Shemaroo Entertainment

Stock Opportunities Untested - but worth a good look
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CMP: 330
Market Cap: 900 Cr

Summary:

One of the top 3 content aggregators in India, growing it’s youtube views rapidly (60-80% y/y) now at 100M page-views per month. Amazing business, and growth but management ethics are under the scanner and need a “leap-of-faith”. I’m introducing this idea hoping that the valuepickr community will help dig deeper into the management ethics part.

Bull-Case:

The optical growth rate right now is only 15% in sales and 28% in profits, but this is because the old media business (non-you-tube) grew only 8% and is the majority of the revenues. If the current trend continues, the next few years the sales growth rate might be: 19%, 25% and 32% as the new media takes a bigger share. And the new revenues seem to be relatively cost-free, as we can see most of it dropping to the bottom line. If this continues, the profits will be growing much faster at > 30%-50% y/y next few years.

Netflix for India launch is a tail-wind.

Bear-Case

  1. The promoter Raman Maroo, of Shemaroo was an independent director with Orbit Corporation, which was classified as a willful defaulter.
  2. This whole entertainment space is full of corrupt people and Eros Entertainment was recently under the for cooking the books.
  3. Most of the profits are fully invested in buying up more “Copy-rights” and we just have to take the management’s word for it. They don’t disclose the break-up. Out of 40 Cr in Net Profit made last year, the company spent 80 Cr in purchasing new “copyrights”; (incl IPO proceeds)

Read more at: http://www.moneycontrol.com/news/ipo-swot/shemaroo-ipo-valuation-stiff-operating-cash-flowworry_1180027.html?utm_source=ref_article

December Results and the youtube growth chart:
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/BE50E8BB_6D72_44A6_A202_43F1F2BFF264_091646.pdf

Investor Presentation: http://www.shemarooent.com/doc/reports/Shemaroo%20Investor%20Presentation%20Nov%202014%20Final.pdf

The company IPO’d at Oct 2014;
• Shemaroo acquires content with either Perpetual rights (complete ownership) or Aggregated rights (limited
ownership)
• The company distributes and monetizes this content across different media platforms.
• The current content library stands at 2,918 titles as on 31st July 2014, with 759 Perpetual rights and 2,159
aggregated rights

• Perpetual Titles (Hindi) – Amar Akbar Anthony, Anari, Dil, Disco Dancer, Ishiqiya, Khuda Gawah, Namak Halal
• Aggregated Titles (Hindi) - Mughal-E-Azam, Jab We Met, Don, Anand, Sarfarosh, Shahenshah, The Dirty Picture

Disclosure: Invested in small amounts.

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I was going through the balance sheet… wondering why do they have a 100Cr short term funding…and large trade receivables

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Good write up Prasana.
The growth momentum is mainly from the new media segment. In that 55% is from telecom MVAS and rest from internet sites like Youtube.
In MVAS segment, management has stated that traditional CRBT(call ring back tunes ) form only a small portion , bulk of MVAS revenues is from sale of imagery, videos.
While telecom mobile data sales has grown at a exponential rate, I don’t see someone with a full fledged 3G connection, buying these imagery or videos. Management says its through mobile ads, they sell these content,It is like those click to purchase banner ads.

I have seen these ads from other vendors like Hungama, which are more like mini scams. Is this sustainable ?

The rest of the story is still good. Would like to hear your views on this.

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Thanks!

  1. Will you be able to provide the source of info for your MVAS split up? I don’t really like that business either. The interest purely comes from rapid youtube growth and netflix launch. It’d be good to understand how much of the new media growth the company is advertising is coming from MVAS non-sense.

  2. @harshil Yes, the short term funding and trade receivables are talked about a bit in the investor ppt, but honestly is not very clear.

  3. I was able to get the CEO to respond by sending an e-mail to: hiren@shemaroo.com / Aditya@valoremadvisors.com (IR firm) – Please ask your questions and share any thing new you learn here.

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December 2015.pdf (129.5 KB)

This concall has the details.

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They have high receivables days in broadcast segment ( 150-200days) .

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Hi @Lynchfan
High receivable days are a nature of the broadcast segment. This is because broadcasters like Zee, Sun, Star buy content a lot in advance. For example, I heard (rumour) that Star has already purchased rights for Salman’s upcoming flick Sultan and will be premiering it in March 2018. The same is true for the second cycle segment in which Shemaroo operates. They buy content for a period of upto 5 years and thus pay piecemeal to Shemaroo. The important thing to note is that these receivables are likely not to be converted to bad debts (due to pre-agreed contracts as well as high credibility of broadcasters) and in fact are coming down due to the management’s negotiation with broadcasters as well as focus on digital media in which receivable cycle is about 60-90 days. Thus ROCE might gradually inch up.

