INSTITUTIONAL EQUITY RESEARCH Eros International Media Ltd (EROS IN) Steady quarter with bright outlook INDIA | SECTOR | Quarterly Update 18 August 2015 EIML delivered steady operating performance in Q1FY16 on an adjusted basis. BUY (Maintain) Adjusted revenue grew 36% yoy and EBIT grew by 55% yoy. EBIT margin rose CMP RS 532 ~200bps yoy and was in line with consensus estimates. EIML released two high- TARGET RS 660 (+24%) budget, three medium, and 11 low-budget movies in Q1. Strong box office performances of Tanu weds Manu Returns and Uttama Villian drove strong revenue COMPANY DATA growth. Given the impressive slate of movie releases planned in FY16/17 and its O/S SHARES (MN) : 93 MARKET CAP (RSBN) : 50.7 strong library content (2000+ titles), we believe that EIML is well positioned to MARKET CAP (USDBN) : 0.8 deliver 22% revenue and earnings CAGR over the next two years. Maintain Buy and 52 - WK HI/LO (RS) : 644 / 207 target price of Rs 660. LIQUIDITY 3M (USDMN) : 4.6 PAR VALUE (RS) : 5 Strong movie pipeline to drive 22% revenue CAGR over FY15-17: Driven by a strong SHARE HOLDING PATTERN, % slate of movie releases planned over the next couple of years, we are forecasting PROMOTERS : 74.4 22% revenue CAGR for EIML over FY15-17. For EIML, Bajrangi Bhaijan and FII / NRI : 22.7 FI / MF : 0.2 Srimanthudu, (released in Q2) have already been blockbusters; hence, the company NON PROMOTER CORP. HOLDINGS : 1.2 should report robust profit numbers in Q2 as well. EIML’s schedule for the rest of PUBLIC & OTHERS : 3.7 FY16 is strengthened by a couple of big-budget Hindi movies (Welcome Back and PRICE PERFORMANCE, % Bajirao Mastani) and several regional movies. 1MTH 3MTH 1YR ABS 8.2 34.8 143.7 Monetization of ErosNow platform will add another layer of revenue stream: As REL TO SENSEX 7.5 33.4 134.5 per the company, EIML will sell digital rights of the movies to ErosNow (an OTT PRICE VS. SENSEX platform owned by Eros Plc.). EIML will also make the non-movie related content 430 and transfer it to ErosNow on a cost-plus basis (transfer pricing and other modalities 380 are yet to be finalized). EIML has an existing movie library of 2,000+ titles, most of 330 which are already in the digital format. As and when EIML delivers the digital rights 280 of these titles to ErosNow, revenue potential can be huge and can add directly to 230 180 the bottom line. 130 80 Integrated studio model ensures monetization through the value chain: EIML is 30 the only listed player in the Indian media space that operates on a vertically Apr-14 Aug-14 Dec-14 Apr-15 integrated studio model controlling content as well as distribution and exploitation Eros BSE Sensex across all formats globally. The company generates revenues across all phases of Source: Phillip Capital India Research the movie-release cycle and it has adopted a successful multi-platform content- monetization model, ensuring revenue generation even a year after the movie’s KEY FINANCIALS release. This makes the business model less risky vs. traditional broadcasting or Rs mn FY15 FY16E FY17E Net Sales 14,212 18,247 20,035 multiplex businesses. Also, given its