Eros International (EROINT) 235

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1 Result Update Rating matrix Rating : B uy Target : 311 Target Period : 12 months Potential Upside : 32% What s changed? Target Changed from UR to 311 EPS FY16E Changed from 32.4 to 31.3 EPS FY17E Changed from 38.2 to 31.1 Rating From Under Review to Buy Quarterly performance Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key financials Crore FY14 FY15 FY16E FY17E Net Sales 1,135 1,421 1,770 1,952 EBITDA Net Profit EPS ( ) Valuation summary FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock data Particular Amount Market Capitalization ( Crore) 2,177.2 Total Debt (FY15) ( Crore) Cash (FY15) ( Crore) EV 2, week H/L 634 / 204 Equity capital 92.5 Face value 10.0 Research Analyst Bhupendra Tiwary bhupendra.tiwary@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com November 20, 2015 Eros International (EROINT) 235 Effort needed to resurrect investor confidence The topline came in at crore against our estimate of crore driven by movies like Bajrangi Bhaijaan (net domestic box office collection of over 300 crore), Welcome Back (gross collection of over 100 crore) and Srimanthudu (regional movie, which went on to become all-time second highest Telugu grosser) The EBITDA margin at 26.9% was lower than our estimate of 31.7% mainly due to higher operating expenses, which can largely be attributed to higher marketing costs due to a mix of films comprising more of high and medium budget movies PAT came in at 90.4 crore against our estimate of 112 crore mainly due to lower operating margins, which led to a PAT miss Leading producer/distributor with one of the largest film libraries Eros, producer/distributor with a large film library of over 2000 films, has entered into partnerships with three Chinese film companies to explore joint opportunities. Also, it has launched Trinity Pictures to focus on franchise films. The company released 64 movies in FY15 across Hindi, Tamil/Telugu & other languages, of which seven were high budget movies. Though the whole of FY15 was relatively weaker for the movie industry, Eros managed to grow box office collections (domestic & overseas) by ~27%. It continues to get its movie selection right, evident from its presence in three out of top four box office releases in H1FY16. Q2 was marked by several superhits like Bajrangi Bhaijaan, Welcome Back and Srimanthudu. The regional foray is not only helping Eros expand its footprint in Indian cinema but is also accretive to its financials. Q2 - Strongest ever quarter led by super hits Q2FY16 was one of the best with releases like Bajrangi Bhaijaan (net domestic box office collection of over 300 crore), Welcome Back (gross collection of over 100 crore) and Srimanthudu (regional movie, which went on become all-time second highest Telugu grosser). While for H2FY16, it has one big release, Bajirao Mastanii, lined up, the content pipeline for FY17 is robust. We expect theatrical revenues (inclusive of overseas) to grow at 13.8% CAGR in FY15-17E to crore in FY17E. Weathering tough times on accounting allegations The company saw a sharp correction in its stock led by rising concerns over accounting practices followed by the parent company, the stark increase in receivables owing to increased business exposure to UAE, validation of the Eros Now user base and future cash flow viability. While the company provided a point to point rebuttal (see Page 4), the damage was already done. We believe the improvement in receivables, a clear transfer pricing deal with the parent coupled with other steps such as announcing dividend payment and a possible share buyback would remain key to revive confidence levels. Lot required to restore investor confidence; maintain BUY We highlight that recent allegations have been a big dent to investors confidence despite the company s point to point rebuttal. While we continue to have faith in the company s business model, we believe a lot needs to be done by Eros to restore the investors confidence. Possible decisions such as announcing dividend payment, a possible share buyback, or improvement in receivables would remain few key monitorables for confidence building. We continue to maintain BUY rating valuing Eros at 10x FY17E EPS to arrive at a target price of 311. We believe that a strong financial performance coupled with improvement in receivables would be the driver for stock price performance. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY16 Q1FY16E Q2FY15 Q1FY16 YoY (%) QoQ (%) Comments Revenue The topline was higher driven by movies like Bajrangi Bhaijaan, Welcome Back and Srimanthudu Other Income , Raw M at er ial Expenses NA NA Employee Expenses Administrative Expenses Operating Expenses Changes in inventories of finished goo EBITDA EBITDA Margin (%) bps 795 bps Margins lower than our estimate mainly due to higher operating expenses, which can largely be attributed to higher marketing costs due to a mix of films comprising more high seven medium budget movies Depreciation Interest Total Tax PAT PAT was lower mainly due to lower operating margins, which led the P AT miss Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 1, , , , The topline estimates have been largely unchanged EBITDA EBITDA Margin (%) bps bps We build in lower margins as we incorporate H1FY16 performance PAT We build in full tax rate from FY17E onwards EPS ( ) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Strong content pipeline The company released 64 movies in FY15 across Hindi, Tamil/Telugu and other languages, of which seven were high budget movies. Though the whole of FY15 was relatively weaker for the movie industry, Eros managed to grow box office collections (domestic and overseas) by ~27%. The company continues to get its movie selection right, evident from its presence in three out of top four box office releases in H1FY16. Last year, movies such as Kochadaiiyaan, Main Tera Hero (overseas), Ek Villain (overseas), Mary Kom (overseas) and Badlapur turned out to be good bets. In the ongoing fiscal, Bajrangi Bhaijaan, Tanu Weds Manu Returns and Welcome Back were superhits. In addition, Eros is rapidly increasing its footprint in the regional domain with movies that have fared quite well such as Srimanthudu (Telugu), Lingaa (multi-lingual), Aagadu (Telugu), Kaththi (Tamil), etc. Going ahead, with the robust content pipeline as shown below, we expect theatrical revenues (inclusive of overseas) to grow at 13.8% CAGR in FY15-17E to crore in FY17E. Exhibit 1: Content pipeline over H2FY16 and FY17E Movie name Starcast / (Director) Expected Bajirao Mastani Ranveer Singh, Deepika Padukone, Priyanka Chopra (Sanjay Leela Bhansali) H2FY16 Mumbai Pune Mumbai2 (Marathi) Swapnil Joshi, Mukta Barve (Satish Rajwade) H2FY16 Do Lafzon KI Kahani Randeep Hooda, Kajal Aggarwal (Deepak Tijori) H2FY16 Mukhtiar Chadha (Punjabi) Diljit Dosanjh, Oshin Sai (Chetan Parwana) H2FY16 24 (Tamil) Suriya Sivakumar & Others (Vikram Kumar) H2FY16 Sanam Teri Kasam Harshvardhan Rane, Mawra Hocane (Radhika Rao, Vinay Sapru) H2FY16 Kai Neelam( Tamil) Vijay Sethupathy, Samuthrakani & Others (Nalan Kumaraswamy) H2FY16 Sardar Gabbar Singh (Telugu) Pawan Kalyan (K. S. Ravindra) H2FY16 Aligarh Rajkumar Rao, Manoj Bajpai (Hansal Mehta) H2FY16 Dictator (Telugu) Balakrishna (Srivaas) H2FY16 Naale (Malayalam) Fahad Fazil, Malavika S Mohan, Isha Talwar, Mukesh (Shiju S Bawa) H2FY16 Phuntroo ( Marathi ) Madan Deodhar, Ketaki Mategaonkar, (Sujay S Dahake) H2FY16 Enkitta Mothathe (Tamil) Natarajan SubramaniyamRajaji and Vijay Murugan (Ramu Chellappa) H2FY16 Phobia Radhika Apte (Pawan Kriplani) H2FY16 Guru (Marathi) Ankush Chaudhary, Urmila Kannetkar (Sanjay Jadhav) H2FY16 Housefull 3 Akshay Kumar, Abhishekh Bachchan, Rietesh Deshmukh (Sajid-Farhad) FY17 Dishoom Varun Dhawan, John Abraham, Jacqueline Fernandez (Rohit Dhawan) FY17 Shivay Ajay Devgn (Ajay Devgn Productions) FY17 Singham - 3 (Tamil) Suriya, Anushka Shetty, Shruti Haasan (Hari) FY17 Banjo Riteish Deshmukh, Nargis Fakhri (Ravi Jadhav) FY17 Raabta Sushant Singh Rajput (Dinesh Vijayan and Homi Adajania) FY17 Chaar Sahibzaade 2 (Punjabi) Sequel to the Chaar Sahibzade, 3D animation (Harry Baweja) FY17 Guru Tegh Bhadur (Punjabi) 3D Animation (Harry Baweja) FY17 Baar Baar Dekho Siddharth Malhotra, Katrina Kaif (Nitya Mehra) FY17 Rock on 2 Farhan Akhtar, Arjun Rampal, Shraddha Kapoor (Farhan Akhtar) FY17 Reunion Various artistes (Sujoy Gosh) FY17 Farzi Shahid Kapoor, Kriti Sanon (Raj Nidimoru and Krishna D.K.) FY17 Bhavesh Joshi Harshvardhan Kapoor (Vikramaditya Motwane/Phantom Films) FY17 Happy Bhaag Jayegi Abhay Deol, Diana Penty, Ali Fazal (Mudassar Aziz) FY17 ICICI Securities Ltd Retail Equity Research Page 3

4 Foraying into Chinese market Eros has entered into partnerships with three Chinese film companies to explore joint opportunities such as promote, co-produce, distribute and unlock value in respective intellectual properties for Sino-Indian films across all platforms in both countries. Foreign films, mainly from Hollywood, accounted for about 45% of total Chinese box office on a strict quota of 34 movies, with the rest coming from over 600 local Chinese films and displayed in China, which has about screens. The company recently announced its first ever Sino-Indian film project, Da Tang Xuan Zang (Monk Xuan Zang) in collaboration with Chinese state owned production company, Chinese Film Corporation. Though the region provides ample growth prospects, it is difficult to quantify the opportunity arising from Sino-Indian projects. Hence, we have not factored it in our estimates. De-risked business - Changing mix towards catalogue, satellite & ancillary Eros generally recovers its whole production cost even before theatrical release in the form of sale of music rights, satellite rights and 39% guaranteed