Shemaroo Entertainment

Stock Opportunities Untested - but worth a good look
41

Hi on the question of how payment made by broadcaster to shemaroo for one time/multiple time showcasing same movie as per 2014 ppt

The standard practice of the Indian television industry is to purchase
forward rights for a period of 5 to 7 years.
• There is a one time fixed fee payment made at the network level for
exclusive license to broadcast the content for multiple telecasts.
• In any given day, an average of 8 movies are shown on a Movie
channel. Even considering the repeat telecast of these movies, the
broadcaster would need access to a significantly large movie library

Do we know how the distribution is done? Let’s pick up a random movie
called X. Shemaroo allows Zee Cinema to broadcast X on a particular day.
And if Zee Cinema wishes to broadcast the same movie next week, will
they pay Shemaroo again? Meaning, in what manner/way Shemaroo monetizes
on a particular film over a period of time, across multiple channels?

42

HI , one quick query from sep 2014 conference call transcript ,I am not able to make out what inflation meant here when the value realization from a movie distribution reduce 70-80% in a cycle of 5 yrs -from a cycle to next cycle ,so purchasing cost for next cycle or renewal of licensing from producer ,should come down or renewal cost in case of 5-10 years of licensing should come down
if any one can help in english here , looking forward to same

regards

"
Rohit Dokania: Also if you can throw some light as to let us say if for the first time when we are able to sell
our five year rights, for a movie say it earned Rs.100 how much does it earn when we sell it
again after those five years in the sixth year is it 100, is it lower is it higher?

Hiren Gada: So the overall industry, obviously we fall in the industry so it’s a larger industry point, so
how it works is that when the first issue of a film happens, the first release of the film which
you know is a five to seven year kind of a television licensing.

Rohit Dokania: Which is the second cycle, so for you the first cycle is the actually the second cycle?

Hiren Gada: Okay, I just quickly come to that also, but to give a larger perspective if the first cycle of
that Rs.100 which is the movie’s first cycle where we do not participate if it that was
Rs.100 the second cycle would be anywhere between Rs.15 to Rs.25. From there onwards
our experience is that cycle-to-cycle the values have been going up between 80% and 120%
roughly you can say a 13% to 15% kind of inflation has been noticed.

Rohit Dokania: Okay so we are actually seeing quite a good inflation basically?
Hiren Gada: Yes."

43

The price for satellite rights for new first run movie paid by broadcasters has crashed 30%-40% this year , wouldn’t it also impact what broadcasters pay for second run to players like shemaroo?

Additionally , is there any reason legal or otherwise which prevents broadcasters from acquiring first time premiere rights from producers for long time may be 10 years or more instead of just five years ? i mean pricewise it will be probably be 10-20% more and given that they now have increasing mediums to feed (in-house apps, streaming services etc) instead of just tv channels .wouldn’t it make business sense for them to just bargain upfront with producers to retain rights for a longer time ?

44

@anon34631667 Is there any particular reason for this crash in price paid by broadcasters? Would you mind sharing the source?

Thanks
Sachit

45

@anon34631667

I think management in their past concalls have clarified that the prices in the second cycle are much more stable and do not correlate with premiere/first cycle rights. This is primarily because in second cycle, channel buys a group of films from their catalogs and hence it is a bundled buy. Moreover, when the broadcasters buy it in second cycle, they consider such buy as staples that needs to be bough to fill the required slots hence the prices are not volatile on upside/down side. This is precisely where management feels that they do not want to take risk by buying first cycle rights.

On your second question, there is nothing that prevents from producers/broadcasters to do a deal for 10 years or more. It is just that 5 yrs has been a trade practice. But, it may very well change if the business model of buying longer term rights is a win-wind proposition or has decent risk-return trade off for both producers and boradcasters. Shemaroo mentioned in one of their calls that some of their recent acquisitions of aggregated content is for longer tenure (10 years). So same may happen in first cycle as well.

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46

@desaidhwanil Great post.

Couple of questions:

  1. What % of library does not earn any money? Just wondering just increasing the count not gonna help them. Its important to have revenue generating library. Having said that the new media might just be the spin of fortune for the redundant library.

