The Hindu Business Line : Saregama India: Hold

While Saregama appears to be making the right moves in new businesses, there could be execution challenges in its transition to a diversified entertainment company.

Demand for CDs and online downloads is on the rise.

Shanthi Venkataraman

Shareholders can retain their holdings in Saregama India. The company is deriving an increasing share of revenues from exploitation of music content in non-physical platforms such as radio, mobile ringtones and international music Web sites. It is also attempting to diversify beyond music into home video, movie production and television content.

These forays hold promise for the company’s growth prospects in the long-term but face execution challenges. Recent earnings performance also suggests that the problems of declining cassette sales are not fully behind it, with these sales still accounting for a chunk of the overall revenues. Performance may continue to be sedate in the near term. At the current market price, the stock trades at about 30 times its trailing four quarters’ earnings per share. Investors can wait for an opportunity to pick up the stock at a lower price or for further clarity to emerge on the company’s changing business model.

Tuning in to new platforms

Saregama India has a vast library of content under its label, ranging across genres from film music, to classical, to regional music. But declining cassette sales in favour of compact discs and MP3s and preferences for new platforms of music in the form of the radio, mobile ringtones and the Internet aversely impacted Saregama’s performance over the last couple of years.

Saregama’s own strategy of avoiding aggressive bids for Hindi film music rights has also led to a declining market share in new Hindi film soundtracks, which accounts for about 40 per cent of Indian music sales. However, Saregama has revamped its strategy to gear itself for the digital age and this is likely to have a positive bearing on financials from FY-09. It has already managed to capitalise on the growing demand for mobile ringtones and the mushrooming of FM stations.

Share of licensing income in revenues has grown from about 14 per cent in FY 06, to about 41 per cent in the first half of FY 08. Licensing income also includes fee from the sale of its content on music portals such as Apple’s i-Tunes and MSN Music.

With growing mobile subscriber additions and radio and internet penetration, the share of licensing income is likely to grow which, in turn, will boost profitability.

Online music portal

Saregama is also planning to launch its own online music portal. It has invested in digitalising 190,000 of its 300,000 soundtracks.

It also has tie-ups with other content providers and claims that the portal will allow users to access more than four million soundtracks and download songs at Rs 10 per song.

The platform has significant potential, as users increasingly prefer to download music from the Internet.

However, the rampant piracy that allows free downloads of music poses a challenge to this. For regular downloaders of music, the cost per download may also be seen as stiff.

Success of these portals lies in ensuring the availability of the latest music on its site and in having the technology to prevent copying and transferring of music files that would result in lost revenue potential.

While these execution challenges exist, the online portal is likely to create a new revenue stream for the company, which if successful, could prove a highly lucrative business.

Diversifying from music

Saregama has been a prominent player in home video distribution, which accounted for about 17 per cent of revenues in FY 06. The breakup for FY-07 is not available.

However, with tie-ups with leading Hollywood studios such as Disney, Warner Bros, Paramount and Miramax, it has a strong advantage in English movie content.

Competition is intensifying in this segment, with Moser Baer’s entry aggressively reducing prices.

Reliance Entertainment has also forayed into this segment. Saregama has already begun to feel the heat, losing its deal with Universal Studios, not to mention some of its senior management, to the former.

It has however, entered into a joint venture with an Australian company, Regency Media, to manufacture optical discs. This should enable it to be more competitive in the market.

Saregama is to merge its 100 per cent subsidiary Saregama Films with itself. Reputed film director Aparna Sen heads the film production and television software business. The division has three releases planned for the next couple of quarters, including one crossover film directed by Aparna Sen and another by Rituparna Ghosh.

The genre of movies lined up appears to be aimed more at a niche audience. Saregama’s first couple of productions have had average success at the box office.

The company also creates 14 hours of programming for the Sun network.

However, Saregama is yet to scale up these businesses to an extent where they can make a significant contribution to revenues.

Film production also enhances the risk profile of the business. We have not factored in any significant growth from production and software.

Overall, while Saregama appears to be making the right moves in new businesses, the transition to a diversified entertainment company is likely to be challenging.

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