cost recovery from its parent for international distribution. In addition, monetisation of its huge movie library over pay TV and innovative box office performance linked satellite rights will further reduce its dependence on theatrical revenue. We expect collective revenues from other segments to grow at 24.2% CAGR in FY15-17 to crore in FY17E, forming 35.2% of overall revenue. However, we have not included revenue from HBO channels in our estimates. Weathering tough times on accounting allegations The company saw a sharp correction in its stock led by rising concerns over accounting practices followed by the parent company, the stark increase in receivables owing to increased business exposure to UAE, validation of the Eros Now user base and the future cash flow viability. The parent has provided a point-to-point rebuttal to the concerns: Increase in receivables at parent Level The increase of US$98 million receivables can be partly attributed to an increase in revenues and partly to extended terms to customers. Its receivables level is in line with global content companies where it is expected at 50-55% of revenues. The Indian subsidiary aims to bring overall receivables down to 525 crore by the end of FY16. Increase in revenues from UAE Eros PLC has 45.2% of revenues from the rest of the world (including UAE). Since the UAE subsidiary owns international rights to its library, it appears as revenue from that region. The company s market includes Japan, Taiwan, South Korea, Russia, Africa, Poland and Indonesia. Once a partner has demonstrated consistent, profitable results in a market, the company expects to extend preferred payment terms as an incentive and retention plan. Furthermore, while the reported geographical segment revenue shows that India contributes just under 40% of total revenues in FY15, attributing a percentage of the reported revenues for the rest of the world to India as is the case, contribution from India translates to ~50-55% of Eros International s total revenues Content amortisation The parent s amortisation policy, of amortising 40% in the first year and balance over nine years or life of assets, is as conservative as its US peers, despite the fact that the Indian film entertainment has a much longer tail of revenues. Library revenues generally account for at least 20-25% of revenues ICICI Securities Ltd Retail Equity Research Page 4

5 each year while television and other rights licensing contribute to this significantly. Accordingly, to consider these rights worthless, after just a year of release, reflects ignorance and gross misunderstanding about the industry as a whole Eros Now user base - The 30 million registered users reported by ErosNow as of September 30, 2015 are a combination of web, WAP and app users. Due to the leverage it got from its acquisition of Techzone, a mobile value-added services provider in India, a large part of ErosNow users are currently mobile users Capex increase, free cash flow and increasing debt - The amount the company spends each year on content capex or investment in content is used to complete and release that current year s film slate as well as to partially fund the release slate for the following two years, given Eros likes to maintain a two year visibility of its slate. Over the last three fiscal years, the company has generated over $388 million in net cash from operating activities. The outlook for spend this year is $225 million and Eros believes it is on track to generate free cash flow by the end of FY16. The total net debt to adjusted EBITDA ratio of the company was 1.59x as of FY15. Hence, Eros is under-levered compared to many of its US peers and has no significant debt repayable in the next 12 months Furthermore, the company has appointed one of the Big four auditors to carve out transfer pricing terms for transactions. It expects the same to be finalised by FY16 end. We believe the improvement in receivables, a clear transfer pricing deal with parent coupled with other steps such as announcing dividend payment and a possible share buyback would remain key to revive confidence levels. ICICI Securities Ltd Retail Equity Research Page 5

6 Valuation We highlight that recent questions that have cropped up have been a big dent to investors confidence despite the company s point by point rebuttal. While we continue to have faith in Eros business model, we believe a lot needs to be done by the company to restore investors confidence. Possible decisions such as announcing dividend payment, a possible share buyback (at parent level) or improvement in receivables would remain few key monitorables for confidence building. We continue to maintain BUY rating valuing it at 10x FY17E EPS to arrive at a target price of 311. We believe a strong financial performance coupled with improved debtors would be the driver for the stock price performance. Exhibit 2: Valuations Sales Growth EPS