  2. Management is guiding that they will cut down on the capex post FY18. If that is the case my assumption is they would be buying lesser titles (rights). Assuming India releases 100movies per year (i am excluding the small budget lesser know movies) and Shemaroo not spending on its main inventory, is little difficult to digest. Its like inviting your competitors to eat up the market share.

  3. Competition is a big risk factor in my view. I agree that Shemaroo might be having the biggest library but even Eros is getting aggressive. And who know Jio might enter the field and starts buying rights (they have every reason to do so). How will Shemaroo defend its market position? I believe rising competiton will spur up the rights prices and then generating higher RoCE would become difficult. Also lets assume competition starts gaining market share, Shemaroo’s decision to cut down on the capex might just back fire. Wondering, since Shemaroo has a long relation with the producers do they have first right of refusal? if that is the case its a big “moat”.

I like the story looking at the bigger picture (digitisation, Jio launch, management focus on generation IRR of >18% etc) but still want to connect few dots to have a complete picture.

Best,
Kunal

Discl: Not Invested but actively tracking

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47

@kunal_patel @desaidhwanil

Kunal,
Appreciate your message and thought to give my understanding on the issue.

  1. Very difficult question and do not exact answer. Having said that even with Doubling networth from 175 Cr in FY14 to Rs 365 Cr in FY16, the company has managed ROE at around 16-17%, which would indirect way to say that not much inventory is unutilised. Also, as Dhwanil has mentioned in detail note, after 18 months of no sale of acquired content under Aggregate rights, the company write off the acquisition cost to P&L.

  2. Find enclose Censure Board data about Hindi Films:

The above information is compiled by Censure Board annual report
http://cbfcindia.gov.in/html/uniquepage.aspx?unique_page_id=30

As we can see, on an average yealry 275 films got censure certificate. Actual release by producer are much lower than censure certificate issued as all films does not get released for various reason. For instance as per Wikipedia in 2015, only 204 Films released

Find enclosed my working for calculation of Shermaroo Share of Hit+Average films in Bollywood. Please note that this all figure are based on my assumption

So Shemaroo has achieved very Critical Size of around 10% market share of Bollywood Hits+Average films catelogue (based on my assumption based working). After acquiring these critical mass along with Perpetual rights (trading business), Shemaroo would have to spent to continue to be relevant in the market, but at the same time, it may reduce capex in relative terms as it already have sufficient Perpetual hindi Films content to get Channel attracted to it.

  1. I believe Getting Aggressive is disaster for most of players in the industry, Also seasonal aggressiveness is not new to the industry. Refer to Dhwanil note about how managmeent faced similar chellange and how they overcome same.
    So have managed to survive in difficlt time for last 5 decades. Of course that does not mean that they would automatically come out of problem in future. However, they are better placed then many other players. Reliance would like to minimise capex on context of Jio Roll out by way of tie-up with content provider rather than buying content in my opinion. In past, ADAG have entered big time in Film industry and now already exited the field.

Hope Dhwanil would not mind my intervention. Comment from every one is appreciated

Discl: My views are biased as I am invested.

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48

For one , there was a bit of bidding frenzy by the various broadcasters for past few years which has cooled down .

Another thing is , broadcasters arent exactly getting the TRPs which they had hoped for when purchasing some of the blockbuster movie content at fancy prices.

Here’s one article covering the topic

49

Thanks for the reply @anon34631667
I may be mistaken by I think this would by and large leave Shemaroo unaffected as old and new movies are totally different beasts (much the same as old rice and new rice - If you follow Basmati rice companies)

Additionally, I do take your point that broadcasters can directly by rights for 10 years but considering that these rights are purchased even before the release of the movie on cinemas, normally broadcasters only purchase the rights for first cycle before they want to see the response before they commit themselves for another 5 years (this is my assumption). Additionally for second cycle movies they normally prefer to purchase bundles which aggregators like Shemaroo can more easily cater to as they normally act as fillers for movie channels (necessary, but nothing more). As far as I
remember on concalls, the CFO Mr. Gada said that Shemaroo content can contribute towards 40-45% of content on any broadcaster’s movie - this according to me is a ‘largish’ moat. Also considering that Shemaroo aims at a modest IRR of 18%, I don’t think there is any major scope of price erosion - of course I may be totally mistaken.