strong library content, we view EIML as one of EBIDTA 3,486 4,447 5,265 the prime beneficiaries of rising video consumption on multiple platforms. Over the Net Profit 2,471 3,190 3,694 last few years, the company has successfully scaled up its library revenues (5-year EPS, Rs 26.5 34.3 39.7 CAGR of 49%) and we expect this trend to continue, which should translate into PER, x 20.0 15.5 13.4 EV/EBIDTA, x 14.9 11.8 9.9 structurally higher margins and cash-flow conversion. P/BV, x 3.3 2.8 2.3 ROE, % 16.7 17.8 17.3 Earnings growth to drive the valuation: Driven by strong movie-pipeline over the Debt/Equity (%) 28.7 28.1 25.6 next couple of years, we expect EIML to register 22% earnings CAGR in FY15-17. We Source: PhillipCapital India Research Est. maintain our target price of Rs 660, which is based on 17x FY17 earnings. Despite Manoj Behera (+ 9122 6667 9973) higher growth and better revenue visibility, EIML is trading at a discount to global [email protected] peers, who mostly trade at ~20x one-year forward earnings, which in our opinion is Naveen Kulkarni (+ 9122 6667 9947) not justified. We see the gap narrowing soon. [email protected] Page | 1 | PHILLIPCAPITAL INDIA RESEARCH EROS INTERNATIONAL MEDIA LTD QUARTERLY UPDATE EIML’s Q1 result table % change (in Rs mn) Q1FY16 Q1FY16E Q1FY15 Q4FY15 vs. cons yoy qoq Revenue 4725 3350 2415 4491 41.0% 95.7% 5.2% Operating expenses 3621 1704 3130 112.5% 15.7% Employee expense 109 79 117 38.2% -7.6% Other expenses 101 49 561 106.4% -82.1% Total expenses 3830 2450 1831 3809 56.3% 109.2% 0.6% EBITDA 895 900 584 682 -0.6% 53.3% 31.2% EBITDAM 18.9% 26.9% 24.2% 15.2% -793bps -523bps 374bps D&A Expense 13 16 19 -16.8% -30.6% EBIT 882 568 663 55.2% 32.9% Other income 81 31 165 159.9% -51.0% Financial expense 85 94 84 -9.7% 1.1% PBT 878 506 745 73.7% 17.8% Tax expense 245 147 228 66.3% 7.3% Tax rate 27.9% 29.1% 30.6% -123bps -275bps Minority 99.9 0.1 -0.4 NM NM PAT 534 560 358 517 -4.7% 48.9% 3.1% EPS 5.8 3.9 5.6 47.9% 3.0% Source: Company, PhillipCapital India Research Name of the movies released in the current quarter Name Language Scope Tanu Weds Manu Returns Hindi Worlwide Uttama Villain Tamil Worlwide Masss Tamil Worlwide Aga Bai Arechaa 2 Marathi Worlwide Gabbar Hindi Overseas Dil Dhadkne Do Hindi Overseas Source: Company, PhillipCapital India Research Portfolio of movies released in Q1FY16 12 10 Q1FY15 Q1FY16 Q1FY15 Q1FY16 10 8 8 6 6 4 4 2 2 0 0 High Medium Low Hindi Tamil/Telugu Regional Source: Company, PhillipCapital India Research Page | 2 | PHILLIPCAPITAL INDIA RESEARCH EROS INTERNATIONAL MEDIA LTD QUARTERLY UPDATE Break-up of Q1FY16 revenue 21.50% Theatrical Overseas 51.50% TV & Others 27% Source: Company, PhillipCapital India Research EIML’s movie pipeline for FY16 and FY17 Release title Star Cast / (Director/Producer) Tentative release date Bajrangi Bhaijaan Salman Khan, Kareena Kapoor (Kabir Khan) Released in Q2 Srimanthudu (Telugu) Mahesh Babu, Shruti Haasan (Koratala Siva) Released in Q2 Bangistan (Overseas) Riteish Deshmukh, Pulkit Samrat, Jacqueline Fernandez (Karan Anshuman) Released in Q2 Welcome Back John Abraham, Anil Kapoor, Nana