Result Update June 2, 2016 Rating matrix Rating : Hold Eros International (EROINT) | 206 Target : | 225 Target Period : 12 months Improving clarity on transfer pricing… Potential Upside : 9% • Revenues were expected to be subdued in the quarter as it had no What’s changed? big budget movie release. During the quarter, there were six medium Target Changed from 164 to | 225 and six low budget movies, respectively. Hence, revenues came in at EPS FY17E Changed from | 23.8 to | 25.2 | 269.9 crore, down 39.9% YoY and 19.5% QoQ EPS FY18E Introduced at | 28.2 • EBITDA came in at | 32.1 crore vs. our expectation of | 37.9 crore Rating Unchanged while margins came in at 11.9% (estimated 14.9%). Margins came in Quarterly performance lower than estimated owing to higher-than-expected operating Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) expenses, which came in at | 208.3 crore vs. estimate of | 199 crore Revenue 269.9 449.1 -39.9 335.4 -19.5 • PAT came in at | 32.7 crore, higher than our estimate of | 21.9 crore. EBITDA 32.1 68.2 (52.9) 66.8 -52.0 The beat was due to tax credit of | 5 crore EBITDA (%) 11.9 15.2 -329 bps 19.9 -803 bps Leading producer/distributor with one of the largest film libraries PAT 32.7 51.7 (36.8) 37.8 -13.4 Eros, a producer/distributor, has a large film library of over 2000 films. Key financials Also, it has launched Trinity Pictures to focus on franchise films. The first | Crore FY15 FY16 FY17E FY18E movie from the arm is likely to get released by FY18E. The company Net Sales 1,421 1,583 1,849 2,158 released 63 movies in FY16 across Hindi, Tamil/Telugu and other EBITDA 349 324 423 499 languages, of which six were high budget movies. Eros continues to get Net Profit 247 214 236 264 its movie selection right and boasts of blockbusters such as Bajrangi EPS (|) 26.7 22.9 25.2 28.2 Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns from its stable. Hence, FY16 saw 28.0% YoY growth in domestic theatrical revenues to Valuation summary | 693.2 crore. With a strong movie slate with movies like Housefull 3, FY15 FY16 FY17E FY18E P/E 7.7 9.0 8.2 7.3 Dishoom, Banjo, Rock On 2 in the pipeline, we expect domestic theatrical Target P/E 8.4 9.8 8.9 8.0 revenues of | 65 1.0 crore & | 684.6 crore in FY17E & FY18E, respectively. EV / EBITDA 6.3 6.1 5.6 5.4 Reduced receivables, B/S improves, catalogue sales to rise P/BV 1.3 1.1 1.0 0.9 Catalogue revenues have longer payment cycles associated with them. In RoNW 16.7 12.1 12.4 12.2 FY16, the company had deferred sales for a couple of quarters to enable RoCE 16.7 14.0 14.7 14.8 the receivables position to normalise. Eros was indeed able to bring down Stock data receivables from | 525.7 crore (FY15) to | 428.2 crore (FY16). Hence, the Particular Amount number of days has come down from 135 to 98 over the same period. Market Capitalization (| Crore) 1,932.0 Eros indicated there were renewed deals with shorter payment cycles Total Debt (FY15) (| Crore) 425.0 while catalogue revenues would again rebound to 20% and 25% of Cash (FY15) (| Crore) 169.7 revenues in FY17E and FY18, respectively, from 15.0% in FY16. There EV 2,187.3 could be some addition from lost revenues in the coming year. We have 52 week H/L 644 / 126 re-aligned our estimates in line with the guidance. Equity capital 92.5 Face value 10 Delivering on clearer transfer pricing terms… Eros has made certain changes in its existing arrangement with Eros International Plc. The transfer of overseas rights including global digital media rights to Eros International Plc, would not be at an amount equal to 40% of the production cost of each film with an additional mark-up of 20% vs. 30% of production cost with a 30% mark-up earlier. It will also alter the amortisation of a new film produced to 76% of content cost in the first year from 72%. We have changed our estimates accordingly. Additionally, Eros India will hold an equity stake of 10-15% in the global digital business structure at a marginal cost. Hence, Eros India can participate in the long term value creation of the ErosNow business, any stake divestment, IPO, etc. We have, however, not assigned any value to Eros Now currently as revenues remain marginal/unclear as of now. Improving business fundamentals; revise target price, maintain HOLD Research Analyst The company has done its best to come clear of the recent allegations. Bhupendra Tiwary The new transfer pricing mechanism is an added positive. However, [email protected] clarity on the Eros Now potential and rationale for 10-15% stake would Sneha Agarwal have been better. We re-align our estimates incorporating