India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

Shemaroo Entertainment / Equity Bottom-Up

We recently wrote a report on Shemaroo Entertainment with a positive bias. The company Q3FY17 (Oct-Dec2016) results were marginally impacted by demonetisation. While net sales increased 14% YoY to Rs. 115 Cr( USD 17 mn), EBITDA increased by 20% YoY to Rs. 32 Cr( USD 4.7 mn) in Q3 FY17. We analyze the result.<div class="content-highlight"><h2>Segment results</h2></div>As mentioned in our detailed report the company derives its revenue from two segments i.e. Traditional Media and New Media segment.Traditional MediaThis segment includes…

We recently wrote a report on Shemaroo Entertainment with a positive bias. The company Q3FY17 (Oct-Dec2016) results were marginally impacted by demonetisation. While net sales increased 14% YoY to Rs. 115 Cr( USD 17 mn), EBITDA increased by 20% YoY to Rs. 32 Cr( USD 4.7 mn) in Q3 FY17. We analyze the result.Segment resultsAs mentioned in our detailed report the company derives its revenue from two segments i.e. Traditional Media and New Media segment.Traditional MediaThis segment includes…

Post demonetisation more Indians are forced to go digital as the government is nudging them in that direction to bring about a cashless society. An unintended beneficiary of this is entertainment as billions of Indian will have access to the Internet for the first time and they are likely to access their favourite Bollywood content on demand. Companies who have content and means to distribute will be massive beneficiaries of this impending deluge of downloads. This is where Shemaroo Entertainment is perfectly positioned.Shemaroo Entertainment is one of the largest content providers in India with a library of nearly 3400 movie titles in various languages. The company generates its revenue by distributing its content to two business segments i.e. Traditional Media comprising broadcasters, DVD sales etc. and New Media comprising online platforms like YouTube, Netflix, Hotstar and collaboration with various telecom operators like Airtel, Vodafone to distribute products like caller ring back tones, ringtones, full songs, wallpaper etc.Unique strategy to content acquisition significantly reduces risk of failures &amp; low returnsThe company typically acquires rights of a movie title in the second cycle which takes place 3-5 yrs post the release of a movie. This reduces the cost of acquisition by near 80-90% which helps the company to generate an expected IRR of 18% from a content. The probability of a failure from the content is also low for the firm as Shemaroo gets sufficient time to analyse viewer acceptance from a content post its release.Growth drivers<ul><li>Traditional media, mainly television revenues is expected to grow at a CAGR of 15% till FY20 aided by strong ad spend from large e-commerce players along with the entrance of Patanjali in the FMCG space. Shemaroo being a key content provider to broadcasters like Zee, Sony, Star may grow in tandem, as price realization of film contents has historically grown in line with Traditional media ad growth rate.</li><li>Digital Media Advertisement is expected to grow at a CAGR of 33% till FY20. This may be aided by robust growth in smartphone users and an expected combination of higher internet speed and cheaper data with the advent of Reliance Jio. This may increase the time spent in video format which is expected to take 75% share of the total data used by an individual by FY20 from 40% in FY16. This may benefit Shemaroo as its content in the digital media platforms are in Video format which will help it to garner higher ad realization.</li></ul>Key Risks<ul class="ember-tether-target ember-tether-enabled ember-tether-element-attached-top ember-tether-element-attached-left ember-tether-target-attached-top ember-tether-target-attached-right"><li>The company follows an unconventional accounting practice of classifying its content acquisition as inventory instead of Gross Block. Although the company has revealed its amortization treatment towards the content acquisition, it doesn’t provide a break up in the P&amp;L. However going ahead, we could expect more clarity as the company has to comply with new Indian Accounting Standard converging with IFRS by FY18.</li><li>The receivable days for the company is high at 180 days, but it might come down to 140 days by FY18, as New Media segment improves its share in overall revenue mix. This may improve Free Cash flow for the firm.</li></ul>Our View<ul class="ember-tether-target ember-tether-enabled ember-tether-element-attached-top ember-tether-element-attached-left ember-tether-target-attached-top ember-tether-target-attached-right"><li>We believe that the fast growing New Media segment may improve its share in Shemaroo's revenue mix to 40% in FY20 from 21% currently.</li><li>This may help net sales to grow at a CAGR of 19% from FY16 to reach Rs 632 Cr(USD 94 mn) by FY19e.</li><li>We also expect 200 bps improvement in EBITDA margin, which may result in an EBITDA CAGR growth of 21% to reach Rs 203 Cr (USD 30 mn) by FY19e.</li><li>We expect PAT to grow at a CAGR of 18 % to reach Rs 91Cr(USD 14mn) in FY19e as we expect a rise in gearing ratio to 0.7x equity which may increase overall finance cost for the firm.</li></ul>ValuationThe company trades at a PE of 17x FY17e EPS, 15x FY18e EPS and 13x FY19e EPS and an EV/EBITDA of 9x FY17e EBITDA, 8x FY18e EBITDA and 7x FY19e EBITDA. We believe that the company is reasonably valued given its high visibility of revenue growth and superior profitability. We think that it would be the major beneficiary of high growth in data and internet penetration in the coming years when compared to its peers.

