Result Update November 20, 2015 Rating matrix Rating : Buy Eros International (EROINT) | 235 Target : | 311 Target Period : 12 mont hs Effort needed to resurrect investor confidence Potential Upside : 32% • The topline came in at | 504.9 crore against our estimate of | 495.4 What’s changed? crore driven by movies like Bajrangi Bhaijaan (net domestic box Target Changed from UR to | 311 office collection of over | 300 crore), Welcome Back (gross collection EPS FY16E Changed from | 32.4 to | 31.3 of over | 100 crore) and Srimanthudu (regional movie, which went EPS FY17E Changed from | 38.2 to | 31.1 on to become all-time second highest Telugu grosser) Rating From Under Review to Buy • The EBITDA margin at 26.9% was lower than our estimate of 31.7% Quarterly performance mainly due to higher operating expenses, which can largely be Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) attributed to higher marketing costs due to a mix of films comprising Revenue 504.9 239.9 110.5 472.5 6.9 more of high and medium budget movies EBITDA 135.8 73.4 85.0 89.5 51.8 • PAT came in at | 90.4 crore against our estimate of | 112 crore EBITDA (%) 26.9 30.6 -371 bps 18.9 795 bps mainly due to lower operating margins, which led to a PAT miss PAT 90.4 50.1 80.3 53.4 69.4 Leading producer/distributor with one of the largest film libraries Eros, producer/distributor with a large film library of over 2000 films, has Key financials entered into partnerships with three Chinese film companies to explore | Crore FY14 FY15 FY16E FY17E joint opportunities. Also, it has launched Trinity Pictures to focus on Net Sales 1,135 1,421 1,770 1,952 franchise films. The company released 64 movies in FY15 across Hindi, EBITDA 300 349 444 494 Tamil/Telugu & other languages, of which seven were high budget Net Profit 200 247 290 287 movies. Though the whole of FY15 was relatively weaker for the movie EPS (|) 21.7 26.7 31.3 31.1 industry, Eros managed to grow box office collections (domestic & overseas) by ~27%. It continues to get its movie selection right, evident Valuation summary from its presence in three out of top four box office releases in H1FY16. FY14 FY15 FY16E FY17E Q2 was marked by several superhits like Bajrangi Bhaijaan, Welcome Back P/E 10.8 8.8 7.5 7.6 and Srimanthudu. The regional foray is not only helping Eros expand its Target P/E 14.3 11.6 9.9 10.0 footprint in Indian cinema but is also accretive to its financials. EV / EBITDA 8.0 7.0 6.2 6.0 P/BV 1.8 1.5 1.2 1.1 Q2 - Strongest ever quarter led by super hits… RoNW 16.5 16.7 16.6 14.1 Q2FY16 was one of the best with releases like Bajrangi Bhaijaan (net RoCE 16.6 16.7 17.7 16.2 domestic box office collection of over | 300 crore), Welcome Back (gross collection of over | 100 crore) and Srimanthudu (regional movie, which Stock data went on become all-time second highest Telugu grosser). While for Particular Amount H2FY16, it has one big release, Bajirao Mastanii, lined up, the content Market Capitalization (| Crore) 2,177.2 pipeline for FY17 is robust. We expect theatrical revenues (inclusive of Total Debt (FY15) (| Crore) 425.0 overseas) to grow at 13.8% CAGR in FY15-17E to | 1265.1 crore in FY17E. Cash (FY15) (| Crore) 169.7 Weathering tough times on accounting allegations… EV 2,432.6 52 week H/L 634 / 204 The company saw a sharp correction in its stock led by rising concerns Equity capital 92.5 over accounting practices followed by the parent company, the stark Face value 10.0 increase in receivables owing to increased business exposure to UAE, validation of the Eros Now user base and future cash flow viability. While the company provided a point to point rebuttal (see Page 4), the damage was already done. We believe the improvement in receivables, a clear transfer pricing deal with the parent coupled with other steps such as announcing dividend payment and a possible share buyback would remain key to revive confidence levels. Lot required to restore investor confidence; maintain BUY We highlight that recent allegations have been a big dent to investors’ confidence despite the company’s point to point rebuttal. While we Research Analyst continue to have faith in the company’s business model, we believe a lot Bhupendra Tiwary needs to be done by Eros to restore the investors’ confidence. Possible [email protected] decisions such as announcing dividend payment, a possible share Sneha Agarwal buyback, or improvement in receivables would remain few key [email protected] monitorables for confidence building. We continue to maintain BUY rating valuing Eros at 10x FY17E EPS to arrive at a target price of | 311. We believe that a strong financial performance coupled with improvement in receivables would be the driver for stock price performance. ICICI Securities Ltd | Retail Equity Research Variance analysis • Q2FY16 Q1FY16E Q2FY15 Q1FY16 YoY (%) QoQ (%) Comments Revenue 504.9 495.4 239.9 472.5 110.5 6.9 The topline was higher driven by movies like Bajrangi Bhaijaan, Welcome Back