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UBS Investment Research
Eros International Media
T he ‘Rockstar’ of film distribution [EXTRACT]
We initiate coverage with a Buy rating
Eros International Media (Eros) is one of the largest film studios in India with a
strong film pipeline for FY12-13E. It primarily co-produces and acquires film
content in Hindi and regional languages from third parties and distributes it on
different media formats. Its film library, distribution network and relationships
with celebrities and production houses are key competitive strengths, in our view.
FICCI-KPMG forecasts 10% industry revenue CAGR for next five years
Films are a major source of entertainment in India, the second largest film market
in the world. FICCI-KPMG forecasts an industry revenue CAGR of 10% for 2011-
15. We expect industry revenue growth to be led by: 1) multiplex penetration and
more digital screens; 2) rising ticket prices; 3) strong demand for films from
broadcasters; and 4) new revenue streams, such as the internet.
Studio model + arrangements with Eros plc = low box office dependence
The domestic box office contributes about 40% to Eros’s revenue compared with
75% for the industry. Intense competition among Hindi entertainment channels for
film rights has helped Eros pre-sell satellite rights at good prices, and recover a
large proportion of costs before the films are released. It recovers 39% of its total
Hindi film costs from the sale of international distribution rights to parent
company, Eros International plc. The ‘studio model’ enables it to work on several
big-budget films simultaneously, thus reducing dependence on any one film, and
also making it a scalable business.
Valuation: price target of Rs300.00 based on 9x FY13E EBITDA
We value Eros at a 15% discount to other India media stocks under UBS coverage.
Eros is trading at 11.1x FY13E PE (on our 25% FY11-13 EPS CAGR and 22%
FY13 ROE forecasts).
Investment Thesis
We initiate coverage of Eros International Media (Eros), one of the largest film
studios in India, with a Buy rating and a price target of Rs300.00. Eros primarily
co-produces and acquires film content in Hindi and regional languages from
third parties and distributes it on different media formats in India, Nepal and
Bhutan. We base our Buy rating on the following:
Studio model, strong movie pipeline: Eros follows a studio approach to
movie distribution. The studio model enables it to work simultaneously on a
large number of films: 1) in many languages (Hindi, Tamil and other
regional languages); 2) with varying budgets (large, medium and small); and
3) at different stages of production. It has an extensive library of over 1,100
films, and syndication revenue (generates 25% of total revenue from cable
and satellite), contributing to revenue growth and margin expansion. We
forecast a 21% revenue CAGR for Eros over FY11-14.
Strong demand for Hindi films by broadcasters: Increasing demand for
films from other revenue streams, such as cable and satellite, has helped Eros
diversify risk in its business model. Intensifying competition among Hindi
entertainment and movie channels for film screening rights helps Eros recover
a significant proportion of film production costs before its films are released.
Domestic box office takings contribute around 40% to its total revenue.
Wide distribution network: Eros has a wide distribution network and a
pan-India presence, covering almost 65% of India’s box office market, with
distribution offices in major cities such as Delhi and Mumbai. Releasing its
films on a large number of screens (around 2,000) helps to improve box
office takings, as 60-70% of takings are generated in the first weekend of a
film’s release.
Experienced management: Management has established relationships with
major movie producers and Bollywood celebrities, enabling it to pre-sell
satellite broadcasting rights and recover a large proportion of costs before it
releases a movie.
UTV-Disney deal suggests valuation upside potential: The Walt Disney
Company (Disney) has announced the delisting of UTV Software (UTV) via
the acquisition of minority stakes. Our calculation suggests an EV/EBITDA
acquisition multiple of 15-16x FY13E EBITDA, a significant premium to
our target 9x FY13E EV/EBITDA for Eros. Eros is trading at 11.1x FY13E
PE (on our 25% FY11-13 EPS CAGR and 22% FY13 ROE forecasts).
We believe the key risks for Eros are: 1) dependence on the success of bigbudget
films for revenue growth and profitability—Ra.One in FY12 and Rana in
FY13; 2) piracy and infringement of intellectual property rights; and
3) competition from other sources of entertainment (such as cricket), which
could lower the number screening days.
Key catalysts
Performance of big-budget films at the box office. Eros aims to distribute
70-100 films per year, of which 18-20 are likely to be Hindi films. We
estimate big-budget Hindi films contribute around 50% to its box office
takings. While Eros is not dependant on any single movie for revenue growth
or profitability, the good performance by its blockbuster Hindi films helps
improve profitability.
We believe the performance of its blockbuster Ra.One (to be released on 26
October 2011) will be a near-term catalyst.