Sachit

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Results for Q4 FY 16 announced :http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/F5A64398_7D05_4E1C_82C9_9AC4BB466A15_092735.pdf

FY2016
PAT increased by 27.4 % YOY to Rs. 5,215 Lacs (FY2016)
Total Income increased by 16.0 % YOY to Rs. 37,668 Lacs (FY2016)
Q4 – FY2016
PAT increased by 28.8 % YOY to Rs. 1,645 Lacs (Q4 FY2016)
Total Income increased by 18.1 % YOY to Rs. 10,309 Lacs (Q4 FY2016)

EBITDA Margin stood increased to 29.6% in FY2016 (27.2% in FY2015)

Business Division Q4 - FY2016 Q4 - FY2015 QOQ Growth% FY 2016 FY 2015 YOYGrowth%
New Media 1,766 1,145 54.3% 6,351 3,731 70.2%
Traditional Media 8,553 7,572 13.0% 31,343 28,740 9.1%
Income from
Operations 10,320 8,717 18.4% 37,694 32,471 16.1%

Can anyone give me some information on negative cashflows. If it is for acquisiton of libraries, will the situation improve in the future?

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the important thing to note here is that the next phase of growth wud b coming thru the digital medium
they have tied up with the dth operators on a revenue sharing basis

the only thing concerning about the company is that they are into MEDIA segment whose credibility is not good. their pl / bs is hard to dissect

but in any case in my personal vu, its much btr than the saregama which only talks about monetising but this company is already showing their credibility by monetising their asset

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CONFERENCE CALL - from Capital Markets

Expects new media to contribute ~ 40-50% of top-line in 5 years horizon

Shemaroo Entertainment held its conference call for discussing Q4 and FY16 results.

Key highlights:-

  • The consolidated top-line for March 2016 quarter has increased by 18% to Rs 103.1 crore. EBIDTA margin grew by 389 bps to 34.82%. The net profit has increased by 28% to Rs 16.4 crore.
  • New media business increased by 54% to Rs 17.7 crore and traditional media by 13% to Rs 85.5 crore in Q4.
  • Crossed 1 billion views on our flagship Shemaroo YouTube channel
  • 100 Million+ Views crossed on ‘Shemaroo Kids’ YouTube channel
  • Crossed 1 lakh Subscribers on ‘Shemaroo Punjabi’ YouTube Channel
  • Subscription on YouTube is free.
  • Signed a further content deal with Spuul
  • Tata Sky ‘Ac9ve Devo9on’ service launched on 25th Feb 2016
  • Tata Sky ‘Comedy’ service launched on 9th Mar 2016
  • Acquired the Sagarika Bengali Audio Catalog perpetually
  • Rs 160 crore is net investment in FY16.
  • Gross purchase is around Rs 400 crore for FY16.
  • Started a entity which is JV with partner where company takes slot for its programming and make revenue from ad sales in that slot…
  • Trade receivable headed downward, but it not big down as visible in Balance Sheet.
  • Net Inventories increase will be around Rs 150 – 200 crore next 2 financial year.
  • Television has grown faster this year. De-growth is happening in DVD and home video which is pulling down traditional business.
  • This year physical media has seen shaper decline.
  • Television segment growth inline with industry or slightly high. Impact of physical media will continue to be down for one more 1 year. The impact of it will be 200 bps.
  • Sharp increase in margin in Q4 was due to new media and got better realization.
  • The mgmt is having conversation with most of the platforms entering the market.
  • The mgmt expects new media to contribute ~ 40-50% of top-line in 5 years horizon.
  • The mgmt said that new media can contribute 40% EBIDTA margin.
  • Around 800 perpetual titles it has.
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Hi,

I am interested in Shemaroo as being the largest content provider. What I see as major issue of being management saying that they would have limited cashflow in next two-three years as they are in process to built the library. Another concern is about their limited success in adding up Perpetual library.

In FY10, Management has given some indication about there plan:
To increase revenue 3 times from Rs 103 Cr in FY10 to Rs 350 Cr in FY14
To increase net profit from Rs 1.29 Cr in FY10 to Rs 30 Cr in FY14
To increase perpetual content right in Hindi film from 165 Films in FY10 to 400+ in next three years (FY13)

Actual achievement by the company was as under:
FY14 Revenue: Rs 265 Cr (Missed by 25% of what projected)
FY14 Net profit: Rs 27.2 Cr (Missed by 10% of what projected)
Actual Perpetual Content Right of Hindi Film as on May 31 2013: 353 (missed by 47 films).

While it appears that company has missed on acquisition and topline significantly, the management was reasonable in projecting and performing on net profit. What I also like is this one (Assuming they actually mean it) (Page 5 PDF file, Annual report FY10)

“At Shemaroo we buy content carefully. We say no more often, then we say yes. We have built systems and processes by which we try and reduce making expensive mistakes. Every content purchase travels through hierarchy of management right upto Board of Directors. Every content acquisition decisions needs to demonstrate a minimum ROI (The company aims to achieve pre tax IRR of 18% on all its acquisition as mentioned on conference call). That is how we think”.