Growth PE EV/ EBITDA RoNW RoCE ( cr) (% ) ( ) ( %) (x) (x) (%) ( %) FY FY FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot Target Price Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Oct-10 Company converted into public limited company. Name changed to Eros International Media Ltd Nov-11 Eros International's Rockstar records hugely successful opening weekend collection of 64 crore gross worldwide May-12 Launches online entertainment service, Eros Now to offer digitised Bollywood film content Sep-13 Eros gains as parent Eros International PLc files update for IPO listing with the SEC Nov-13 Temasek's Fullerton buys stake in Indian film distributor through Eros International Plc ganing a foothold in the local movie industry, Bollywood Dec-13 Movies like Yeh Jawani Hai Deewani, Ram Leela and R Rajkumar fare exceedingly well at the box office Dec-13 Eros International Media (Eros International) forays into the Telugu market by co-producing Mahesh Babu's '1 ' Nenokkadine. Produced by 14 Reels Entertainment and Eros, the upcoming action thriller releases on January 10, 2014 Aug-14 Acquires mobile VAS player Techzone to manage billing and marketing of its digital offerings through Eros Now across mobile platforms May-15 Signs deals with three major Chinese state owned film and entertainment companies to promote, co-produce, distribute and unlock value in respective intellectual properties for Sino-Indian films across all platforms in both the countries through co-productions, dubbed releases and remakes Oct-15 The stock of the parent company faces several downgrades by some renowned investment banks on concerns relating to the increase in recievables, cash flows and increasing exposure to the UAE. In addition, some of the investment blogs highlight several accounting related inconsistencies in the financials of the company leading to such a massive slump in the stock price Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Eros Worldwide FZ, L.L.C. 31-Mar Eros Digital Pvt. Ltd. 31-Mar Skagen AS 30-Sep Norges Bank Investment Management (NBIM) 31-Mar Handelsbanken Asset Management 31-Mar Indus Capital Partners, LLC 31-Mar Dimensional Fund Advisors, L.P. 31-Aug Danske Capital 31-Mar Jupiter Asset Management Ltd. 31-Mar Manulife Asset Management (Asia) 31-Mar Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Skagen AS 10.15m 1.27m Handelsbanken Asset Management -7.32m -1.14m Manulife Asset Management (Asia) 2.72m 0.42m Jupiter Asset Management Ltd m -0.55m Russell Investments Limited 1.98m 0.25m Thomas White International, Ltd m -0.47m Octopus Investments Limited 1.54m 0.24m Danske Capital -1.60m -0.25m Putnam Investment Management, L.L.C. 1.13m 0.14m OppenheimerFunds, Inc m -0.20m tekle Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year- end March) FY14 FY15 FY16E FY17E Total operating Income 1, , , ,951.5 Growth (%) Operating Expenses , , ,320.4 Employee Expenses Administrative Expenses Change in inventory& Other exp. 5.8 (132.9) Total Operating Expenditure , , ,457.1 EBITDA Growth (%) Depreciation Interest Other Income PBT Total Tax Minority Interest (6.4) (0.1) PAT Growth (%) EPS ( ) Cash flow statement Crore (Year- end March) FY14 FY15 FY16E FY17E Profit af ter Tax Add: Depreciation & Amortization Add: Interest Paid (Inc)/dec in Current Assets Inc/(dec) in CL and P rovisions CF from operating activities (Inc)/dec in Fixed Asset Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend & dividend tax Interest Paid Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year- end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital ESOP's Reserve and Surplus 1, , , ,940.8 Total Shareholders funds 1, , , ,034.2 Total Debt Other Non Current Liabilities Total Liabilities 1, , , ,111.5 Assets Gross Block 3, , , ,998.3 Less: Acc Depreciation 2, , , ,915.5 Net Block 1, , , ,082.8 Capital WIP , Total Fixed Assets 1, , , ,719.0 Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets , ,029.0 Creditors , , ,577.3 Provisions Total Current Liabilities , , ,640.3 Net Current Assets Other Non Current Assets Application of Funds 1, , , ,111.5 Key ratios (Year- end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DP S Cash Per Share Operating Ratios (%) EBITDA Margin EBIT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Media) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E DB Corp (DBCORP) Hold 5, DISH TV (DISHTV) Hold 10, NA NM NM ENIL (ENTNET) Hold 3, Eros (EROINT) Buy 2, Hathway Cables (HATCAB) Sell 3, NM NM NM NM NM NM NM HT Media (HTMED) Hold 1, Inox Leisure (INOX) Buy 2, Jagran Prakashan (JAGPRA) Buy 4, PVR (PVRLIM) 828 1,017 Buy 3, Sun TV (SUNTV) Hold 15, TV Today (TVTNET) Buy 1, ZEE Ent. (ZEETEL) Hold 38, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

11 ANALYST CERTIFICATION We /I, Bhupendra Tiwary MBA, Sneha Agarwal, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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