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Film production and distribution company Eros International's (Eros) scrip made a new 52 week high in the last week of June. The gains in the stock, which has outperformed the S&P BSE Sensex in the past few months, is fuelled by a host of positive developments.
Healthy response to the company's digitised content (Bollywood movies/music/TV shows) playing/downloading portal Eros Now, recent tie ups with Chinese film companies to promote, co-produce and distribute Sino-Indian films in both countries, and scope to increase content monetisation significantly are few reasons behind this rally. Recent rumours around possible de-listing is another. The company though has remained silent on the buzz around delisting.
Healthy response to the company's digitised content (Bollywood movies/music/TV shows) playing/downloading portal Eros Now, recent tie ups with Chinese film companies to promote, co-produce and distribute Sino-Indian films in both countries, and scope to increase content monetisation significantly are few reasons behind this rally. Recent rumours around possible de-listing is another. The company though has remained silent on the buzz around delisting.
Eros Now's subscriber base stands at a strong 19 million currently, of which 15 million are in India. Given that large part of these subscribers are using free subscription currently, Eros plans to launch a $10 million marketing campaign soon to convert them to paid subscribers. Even though some content will continue to be free it will be supported by higher advertising revenues.
The company aims to convert its users into monthly subscribers - similar to the approach by Netflix. Premium subscribers will get ad-free content and other benefits like device portability.
Eros' partnership with China will provide opportunity to distribute select Bollywood movies in about 23,600 screens in China. Analysts though have still not factored revenues from these initiatives and are awaiting more details on monetisation before including these in their estimates.
Even after excluding the benefits from above initiatives, Eros' revenues and net profit growth is pegged at 16% and 20%, respectively in FY16. The company's EBITDA margin is expected to increase 130 basis points to 25.8% on the back of increasing revenue share from non-box office, high margin revenues from music rights, satellite rights, cost recovery from parent, amongst others.
"We expect the collective revenues from non box office segments to grow at 24.2% CAGR over FY15-17 to reach Rs 686.4 crore in FY17, forming 35.2% of overall revenues", says Karan Mittal of ICICI Securities.
| IMPROVING MARGINS | FY15 | FY16E | FY17E |
| Net sales (Rs crore) | 1,421 | 1,653 | 1,948 |
| % change y-o-y | 25.3 | 16.3 | 17.8 |
| EBITDA (%) | 24.5 | 25.8 | 27.2 |
| Bps change y-o-y | -190 | 130 | 140 |
| Net profit (Rs crore) | 247 | 296 | 360 |
| % change y-o-y | 23.7 | 19.9 | 21.5 |
| E: Estimates | |||
| Source: Company, Brokerage reports | |||
In FY15, about 38% of Eros' revenues came from domestic box office, satellite rights and catalogue sales formed 31.3% while international geographies contributed 30.7% of overall revenues.
"We believe that there are significant opportunities for monetisation of content on digital platforms which would provide upside triggers to our and consensus forecast. We expect Eros to see significantly re-rating from current price to earnings of 12.8 times for FY17 and assign target price to earnings ratio of 15 times FY17", says Urmil Shah of IDBI Capital.
Eros' movie release pipeline appears healthy for FY16 and includes big-budget movies such as 'Bajrangi Bhaijaan', 'Bajirao Mastani' , regional movies including 'Uttama Villain' (Tamil), 'Masss' (Tamil) and 'Rajini Murugan' (Tamil) and 'Gabbar Singh 2' (Telugu). Any delays in release of large movies, increasing bargaining power of multiplexes (post recent consolidation) and any adverse change in transfer pricing agreement with parent are key downside risks for the company.