Patekar, Paresh Rawal (Anees Bazmee) Q2 FY16 Hero Sooraj Pancholi, Athiya Shetty (Nikhil Advani) Q2 FY16 Life of Josutty (Malayalam) Dileep, Jyothi Krishna, Rachana Narayankutty (Jetthu Joseph) Q2 FY16 Trisha Illana Nainathara (Tamil) GV Prakash, Anandhi & Others (Adhik Ravichandran) Q2 FY16 Haiku (Tamil) Kavin, Nayana, Abhiman, Karthik kumar & Others (Pandiraj) Q2 FY16 Singh is Bling (Overseas) Akshay Kumar, Kareena Kapoor, Amy Jackson (Prabhu Deva) Q3 FY16 Bajirao Mastani Ranveer Singh, Deepika Padukone, Priyanka Chopra (Sanjay Leela Bhansali) Q3 FY16 24 (Tamil) Suriya Sivakumar & Others (Vikram Kumar) Q3 FY16 Kai Neelam ( Tamil) Vijay Sethupathy, Samuthrakani & Others (Nalan Kumaraswamy) Q4 FY16 Rajini Murugan (Tamil) Sivakarthikeyan (Ponram) Q4 FY16 Gabber Singh 2 (Telugu) Pawan Kalyan (K. S. Ravindra) Q4 FY16 Aligarh Rajkumar Rao, Manoj Bajpai (Hansal Mehta) Q4 FY16 Dictator (Telugu) Balakrishna (Srivaas) Q4 FY16 Naale (Malayalam) Fahad Fazil, Malavika S Mohan, Isha Talwar, Mukesh (Shiju S Bawa) Q4 FY16 Phuntroo ( Marathi ) Madan Deodhar, Ketaki Mategaonkar, (Sujay S Dahake) Q4 FY16 Perai Thedai Natkal (Tamil) Ashok Selvan (Abraham Prabhu) Q4 FY’6 Enkitta Mothathe (Tamil) Natarajan Subramaniyam Rajaji and Vijay Murugan (Ramu Chellappa) Q4 FY16 Housefull 3 Akshay Kumar, Abhishekh Bachchan, (Director-Sajid-Farhad) FY17 Dishoom Varun Dhawan, John Abraham, Jacqueline Fernandez (Rohit Dhawan) FY17 Shivay Ajay Devgn (Ajay Devgn Productions) FY17 Untitled Kajol (Ajay Devgn Productions) FY17 Farzi Shahid Kapoor, Kriti Sanon (Raj Nidimoru and Krishna D.K.) FY17 Banjo Riteish Deshmukh, Nargis Fakhri (Ravi Jadhav) FY17 Raabta Sushant Singh Rajput (Dinesh Vijayan and Homi Adajania) FY17 Chaar Sahibzaade 2 (Rise of Banda Singh Bahadur) Sequel to the Chaar Sahibzade, a Punjabi language Indian 3D Computer- FY17 animated historical film (Directed by Harry Baweja) Guru Tegh Bhadur Harry Baweja (Director) FY17 Jugaadu Harman Baweja and others FY17 Untitled Siddharth Anand (Director) FY17 Source: Company, PhillipCapital India Research Page | 3 | PHILLIPCAPITAL INDIA RESEARCH EROS INTERNATIONAL MEDIA LTD QUARTERLY UPDATE Financials Income Statement Cash Flow Y/E Mar, Rs mn FY14 FY15 FY16e FY17e Y/E Mar, Rs mn FY14 FY15 FY16e FY17e Net sales 11,347 14,212 18,247 20,035 Pre-tax profit 2,670 3,232 4,116 4,927 Growth, % 6 25 28 10 Depreciation 50 69 62 59 Other income 0 0 0 0 Chg in working capital -891 -1,365 -1,959 -959 Total income 11,347 14,212 18,247 20,035 Total tax paid -220 -244 -668 -800 Raw material expenses -7,733 -9,400 -12,525 -13,366 Cash flow from operating activities 9,083 9,869 11,872 13,343 Employee expenses -282 -359 -398 -439 Capital expenditure -8,959 -9,348 -11,404 -11,376 Other Operating expenses -335 -967 -876 -965 Chg in investments 2 80 0 0 EBITDA (Core) 2,998 3,486 4,447 5,265 Cash flow from investing activities -7,858 -10,787 -11,444 -11,418 Growth, % 32.5 16.3 27.6 18.4 Free cash flow 1,226 -919 428 1,926 Margin, % 26.4 24.5 24.4 26.3 Equity raised/(repaid) 1 5 0 0 Depreciation -50 -69 -62 -59 Debt raised/(repaid) 491 -82 783 443 EBIT 2,947 3,417 4,385 5,206 Dividend (incl.