Friday, June 1, 2012

>EROS INTERNATIONAL MEDIA LIMITED: Successful movies drive revenue growth

Eros International Media Limited reported better than expected numbers in Q4FY12; sales, EBITDA and net profit grew y-o-y at 81%, 156% and 119%, respectively. The company’s strategy of pre-selling all the movie rights has given good results in derisking the business model and increasing the margins. Eros International has released a total of 77 films in FY12 across Hindi, Tamil and other regional language films. The company has increased its revenue visibility by increasing the future movie slate with an addition of films scheduled to be released over the next 12 to 18 months. In our opinion, the company will report better Q1FY13 numbers, mainly on the back of better net collections from Housefull 2 (Rs 1440 mn) and Vicky Donor
(Rs 450 mn). Higher purchase/operating expenses has restricted the margin expansion for the company in FY12. We have increased our estimates for operating expenses and reduced our EBITDA estimates to Rs 3030 mn for FY13. Considering the improving movies’ pipeline and its quality, increasing demand for satellite rights, better monetisation of catalogue and focus on improving cash flows, the company is likely to perform better in the future. We have maintained our Overweight rating on the stock, but have reduced our target price to Rs 251 from our previous target price of Rs 291 after adjusting for the increased operating expenses.

Key Highlights
 Successful movies drive revenue growth
Revenues for Q4FY12 have increased by 81% y-o-y to reach Rs 2068 mn. This was mainly because of successful movies like ‘Agent Vinod’ and ‘Agneepath’ (International only) and a few Tamil films. Revenue for FY12 has increased by 34.5% to Rs 9632 mn as compared to Rs 7159 mn in FY11. Four of the top 10 box office grossing Hindi films in India in CY11 were Eros International films — Ra. One, Zindagi Na Milengi Dobara, Ready and Rockstar.

 Higher purchase/operating expenses restricted margin expansion
The company’s purchase/operating expenses has grown at 34.4% y-o-y to reach Rs 6655 mn in FY12 as compared to Rs 4951 mn in FY11. The EBITDA margin has expanded only 42 bps to 22.5% in FY12 as compared to 477 bps margin expansion witnessed during FY10-11.

■  Addition to films pipeline for FY13E and FY14E provides revenue visibility
The company has expanded its portfolio by adding new films such as Ferrari Ki Sawaari, Teri Meri Kahaani, Maatran (Tamil), English Vinglish to the existing film slate, which includes Kochadaiyaan, Cocktail, Tanu Weds Manu 2 and Khiladi 786. The company continues to pursue avenues to monetise content via different digital platforms, as entertainment is shifting to the new digital distribution channels.

In our opinion, the company’s sales, EBITDA and net profit is likely to grow at 16.6%, 42.7% and 41.1%, respectively in FY13E on the back of better portfolio of movies, improved satellite deals and de-risking strategy. Considering the success of movies, in terms of box office collections, improving satellite deals and higher catalogue revenues, the financial performance of the company is likely to improve along with profitability in FY13E. We value Eros International at P/E of 11x FY13E EPS to arrive at a value of Rs 251, implying a potential return of 52%. Thus, we maintain our Overweight rating on the stock with a target price of Rs 251.

Key Risks
 Slowdown in TV licensing income, non-performance of movies in theatres and sporting events, such as cricket match series, are likely to impact the company negatively.

Eros International Media Ltd Overweight