Table 2: Film pipeline for H2 FY12
Film Tentative release date Star cast
RA.One Oct 2011 Shah Rukh Khan, Kareena Kapoor
Rockstar Nov 2011 Ranbir Kapoor, Nargis Fakhri
Desi Boyz Nov 2011 Akshay Kumar, John Abraham, Deepika Padukone
Agent Vinod Dec 2011 Saif Ali Khan, Kareena Kapoor
Untitled Feb 2012 Shahid Kapur, Priyanka Chopra
Source: Company data
We think the timely release of Rana (starring Rajinikanth) in FY13 could
also be a catalyst (filming likely to start in December 2011).
Datapoints showing strong demand for Hindi films from broadcasters
— The launch of a Hindi movie channel by TV18 (Colors Movies) in FY13
is likely to result in competition intensifying in the Hindi entertainment
and movie genre. This should help Eros to better monetise the satellite
rights of its films.
— Newsflow suggests that Sahara One has paid Rs700m for the satellite
rights to around 100 films for seven years; this includes some films
distributed by Eros, such as Mausam.1
Rapid adoption of 3G. Eros has built a digital asset management (DAM)
platform and has taken the initiative to digitise its entire movie library to
better exploit the content on emerging media platforms, such as mobile
devices and the internet. We view this as an earnings growth contributor in
the long term, and expect Eros, an early mover in this direction, to benefit.
Risks
Profitability could be affected by poor box office takings or the timing of
the release of big-budget Hindi films. We estimate Eros generates more than
50% of its revenue from Hindi blockbusters, and hence poor takings at the box
office of the films it co-produces and distributes would affect its profitability. Its
profitability could also be affected by the poor timing of a movie’s release, as
this would result in uneven quarterly results. For example, a delay in the release
of Rana (starring Rajinikanth and likely to be released in FY13) could have an
impact on our FY13 revenue forecast. However the ‘studio’ approach to movie
production helps the company manage these risks to some extent.
Piracy and infringement of intellectual property rights. Piracy remains a key
issue faced by the film industry and has been a major impediment to industry
growth. According to a Federation of Indian Chambers of Commerce and
Industry (FICCI)-KPMG 2011 report (Hitting the High Notes, published in
March 2011), 600-700m units of pirated DVDs are sold every year in India
through a distribution network of 10,000 vendors. In the absence of any law to
restrain cable operators from screening pirated films and the easy availability of
pirated prints, some movie producers and distributors are exposed to financial
loss.
Competition from other sources of entertainment, fewer screening days.
With the International Cricket Council (ICC) World Cup and the Indian Premier
League (IPL) providing alternative entertainment in H111, most films producers
deferred releasing their films to H211. This has led to a concentration of film
releases in H2, particularly during the festival season, thereby lowering the
number of screening days and affecting domestic box office takings.
Multiplex consolidation. Potential consolidation among large multiplex
operators (such as PVR Cinemas) could increase their bargaining power with
film producers and distributors, enabling them to demand a higher revenue share
of box office takings.
Terms of agreement with parent company Eros International plc (Eros plc)
could change. Eros recovers 39% of its total Hindi film costs from Eros plc via
the sale of distribution rights for international markets. This agreement is
reviewed every year and is valid until October 2014.
Valuation and basis for our price target
We value Eros at 9x FY13E EV/EBITDA, the high end of its historical trading
range (since listing in October 2010) and a 15% discount to other India media
companies under UBS coverage.
We believe Eros is attractive at 11.1x FY13E PE, given its strong earnings
growth potential (a 42% CAGR over FY08-11; we forecast a 33% net profit
CAGR over FY11-13). Eros is trading at 7.6x FY13E EV/EBITDA, in line with
global entertainment companies, despite better earnings growth potential (Table
21). Our price target of Rs300.00 implies 13.3x FY13E PE and 2.6x FY13E
P/BV (on 22% FY13E ROE).
Table 3: Price target derivation
FY12E EBITDA (Rs m) 2,429
FY13E EBITDA (Rs m) 3,049
EBITDA growth (%) 26%
Target forward EV/EBITDA—March 2013E (x) 9.0
Target EV (Rs m) 27,562
FY12E net debt (Rs m) 174
Equity value at target (Rs m) 27,388
12-month valuation (Rs) 300
Source: UBS estimates
Eros International Media
Eros is one of the largest movie studios in India. In addition to its own
productions, it sources film content (in Hindi, Tamil and other regional
languages) through co-productions and acquisitions from third parties, and
distributes them via multiple media formats in India, Nepal and Bhutan. In FY11,
Eros raised Rs3.5bn from its listing of 20m shares at its IPO in October 2010 on
the Bombay Stock Exchange.
