Tips Music is a great quality play. But, valuations have to be considered. The value of any asset is the sum of all future discounted cash flows. For me, the price and value of Tips are matching right now. This has nothing to do with stock performance. The price may outpace the value in the short to medium term. But I was not comfortable in holding Tips Music anymore.
You are correct that Tips and Saregama can not be compared based on PE because their product mix is different and they have a different expensing policy.
I hope I get a chance to re-enter in the business in the future at the right valuations.
I am curious to know how did you come about indentifying true value of TIPS music.
Like whats your rational behind selling at 935?
I personally feel that it has a long way to go from here.
The industry projected size as per the managment is 12-15k crores for next 3-4 years
And if you look 10-15 years down the line the industry size can easily be 30-40 or 50 thousand crores
Assuming 10% market share for TIPS revenue for next 3-4 year comes out to be 1200-1500 crores and profit to be around 600-750 crores and it will still trade around 60-70 PE because look at the historic 10year median PE of all the consumer facing FMCG companies they are all at 60-70 median PE range.
So I believe considering such a strong bull market I believe a business like TIPS with so 100+ ROCE and 70+ ROE and 50-60% PAT margin once this story unfolds in the broader markets with many media channels covering it will explode like anything.
I feel once the euphoria hits the market will price in 10-15 years of earnings in next 2-4years
I might be wrong but I feel music industry has lots of room to grow multifold from here.
And companies like TIPS will keep on trading at high PE range of 50-70 for years to come.
The rationale behind my thesis is based on the guidance given by the management.
What I have observed from reading past 3-4years con calls and watching multiple interviews of the management is that they are quite conservative whenever they give any future guidance.
They have been saying since past year that Industry can become 12-15k crores in next 3-4 years so I get my numbers of sales and PAT from there.
Also I feel the growth rates and PAT margins that you have used in your model is too conservative.
Provided the growth potential the whole industry has.
But I feel thatâs what makes investing interesting every investor has/her own opinions.
Lets see wait and watch what happens with TIPS in the coming years.
I am fully invested though and will keep adding till on dips till the momentum in the stock continues.
Yes Yash, my estimates of growth and margins are conservative. I like to keep a bit of a margin of safety.
Tips Music is a great quality business, that generates cash at an excellent RoE and growing quite rapidly. There are not many businesses in India showing such numbers.
Even at these valuations, the business looks better than Saregama to me because of better cash allocation practices and a focused approach.
Valuation is my only problem, which I find a bit stretched right now. I also fear that I might not be able to ride the bus again.
The problem with selling sich a stock in this kind of market is that everything is overvalued. So it means choosing cash. I would value it at 60 p/e. So there is 20% downside risk that I see.
Sorry for being ignorant about Finance, but as per the excel Tips will generate PAT of 1261 Crs and exit PE is 40. Why does that not make the exit bull case market cap ~50K Crs making it a 5x opportunity from here over next 15 years? And I think the growth rates are really low - once people actually start paying for music, Tips should benefit even more.
I have taken an exit PE of 40 at FY34, when net profit is 710 Cr, making Tips valuation at 28500 Cr at the end of FY34. - This means a 2.7X from here in 10 years.
Difficult to comment on exit PE over a much longer duration for a music label like Tips. How relevant would their music library be at that time? Typically, exit PE depends on the companyâs ability to grow after that point.
But if you assume the same exit PE, It is a 5X opportunity in 15 years.
Ah understood. To be honest, I have also started trimming given valuations are extremely frothy right now. Has definitely run a few quarters ahead of earnings. The big question is where do you deploy cash?
Tiktok is still banned in India, right? Whats the strategy here? Are they expecting the ban to be lifted since India and China did away with their differences recently?
Weâve been holding this stock since my father purchased it back in 2009. Over the years, it remained in my momâs account but is now accessible through the same stock application I use for easier management. At the time, only a small quantity was purchased at an average price of âš5.50, and the stock remained stagnant until 2021.
Fast forward to today, weâre sitting on a staggering 15,917% return. This year, we sold 64% of the shares, leaving just around 125 shares. These remaining shares hold sentimental value, so I plan to keep them as a legacy. Whether the stock is overvalued or not is secondary to meâany 10-30% drawdown wouldnât matter much at this stage.
Inflation is going to stay 4 to 5 percent in coming years. Taking that into account and a consumer discretionary proxy I think the grow will sustain 15%-20% plus and exit multiple 40 will be applicable.
Thanks for sharing the article. Looks like the impact of the Warner deal is yet to be realized.
What I seem to understand about the music label business is -
The business earns money from past library. So till the library is in fashion, business will earn money.
But when the library goes out of fashion, the business may not grow. There is a risk of de-growing revenues also if a business does not reinvest sizeable sums. An extreme example of such a business is the O&G exploration business. Here if you discover Oil, wells will only give you money for the next 10-15 years, but they will deplete gradually. You need to reinvest in new discoveries.
I always feel Saregama is a bit of a sub-optimal business because its past library is out of fashion compared to Tips Music. You can see that from the daily YouTube views received by both of them.
However, Saregama is investing massively now to build their library for the future. It is debatable whether the investments are justified or not, but they target 5-year payback period.
Tips music has the inherent advantage of acquiring songs when they were cheap. Saregama is placing bets on the future.
For Tips Music, the current 1-2 years will surely be good. But I am afraid that their rate of reinvestment may still be slow for 10 years down the line. The music will not be cheaper anymore I guess. So you need to pay the prevailing prices only. Unless you launch music of new artists and it becomes successful.
Surely, the industry will benefit in long term from paid subscribers in downstream platforms.
I will be more happy if company reduces its margin a bit and reinvests more in good opportunities to keep the business sustainable.
Any other thoughts on business model?
Stance - Not invested. Actively tracking. Prices are moving towards a fair value level I guess.
Tips is generating more non film content and acquiring film content selectively which could payback in short term. Also they are using existing library to generate content by remixing songs etc. Aquiring content at higher cost with 5 years payback period is not a good business model imo. We also need to check 5 years payback at what IRR?
We should ask Tips management to proved breakup of revenue of new content eg. Revenue contribution of past 5 yearâs library or so to get idea.
The 5-year payback period refers to the amount of time it takes for an investment or project to recover its initial cost within 5 years. This metric helps investors or businesses determine how quickly they can recoup their invested funds from the cash flows or profits generated by the investment.
How It Works
The payback period is calculated by adding up the cash inflows (or savings) generated by the project or investment year by year until the total equals or exceeds the initial investment. The 5-year payback period specifically looks at whether this breakeven point can occur within 5 years.
Payback Period = Initial Investment á Annual Cash Inflows
For example:
⢠If you invest âš10,00,000 in a project and it generates âš2,00,000 annually, the payback period is:
10,00,000 á 2,00,000 = 5 years
How to Calculate in Practice
Determine Initial Investment: This is the upfront cost required to start the project or investment.
Estimate Cash Inflows: Predict the yearly revenue, savings, or cash flow the investment will generate.
Cumulative Cash Flow: Add up the cash flows year by year.
Breakeven Year: Identify the year where the cumulative cash flow equals the initial investment.
Example:
Imagine you invested âš50,00,000 in a renewable energy project that saves costs as follows:
Year
Annual Cash Inflow (Rs)
Cumulative Cash Flow (Rs)
Year 1
10,00,000
10,00,000
Year 2
12,00,000
22,00,000
Year 3
14,00,000
36,00,000
Year 4
16,00,000
52,00,000
⢠The cumulative cash flow exceeds the initial investment in Year 4. So, the payback period is 4 years.
