Investors can avoid the initial public offering of the shares of Shemaroo Entertainment, a content library player with access to mostly Hindi and some regional films.

However, as evident to our readers, our stock recommendations, based on fundamental analysis, are meant for long-term investors. We do not preclude the possibility of listing gains given the state of the primary market.

Relatively high valuations, a business model built around aggregating and syndicating older films to different media — which may not be lucrative — and competition from entrenched peers are key negatives for the company.

In addition, the company has also been continuously faced with higher short-term borrowings. Piling inventories and trade receivables have necessitated higher working-capital requirements for content acquisition.

Also, the company hardly has any cash (₹93 lakh) in its books.

Most of the issue proceeds are to be used for working-capital requirements rather than any technological or content augmentation.

The company is looking to raise ₹120 crore through fresh issue of shares in the price band of ₹155-170. At the upper end of the price band, the offer asks for 19 times 2013-14 earnings on a diluted basis. This is far more expensive (though not strictly comparable) than a large player such as Eros International, which trades at 12 times the trailing earnings.

In 2013-14, Shemaroo’s revenues grew 23.1 per cent over 2012-13 to ₹266 crore, while net profits rose 16.3 per cent to ₹27.3 crore. The profits were helped by the fact that expenses were lower, mainly due to the ‘change in inventory’ component of ₹54 crore. In the last three years, revenues have grown at a compounded rate of 18.7 per cent, while net profits rose at a rate of 26.1 per cent.

Challenging business

Shemaroo has a content library with over 2,900 titles spanning mostly Hindi movies and films in a few regional languages .

This library comprises mostly older classics, as well as a few that were released in recent years.

There are two types of rights it has over content — perpetual and aggregation. The former gives the company the right to use the content for monetisation across television, internet, mobile or any other media for perpetual period. Aggregation rights are limited in the sense that monetisation can be done for a limited period or specific media or geography only.

Now, for all the hits in recent years such as Queen, Dirty Picture, Kahani and Azab Prem Ki Ghazab Kahani , it has only limited rights, which means that it may not be able to maximise revenues from them.

Most channels run older movies that were not well received in theatres as well as old hits only in non-prime slots, mostly to act as fillers. Entertainment channels do not generate significant advertising revenues from such movies. So the content is likely to be acquired at relatively low costs by these channels.

This means that selling to DTH or general entertainment channels may not provide sustainable revenues for Shemaroo. The content for which it has perpetual rights are movies that were received with lukewarm or no enthusiasm in recent years. It has no access to blockbuster movies across any media.

There are some old time classics such as Amar Akbar Antony, Zanjeer and Namak Halal, over which the company has perpetual rights. Given these films’ numerous re-runs in single-screen theatres as well as in many entertainment channels in the past, it may be challenging for the company to milk it further for revenues.

In addition, there are numerous websites that allow users to download older movies for free.

The other key risk that the company faces is competition from entrenched players with strong corporate backing such as Hungama Digital and Moser Baer. Hungama Digital especially is a very large player and is among the largest in the domestic mobile entertainment content space. So, though the mobile content space is fast growing, it may not be the top choice for operators to look up to for content aggregation. Pricing power too may not be high.

Strained financials While the company set out to add to the number of titles that it owns, its short-term borrowings have risen steadily over the years; in 2013-14, it jumped over 28 per cent over the previous fiscal to ₹141 crore. This is also sharply up from the ₹87 crore levels in 2012-13. The inventory holding days have gone up from 207 in 2012-13 to 237 in the previous fiscal. Receivable days too are up from 136 to 145.

Shemaroo’s inventories have risen in the past three-four years to touch over ₹200 crore in 2013-14, suggesting that its older content is yet to move out of the shelves or is waiting to be monetised.

The company’s operating cash flows are negative, indicating that it has used up cash. Trade receivables have doubled over 2013-14 to over ₹140 crore. There has also been a spike in long-term borrowings in this period.

The company is thus looking to raise ₹120 crore from this offer mainly to finance its workingcapital requirements.

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