Statement of Risk
We believe the key risks for Eros are: 1) dependence on the success of largebudget
films for revenue growth and profitability, Ra.One in FY12 and Rana in
FY13; 2) piracy and infringement of intellectual property rights; and 3)
competition from other entertainment (such as cricket), which reduces the
numbers of screening days.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Eros International Media
T he ‘Rockstar’ of film distribution [EXTRACT]
We initiate coverage with a Buy rating
Eros International Media (Eros) is one of the largest film studios in India with a
strong film pipeline for FY12-13E. It primarily co-produces and acquires film
content in Hindi and regional languages from third parties and distributes it on
different media formats. Its film library, distribution network and relationships
with celebrities and production houses are key competitive strengths, in our view.
FICCI-KPMG forecasts 10% industry revenue CAGR for next five years
Films are a major source of entertainment in India, the second largest film market
in the world. FICCI-KPMG forecasts an industry revenue CAGR of 10% for 2011-
15. We expect industry revenue growth to be led by: 1) multiplex penetration and
more digital screens; 2) rising ticket prices; 3) strong demand for films from
broadcasters; and 4) new revenue streams, such as the internet.
Studio model + arrangements with Eros plc = low box office dependence
The domestic box office contributes about 40% to Eros’s revenue compared with
75% for the industry. Intense competition among Hindi entertainment channels for
film rights has helped Eros pre-sell satellite rights at good prices, and recover a
large proportion of costs before the films are released. It recovers 39% of its total
Hindi film costs from the sale of international distribution rights to parent
company, Eros International plc. The ‘studio model’ enables it to work on several
big-budget films simultaneously, thus reducing dependence on any one film, and
also making it a scalable business.
Valuation: price target of Rs300.00 based on 9x FY13E EBITDA
We value Eros at a 15% discount to other India media stocks under UBS coverage.
Eros is trading at 11.1x FY13E PE (on our 25% FY11-13 EPS CAGR and 22%
FY13 ROE forecasts).
Investment Thesis
We initiate coverage of Eros International Media (Eros), one of the largest film
studios in India, with a Buy rating and a price target of Rs300.00. Eros primarily
co-produces and acquires film content in Hindi and regional languages from
third parties and distributes it on different media formats in India, Nepal and
Bhutan. We base our Buy rating on the following:
Studio model, strong movie pipeline: Eros follows a studio approach to
movie distribution. The studio model enables it to work simultaneously on a
large number of films: 1) in many languages (Hindi, Tamil and other
regional languages); 2) with varying budgets (large, medium and small); and
3) at different stages of production. It has an extensive library of over 1,100
films, and syndication revenue (generates 25% of total revenue from cable
and satellite), contributing to revenue growth and margin expansion. We
forecast a 21% revenue CAGR for Eros over FY11-14.
Strong demand for Hindi films by broadcasters: Increasing demand for
films from other revenue streams, such as cable and satellite, has helped Eros
diversify risk in its business model. Intensifying competition among Hindi
entertainment and movie channels for film screening rights helps Eros recover
a significant proportion of film production costs before its films are released.
Domestic box office takings contribute around 40% to its total revenue.
Wide distribution network: Eros has a wide distribution network and a
pan-India presence, covering almost 65% of India’s box office market, with
distribution offices in major cities such as Delhi and Mumbai. Releasing its
films on a large number of screens (around 2,000) helps to improve box
office takings, as 60-70% of takings are generated in the first weekend of a
film’s release.
Experienced management: Management has established relationships with
major movie producers and Bollywood celebrities, enabling it to pre-sell
satellite broadcasting rights and recover a large proportion of costs before it
releases a movie.
UTV-Disney deal suggests valuation upside potential: The Walt Disney
Company (Disney) has announced the delisting of UTV Software (UTV) via
the acquisition of minority stakes. Our calculation suggests an EV/EBITDA
acquisition multiple of 15-16x FY13E EBITDA, a significant premium to
our target 9x FY13E EV/EBITDA for Eros. Eros is trading at 11.1x FY13E
PE (on our 25% FY11-13 EPS CAGR and 22% FY13 ROE forecasts).
We believe the key risks for Eros are: 1) dependence on the success of bigbudget
films for revenue growth and profitability—Ra.One in FY12 and Rana in
FY13; 2) piracy and infringement of intellectual property rights; and
3) competition from other sources of entertainment (such as cricket), which
could lower the number screening days.
Key catalysts
Performance of big-budget films at the box office. Eros aims to distribute
70-100 films per year, of which 18-20 are likely to be Hindi films. We
estimate big-budget Hindi films contribute around 50% to its box office
takings. While Eros is not dependant on any single movie for revenue growth
or profitability, the good performance by its blockbuster Hindi films helps
improve profitability.
We believe the performance of its blockbuster Ra.One (to be released on 26
October 2011) will be a near-term catalyst.
