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Eros International (EROS)
Media
Marginally weak 2QFY12. Eros reported 2QFY12 EBIT at Rs473 mn (-15% yoy),
marginally below estimates. The yoy performance seems weak due to (1) unfavorable
base in 2QFY11 (contribution from sale of library) and (2) forex losses (at PAT level). The
structural drivers remain intact: (1) C&S TV licensing income, (2) Digital Cinema et al;
Eros has also put forth a robust initial film slate for FY2013E-14E with potential for
accruals through acquisitions. However, valuations (14X FY2013E EPS) have caught on;
downgrade to REDUCE with limited upside to FY2013E FV of Rs270.
Seemingly weak 2QFY12 due to unfavorable base
Eros reported 2QFY12 EBIT at Rs473 mn (-15% yoy, +58% qoq) largely on account of strong
performance of Zindagi Na Milegi Dobara (ZNMD) but limited contributions from Murder 2
(partially booked in 1QFY12) and Mausam (average performance). The yoy performance seems
weak due to large contribution from sale of library in 2QFY11 (Rs283 mn; Exhibit 2); 2QFY12
standalone EBIT of Rs416 mn (+51% yoy; largely new films) was robust.
Among the usual challenges of estimating the operating profits of movie business, a common
mistake we have noticed is projecting the gross profitability (revenues – production/distribution
expenses) of individual movies to operating profitability of the company. A large film studio
(distribution) needs to maintain distribution offices and officers (overheads and employees),
with annualized expenses of ~Rs550 mn (in FY2011 for Eros) equivalent to gross contribution
from one blockbuster movie (ZNMD, for example). Thus, the lack of ‘niche’, ‘profitable’ film
studios (a contradiction, in our view) is hardly surprising in the industry.
Downgrade to REDUCE as valuations have caught on
The structural drivers for Eros remain unchanged led by (1) C&S TV licensing (recent deals in the
region of Rs350-400 mn for Don 2 as well as Agneepath), (2) Digital Cinema (wider release across
Tier-II/III towns at low incremental cost), (3) profit sharing agreements with talent resulting in
reduced breakeven points. The company is also investing in (1) regional films and (2) new media
(digital), which can become future growth drivers. Finally, Eros has put out a robust slate for
FY2013E (Exhibit 5), which will likely be augmented through acquisitions. We leave our FY2013E
fair value (Rs270) and earnings estimate (Rs19.7) largely unchanged.
However, valuations at 14X FY2013E EPS, post 21% EPS CAGR between FY2011-13E, have
caught on (similar to FCF-positive media companies; Eros reported negative-FCF in FY2011 given
rising investments in FY2012E-13E film slate). We believe Eros should trade at discount to general
media valuations given (1) unpredictability and (2) working capital cycle of film business. Eros
valuations will move up over time as its library scales up (Exhibit 6; ~5K films equal to the larger
Hollywood studios versus ~1K currently) and ancillary revenue streams (digital new media) become
developed, resulting in greater predictability and cash flows.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Eros International (EROS)
Media
Marginally weak 2QFY12. Eros reported 2QFY12 EBIT at Rs473 mn (-15% yoy),
marginally below estimates. The yoy performance seems weak due to (1) unfavorable
base in 2QFY11 (contribution from sale of library) and (2) forex losses (at PAT level). The
structural drivers remain intact: (1) C&S TV licensing income, (2) Digital Cinema et al;
Eros has also put forth a robust initial film slate for FY2013E-14E with potential for
accruals through acquisitions. However, valuations (14X FY2013E EPS) have caught on;
downgrade to REDUCE with limited upside to FY2013E FV of Rs270.
Seemingly weak 2QFY12 due to unfavorable base
Eros reported 2QFY12 EBIT at Rs473 mn (-15% yoy, +58% qoq) largely on account of strong
performance of Zindagi Na Milegi Dobara (ZNMD) but limited contributions from Murder 2
(partially booked in 1QFY12) and Mausam (average performance). The yoy performance seems
weak due to large contribution from sale of library in 2QFY11 (Rs283 mn; Exhibit 2); 2QFY12
standalone EBIT of Rs416 mn (+51% yoy; largely new films) was robust.
Among the usual challenges of estimating the operating profits of movie business, a common
mistake we have noticed is projecting the gross profitability (revenues – production/distribution
expenses) of individual movies to operating profitability of the company. A large film studio
(distribution) needs to maintain distribution offices and officers (overheads and employees),
with annualized expenses of ~Rs550 mn (in FY2011 for Eros) equivalent to gross contribution
from one blockbuster movie (ZNMD, for example). Thus, the lack of ‘niche’, ‘profitable’ film
studios (a contradiction, in our view) is hardly surprising in the industry.
Downgrade to REDUCE as valuations have caught on
The structural drivers for Eros remain unchanged led by (1) C&S TV licensing (recent deals in the
region of Rs350-400 mn for Don 2 as well as Agneepath), (2) Digital Cinema (wider release across
Tier-II/III towns at low incremental cost), (3) profit sharing agreements with talent resulting in
reduced breakeven points. The company is also investing in (1) regional films and (2) new media
(digital), which can become future growth drivers. Finally, Eros has put out a robust slate for
FY2013E (Exhibit 5), which will likely be augmented through acquisitions. We leave our FY2013E
fair value (Rs270) and earnings estimate (Rs19.7) largely unchanged.
However, valuations at 14X FY2013E EPS, post 21% EPS CAGR between FY2011-13E, have
caught on (similar to FCF-positive media companies; Eros reported negative-FCF in FY2011 given
rising investments in FY2012E-13E film slate). We believe Eros should trade at discount to general
media valuations given (1) unpredictability and (2) working capital cycle of film business. Eros
valuations will move up over time as its library scales up (Exhibit 6; ~5K films equal to the larger
Hollywood studios versus ~1K currently) and ancillary revenue streams (digital new media) become
developed, resulting in greater predictability and cash flows.
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