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History and Business Model
DQ Entertainment (International) Ltd incorporated in 2007 is one of the leading
producers of animation, visual effects, game art and entertainment content for the
Indian as well as global media and entertainment industry. DQE has emerged and
established itself as a major producer of IPs and co-producer of international iconic
brands with high profile partners across Europe, North America & Asia for
Animation for TV, Home Video and Feature Film Markets. DQE has been
recognized as one of the top animation producers worldwide under the Global
Animation industry report, published by Screen Digest. DQ Entertainment has 10
production facilities in India (eight in Hyderabad and one each in Mumbai and
Kolkata) and worldwide third-party sales representatives in Paris, Tokyo and Los
Angeles.
Financials
Most of the revenues (92%) of the company are from television production.
Licensing and distribution activities contributed a meager 5% of revenues, whilst
full motion video and game development contributed 4%. The Company expects
licensing and distribution activities to contribute 35-40% going forward. The
company has high dependence on the European and American geographies. The
business is somewhat seasonal in nature as second half is always better than first
half. Majority of new launches takes place during September-April/May period
which is vacation time for schools. For the year FY11, it posted net sales of Rs 208
crores, a Y-o-Y increase of 18%. Net profit grew to Rs 31crores, a growth of 15%.
Growth Drivers
• Low risk business model with presence across value chain: The
Company has strategically moved upward in the animation value chain. As a
result, they not only continue to receive production revenues generating its
usual production margin, but also acquire rights to earn license revenues.
• Robust Order Book: As of April 01, 2011, the Company has Rs 500 crore of
order pipeline to be executed in next 30 months.
• Diversified client base: DQE has a client base of over 90 companies which
include internationally recognized brands such as the Disney Group,
Nickelodeon, American Greetings, BBC, ZDF-Germany, and NBC Universal.
• Licensing & Distribution to drive growth: The Company has a library of
over 500 hours of international programs for distribution and licensing globally.
It has signed 27 merchandising deals and 30 more are in pipeline.
• Cost advantage vis-à-vis global peers: Driven by the need to reduce
protracted development cycles and high labour cost of developing animation
in the West, animation companies are increasingly looking at Asian
destinations such as India due to low labour costs.
• Robust industry prospects: The Indian animation industry, estimated at
US$494 million in 2008, is miniscule as compared to its global counterpart. It
holds huge potential considering rapid advancement of technology, wider
target audience and increasing trend in outsourcing by U.S and Europe
Valuations:
With its low risk business model, robust order book position and comparatively
higher operating margins, DQE seems to be the right bet to capture the growing
Indian animation industry. The Company expects that the next major growth driver
will be licensing and distribution segment that include apparels, toys, etc and we
expect substantial revenue flow from this segment going ahead. At the CMP of Rs
32.5, the stock is available at P/E of 7.4x and P/BV of 0.8x its FY12E. Buy.
Technicals
This scrip has lost more than 70% since the time it has listed. There has been no
looking forward and the downside has been steep. At Rs 35 levels it has shown
some resilience and bounced back till Rs 50. However it has reached to lows again
but the diminishing volume is giving signs of exhaustion from bears. Once it forms
some base near Rs 30 which is its multiple support, it is likely to bounce back
towards Rs 50-60 region.
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