Result Update June 2, 2015 Rating matrix Rating : Buy Eros International (EROINT) | 416 Target : | 500 Target Period : 12 months Potential Upside : 20% Growing share of library monetization to support box What’s changed? office collection… Target Changed from | 460 to | 500 EPS FY16E Changed from | 32.5 to | 31.8 • Eros reported topline of | 449.1 crore in Q4FY15, up 42.7% YoY EPS FY17E Changed from | 38.3 to | 38.5 versus estimates of | 320.1 crore on account of better than expected Rating Unchanged box performance of medium/low budget movies like “NH10”, “Tevar” Quarterly performance and “Badlapur” and also better library monetization. Q4FY15 Q4FY14 YoY (%) Q3FY15 QoQ (%) • However, EBITDA came in at | 68.2 crore (IDirect expectation of | Revenue 449.1 314.6 42.7 490.7 -8.5 76.3 crore) due to higher movie production and amortization cost EBITDA 68.2 73.6 (7.3) 147.2 -53.7 and provisioning for bad debts. EBITDA (%) 15.2 23.4 -819 bps 30.0 -1481 bps • Eros reported PAT of | 51.7 crore, partly aided by higher other PAT 51.7 41.4 25.0 109.3 -52.7 income pertaining to recovery of previously written-off receivables. Innovative measures to boost box office collection… Key financials Eros, a leading producer/distributor with one of the largest film library of | Crore FY14 FY15 FY16E FY17E over 2000 films has entered into partnerships with three Chinese film Net Sales 1,135 1,421 1,665 1,952 EBITDA 300 349 429 531 companies to explore joint opportunities. In addition, it has also launched Net Profit 200 247 294 356 Trinity Pictures to focus on franchise films. The company released 64 EPS (|) 21.7 26.7 31.8 38.5 movies in FY15 across Hindi, Tamil/Telugu and other languages, of which 7 were high budget movies. Though the whole of FY15 was relatively weaker for the movie industry, Eros managed to grow box office Valuation summary collections (domestic and overseas) by ~27%. The company continues to FY14 FY15 FY16E FY17E get its movie selection right, evident from its presence in four out of top 8 P/E 19.2 15.6 13.1 10.8 Target P/E 23.0 18.7 15.7 13.0 box office releases in Q1FY16 also. Last year, movies such as EV / EBITDA 13.6 11.8 9.8 8.3 “Kochadaiiyaan, ‘Main Tera Hero (Overseas), ‘Ek Villain (Overseas), ‘Mary P/BV 3.2 2.6 2.2 1.8 Kom (Overseas), ‘Badlapur’ turned out to be good bets. In addition, Eros RoNW 16.5 16.7 16.8 16.9 is rapidly increasing its footprint in the regional domain with movies RoCE 18.5 17.9 19.4 19.5 which has fared quite well such as Linga (Multi-lingual), Aagadu (Telugu) and Kaththi (Tamil) etc. Eros has an impressive movie slate for FY16, on back of its Chinese partnership intends to explore opportunities to jointly Stock data produce movies and release selective Bollywood movies in China which Particular Amount Market Capitalization | 3848.4 Crore has over ~23600 screens. However, it is difficult to quantify opportunity Total Debt (FY15) | 425 Crore arising from Sino-Indian projects; hence we have not factored it in our Cash and Investments (FY15) | 169.7 Crore estimates. We expect the theatrical revenues (inclusive of overseas) to EV | 4103.7 Crore grow at a 13.8% FY15-17E CAGR to | 1265.1 crore in FY17E. 52 week H/L 404 / 149 De-risked business - Changing mix towards catalogue, satellite & ancillary Equity capital | 92.5 Crore Face value | 10 Eros generally recovers whole production cost even before theatrical release in the form of sale of music rights, satellite rights and 39% guaranteed cost recovery from its parent for international distribution. In addition, monetization of huge movie library over pay TV, innovative box office performance linked satellite rights and preview over premium TV (HBO Defined and HBO Hits) will further reduce its dependence on theatrical revenue. Non box office segment contributed life time high of 31.3% to overall collection, of which 22% was contributed by old library monetization. We expect the collective revenues from other segments to grow at 24.2% FY15-17 CAGR to reach | 686.4 crore in FY17E, forming 35.2% of overall revenue; though we have not included revenue from Research Analyst HBO channels in our estimates. Karan Mittal [email protected] Maintain Buy with a revised target price of | 500 Sneha Agarwal In addition, Eros also enjoys a competitive advantage in terms of strong [email protected] international presence owing to its parent company Eros PLC. We expect consolidated revenue and PAT CAGR over FY15-FY17E of 17.2% and & 20.0%. We continue to