Catalogue monetization led positive surprise at both revenue and margin front Revenue grew by 17% YoY to Rs.433 crore in Q3 FY14 against our expectation of Rs 404 crore. Positive surprise at revenue front was led by huge spurt in catalogue monetization which increased by around 75% YoY to Rs.60 crore in Q3 FY14.
Revenue from other main streams such as theatrical and satellite rights were more or less in with expectation i.e. ~Rs.170 crore (39% of revenue) and ~Rs.110 crore (25% of revenue), respectively, in Q3 FY14.
EBITDA margin improved by 679 bps QoQ to 31.3% in 3Q FY14 significantly better than our estimates of 25% margin level. Higher than expected EBITDA margin was primarily led by catalogue monetization as minimum expenditure is incurred for earning the same and hence top-line directly flows to bottom-line.
Movies lined-up for FY15E looks promising
The company is planning to release in FY15E eight movies of A category of which 4 will be in Hindi and 4 in regional languages such as Tamil & Telugu. Big movies lined up for release in H1 FY15E are Happy Ending (starring Saif Ali Khan), Kochadaiyaan (starring Rajinikanth, Deepika Padukone and music composed by A R Rehman) and Action Jackson (star cast includes Ajay Devgan and Sonakshi Sinha).
EBITDA margin is likely to be around 25% in FY14E and FY15E
The management expects EBITDA margin to be around 25% in FY14E and FY15E; as compared to historical average i.e. ~22% range, supported by revenue flow from catalogue monetization which has relatively higher margin as compared to other revenue streams.
Parent company committed that new deal terms will be similar to current deal in respect of sharing overseas films right Parent companys top management downplayed the street concerns about significant changes in respect of terms for sharing overseas films rights on deal renewal in October 2014. Under the current deal, Parent Company i.e. Eros International Plc pay ~39% of film cost for overseas rights to Eros International Media Ltd. We believe, clarity from Parent Company will remove major overhang on the stock.
Valuation and view
We believe strong movie slate lined-up for release in FY15E will support mid-teen growth rate in the coming year. Moreover, we expect EBITDA margin will continue to be in the range of 25% supported by catalogue monetization. Further, clarity from Parent Company in respect of terms for sharing overseas films rights on agreement renewal will remove major overhang on the stock. We recommend BUY on the stock with a price target of Rs 213 by assigning P/E multiple of 13 times to FY15E adjusted EPS of Rs.16.4.
Other Key Highlights
The companys net debt at the end of Q3 FY14 stood at Rs.280 crore which is more or less at the same level in Q3 FY13.
With the tie-up with Tata Sky in December 2013, Eros has covered around 80% of 80 million DTH homes. The company is witnessing significant traction for HBO premium channels and expect momentum to pick up further once it starts marketing services aggressively, going forward.
Production cost during 9M FY14 stood at Rs.600 crore and for FY14E is likely to be in the range of Rs.750 crore to Rs800 crore. In FY15E, production cost will be in the range of Rs.800 crore to Rs900 crore.
The company has attractive movie slate lined-up for FY15E especially Q1 FY15E looks very strong supported by release of Kochadaiyaan, Action Jackson and partial revenue flow from Happy Ending
Read full report:Eros International Media Ltd