Comments welcome

Sachit

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50

While with one article, it would be not possible to conclusively say that rate has declined, but assuming that acquisition price of broadcast decline in Jan 2016 by around 40% in article, it is also worthwhile to note that perpetual Hindi film content of Shemaroo has increased maximum during last 5 years in FY2015-16. We do not know exact date of addition in content, but at least it reinforce to me that management is walking the talk. They are reasonably aggressive when price are down and stay away from market when market is hyped.

As always, comments are welcome and my disclosure to previous note applies here as well.

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51

Shemaroo has published Investor Presentation for Q1FY17.

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52

Shemaroo has published a decent management presentation - it does give detailed view of cost amortization treatment they give to their rights. Management also seems clear about where the next business growth will come from. As they have been in this business for a while, they do have perpetual rights of some solid hits from the past. This asset/ inventory value doesn’t depreciate much, it may appreciate on the other hand.
Management is not 100% transparent I agree but it is a decent bet for mid term considering reasonable visibility of revenue and profit in next 3-4 years.

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53

Awesome notes @desaidhwanil . Gave me goosebumps.

2 observations/hypothesis, on your comments in the highlights sections of your evernote:

Highlight 1: “However, selecting which movie to air has become trickier due to lacklustre performance of some box office hits on television and bland performance of a few big budget movies. This has necessitated television broadcasters to become more strategic with their films acquisition budgets, significantly impacting the C&S rights of most films . While prices of A-category films continued to hold ground, the rest of the films took a beating either in terms of price or ability to sell the title. There were very few bulk deals and certain films, despite crossing INR 1 bn at the box office, were unable to find buyers. Nonetheless, industry experts remain optimistic on big budget movies, stressing that their C&S rights will still be bought but probably at a lower price”.

Your comment: This is a very candid view of the changing industry dynamics. It also implies softness in deal values. How does shemaroo construct portfolio to counter this?

My hypothesis: If I use the help of a diagram of distribution of revenues, this is probably what it looked like 5-7 years before

Drawing (1).jpeg1055×639 181 KB

The area under the curve is the total revenues generated for a particular movie across time. The middle shaded area represents the reveneus generated from non-theatrical section first cycle.

I think going forward, this is how it would start looking like:

Drawing (2).jpeg1055×639 176 KB

There would be more such movies produced where most of the revenues from the first cycle would be concentrated in the theater release itself. Paying high premium for broadcasting/television rights won’t be a great investment. However, this would not really affect the second cycle revenue and it should probably stay stable, if not increase. However, the premium of the content rights for the second cycle might start coming cheaper due to lower revenues being generated from first cycle (excluding theatre releases). Businessmen might extrapolate the poor revenues generated from first cycle and give away the second cycle rights for cheaper rates in bundle. Given the experience of management of shemaroo, they would probably pounce on such deals going forward. I think this trend is not visible right now clearly, but going forward people would slowly realize this trend.

Highlight 2: “Share of video in Internet data traffic is expected to rise from about 41% in FY2012 to 64% in FY2017. In India, consumer Internet video traffic is expected to reach 1.4 Exabyte per month in 2017, up from 121 petabytes per month in 2012”

Your comment: So what is the CAGR?

My thinking: 1000 petabyte is 1 exabyte.
So 1.4 exabyte is 1400 petabyte. Thus CAGR would be (1400/121)^(1/5) ~ 63% CAGR.
One more thing which we can infer is that Internet data traffic would have around 50% CAGR as we have to take into account the increasing share of video in Internet data traffic (from 41% to 64%)

There might be a lot of inaccuracies in my judgement and calculation so please feel free to question my inherent assumptions.

Disc: Not invested, but tracking very closely.

2 Likes
54

Anythoughts on negative FCF & CFO

55

i dont think comparing movie libarary with basmati rice is apt analogy . Movie libraries (unless its disney’s!) loses its appeal and value drastically with vintage. except for a few movies most become almost worthless as they age and hence become filler fodder to be packaged by players like shemaroo and rate at which they become worth less seems to be only accelerating .

