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Eros International (EROS)
Media
Time for a valuation check. We expect a reality check on Eros stock post 39%
outperformance versus BSE-30 Index in the past three months. The structural drivers
remain intact: (1) C&S TV rights revenues and (2) improved BO performance (Digital
Cinema); (3) Regional movies and (4) new media revenues could provide impetus in
future. However, valuations at ~11X FY2012E and ~8X FY2013E EV/EBIT have caught
up; we reiterate our ADD rating with a revised FY2013E TP of Rs270 (Rs250 previously)
as upside to current earnings estimates exists. The film business is a robust defensive
play in an economic downturn, as seen from the Hollywood experience.
Eros’ valuations have caught up with structural and cyclical drivers
Exhibit 1 presents the valuation of Eros stock; the gap versus Indian regional print and C&S TV
stocks has bridged led by robust structural drivers (1) C&S TV rights revenues (high competitive
intensity in weak economic environment) and (2) improved BO performance of Hindi movies
(Digital Cinema in Tier-II/III cities). Additionally, Eros stock has also been helped by robust BO
performance of the Indian film industry in general during the current economic downturn, which
has adversely impacted the Indian media industry; the film industry is a robust defensive play in an
economic downturn, as witnessed in Hollywood (Exhibit 2).
However, current valuations must be seen in the context of the inherent nature and emerging
stage of Indian film business: (1) Exhibit 3 presents the free cash flows of Eros and compares it to
Indian regional print media. Eros will continue to invest in scaling-up the legacy/core (Hindi films)
and new (regional films) business for some time (FY2012E-13E). (2) The street also seems enthused
by Eros’ FY2012E film slate thus far, with above normal performance (Exhibit 4); however, the law
of averages may catch up. Eros has de-risked its business model to a large extent with the pre-sale
of film rights, resulting in profits even for films with average BO performance. However, the
quantum of profits is dependent on the performance of the film slate.
Reiterate ADD with FY2013E TP of Rs270; expect earnings upgrades
We highlight that our ratings on Eros stock changed to ADD (BUY previously) with the shift in KIE
ratings system to absolute upside ratings. We reiterate our positive view on Eros, but for relatively
fair valuations as the structural drivers remain intact: (1) the slowdown in C&S TV advertising has
not impacted Eros given higher competitive intensity and (2) shifting consumption patterns in Tier-
II/III towns of India (expanded film distribution through Digital Cinema). The company is also
investing in future growth drivers: (1) regional films and (2) new media.
We leave our earnings estimates unchanged but highlight likely upsides: (1) robust performance of
the film slate thus far in FY2012E and (2) tail revenues (ancillary/new media) from the FY2012E
film slate in FY2013E. Eros is finalizing its FY2013E film slate but it is likely to be larger in volume
and value terms; we increase our FY2013E TP to Rs270 (Rs250 previously).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Eros International (EROS)
Media
Time for a valuation check. We expect a reality check on Eros stock post 39%
outperformance versus BSE-30 Index in the past three months. The structural drivers
remain intact: (1) C&S TV rights revenues and (2) improved BO performance (Digital
Cinema); (3) Regional movies and (4) new media revenues could provide impetus in
future. However, valuations at ~11X FY2012E and ~8X FY2013E EV/EBIT have caught
up; we reiterate our ADD rating with a revised FY2013E TP of Rs270 (Rs250 previously)
as upside to current earnings estimates exists. The film business is a robust defensive
play in an economic downturn, as seen from the Hollywood experience.
Eros’ valuations have caught up with structural and cyclical drivers
Exhibit 1 presents the valuation of Eros stock; the gap versus Indian regional print and C&S TV
stocks has bridged led by robust structural drivers (1) C&S TV rights revenues (high competitive
intensity in weak economic environment) and (2) improved BO performance of Hindi movies
(Digital Cinema in Tier-II/III cities). Additionally, Eros stock has also been helped by robust BO
performance of the Indian film industry in general during the current economic downturn, which
has adversely impacted the Indian media industry; the film industry is a robust defensive play in an
economic downturn, as witnessed in Hollywood (Exhibit 2).
However, current valuations must be seen in the context of the inherent nature and emerging
stage of Indian film business: (1) Exhibit 3 presents the free cash flows of Eros and compares it to
Indian regional print media. Eros will continue to invest in scaling-up the legacy/core (Hindi films)
and new (regional films) business for some time (FY2012E-13E). (2) The street also seems enthused
by Eros’ FY2012E film slate thus far, with above normal performance (Exhibit 4); however, the law
of averages may catch up. Eros has de-risked its business model to a large extent with the pre-sale
of film rights, resulting in profits even for films with average BO performance. However, the
quantum of profits is dependent on the performance of the film slate.
Reiterate ADD with FY2013E TP of Rs270; expect earnings upgrades
We highlight that our ratings on Eros stock changed to ADD (BUY previously) with the shift in KIE
ratings system to absolute upside ratings. We reiterate our positive view on Eros, but for relatively
fair valuations as the structural drivers remain intact: (1) the slowdown in C&S TV advertising has
not impacted Eros given higher competitive intensity and (2) shifting consumption patterns in Tier-
II/III towns of India (expanded film distribution through Digital Cinema). The company is also
investing in future growth drivers: (1) regional films and (2) new media.
We leave our earnings estimates unchanged but highlight likely upsides: (1) robust performance of
the film slate thus far in FY2012E and (2) tail revenues (ancillary/new media) from the FY2012E
film slate in FY2013E. Eros is finalizing its FY2013E film slate but it is likely to be larger in volume
and value terms; we increase our FY2013E TP to Rs270 (Rs250 previously).
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