Saregama India Ltd: India’s premier music publishing label

Chaitanya_Motani · December 22, 2021, 7:44am

The revenue projections given by the management at the RPSG Investor conference was more than 30% revenue growth. He also said that if Music OTT apps start getting more paid subscribers, the growth can go upto 70%.

On the capital allocation part, he also mentioned that no money from the 750 cr. QIP will be used for anything other than the music business.

On the valuation part, I think it definitely deserves far better valuations than 40 PE as it is a digital business and has a very high revenue growth projection.

One key thing note about the management is the passion with which he talks about the business, you should have a look at their virtual investor conference to understand this and more .

rshankv · December 22, 2021, 7:46am

The numbers and calculations are all good but have you thought abt the below scenarios playing out

Topline: as more people come on the smartphone bandwagon the revenue will grow exponentially
Bottom-line: As more customers opt for paid streaming services their bottom line will most likely grow multi folds

Badshah “Pani Pani” song has 64.5 crores YouTube view alone even if Saregama gets 10 paise per view their revenue from this song alone on one channel is 6.3 crores , there revenue calculation is not based on per view for YouTube but a factor of % of ad revenue or % fees paid subscribers, i just wanted to keep it simple and hence took 10 paise per view , Imagine the revenue from top 5 channels.
Imagine the number of such super hit sings they can come up with in a year and # of songs that they can repurpose.

AND this is the reason why Saregama is commanding a PE of 80

nirvana_laha · December 22, 2021, 8:13am

Thanks for your pointers!

The revenue projections given by the management at the RPSG Investor conference was more than 30% revenue growth.

Thanks. I hadn’t gone through the RPSG investor conference video, will do so now.

On the capital allocation part, he also mentioned that no money from the 750 cr. QIP will be used for anything other than the music business.

Yes I am aware of this assurance by Mr. Mehra. But he had not shared how he was planning to use the fundraise money. Are we certain that the money will be used for an acquisition and not for expediting own content development? The size of the fundraise does point towards a one time deployment which probably means acquisition, but I wanted to hear the views of experienced investors about this. Also, in case of acquisition, the quality of content may not be 100% on target, right? So performance of the assets acquired (songs) can be reasonably expected to perform less well than own IP content?

Assuming the money is used for acquisitions, can we arrive at approx. figures of how much revenue a 750 Cr acquisition of music assets can generate in the next 3-5 year timelines?

On the valuation part, I think it definitely deserves far better valuations than 40 PE as it is a digital business and has a very high revenue growth projection.

This is very interesting. What do you think a reasonable PE multiple may be for Saregama 3 years from now? Are there any similar companies in other markets that justify a valuation higher than 40x? TIPS and Zee Ent. in Indian markets are at 30x TTM PE and Warner Music is the only label I could find in US markets and its trading at 50x TTM PE. Because a 20% increase in PE ratio will change the return numbers significantly.

One key thing note about the management is the passion with which he talks about the business, you should have a look at their virtual investor conference to understand this and more .

I have heard a lot of praise of Mr. Vikram Mehra, one more reason I am interested in this stock

@kashish24 @rshankv Thanks for your bullish responses I have combined my counter queries/responses of your posts as well in this response, do take a look and respond if possible!

arjunbadola · December 22, 2021, 11:46am

I don’t know what could be the PE multiple 3 years down the road but one has to remember three things:

EBITDA margins of Indian players are better then foreign peers due to the nature of industry (Film producers rule the show here). Refer: https://twitter.com/soicfinance/status/1409162856826765316
TIPS is a very small players compared to Saregama. The latter has business relationship to fight T-Series.
ZEE gets a lower multiple due to corporate governance issues which seems to be getting resolved but even after that one has to check whether business is focused or not.

The above points do not conclude that Saregama should definitely get very high PE but in the bull case scenario a very high PE could be sustained.

