Tips Industries Limited - Ready to RACE ahead!

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Notes from the Earnings con call today. Jotted down in a hurry, tried to be as accurate and objective as possible, there may be minor mistakes

Clarification on Balance Sheet

  1. There is an entry in balance sheet under non-current liabilities amounting to 37 Cr. Management clarified that this is erroneously placed under wrong heading (Employee benefit obligations… there are 2 entries there). These are actually advance payments from customer contracts. It was later clarified that most of the advances are for 1 year contracts but there is one contract of 2+ years period

Growth Guidance

  1. 68% revenue from digital channels, about 30% revenue from non-digital channels
  2. Management is confident of delivering 20% to 25% growth over the next 3 years. They expect digital revenue to grow by 30% to 35%.
  3. We are currently no 5 player in Indian music industry. Aspiration is to be the no 3 player in next 2-3 years
  4. Size of the no 3 music player is in 175 Cr to 200 Cr range
  5. EBIDTA margin has grown, but is sustainable. Last year, we did some write-offs relating to films business, hence EBIDTA had fallen.

Covid Impact

  1. Q1 & Q2 were weak, but we did well to recover in last 2 quarters.
  2. Licensing revenue from events & live performances were hit badly due to covid situation. Revenue hit due to this was about 10%. Though, they have a very good deal in place with a partner to monetise, covid situation was a dampner.
  3. Revenue from this channel had recovered very well in Q3 / Q4. Second round of lockdown has again been a dampener, though looking at the sharp recovery seen post 1st lockdown, management is very confident that a similar sharp recovery will be seen starting Q2 this year.

Catalog

  1. About 29000 songs catalog. About 12000 are Hindi songs. Remaining are regional songs
  2. Most of the content comprises of very popular hit songs of 90s and 2000s.

Catalog Longevity

  1. Catalog has high number of hits. Can continue to deliver 20% to 25% revenue growth for next 2-3 years, even if we do not add much to the catalog,
  2. With so many hits in catalog, we can continue generating revenue by recreating old hit songs (Gave example of 2-3 old hit songs which have been recreated and released recently, which have garnered massive attention recently)

Content Acquisition

  1. Spent 12 Cr on content acquisition in previous year
  2. Spent 10 Cr on content acquisition in this year. Spending on acquisition is low as there have been no major releases
  3. Future content acquisition focus will be on buying bollywood music as well as producing own music
  4. With normalisation of business, looking at spending 25 to 30 Cr on content acquisition
  5. Will not buy content at any cost for sake of buying. Will buy if it makes business sense and can payback within certain time. Typically, content should payback in 2 to 3 years
  6. 30-35 songs are already in pipeline in this year, many will be recreated songs (A & B+ category songs)
  7. There is some cost of recreation (engaging new music director, lyricist, video etc), though this can be controlled well.
  8. Reinvesting of Cash flows - will prefer investing in content acquisition
  9. Idea is to acquire quality content so that 20 years from now, whoever is running the company still has valuable content to monetise
  10. Have signed up with 5 new artist for music. Have a 360 degree contract with them. Will generate revenue from not just recorded music, but also will handle their events / live performances.

Accounting & Content Expense

  1. Content is charged to P&L, it is NOT capitalised.
  2. Operating cost in current form is about 20 Cr
  3. So given current cash flows, a substantial amount can be budgeted for content acquisition

Content Deals / Structure

  1. No company expects huge revenue from radio.

  2. There is an effort (by all music companies) to renegotiate licensing terms with radio industry. The matter is in court, but we expect this to be settled one way or the other

  3. Have a mix of deal structures with other digital customers

  4. Revenue sharing model OR Lump-sum outright with Minimum guaranteed (MG) payments

  5. One or two indian OTT players (Jio Saavn) are on Lump-sum with MG. They are still evolving their systems to have detailed accounting reports

  6. Most deals are annual deals, with significant (about 5 to 10%) incremental pricing negotiated on renewals

  7. OTT guys pay about 10 paisa per stream

  8. Most big guys such as spotify, Amazon etc have very detailed reporting, which provides ways to validate

  9. Even with customers with whom we have fixed sum deal, we ask them for detailed reports, which we evaluate regularly

  10. Ad revenue share with google on YouTube

  11. We have total of 14-15 different channels on YouTube, with cumulative subscriber base of 64 million users

  12. Customer typically pay out on quarterly basis

  13. Warner has Global deal with Apple, Amazon and Spotify. We have a deal with Warner, so out content is available on global platforms through warner deal

  14. Have a lump-sum deal with FB.

  15. Had a dispute with Gaana in 2020. Their 2 year old contract came up for renewal in May 2020, at peak of lockdown. Negotiations for renewal broke down over revenue increment, so Gaana decided to pull down Tips catalog.

  16. If any OTT app does not have content catalog from the leading 5 players, they suffer. They realised their mistake and are now discussing a new contract. Hopefully, they will sign a new contract very soon.

Revenue Potential

  1. We have a fixed sum deal with FB. Narrated an interesting fact about this. FB signed with partners on a fixed sum basis for 2 years, till their systems and processes evolve and stabilise. They share detailed reports. In 1st month Tips content was accessed 50 crore times. In 2nd month, the it gathered 100 Cr hits, in 3rd month 200 Cr and in 4th month 400 Cr!! Hits doubled every month!! Imagine the revenue potential!
  2. If the OTT apps add subscribers as some of the reports suggest, the potential can be massive. Ad-based model will never go away in a country like India. But if the subscription-based model stabilises and grows, we can see 70 to 80% YoY growth in revenues for some time.

Films Division

  1. Bhoot police (hope I got the name right :slight_smile: ) is the only film being made this year
  2. Films business is being demerged
  3. Post demerger, all movie rights will be under demerged company
  4. We will need funding for the films company, or a production partner. We are exploring those options
  5. Will continue to produce 2-3 movies / web-series per year
  6. Will come back with firm plans in 2 quarters, by around the time of demerger

Demerger

  1. All music rights will be under music company, and films rights will be under films company
  2. We have separate staff even today for both the divisions, so staff will be split accordingly
  3. Management responsibilities of both the company will be shared by promoter family
  4. Demerger should be complete within next 2 quarters

Corporate Governance

  1. Lack of corporate governance in bollywood related companies is more of a perception problem
  2. We have been listed since 2001, we have seen several ups and downs, financially and business wise. We were ravaged by piracy and other challenges, but we continued focussing on the core business
  3. Even when several companies have mishandled their finances, we have always focussed on creating good business. Only those companies which have created solid content will stand in the long run, rest will vanish
  4. We have 3 reputed directors on the board from leading companies
  5. We are committed to creating value for investors
  6. Succession planning - Son (Girish) is actively involved in day-to-day working of the company
  7. We did a 19 Cr buyback recently
  8. If we do not spend on content acquisition, we are open to giving substantial dividends to shareholders

DISC: Invested in Tips recently & in Saregama from lower levels.

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