Let me just expand a bit further on my though process on what i see as key risks to this business :

Movie shelf life is declining and pace of decline is increasing : We’ve seen how theatrical life of a movie has drastically reduced to average of 3-4 weeks and a single run from several months and multiple runs just a decade back .
This was driven by two key factors :

  1. Adoption of digital distribution and projection technology which helped producers to have saturation releases in 3000-4000 screens on opening day instead of just few hundred theatres a decade back.
  2. increasing internet availablity coupled with rapid smartphone penetration which madeit very easy to pirate new movies and consume those movies very cheaply or for free in days after movie release.

This change took a decade or so to come to pass simply because all the digital distribution and projection infrastructure took that long to build Plus internet/smartphone penetration also took some time to gain momentum.

Now , it appears something similar is happening to a movie’s post theatrical life also . With increased social media awareness , word of mouth spreads faster upon a movie’s release and increased pirated content
availability and means of consumption for that content provides faster means of gratification to people who dont want to shell out big bucks for theatre tickets yet keen to watch that “must see movie” everybody is talking about in their peer group before movie premiere on tv.
This means that available pool of captive eyeballs for a decent movie for its premiere on a tv channel is shrinking continiously . Here are the TRPs for the new movie premieres in 2016:

  1. Prem Ratan Dhan Payo - 2,51,19,000
  2. Housefull 3 - 78,16,000
  3. Baaghi - 69,88,000
  4. Dilwale - 67,61,000
  5. Sanam Re - 56,66,000
  6. Bajirao Mastani - 54,76,000
  7. Ghayal Once Again - 38,61,000
  8. Sanam Teri Kasam - 37,01,000
  9. Fan - 34,18,000
  10. Neerja - 19,73,000
  11. Airlift - 19,01,000
  12. Kapoor & Sons - 12,65,000

if you look at it closely , movies which were hits and had generated great word of mouth during their theatrical release like Airlift,Neerja, kapoor and sons -Movies which normally would have done very well on TV just a couple of years back- have registered pitiful TRPs on their satellite TV premiere .
This is essentially because these movies (like most movies these days) were targeted towards multiplex crowds, in other words urban centres with increased internet penetration . Only Movies which can appeal beyond key metro cities to semi urban or rural centres i.e areas with low internet penetration are drawing in TRPs.

Increased internet penetration could easily act as headwind for shemaroo as tailwind :As internet penetration increases rapidly,movie content consumption cycle will keep shrinking .By the time a movie reaches its sixth year or much earlier , almost anyone who would have wanted to see the movie would have consumed it already and the newer generation would be more receptive towards original edgy content on their mobile devices rather than stale old movies .Basically and importantly for shemaroo, the audience pool for a typical six year old movie will be drastically lower than what it is now or what it was just a few years back.

Thrust on original differentiated content : Because of above two reasons,Broadcasters and internet streaming services are increasingly focusing on developing original differentiated content for their internet channels/streaming services/apps rather than just relying on running old serials and movies …Netflix for example wants their 50% of content to be original. So Bulk of the content budget will be spent on creating original content for internet medium or cheaper tv soaps for satellite TV.Whats remaining of the shrinking pie will be spent on acquiring new movie rights and even less would be devoted to fillers from shemaroo library.

Disclaimer : Not invested .This is my hypothesis based on my personal , subjective understanding of how film industry and movie consumptions patterns are evolving.

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56

Hi @anon34631667, thanks for a very crisp account. While I agree with you on all of these keys points I do believe that most of your thesis still pertains to the first cycle of a film which is from 0 to 5 years - this includes theatrical as well as satellite revenues for the first 5 years. I still believe (and I may be biased as I am invested) that for the period 5-10 years i.e. the second cycle, this will not really make much of an impact. Consider this like a tail of a standard normal curve, it can only get so thin.

I agree with your hypothesis that this is mostly filler content except say 1 in 10 movies like Jab We Met, etc which inspite of being old still retain large eyeball numbers. But the mere fact that this is filler content should not impede Shemaroo’s pricing power on 2 accounts:

  1. Because it is necessary inspite of being filler - and Shemaroo having a huge library has a reasonably monopolistic position and can hold on to its prices
  2. Because as per the management (and I am taking a leap of faith here on their commentary) they target a very reasonable IRR of 18% (before tax - which means after tax IRR of 12%) hence omitting any major scope of price erosion.