and Srimanthudu Other Income 5.1 4.0 0.4 8.1 1,167.5 -37.5 Raw Material Expenses 0.0 0.0 0.0 0.0 NA NA Employee Expenses 14.2 13.9 6.7 10.9 111.3 30.9 Administrative Expenses 13.8 17.3 15.0 10.1 -8.2 37.3 Operating Expenses 340.7 307.0 146.0 230.2 133.3 48.0 Changes in inventories of finished goo 0.4 0.0 -1.3 131.9 -134.6 -99.7 EBITDA 135.8 157.2 73.4 89.5 85.0 51.8 EBITDA Margin (%) 26.9 31.7 30.6 18.9 -371 bps 795 bps Margins lower than our estimate mainly due to higher operating expenses, which can largely be attributed to higher marketing costs due to a mix of films comprising more high seven medium budget movies Depreciation 1.7 1.9 1.7 1.3 2.4 33.3 Interest 10.5 8.8 10.9 8.5 -4.1 23.8 Total Tax 37.5 37.6 11.1 24.5 238.8 53.1 PAT 90.4 112.0 50.1 53.4 80.3 69.4 PAT was lower mainly due to lower operating margins, which led the PAT miss Source: Company, ICICIdirect.com Research Change in estimates FY16E FY17E (| Cr or e) Old New % Change Old New % Change Comments Revenue 1,760.1 1,769.6 0.5 1,951.5 1,951.5 0.0 The topline estimates have been largely unchanged EBITDA 442.5 443.7 0.3 532.0 494.5 -7.1 EBITDA Margin (%) 25.1 25.1 -7 bps 27.3 25.3 -193 bps We build in lower margins as we incorporate H1FY16 performance PAT 299.8 289.8 -3.3 353.8 287.3 -18.8 We build in full tax rate from FY17E onwards EPS (|) 32.4 31.3 -3.3 38.2 31.1 -18.8 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Strong content pipeline The company released 64 movies in FY15 across Hindi, Tamil/Telugu and other languages, of which seven were high budget movies. Though the whole of FY15 was relatively weaker for the movie industry, Eros managed to grow box office collections (domestic and overseas) by ~27%. The company continues to get its movie selection right, evident from its presence in three out of top four box office releases in H1FY16. Last year, movies such as Kochadaiiyaan, Main Tera Hero (overseas), Ek Villain (overseas), Mary Kom (overseas) and Badlapur turned out to be good bets. In the ongoing fiscal, Bajrangi Bhaijaan, Tanu Weds Manu Returns and Welcome Back were superhits. In addition, Eros is rapidly increasing its footprint in the regional domain with movies that have fared quite well such as Srimanthudu (Telugu), Lingaa (multi-lingual), Aagadu (Telugu), Kaththi (Tamil), etc. Going ahead, with the robust content pipeline as shown below, we expect theatrical revenues (inclusive of overseas) to grow at 13.8% CAGR in FY15-17E to | 1265.1 crore in FY17E. Exhibit 1: Content pipeline over H2FY16 and FY17E Movie name Starcast / (Director) Expected Bajirao Mastani Ranveer Singh, Deepika Padukone, Priyanka Chopra (Sanjay Leela Bhansali) H2FY16 Mumbai Pune Mumbai2 (Marathi) Swapnil Joshi, Mukta Barve (Satish Rajwade) H2FY16 Do Lafzon KI Kahani Randeep Hooda, Kajal Aggarwal (Deepak Tijori) H2FY16 Mukhtiar Chadha (Punjabi) Diljit Dosanjh, Oshin Sai (Chetan Parwana) H2FY16 24 (Tamil) Suriya Sivakumar & Others (Vikram Kumar) H2FY16 Sanam Teri Kasam Harshvardhan Rane, Mawra Hocane (Radhika Rao, Vinay Sapru) H2FY16 Kai Neelam( Tamil) Vijay Sethupathy, Samuthrakani & Others (Nalan Kumaraswamy) H2FY16 Sardar Gabbar Singh (Telugu) Pawan Kalyan (K. S. Ravindra) H2FY16 Aligarh Rajkumar Rao, Manoj Bajpai (Hansal Mehta) H2FY16 Dictator (Telugu) Balakrishna (Srivaas) H2FY16 Naale (Malayalam) Fahad Fazil, Malavika S Mohan, Isha Talwar, Mukesh (Shiju S Bawa) H2FY16 Phuntroo ( Marathi ) Madan Deodhar, Ketaki Mategaonkar, (Sujay S Dahake) H2FY16 Enkitta Mothathe (Tamil) Natarajan SubramaniyamRajaji and Vijay Murugan (Ramu Chellappa) H2FY16 Phobia Radhika Apte (Pawan Kriplani) H2FY16 Guru (Marathi) Ankush Chaudhary, Urmila Kannetkar (Sanjay Jadhav) H2FY16 Housefull 3 Akshay Kumar, Abhishekh Bachchan, Rietesh Deshmukh (Sajid-Farhad) FY17 Dishoom Varun Dhawan, John Abraham, Jacqueline Fernandez (Rohit Dhawan) FY17 Shivay Ajay Devgn (Ajay Devgn Productions) FY17 Singham - 3 (Tamil) Suriya, Anushka Shetty, Shruti Haasan (Hari) FY17 Banjo Riteish Deshmukh, Nargis Fakhri (Ravi Jadhav) FY17 Raabta Sushant Singh Rajput (Dinesh Vijayan and Homi Adajania) FY17 Chaar Sahibzaade 2 (Punjabi) Sequel to the Chaar Sahibzade, 3D animation (Harry Baweja) FY17 Guru Tegh Bhadur (Punjabi) 3D Animation (Harry Baweja) FY17 Baar Baar Dekho Siddharth Malhotra, Katrina Kaif (Nitya Mehra) FY17 Rock on 2 Farhan Akhtar, Arjun Rampal, Shraddha Kapoor (Farhan Akhtar) FY17 Reunion Various artistes (Sujoy Gosh) FY17 Farzi Shahid Kapoor, Kriti Sanon (Raj Nidimoru and Krishna D.K.) FY17 Bhavesh Joshi Harshvardhan Kapoor (Vikramaditya Motwane/Phantom Films) FY17 Happy Bhaag Jayegi Abhay Deol, Diana Penty, Ali Fazal (Mudassar Aziz) FY17 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Foraying into Chinese market Eros has entered into partnerships with three Chinese film companies to explore joint opportunities such as promote, co-produce, distribute and unlock value in respective intellectual properties for Sino-Indian films across all platforms in both countries.