The fortunes of the entertainment industry tend to move in line with the prevailing economic environment. But within the industry, there are companies that have built a resilient business model around film distribution that allows them to stay insulated and thrive even when spends in the economy slow.

Eros International Media (Eros) is one such film distributor and co-producer of mostly Hindi and select regional language movies.

The company has managed to derive significant revenues from movies across budget sizes, while reducing business risks by monetising the cable and satellite rights for such films.

Investors can buy the shares of Eros with a two-year horizon. At Rs 185, the share trades at 11 times estimated per share earnings in FY14. This is lower than the high double-digit valuation enjoyed by multiplex players as well as its own average historical multiples of 13 times over the past three years.

A slew of top movie releases with mid-sized budgets that have been successful in the current fiscal, a strong pipeline of star-studded films and the ability to monetise movie rights by selling them to satellite channels are key positives for the company.

In the first half of this fiscal, Eros benefited from films such as Grand Masti, Raanjhanaa and Yeh Jawani Hai Deewani.

Still, revenues fell 19 per cent over the same period in the previous fiscal to Rs 395.7 crore, though net profit rose 15.1 per cent to Rs 66.3 crore.

The revenue drop was because the company focused on mid-sized budget films without too many megastars featuring in them as it wanted to stay away from risky high-cost movies.

In the current slowing economic environment, the company is not going big on mega budget movies of Rs 100-150 crore, like it did earlier.

This meant there were no blockbuster releases, as a result of which revenues were not as robust. But the focus on mid-budget films with a moderate star cast has helped it contain costs significantly.

De-risked business model

Eros is predominantly a film distributor, though there are films that it has co-produced as well. Given the trend of releasing Hindi films early in the lucrative overseas market (countries with significant Indian expatriate presence, such as the US, Canada, the UK and the UAE), this proportion bodes well. Even regional language films are now releasing simultaneously abroad or even slightly earlier in some cases.

Here, Eros de-risks its business by pre-selling the overseas rights to overseas entities that have significant presence. Through this, Eros has generally been able to recover nearly 40 per cent of its cost of acquisition of a film, thus, significantly reducing the risk associated with a film's offtake as well as ensuring cash flows.

The company also recovers 35-40 per cent of its costs by selling movie rights to channels such as Colors, Zee TV and Star Plus.

While co-producing, Eros tends to enter into revenue sharing arrangements with stakeholders only after it recovers a significant portion of its investment.

Together, these strategies reduce the risk inherent in the film production and distribution business. Thus, Eros has been able to gain from multiple revenue streams and limit the losses quite significantly in case movies do not perform well in theatre screens.

Gaining from satellite

After the telecom regulator mandated digitising cable networks in metros and top cities, DTH players and digital cable companies have been able to substantially increase the number of subscribers to their networks. This has led to growth in subscription revenues for satellite channels. It is also increasingly helping them broadcast new movies soon after after their release.

According to a FICCI-KPMG report, the size of the Indian film industry is set to grow at a compounded annual rate of 11.5 per cent from 2013 to touch Rs 19,330 crore by 2017.

But the television industry is set to grow at a much faster 18 per cent over the same period and touch Rs 84,760 crore by 2017.

Players such as Eros would benefit from this trend as they increasingly look to tap the small screen for monetising films.

Healthy pipeline

While the company has indicated its intention to remain focussed on mid-sized budget films, a few releases big-ticket releases are on the anvil.

These include Kochadaiyaan, Ram Leela, Krrish 3 (released this month) and Happy Ending.

The star cast in these movies includes Rajinikanth, Deepika Padukone, Saif Ali Khan, Hrithik Roshan, Priyanka Chopra and Shahid Kapoor, among others, who could pull the public to the multiplexes.

The company is consciously staying away from mega budget films featuring the three Khans or Akshay Kumar.

However, this strategy may see it lose out on potentially top-grossing movies.

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