maintain BUY rating valuing it at 13.0x FY17E EPS to arrive at a target price of | 500. ICICI Securities Ltd | Retail Equity Research Variance analysis • Q4FY15 Q4FY15E Q4FY14 Q3FY15 YoY (%) QoQ (%) Comments Revenue 449.1 320.1 314.6 490.7 42.7 -8.5 Higher revenue aided by exceptional growth in TV revenue from library monetization and better-than-expected revenue from box office perfromance of low budget movies Other Income 16.5 1.5 -4.3 1.2 -484.7 1,233.9 Spike in other income on account of recovery from deals written off earlier Raw Material Expenses 0.0 0.0 0.0 0.0 NA NA Employee Expenses 11.7 8.0 6.8 9.6 72.9 22.4 Administrative Expenses 56.1 14.4 13.9 22.1 304.8 153.7 High administrative expense bloated by provisions for bad debts Operating Expenses 361.0 221.4 217.0 395.3 66.4 -8.7 Higher expense partly mitigated when seen in conjuction with changes in inventory. Changes in inventories of finished goo -48.1 0.0 3.4 -83.5 -1,509.4 -42.5 EBITDA 68.2 76.3 73.6 147.2 -7.3 -53.7 EBITDA marred by higher provisioning for bad debts EBITDA Margin (%) 15.2 23.8 23.4 30.0 -819 bps -1481 bps Depreciation 1.9 1.4 1.3 1.8 48.8 3.3 Interest 8.4 9.7 14.5 9.7 -42.4 -14.1 Total Tax 22.8 18.7 14.3 27.6 59.6 -17.3 PAT 51.7 47.7 41.4 109.3 25.0 -52.7 Source: Company, ICICIdirect.com Research Change in estimates FY16E FY17E (| Crore) Old New % Change Old New % Change Comments Revenue 1,508.6 1,665.2 10.4 1,732.0 1,951.5 12.7 Revenue estimates tweaked to factor in better library monetization and higher number of movies guided by management EBITDA 429.5 429.3 -0.1 500.1 530.9 6.2 EBITDA estimates increased for FY17 on account of higher number of movies released, however, margins lower due to increased movie cost and ammortization of previously released high cost movies EBITDA Margin (%) 28.5 25.8 -269 bps 28.9 27.2 -167 bps PAT 300.7 294.0 -2.2 354.4 355.8 0.4 EPS (|) 32.5 31.8 -2.2 38.3 38.5 0.4 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Heavy Content Pipeline The company released 64 movies in FY15 across Hindi, Tamil/Telugu and other languages, of which 7 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 four out of top 8 box office releases in Q1FY16 also. Last year, movies such as “Kochadaiiyaan, ‘Main Tera Hero (Overseas), ‘Ek Villain (Overseas), ‘Mary Kom (Overseas), ‘Badlapur’ turned out to be good bets. In addition, Eros is rapidly increasing its footprint in the regional domain with movies which has fared quite well such as Linga (Multi-lingual), Aagadu (Telugu) and Kaththi (Tamil) etc. Going ahead, with the robust content pipeline as shown below, we expect the theatrical revenues (inclusive of overseas) to grow at a 13.8% FY15- 17E CAGR to | 1265.1 crore in FY17E. Exhibit 1: Content Pipeline Movie name Starcast / (Director) Expected Dil Dhadkne Do (Overseas) Ranveer Singh, Farhan Akhtar, Priyanka Chopra, Anushka Sharma Q1 FY16 Life of Josutty (Malayalam) Dileep, Jyothi Krishna, Rachana Narayankutty (Jetthu Joseph) Q1 FY16 Bajrangi Bhaijaan Salman Khan, Kareena Kapoor (Kabir Khan) Q1 FY16 Rajini Murugan (Tamil) Sivakarthikeyan (Ponram) Q2 FY16 Bangistan (Overseas) Ritesh Deshmukh, Pulkit Samrat, Jaqliene Fernandis Q2 FY16 Hero Sooraj Pancholi, Adheya Shetty (Nikhil Advani) Q2 FY16 Singh is Bling (Overseas) Akshay Kumar, Kareena Kapoor, Amy Jackson (Prabhu Deva) Q3 FY16 Bajirao Mastani Ranveer Singh, Deepika Padukone (Sanjay Leela Bhansali) Q3 FY16 Gabbar Singh 2 (Telugu) Pawan Kalyan (K. S. Ravindra) Q4 FY16 Aligarh Kangana Ranaut (Hansal Mehta) Q4 FY16 Dictator (Telugu) Balakrishna (Srivaas) Q4 FY16 Naale (Malayalam) Fahad Fazil, Malavika S Mohan, Isha Talwar, Mukesh Q4 FY16 Perai Thedai Natkal (Tamil) Ashok Selvan (Abraham Prabhu) Q4 FY16 EnkittaMothathe (Tamil) Natarajan Subramaniyam Rajaji, Vijay Murugan and Radha Ravi Q4 FY16 Housefull 3 Akshay Kumar, Abhishekh Bachchan, Rietesh Deshmukh FY17 Shivay Ajay Devgn (Ajay Devgn) FY17 Untitled Kajol (Ajay Devgan Productions) FY17 Farzi Shahid Kapoor, Kiriti Sanon (Raj Nidimoru and Krishna D.K.) FY17 Banjo Riteish Deshmukh, Nargis Fakhri (Ravi Jadhav) FY17 Raabta Sushant Singh Rajput (Dinesh Vijayan and Homi Adjania) FY17 Chaar Sahibzaade 2 Sequel to the Punjabi language film FY17 Guru Teg Bahadur Directed by Harry Baweja FY17 Jugaadu Harman Baweja and others FY17 Untitled Saif Ali Khan (3 movies) FY17 Source: Company, ICICIdirect.com Research Foraying into the Chinese market Eros has entered into 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 the countries.