY2014E (which is a 12% year on year [YoY] growth). 
  • Valuation: We appreciate EIML's intent and efforts on getting back to the 'A' category movie acquisitions and ramping up the number of big-budget movies in the slates, which improves the business visibility significantly. Further, investors fears of the renewal of the relationship agreement between EIML and its parent (39% cost recovery of movies rights), which is set to expire in October 2014 is likely to phase out, as the management has assured that the relationship will continue in the present condition beyond 2014. Given the improved visibility and success of recent releases, we have tweaked our estimates for FY2014E and FY2015E, and introduced our FY2016E estimates. At CMP of Rs165, the stock trades at 8x, 6.8x and 5.8x FY2014/15/16 earnings estimates. We have rolled over our target multiple to December 2014, and consequently increase our price target to Rs220 (based on 8x target multiple). We maintain our positive stance on EIML and maintain our Buy rating on the stock.