The content liberary of the company has grown as under:

Another major point which I like is growth in non traditional media business. As per management, Non traditional business is broadly split between Mobile Service driven and Internet Driven with revenue split of 55:45. In Internet driven business, youtube account for less than 50% of same.

My Concern:

  1. What is value of company inventory and how same is charged to P&L? While management did give some idea on conference call, It has not provided exact value of residual inventory on conference call.
  2. Management issuing Bonus share from capital reserve in past which was generated from company restructuring. Not sure whether same was cash earning/ share premium receipt or mere accounting entry
  3. what is life of copy right in India? In my understanding same is 60 years. Many old 50s movies, now may loose same. Although not sure about same.

I would appreciate if the members can give their view on same.

Discl: I am holding shares and increased my holding in last 1 month. My view may be biased to that effect.

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Hi @dd1474,
“In FY10, Management has given some indication about there plan:
To increase revenue 3 times from Rs 103 Cr in FY10 to Rs 350 Cr in FY14
To increase net profit from Rs 1.29 Cr in FY10 to Rs 30 Cr in FY14
To increase perpetual content right in Hindi film from 165 Films in FY10 to 400+ in next three years (FY13)”

Where did you get the above management guidance? I thought the share has only been listed a year ago

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refer to FY10 annual report, Page 5 and Page 18. Link for same is given in previous message

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@dd1474 They have a very good IR department and most of your questions will have direct answers. They also will be open to hopping on a call with you. Good research there. Please share any interesting findings.

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This is good link to understand the Industry prospect.

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http://www.bseindia.com/corporates/anndet_new.aspx?newsid=c6fbc81d-2baa-4a32-9c00-841e308d3eb4

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I was just going through annual report for FY16 of Shemaroo. Happy to see major jump in Hindi film perpetual rights. During FY16, the company’s content liberary has seen highest growth in last 5 years, including highest acquisition Hindi film title perpetual rights in last 5. During FY11, the company has added almost 130 films after which it has been in range of 10-30 films per annum.

Pasted image754×301 9.81 KB

Discl: I have increased my holding during last week and my view may be biased. Investor is advise to do its own due diligence before taking any decision.

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Thanks for the input dhiraj.
Any inputs on the new media segment , on the MVAS Sustainability(50% of segment)?

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No definite asnwer. However, launch of 4G Net work would defintely drive growth in MVAS as well Internet related business of Shemaroo. The best example to check 3G Penetration and Growth. As per Wikipedia, Private sector operator got approval in September 2010 for 3G launch. From FY11 to FY16, growth in Shemaroo sales in new media, which incerased share from 4.3% in FY11 to 16.8% in FY16 and further 21.1% in Q1FY17, giving some comfort.

I see 4G Launch also would drive data consumption by Indian Customer at least for 3 years for sure. I am enclosing link about data usage in 3G in India conducted by Nokia for your reference.


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Thanks Prasanna and Dhiraj and others for their research.
I have recently invested in Shemaroo.
From the tone of the Concall I felt that the management is conservative.
The growth in online views on you tube is encouraging and the stock appears to be available at decent valuations.
Apart from the inventory that Shemaroo possess which is the main moat, what I liked is their relative risk averse approach.
they are not into big banner new releases which are risky and lead to unpredictable and volatile earnings.
When you are purchasing rights of old movies , you already know whether the movie is good or bad, what kind of audience would enjoy watching such movies and i believe that the management would have an idea of the kind of revenue the movie would generate for them.
Also, since they have a big inventory, they can get better terms from the movie channels. As frequently , channels club movie on different themes - comedy, action or based on a particular actor.
Most of their titles are old and yet they are showing good growth in digital revenues. That shows there is a fair amount of customers for such content.
Also I feel if i want to watch a particular movie or song , i would watch it irrespective of who owns the rights. So Shemaroo having a vast inventory can sustain large subscription / views to their channel , hopefully.

This I believe is an entry barrier. Competition can launch better platform / services but they cannot show Shemaroo content without paying commission.
Even in that case they are more likely to enter into an agreement with other players for content otherwise a viewer will not stick and will move on to you tube / netflix where he can easily get what he is looking for.

In india except for few cities , the internet connection is very poor and it is difficult to play you tube without frequent buffering. With 3G becoming more accessible and cheaper and 4G , reliance jio coming in , data speeds are going to get better for sure and you tube views are going to increase. This should help Shemaroo.
Entry of Netflix is also a positive. Launch of home video on Airtel and Tata Sky is a positive. Company seems to have done well on capitalising the digiital segment.

Risk could be of Promoter integrity , since its a newly listed company and in media sector. However, i could not find anything negative on promoters.
Another risk is online piracy. Also now one can download videos from you tube onto his hard disk / computer, this may effect revenues ? as the viewer will not need to view it frequently on you tube.

Disc : invested .This is not a buy or sell recomm.

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