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Eros International Media (EROS IN, Rs155.80, Buy) – In a sweet spot
India's film industry is set to benefit from the rollout of multiplexes and digital screens, and
traction in TV licensing. Eros looks particularly well placed on pre-sales of TV/music rights,
while annuity library revenues and overseas rights sales to the parent help derisk volatile
box-office sales. We initiate with a Buy.
Drivers in place for secular growth in the Indian film industry
Expansion of multiplex chains and increased use of digital are driving box office collections
(the top 50 box-office movies have seen 15% CAGR in 2000-10). Growth and competition in
broadcasting and a shorter release window to TV (from 5-6 months to 2 months) have also
led to a sharp uptick in TV licensing. Revenue sharing with key talent is now the norm versus
the earlier model of upfront fees, which lowers the volatility of returns.
Largest distributor of Indian films with relatively lower-risk business model
We believe Eros, the largest distributor of Indian films, is a relatively lower-risk play within the
industry. It has over 50 films slated for release in FY11/12, adding to its 1,000+ library that
generates high margin revenues. A transfer pricing mechanism with its parent for overseas
rights covers about 38% of costs. We believe these factors and a focus on controlling project
costs give Eros a hedge against the vagaries of the box office. With its Rs3.5bn IPO equity
raising, we forecast Eros to be unlevered by FY12, thereby creating room for future scale up.
FY11/12 revenue growth and margin upside driven by improving fundamentals
We project an 18% revenue CAGR over FY10-13F based on the current visible pipeline. The
company has pre-sold TV/music rights of Rs2.4bn from its FY11/12 release slate, partly derisking variable box-office returns. We expect margins to scale up by 862bp to 25.3%, helped
by improving realisations on TV/music licensing, while costs should stay largely rangebound. This translates into a 22% EPS growth in FY10-13F.
DCF-based valuation of Rs222; we initiate coverage with a Buy recommendation
We initiate coverage on Eros with a Buy recommendation, and a 1-year forward DCF-based
target price of Rs222, suggesting potential upside of 42% from current levels. On global peer
group metrics, the stock trades at a significant discount, despite above-average growth and return
ratios, on our analysis. We expect the company’s December 2010 results, seasonally the
strongest, to be a key catalyst for the stock.
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