Eros International Media: Buy

With the economy on the path to recovery, the entertainment industry is likely to be one of the key beneficiaries.

Multiplexes have been reporting steady increase in their average ticket prices over the past few quarters.

Other players in the entertainment value chain also look set to jump onto the bandwagon to ride the revival in economic sentiment.

Eros International Media (Eros), a film distributor and co-producer of mostly Hindi and select regional language movies, has built a resilient business model that allows it to thrive even in a relatively tough macro environment.

A slew of successful movie releases with mid-sized budgets, 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.

Investors can buy the shares of Eros with a two-year horizon. At ₹206, the share trades at eight times stimated per share earnings in 2014-15.

This is lower than the high double-digit valuation enjoyed by multiplex players as well as its own average historical multiples of about 12-13 times over the past three-four years.

In 2013-14, Eros benefited from films like Grand Masti, Raanjhanaa, Yeh Jawani Hai Deewani and Goliyon Ki Rasleela – Ramleela . Kochadaiyaan , the Rajinikanth starrer, which released recently, has also managed a good collection of ₹42 crore in its opening weekend.

Satellite rights for the movie too have been sold to various general entertainment channels.

In 2013-14, Eros’ revenues grew 6.1 per cent over the previous year to ₹1,139.6 crore, while its net profit rose 29.2 per cent to ₹199.7 crore.

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 range of ₹100-150 crore.

Over the past one year, Eros has consciously stayed away from mega budget films featuring the three Khans or Akshay Kumar.

This meant there were no blockbuster releases, as a result of which revenue growth was not that robust. But the focus on mid-budget films helped it contain costs significantly.

Eros is predominantly a film distributor, though it has co-produced films 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), Eros stands to benefit from early collections. Even regional language films are now releasing simultaneously abroad or even slightly earlier in some cases.

Theatrical revenues account for 42 per cent of the company’s overall revenue; overseas distribution 26 per cent and other avenues (mainly sales to satellite television channels) constitute 32 per cent.

Eros de-risks its business by pre-selling the overseas rights to overseas entities that have significant reach in those markets.

Through this, the company has generally been able to recover nearly 40 per cent of a film’s acquisition cost.

This significantly reduces the risk associated with a film's offtake and also ensures 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 risks inherent in the film production and distribution business.

Eros has thus been able to gain from multiple revenue streams and limit the losses quite significantly, in case a movie does not perform well on theatre screens.

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

In 2014-15, some of the movies in the pipeline are Happy Ending, Action Jackson, NH10 and Tevar . The star cast in these movies includes established stars such as Saif Ali Khan and Ajay Devgn and some rising stars such as Varun Dhavan.

Leading ladies such as Anushka Sharma and Sonakshi Sinha could also pull the public to the multiplexes.

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