Disclosure: Invested

Chaitanya_Motani · December 22, 2021, 12:00pm

Hi Arjun, what do you think will happen to the scenario now that Zee and Sony are merging? They are two of the top 5 players, right?

arjunbadola · December 22, 2021, 12:51pm

I don’t know as I lack the data to provide any opinion.

All I know is that Zee Music has around 7000 songs music catalogue (Don’t know about Sony India). Both the players in past did not have much focus on the music label business which can be seen: ZEE towards OTT & movies and Sony towards movies I believe.

Growth for Saregama is clear for next 2-3 years but ZEE & Sony can definitely bring in some pressure in the incrementally acquisition market.

Chaitanya_Motani · December 22, 2021, 1:28pm

Exactly, they are bringing in 8000 crores as growth capital to the newly merged entity. Even if they use only 1\10th of that for music, they have a bigger war chest than SAREGAMA. I agree that SAREGAMA has great relationships with the film industry, but so do Sony and Zee.

Do you think this is a credible threat to SAREGAMA projections?

arjunbadola · December 22, 2021, 1:56pm

Yes, it could be. But not till an extend where it stops Saregama to grow at 20-25% as there are other growth levers too.

One would need more data to form an appropriate opinion which could happen only after seeing how the new entity is executing.

I feel most of the discussion about ZEE-SONY is happening because people are trying to jump on the train at current valuations which could be a risky thing to do, in my opinion. Otherwise, a business with foreseeable future growth rate of 20-25% is great to own (being conservative here).

Chaitanya_Motani · December 22, 2021, 2:12pm

Yes sir, agee with you. I am not actually thinking of buying Zee. But it is more to find out about the effect of the merger on Saregama’s business, which I own.

Thank you for the info.

Rushil_Shah · December 24, 2021, 7:47am

The war chest is being created mainly to bid for and get back the IPL broadcasting rights. I do think that they don’t have much focus on the music side of business considering it won’t be a major part of their revenues going forward.

Chaitanya_Motani · December 24, 2021, 7:53pm

So, as per Motilal Oswals’ Research report that was released yesterday after the conference call of Zee, the music businesses are not being merged.

So, that isn’t any issue anymore.

richdreamz · December 25, 2021, 1:34pm

Of the companies in my portfolio the strongest one has been Saregama. The correction in the broader markets has been sharp particularly in the ones that have gone up a lot but Saregama did not correct. I usually give a lot of weightage to the price action as it usually indicates what market participants think (takes out ego from the equation) and is also a fair predictor of “future strong earnings growth and/ or re-rating).

Valuations must be looked at taking into account the future earnings growth, it’s probability and never TTM earnings.

The RPSG investor presentation is a must if anyone has Saregama as their highest allocation. I have gone through it multiple times and my main takeaways as spelled out by Vikram himself are:

30% earnings growth in Music streaming for 5 years WITHOUT taking into account IPRS growth and premium subscription growth.
Any IP content that has long term monetary value, Saregama is interested in. It could be Music, Podcasts, re-makes, non-film music, regional content etc.
Categorically NOT interested in Bollywood big budget movies (I’m particular in this as any deviation from this assertion will make me change my mind as competing against the likes of big boys at this stage is neither sensible not optimal usage of capital).
Vikram fleetingly mentioned that if paid subscriptions take off in a big way the growth could even 50% plus. He mentioned 70% too but I take it as a passing comment to put his point across.
OTTs chasing vanity metrics like MAUs and other incomes like Ad income over paid subscriptions is his main worry. I believe the Music OTTs have reached or will reach that tipping point sooner than later where they can start to monetise rather than keep subsidising.
The current music industry which is valued revenue wise at 1500 crore could reach 10000 in 3 years time as per his comment in another interview few months back (can’t get source).
The QIP money is only for Music and it will bid around 25-30% of the new film music coming to the market with a payback period of 5 years. It is invariably a GIVEN that any sensible management will not kill the valuations at the beginning of J curve by diverting the money and bad allocation of capital.
As far as my observations go, Vikram is walking the talk. Being from a Telugu state I can see their aggression in Telugu music. I believe he was referring to Aditya Music as a dominant one in Telugu. Any acquisition of Aditya Music will be fantastic actually given that Aditya is a behemoth in Telugu states and adds marquee Telugu music.
2 types if aggression. A) Bid big films music like RRR etc for eye popping amounts B) Produce big budget movies with huge star cast C) Sensible music acquisition like Sarkaru Vari Paata, Shyam Singha Roy etc at sensible amounts and milk them. A & B are risky while C is sensible from business point of view. I like that Saregama is following approach C consciously.

