Strong movie pipeline, improving mix

Last Updated: Tue, Jun 26, 2012 04:04 hrs

Eros International Media (Eros), India’s leading film and entertainment company, is trading close to its one-year low of Rs 158.20, in line with weak markets. However, its recent releases, such as Vicky Donor, Ferrari ki Sawari and Housefull2 have fared well at the box office, and this would lead to the company’s earnings in the quarter ending June rising about 78 per cent, say analysts.

A strong pipeline of films, higher contribution from the sale of television and music rights and catalogue revenues should lead to healthy growth in 2012-13. The company is also increasing its distribution segment and digitising its content library of 1,100 films. This would help the company de-risk its business from the vagaries of box office collections in the medium term.

HSBC analyst Deepan Sankar says, “Considering the success of movies, in terms of box office collections, improving satellite deals and higher catalogue revenues, the company’s financial performance, as well as its profitability, is likely to improve in 2012-13. We value Eros International at Rs 251.” The company’s scrip is currently trading at about Rs 167.

In Rs crore FY12 FY13E
Net revenues 944.4 1239.9
Y-o-Y chg (%) 33.6 31.3
Ebitda (%) 24.5 24.0
Y-o-Y chg (bps) 104.0 -50.0
Net profit 147.4 174.0
Y-o-Y chg (%) 24.9 18.0
P/E (x) 10.7 8.0
P/BV (x) 1.9 1.4
E: Estimates                    Source: Analysts’ reports

TV rights sales rise
Eros’ strategy of selling the television and music rights of movies before their release is paying off. In 2011-12, the company recovered about 40-60 per cent of a film’s cost before it was released (the figure earlier stood at 30 per cent). Television rights of the company’s RA.One and Rockstar films were sold at a 50 per cent premium. Analysts expect this segment to contribute about 35-40 per cent of the company’s incremental revenue in 2012-13. Eros has already sold the rights for many of the films lined up for this financial year to television channels.

Growth in multiplexes, coupled with a growing revenue pie (55 per cent in 2011-12, versus 50 per cent in 2010-11), is likely to support earnings from box office collections. Analysts estimate growth for this segment at 14 per cent in 2010-13. The company’s catalogue revenue is also rising, as it has now digitised half of its library of 1,100 movies. It plans to complete the entire digitisation process by the end of this year, and this would add to the revenue in the coming years.

Valuation, outlook
Currently, the Eros scrip is trading at eight times the estimated 2012-13 price-to-earnings ratio, which, though close to its all-time low, is in line with the fall in the broad and mid-cap indices. Analysts expect this to inch up to 11-13 times the estimated levels for 2012-13, as business outlook remains healthy. The company has a pipeline of about 32 movies to be released in 2012-13 and 2013-14, providing strong revenue visibility. Given it has movies lined up for every quarter, volatility in revenues is likely to be low.

Jigar Shah, analyst at Kim Eng Securities, says, “We believe Eros has surplus funds, even after it committed Rs 600 crore to produce films this year. Also, the number of movies produced in 2012-13 may spring a surprise on the upside. We believe given Eros’ consistent earnings growth for 2010-11 and 2011-12, investors would take note of the estimated earnings growth of 29 per cent for 2012-13. We believe investor apprehensions on growth have been allayed, and the stock is poised for a re-rating.”

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