Post demonetisation more Indians are forced to go digital as the government is nudging them in that direction to bring about a cashless society. An unintended beneficiary of this is entertainment as billions of Indian will have access to the Internet for the first time and they are likely to access their favourite Bollywood content on demand. Companies who have content and means to distribute will be massive beneficiaries of this impending deluge of downloads. This is where Shemaroo Entertainment is perfectly positioned.Shemaroo Entertainment is one of the largest content providers in India with a library of nearly 3400 movie titles in various languages. The company generates its revenue by distributing its content to two business segments i.e. Traditional Media comprising broadcasters, DVD sales etc. and New Media comprising online platforms like YouTube, Netflix, Hotstar and collaboration with various telecom operators like Airtel, Vodafone to distribute products like caller ring back tones, ringtones, full songs, wallpaper etc.Unique strategy to content acquisition significantly reduces risk of failures &amp; low returnsThe company typically acquires rights of a movie title in the second cycle which takes place 3-5 yrs post the release of a movie. This reduces the cost of acquisition by near 80-90% which helps the company to generate an expected IRR of 18% from a content. The probability of a failure from the content is also low for the firm as Shemaroo gets sufficient time to analyse viewer acceptance from a content post its release.Growth driversTraditional media, mainly television revenues is expected to grow at a CAGR of 15% till FY20 aided by strong ad spend from large e-commerce players along with the entrance of Patanjali in the FMCG space. Shemaroo being a key content provider to broadcasters like Zee, Sony, Star may grow in tandem, as price realization of film contents has historically grown in line with Traditional media ad growth rate.Digital Media Advertisement is expected to grow at a CAGR of 33% till FY20. This may be aided by robust growth in smartphone users and an expected combination of higher internet speed and cheaper data with the advent of Reliance Jio. This may increase the time spent in video format which is expected to take 75% share of the total data used by an individual by FY20 from 40% in FY16. This may benefit Shemaroo as its content in the digital media platforms are in Video format which will help it to garner higher ad realization.Key RisksThe company follows an unconventional accounting practice of classifying its content acquisition as inventory instead of Gross Block. Although the company has revealed its amortization treatment towards the content acquisition, it doesn’t provide a break up in the P&amp;L. However going ahead, we could expect more clarity as the company has to comply with new Indian Accounting Standard converging with IFRS by FY18.The receivable days for the company is high at 180 days, but it might come down to 140 days by FY18, as New Media segment improves its share in overall revenue mix. This may improve Free Cash flow for the firm.Our ViewWe believe that the fast growing New Media segment may improve its share in Shemaroo's revenue mix to 40% in FY20 from 21% currently.This may help net sales to grow at a CAGR of 19% from FY16 to reach Rs 632 Cr(USD 94 mn) by FY19e.We also expect 200 bps improvement in EBITDA margin, which may result in an EBITDA CAGR growth of 21% to reach Rs 203 Cr (USD 30 mn) by FY19e.We expect PAT to grow at a CAGR of 18 % to reach Rs 91Cr(USD 14mn) in FY19e as we expect a rise in gearing ratio to 0.7x equity which may increase overall finance cost for the firm.ValuationThe company trades at a PE of 17x FY17e EPS, 15x FY18e EPS and 13x FY19e EPS and an EV/EBITDA of 9x FY17e EBITDA, 8x FY18e EBITDA and 7x FY19e EBITDA. We believe that the company is reasonably valued given its high visibility of revenue growth and superior profitability. We think that it would be the major beneficiary of high growth in data and internet penetration in the coming years when compared to its peers.

Shemaroo Entertainment- Smart Entertainer For- "Digitized Billions" - A Reality Post Demonetisation

India

Shemaroo Entertainment Limited produces theatrical and non-theatrical motion pictures and video tapes.

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Shemaroo Entertainment (SHEM IN)

Shemaroo Entertainment- Q3 FY17 Update

We recently wrote a report on Shemaroo Entertainment with a positive bias. The company Q3FY17 (Oct-Dec2016) results were marginally impacted by...

Das Capital Management and Advisors

Shemaroo Entertainment- Smart Entertainer For- "Digitized Billions" - A Reality Post Demonetisation

Post demonetisation more Indians are forced to go digital as the government is nudging them in that direction to bring about a cashless society. An...

Das Capital Management and Advisors

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