Well, the story is well know and how much do you pay? While it’s up to markets to arrive at that valuation band, my main job is to use what I know from my experience and pay what I’m comfortable.

Valuations:

It is quite evident that market now deems Saregama as “equivalent” to platform company and so valuations I’m comparing with such peers.

Value Yodlee, Caravan, Series for OTTs, Tamil series, QIP cash of 750 crore at 2000 crore.
Music streaming: I assume 30% CAGR and get to 625 crore for FY24. (Saregama music revenues are predictable, so I can go as far as FY24 unlike a metal company).
The current FY24E EV/Sales of tech/ platform businesses are in the following order, approximately: This metric does not make sense without taking many variables like, margins, CACs, new user growth rate, take rates etc. But broadly, they are like below:

Indiamart: 16
Policybazaar: 15
Zomato: 13
Nykaa: 12
Saregama: 10
Nazara: 05
CarTrade: 06 (Market handed me the biggest lesson here where I booked out > 25% loss)

Given that CarTrade is profitable, growing at 40% in a large addressable market made me value it at 10 time EV/Sales but it looks like Market is worried about the competition who are well funded and are more aggressive while CarTrade is offline+online and is also a holding company structure. Whatever, market handed handed my head in a platter to me only. That’s how market will show anyone its place and making 25% CAGR over 10 years plus is simple but not easy.

Oh, these valuations of most are of course at a premium and are very sensitive to growth projections (usually growth starts at 30% plus) with not much chance of re-rating unless growth accelerates even further.

It is very individual decision and a matter of PF construction and a host of other factors to invest or not at these prices BUT what I liked is HOW markets lined up the companies valuations based on growth projections, strength of platform, sustainability, total addressable market opportunity, competition, franchise value, optionality etc. These valuations will be and logically should be at a premium to comparable global companies because of the narrative around growth rate of Indian companies which is at least twice that of others in some sectors.

Questions to ask:

Will users pay 1000 /- per year to listen to music without ads? YouTube is getting aggressive in converting users to premium by limiting features like HD downloads etc.
Will the industry structure of film:non-film music change in near future?
Do we have visibility into addressable market opportunity beyond a couple of billion USD?
Will artists directly approach OTTs/Platforms bypassing Music labels? Unlikely in near term.
Will piracy come back?
People stop listening to old music and only the latest ones? (Unlikely). The way trends change, nothing is impossible, actually.
Are technological innovations like blockchain, NFTs, Metaverse pose any future challenges?
Gaming IAPs replace music paid subscriptions for future kids?
Is 25% to 30% music streaming sustainable? My biggest question is this. Any change in growth projections here, the valuation will oscillate between 6 EV/sales to 12 EV/sales, so correction or re-rating is dependant on this in the near term.

Disclosure: I hold and this is not a recommendation to buy/sell/ hold, buy transactions in last 3 months but not any in last 1 month. I may sell/buy without first notifying this forum first if there is a change in thesis or better opportunity for large deployment of capital comes across. I’m very brutal in selling a position as I have concentrated PF.

Sajju · December 25, 2021, 1:50pm

Is the below song an example of artist approaching the platform directly??

