Saregama India Limited: Rating Reaffirmed Summary of Rating Action

November 27, 2020 Saregama India Limited: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Commercial Paper1 40.00 40.00 [ICRA]A1+; Reaffirmed Total 40.00 40.00 *Instrument details are provided in Annexure-1 Rationale The assigned rating considers Saregama India Limited’s (SIL) status as a RP-SG Group company, of which CESC Limited (rated at [ICRA]A1+) is the flagship company, leading to a considerable financial flexibility The rating also considered the company’s comfortable financial profile, as indicated by a healthy operating profitability, a conservative capital structure, and strong debt protection metrics. ICRA notes that while the lower sales volume of Carvaan adversely impacted the operating income in H1 FY2021, the continued growth in high-margin licensing business and cost rationalisation measures undertaken by the management in advertising and sales promotion expenses significantly improved the profitability during the same period. The liquidity also remained strong with cash and bank balance of around Rs. 80 crore as on September 30, 2020. The rating also considered SIL’s extensive experience in the music industry with a strong competitive position as one of India’s major music recording and publishing companies with more than 1.3 lakh songs in its library. ICRA notes that the music industry has undergone significant changes over the past decade, with the digital content contributing to an increasing share of revenues for music publishers, including SIL. The company has benefited from the same as corroborated by a significant growth in the licensing revenue over the past few years. The continued acquisition of new music across various languages is likely to further support the licensing income, going forward. ICRA notes that although the company has an established presence in the television serial segment, especially in South India coupled with production of movies for the digital platform, which led to a further diversification of revenues, the share of the same in the total revenue continues to remain low. Thus, the credit profile of the company is primarily determined by its music segment at present. The rating, however, remains constrained by the continued financial support extended by SIL to the loss-making operations of its wholly-owned subsidiary, which publishes the magazine, Open. This adversely impacts SIL’s overall business returns and cash accruals. ICRA expects such support to continue over the near to medium term. The music industry is also susceptible to the threat of piracy, rapid technological changes and intense competition, which resulted in content cost escalation, affecting the profitability. ICRA also notes that the overall scale of operation is likely to be impacted in FY2021 owing to a significant volume decline of Carvaan. Nonetheless, SIL’s healthy cash accruals from the music licensing business together with cost control measures are likely to result in a healthy profitability and strong debt protection metrics and liquidity position of the company in the current financial year. 1 1 While assigning the rating, ICRA notes that the proceeds from the rated CP programme are intended to be utilised for funding the working capital requirements, as per the objects of the issue. A deviation from the above that has the effect of exerting pressure on the asset-liability position of the company would be a rating sensitivity. 1 Key rating drivers and their description Credit strengths SIL’s status as a company belonging to the RP-SG Group – The RP-SG Group currently holds a 59.05% stake in SIL. Given the established position of the Group, having diversified business interests in power and natural resources, IT and education, infrastructure, retail and media and entertainment, SIL enjoys considerable financial flexibility and maintains a healthy relationship with domestic banks. Extensive experience in industry with a strong competitive position as one of India’s major music recording and publishing companies – One of the country’s largest music recording and publishing companies, SIL has achieved several milestones. SIL has a music library of approximately 1.30 lakh songs, including those by renowned musicians like Lata Mangeshkar, Asha Bhonsle, Mohammad Rafi, Pandit Hariprasad Chaurasia, R.D. Burman and many other musical stalwarts. Its content includes music recorded in 18 different languages and classical music. It also has the largest music catalogue in India. Most of the company’s music are from the period 1960s to 2000s, which contributes ~69% to the count of songs and ~66% of the total licensing revenue, thus enabling it to leverage its collection, given the limited availability of these rare songs. The company has also started acquiring new music rights in the last two-three financial years, which will further support the licensing income going forward. Comfortable financial risk profile supported by conservative capital structure and strong debt protection metrics – The financial performance remained comfortable with healthy profits and cash generation in the last two financial years. There has been no debt as on date, leading to a conservative capital structure. In FY2020, although the operating income had declined by around 10% owing to a significant volume decline of Carvaan in Q4 FY2020, a consistent increase in high- margin licensing revenue, supported the consolidated operating margin, which remained at around 12% in FY2020. In H1 FY2021, while the lower sales volume of Carvaan continued to adversely impact the total revenue, a continued growth in licensing business and severe cost rationalisation measures undertaken by the management in advertising and sales promotion significantly improved the profitability. The company’s debt-coverage indicators also remained strong with an interest coverage and TD/OPBDITA of ~9.0 times and ~0.15 times, respectively in FY2020. The coverage indicators are expected to further improve in the current year, led by ab improved profitability and lower interest expenses. Significant growth in high-margin licensing business through better digital penetration – Over the years, the licensing income has witnessed a compounded annual growth rate (CAGR) of ~20% to around Rs. 238 crore in FY2020 from Rs. 138 crore in FY2017. The growth was primarily driven by significant increase in online music streaming/content consumption through better digital penetration, thus supporting the revenue and cash accruals of the company. Saregama’s music has been licensed to over 45 music streaming (OTT) platforms. In addition, SIL has 25 channels on YouTube with a cumulative subscriber base of over 34 million (mn). The music has also been licensed to 357 TV channels for use in their various programs. SIL is also acquiring new music across various languages to further support the licensing income, going forward. Established presence in television serial segment in South India and expanding presence in film production for digital platform lead to revenue diversification – SIL has an established presence in the television serial segment in South India and has rights of over 6,050 hours of Tamil series including successful serials such as ’Roja‘, ‘Chandralekha‘ and ’Valli‘. As most of these programmes have considerable viewership and record high gross rating points (GRPs), they command favourable advertising rates. The Intellectual Property (IP) rights of all these serials are owned by Saregama. The digital film segment is also gaining momentum gradually. SIL has produced and licensed 13 movies on various video streaming platforms in the last three years. 2 Credit challenges Higher dependence on old catalogue; strategy to selectively acquire new music in recent years is likely to mitigate the risk to an extent – SIL was highly dependent on old catalogue of music content and generated a significant portion of revenue from old contents. However, the company has started acquiring new music content in the last three-four financial years, which is likely to mitigate the risk to an extent, going forward. Also, the plans to spend around Rs. 200 crore for new music acquisition over the next three financial years, are likely to support the licensing income, going forward. Financial support to loss-making operations of OMNPL adversely impacts SIL’s business returns and cash accruals – SIL continues to support the loss-making magazine publishing business of its wholly-owned subsidiary, Open Media Network Private Limited (OMNPL). With SIL making annual provisions/charge off such advances/support given to OMNPL, the same affected the company’s bottom line, adversely impacting its business returns to an extent. ICRA expects such support to continue over the near to medium term. Susceptibility to challenges posed by piracy of music – The nature of operations in the music industry leads to maintenance of intellectual property rights, critical for appropriate levels of revenue generation. Thus, piracy of content through counterfeit media and unauthorised use of proprietary and intellectual property rights resulted in a loss of revenue and significantly reduced the pricing power for music companies, including SIL. Industry characterised by intense competition, which resulted in content cost escalation and kept profitability under pressure – The music industry is also characterised by intense competition from both new as well as existing players in the film and television media segments, which increases demand

Load more