EROS: A blockbuster pick
India's leading movie and entertainment company, Eros International Media (Eros) is trading closer to its one-year low, in line with weak markets. However, its latest movies such as Vicky Donor, Ferrari ki Sawari and Housefull2 have done well at the box office, giving an impetus to its June quarter earnings.
A strong movies pipeline, higher contribution from high-margin TV and music rights sale and catalogue revenues should lead to healthy growth in FY13 as well. Box office success of movies such as Housefull2 and Vicky Donor will boost June quarter earnings (by 78 per cent). The company is also increasing its distribution segment and digitising its content library of 1,100 films. All these moves will enable the company to de-risk its business from the vagaries of box office collections and enable it to post healthy financial performance.
Deepan Sankar, analyst at HSBC believes, "Considering the success of movies, in terms of box office collections, improving satellite deals and higher catalogue revenues, the financial performance of the company is likely to improve along with profitability in FY13. We value Eros International at Rs 251".
TV rights sales up
Eros' strategy of selling TV and music rights of movies before release seems to be paying off really well. In FY12, the company recovered about 40-60 per cent of a film's cost, a figure which stood at 30 per cent previously, before release of the film. This was largely driven by higher value of these sales. Notably, Eros' RA.One and Rockstar's TV rights were sold at a 50 per cent premium value.
Going forward, analysts expect that this segment will contribute about 35-40 per cent of the incremental revenues in FY13. Eros has sold a large part of its movies lined up this fiscal to television channels. Further, growth in multiplexes in India coupled with growing revenue pie (55 per cent in FY12 versus 50 per cent in FY11) are likely to support box office collections revenue for Eros. Analysts peg the same at 14 per cent for FY13. Its catalogue revenue is also growing because it has now digitised half of its library of 1,100 movies. It plans to complete entire digitisation by end-2012.
Valuation and Outlook
At 8 times FY13 price to earnings ratio, the Eros scrip is trading closer to its all time low valuations, in line with the fall in broader and midcap indices. Analysts expect this multiple to inch up to around 11-13 times levels for FY13. This translates into upsides of 50-55 per cent in the share price from current levels.
Eros has a strong pipeline of about 32 movies to be released in FY13 and FY14, providing strong revenue visibility. Given the fact that it has strong movies lined up every quarter, analysts expect each quarter to contribute 20 per cent to its FY13 earnings estimates.
According to Jigar Shah, analyst at Kim Eng Securities, "We believe Eros has surplus funds even after its committed Rs 600 crore for film production this year and the number of movies produced in FY13 may surprise on the upside. We believe given Eros’ consistent earnings growth for FY11 and FY12, investors will take note of FY13 estimated earnings growth of 29 per cent. We believe, investor apprehensions on growth have been allayed and the stock is poised for a re-rating".
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