Worldlywiseinvestors · December 25, 2021, 2:36pm

If you check the description carefully, you will find Universal Music Group India

Dev_S · December 25, 2021, 7:49pm

How do we assess Opportunity size? A high level take on it

Music Streaming hours Opportunity size in a year = total active users * hours per day spent on music * 365

= 300 M active listener( key variable) * 2 hours * 365 days = 200 B hours approx

Avg song plays for 5 minutes and delivers 10 paisa revenue to Saregama

1 hour , 60 minute play time is roughly 1.2 rs , say 1 INR for simplicity

Opportunity could be 200 B * 1 = 200B INR = 20000 cr - conservatively lets say 10000 Cr - 15000 cr at industry level for streaming music

Tseries music is at 800 cr/yr(20% from YouTube), T-Series: The Bollywood record label that conquered YouTube - BBC Culture
Saregama at 400 cr year( excluding carvaan), in line with Tseries they are Probably in same range of sub 20% revenue from YT
others all put together will be another 800 cr at best so 2000 cr per year at industry level( streaming + YouTube + misll)

2000 cr to 12K/15K cr( streaming +YT) journey in current shape and form looks doable over next few years. Anywhere between 5X to 7X, efficient players will perform better( content quality being key)

Over simplistic but shouldn’t be far from possibility, between Tseries ( 160000 songs )and Saregama ( 130000 songs) they have lion share of all songs- they should be able to garner larger market share by revenue as well.

Aligns roughly with runway of 5-6years at 30%+ growth rate talked by Mehra.

Above has many assumptions and may be off but has high probability.

Subscription will add further upside to it, as new active user addition growth rate tapers off( base getting higher), Subscription push will be more visible.

Risk - Gaming, Metaverse and other disruptive youth time and mind share grabbers. Hopefully will be first visible in Western world.

Chaitanya_Motani · December 25, 2021, 8:06pm

According to Spotify, a song is considered to be streamed, if it is played for more than 30 seconds. Most of the songs I listen, I rarely listen to the entire song.

Secondly, your assumptions haven’t taken into consideration when users start moving from ad based streaming to subscription based. That according to Mr. Vikram Mehra can lead to a growth of as much as 70%.

Dev_S · December 25, 2021, 8:11pm

Feel free to create your own hypothesis

Reread the post- clearly says Subscription will add further upside to it

richdreamz · December 25, 2021, 8:41pm

As per gaana management (link below) currently they have 185 million monthly active users and I believe they have 30% market share which puts total active users currently at 560. Management is confident of 500 m MAU in 3 years and if they attain 40% market share then the total MAUs stand at 1250 which is total population of India, doesn’t make sense. May be he targets 500 MAUs and a market share of 60%!

Also, even if each member of the family has single account for each music stream app, subscription would be to only 1 OTT. So, I infer there’s high scope for consolidation. Current 9 OTTs is not feasible, just like telecom. Over next 3-5 years I expect 3 major players in the fray.

So, until such time it’s MAU game and once that is over subscription will be name of the game.

3 hours per day is the current metric and this seems to be conservative as per Vikram in the call. This may be steady or inch higher as economic activity, travel increases.

Things seem to be getting clear for me as I write the narrative.

Basis this 10000 crore in 3-5 years is pretty much conservative as things stand. IF there’s no outside sector like gaming completely taking over music time, the story looks getting started for a long time. We need to track the happenings in OTT players and competition. Saregama needs to keep doing right things and things right and business will fall into place.

Vikram seems to have his head set properly on the shoulders and is trying out other optional revenue streams like Yodlee, Caravan with small capital allocation.

Gaana, Spotify, YT music premium could be eventual stand alone Music OTTs while Amazon Prime, Wynk, Apple Music, Jio Saavn could play second fiddle. As the GDP per capita increases, paying subscription amount of 1000/- per year is nominal actually.

arjunbadola · December 26, 2021, 4:25pm

ramdhawad · December 30, 2021, 1:41am

Payout rate in the U.S varies hugely across all major platforms contrary to what’s a standard norm of avg 10 paise per stream in India according to VM. Although this is apple and oranges as the chart above reflect the payout rates to the artist and not the music labels.