Table 2: Film pipeline for H2 FY12
Film Tentative release date Star cast
RA.One Oct 2011 Shah Rukh Khan, Kareena Kapoor
Rockstar Nov 2011 Ranbir Kapoor, Nargis Fakhri
Desi Boyz Nov 2011 Akshay Kumar, John Abraham, Deepika Padukone
Agent Vinod Dec 2011 Saif Ali Khan, Kareena Kapoor
Untitled Feb 2012 Shahid Kapur, Priyanka Chopra
Source: Company data
We think the timely release of Rana (starring Rajinikanth) in FY13 could
also be a catalyst (filming likely to start in December 2011).
Datapoints showing strong demand for Hindi films from broadcasters
— The launch of a Hindi movie channel by TV18 (Colors Movies) in FY13
is likely to result in competition intensifying in the Hindi entertainment
and movie genre. This should help Eros to better monetise the satellite
rights of its films.
— Newsflow suggests that Sahara One has paid Rs700m for the satellite
rights to around 100 films for seven years; this includes some films
distributed by Eros, such as Mausam.1
Rapid adoption of 3G. Eros has built a digital asset management (DAM)
platform and has taken the initiative to digitise its entire movie library to
better exploit the content on emerging media platforms, such as mobile
devices and the internet. We view this as an earnings growth contributor in
the long term, and expect Eros, an early mover in this direction, to benefit.
Risks
Profitability could be affected by poor box office takings or the timing of
the release of big-budget Hindi films. We estimate Eros generates more than
50% of its revenue from Hindi blockbusters, and hence poor takings at the box
office of the films it co-produces and distributes would affect its profitability. Its
profitability could also be affected by the poor timing of a movie’s release, as
this would result in uneven quarterly results. For example, a delay in the release
of Rana (starring Rajinikanth and likely to be released in FY13) could have an
impact on our FY13 revenue forecast. However the ‘studio’ approach to movie
production helps the company manage these risks to some extent.
Piracy and infringement of intellectual property rights. Piracy remains a key
issue faced by the film industry and has been a major impediment to industry
growth. According to a Federation of Indian Chambers of Commerce and
Industry (FICCI)-KPMG 2011 report (Hitting the High Notes, published in
March 2011), 600-700m units of pirated DVDs are sold every year in India
through a distribution network of 10,000 vendors. In the absence of any law to
restrain cable operators from screening pirated films and the easy availability of
pirated prints, some movie producers and distributors are exposed to financial
loss.
Competition from other sources of entertainment, fewer screening days.
With the International Cricket Council (ICC) World Cup and the Indian Premier
League (IPL) providing alternative entertainment in H111, most films producers
deferred releasing their films to H211. This has led to a concentration of film
releases in H2, particularly during the festival season, thereby lowering the
number of screening days and affecting domestic box office takings.
Multiplex consolidation. Potential consolidation among large multiplex
operators (such as PVR Cinemas) could increase their bargaining power with
film producers and distributors, enabling them to demand a higher revenue share
of box office takings.
Terms of agreement with parent company Eros International plc (Eros plc)
could change. Eros recovers 39% of its total Hindi film costs from Eros plc via
the sale of distribution rights for international markets. This agreement is
reviewed every year and is valid until October 2014.
Valuation and basis for our price target
We value Eros at 9x FY13E EV/EBITDA, the high end of its historical trading
range (since listing in October 2010) and a 15% discount to other India media
companies under UBS coverage.
We believe Eros is attractive at 11.1x FY13E PE, given its strong earnings
growth potential (a 42% CAGR over FY08-11; we forecast a 33% net profit
CAGR over FY11-13). Eros is trading at 7.6x FY13E EV/EBITDA, in line with
global entertainment companies, despite better earnings growth potential (Table
21). Our price target of Rs300.00 implies 13.3x FY13E PE and 2.6x FY13E
P/BV (on 22% FY13E ROE).
Table 3: Price target derivation
FY12E EBITDA (Rs m) 2,429
FY13E EBITDA (Rs m) 3,049
EBITDA growth (%) 26%
Target forward EV/EBITDA—March 2013E (x) 9.0
Target EV (Rs m) 27,562
FY12E net debt (Rs m) 174
Equity value at target (Rs m) 27,388
12-month valuation (Rs) 300
Source: UBS estimates
Eros International Media
Eros is one of the largest movie studios in India. In addition to its own
productions, it sources film content (in Hindi, Tamil and other regional
languages) through co-productions and acquisitions from third parties, and
distributes them via multiple media formats in India, Nepal and Bhutan. In FY11,
Eros raised Rs3.5bn from its listing of 20m shares at its IPO in October 2010 on
the Bombay Stock Exchange.
Statement of Risk
We believe the key risks for Eros are: 1) dependence on the success of largebudget
films for revenue growth and profitability, Ra.One in FY12 and Rana in
FY13; 2) piracy and infringement of intellectual property rights; and 3)
competition from other entertainment (such as cricket), which reduces the
numbers of screening days.
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