the changes [email protected] from the revised transfer pricing arrangement valuing Eros at 8x FY18E EPS to arrive at a target price of | 225. We maintain HOLD. ICICI Securities Ltd | Retail Equity Research Variance analysis Q4FY16 Q4FY16E Q4FY15 Q3FY16 YoY (%) QoQ (%) Comments Revenue 269.9 266.3 449.1 335.4 -39.9 -19.5 The quarter had no major high budget releases. Some of the catalogue revenues were also done away with to improve the receivables situation in the balance sheet Other Income 4.8 3.0 16.5 2.9 -70.8 68.9 Raw Material Expenses 0.0 0.0 0.0 0.0 NA NA Employee Expenses 16.5 12.0 11.7 14.1 40.1 16.5 Administrative Expenses 9.9 17.3 56.1 24.3 -82.3 -59.3 Operating Expenses 208.3 199.0 361.0 232.1 -42.3 -10.2 The content costs of the movies was slightly higher than expectations Changes in inventories of finished goo 3.1 0.0 -48.1 -2.0 -106.5 -257.4 EBITDA 32.1 37.9 68.2 66.8 -52.9 -52.0 The operating expenses came in higher-than-expected owing to higher operating expenses EBITDA Margin (%) 11.9 14.3 15.2 19.9 -329 bps -803 bps Margins are lower on a YoY basis due to lower catalogue revenues Depreciation 2.4 0.9 1.9 2.0 29.6 18.1 Interest 7.0 8.4 8.4 7.9 -16.2 -11.6 Total Tax -5.0 9.5 22.8 22.1 -121.7 -122.4 PAT 32.7 21.9 51.7 37.8 -36.8 -13.4 Higher other income and a income tax benefit has led to higher other income Source: Company, ICICIdirect.com Research Change in estimates FY17E FY18E (| Crore) Old New % Change Introduced Comments Revenue 1,858.8 1,848.6 -0.6 2,157.5 We have further reduced our catalogue revenue estimates for FY17E in line with the management's commentary on revenues to be ~20% of overall revenues. The decline was offset by the increase in transfer pricing arrangement wherein overseas revenues have now come in at 40% of cost and an additonal 20% mark up vs. 30.0% of cost and addtional 30.0% mark-up EBITDA 420.8 423.4 0.6 498.9 EBITDA Margin (%) 22.6 22.9 27 bps 23.1 PAT 222.7 235.6 5.8 263.8 The interest burden has reduced owing to debt reduction in FY16, which is aiding PAT EPS (|) 23.8 25.2 5.8 28.2 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Content pipeline The company released 63 movies in FY16 across Hindi, Tamil/Telugu and other languages, of which six were high budget, 16 were medium budget and 41 low budget movies. The company continues to get its movie selection right, evident from its presence in three out of top four box office releases. Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns and Welcome Back were superhits in FY16. 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. Hence, FY16 saw 28.0% YoY growth in domestic theatrical revenues to | 693.2 crore. With the strong movie slate with movies such as Housefull 3, Dishoom, Banjo, Rock On 2 in the pipeline, we expect domestic theatrical revenues of | 651.0 crore & | 684.6 crore in FY17E & FY18E, respectively. Exhibit 1: Content pipeline till FY17E Movie name Starcast / (Director) Expected Housefull 3 Akshay Kumar, Riteish Deshmukh, Abhishek / (Nadiadwala / Sajid Farhad) Q1FY17 Ganvesh Kishore Kadam, Mukta Barve, Dilip, Smita / (Atu Jagdale) Q1FY17 & Jara Hatke Indraneil Sengupta & Mrinal Kulkarni / (Ravi Jadhav) Q1FY17 White Mammootty, Huma Qureshi, Shankar Ramakrishnan / (Uday Amanthan) Q1FY17 Saat Kadam Amit Sadh, Deeksha Seth, Ronit Roy / (Mohit Jha) Q1FY17 Naale Fahad Fazil, Malavika S Mohan, Isha Talwar, Mukesh (Shiju S Bawa) Q2FY17 Happy Bhaag Jayegi Abhay Deol & Diana Penty / (Colour Yellow / Mudassar Aziz) Q2FY17 Dishoom John Abraham, Varun Dhawan, Jackie Fernandez / (Nadiadwala / Rohit Dhawan Q2 FY17 Banjo Riteish Deshmukh & Nargis Fakhri / (Ravi Jadhav) Q2 FY17 Baar Baar Dekho Siddharth Malhotra & Katrina Kaif / (Dharma / Nitya Mehra) Q2 FY17 Ticket to Bollywood Amyra Dastoor, Diganth Manchale / (Eros) Q2 FY17 Enkitta Mothathey Nutty, Sanchitha Shetty, Parvathy/ RV Films / Ramu Chellapa Q2 FY17 Kai Neelam Vijay Sethupathy, Samuthrakani & Others (Nalan Kumaraswamy) Q3 FY17 Manmarziyan Ayushmann Khuranna & Bhumi Pednekar / (Colour Yellow) Q3 FY17 Shivaay Ajay Devgn / (Ajay Devgn) Q3 FY17 Rock On 2 Farhan Akhtar, Arjun Rampal / (Excel / Shujaat Saudagar) Q3 FY17 Chaar Sahibzaade 2 3D Animation / (Harry Baweja) Q4 FY17 Guru Tegh Bahadur 3D Animation / (Harry Baweja) FY17 Singam 3 Suriya, Anushka Shetty and Shruti Haasan / (Studio Green / Aadnah Arts) FY17 Untitled Karthi / (Aadnah Arts / Lingusamy) FY17 Oru Kidayin Karunai Mamu (Ramu Chellapa) FY17 Source: Company, ICICIdirect.com Research Reduced receivables, B/S improves, Catalogue sales to rise Catalogue revenues have longer payment cycles associated with them.