I agree with your point on digitisation about unique and differentiated content however this is a capricious industry. One of my best friends used to work in Ronnie Screwvala’s digital content creation house called ARRE and he told me that it’s not doing that well (various reasons I’d rather not discuss on this platform). Additionally, within past 2 years, the broadcasters have initiated a slew of measures to create channels dedicated to hindi and regional movies to increase their market penetration so I feel that at least taking of view of 5 years, Shemaroo has a position which is at the very least ‘defendable’ if not opportunistic

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57

@anon34631667

Appreciate your view point. Very informative and explanatory.

Find enclosed my view on valid concern:

  1. Content have limited life and declining majorly: Like in stock market, every stock is good at particular value, I believe same apply to economic resources. Anyway, management said that they are not in race of first wave of release and right acquition which account for 90% of revenue over lifecycle.

From the revenue growth with same old movie catelogue, at least in case of Shemaroo financials, kind of not support your view point about limited demand for old films. The growth in youtube channel subscription by more than 50% also does support that there is sufficient space for all kind of content including old to 80s to 90s to 2000s movies from India. Globally, India has lagest number of movies and also ticket sold. Due to lower percapita income, same does not translate in value, but with increasing standard of living, I am of strong opinion that we shall continue to see high growth in media business.

Secondly, while your point about new movies are not getting sufficient TRP is valid, please also look at Economic Times article about Hindi Film Channel Viewership being higher than hindi GEC in recent quarter. Further, as already said, Shemaroo has limited presence or rather no presence, in the first cycle release. So limited viewship of new movies does not raise big risk for Shemaroo, rather is assist in reduce the acquisition of new films rights. (Too an extent the gain of lower acquisition price would offset of lower inventory cost of existing inventory. But till the time company is in acquisiton face, it still gain more from lower prices of acuqisition, at least on cashflow point of view, then by lossing on inventory valuation)

Thirdly, on increasing internet penetration could act as headwind, I would repeat the Youtube viewship growth in last 3 years support the view that there is sufficient demand and longetivity for old content. I would appreciate if you can put forward some market intelligence to take discussion further.

Fourthly, your point about Nelflix business model on original content is valid, but at the same time with the original content around 50%, Net flix is yet to make any impact in Indian market. That does not mean that Nexflix is failed. However, for Shemaroo, any way for the balance 50% of market of repeat film telecast would be largest content provider even with Netflix, and get one more partner to leverage on the content business. That shall be sufficient to drive Shemaroo growth even through Netflix (depiste Netflix focus on original content) in my opinion,

Lastly, I see reducing piercy by lower cost (Rs 3 per movie view, or free youtube movie with ads) can add significant jump to revenue for companies like Shemaroo.

Appreciate your hard work and do look forward to constructive counter viewpoint on the subject.

Disclaimer: I have investment in Shemaroo and my view may be biased.

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58

While searching for competitor for Shemaroo, I came accross Ultra movies. Ultra has around 1000 tiles and within my limited knowledge would be second largest content company after Shemaroo.

Find enlcosed ultra management details

Also a very old interview about the company which kind of lost relevance (from CD based content business to digilised distribtuion), but still provide useful insight about the company and industry.

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59

Hi @anon34631667

What are the underlying assumptions/empirical evidence to forecast that increasing internet penetration would be headwind for Shemaroo?

It is quite apparent with lowering data cost and increasing broadband speed, people would like to listen to more songs on youtube rather than downloading and indexing them. Youtube search is amazing.

And an extension of this trend would be watching movies on Youtube while travel and whenever you are free.

Since Youtube pays almost 50% of advertising revenue to content provider. I see bumper increase in new media for Shemaroo.

If you look at history of Shemaroo, the company successfully transitioned several times from video cassette lending library to cd/dvd to latest transition to new media.

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60

Though I am not tracking the stock and have not gone into much details, One risk I could find was the technology risk of 3D adoption in mobile contents. Already 3D videos and Head Mounted displays are cheaply available.

Also Cheap Mobiles are supporting higher resolutions and bandwidth required for 3D viewing. 3D content is highly immersive and engaging.So New content will also be changing to 3D in coming years.

Will the content acquired by Shemaroo be relevant in such a scenario? Imagine watching B&W movies after seeing colour movies. The revenues may take a hit on a 5 -10 year term.

Just a counter view on this matter.