Sharekhan's Stock Idea: Eros International (Making of a blockbuster; PT: Rs247)



Eros International Media
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs247
Current market price: Rs186

Making of a blockbuster

Key points 

  • Unique media property with a proven track record: Eros International Media Ltd (EIML) is one of the rare media companies that have shown an impressive and profitable growth even in the recent recessionary phase. Its revenues and net profit have grown at an exponential pace of 58% and 157% CAGR respectively during FY2006-10. To sustain its growth in future, the company has chalked out aggressive plans to invest close to Rs1,000 crore in co-production and acquisition of film rights over the next 18-24 months in order to more than double its existing gross block of Rs1,016.4 crore by FY2012E.
  • A de-risked business model: Despite being in the film co-production and distribution business, its unique business model enables the company to recover the bulk of its cost upfront through pre-sales of overseas rights, music rights and broadcasting rights (on television and the other emerging delivery platforms like broadband and 3G), and in-film advertising. EIML has an exclusive tie-up with its parent company for international distribution rights that covers 39% of the cost (30% of total cost with a 30% mark-up, ie 39% of the total cost). Similarly, it has an arrangement with T-series for music rights (wherein it gets 10-15% of the total cost) while television rights cover additional 20-25% of the total cost, thereby taking care of almost 80-85% of the money invested by the company.
  • Favourable revenue mix to further boost its profitability: EIML has shown a significant improvement in its OPM on the back of the efforts taken to exploit its vast content library. Consequently, its OPM has more than doubled in the past four years, aiding its operating profit to grow at a CAGR of 99% as compared to the CAGR of 58% recorded by its revenues in the same period (FY2006-10). The company?s management expects the OPM to expand further due to an improving trend in the revenue mix in favour of the exploitation of content library. Recently, it signed a deal with Zee Entertainment Enterprises (ZEE)' television network for exclusive broadcasting of the company?s movie library?this is a testimony to the successful penetration of the high-margin revenue platform by the company.
  • Valuations?strong earnings growth of 32.1% CAGR during FY2010-13E: EIML is one of the largest integrated film studios in India with multi-platform revenue streams and a well-established distribution network across the globe. With its proven track record, de-risked business model and aggressive ramp-up plans, we believe the company is well poised to gain from the rising discretionary spending on film entertainment driven by the country?s favourable demographics. Thus, EIML is a compelling value play on the Indian media and entertainment industry. We initiate coverage on EIML with a 12-month price target of Rs247 (valued at 15x FY2012E).

Source : Sharekhan


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