Top 5 picks

R Jain, Saregama’s has not gone anywhere in last 10 years despite content monetization theme. I remember reading reports where mobile boom was supposed to take this company places. Has something changed recently which will unlock this value?

As someone said, being too early on an Idea is sometimes indistinguishable from being wrong.

Look around you - you finally have smartphones and therefor internet available on the fly. While Indian broadband speeds are still insufficient for high quality video that is not the case for music. It requires much less bandwidth. What has changed ? Technology has caught up to a point where smartphones can be bought for < 10,000 Rs. Economic models have evolved that make content monetization easier. Do you know how much revenue Youtube makes in India? It’s more than 1000 crore. That would have been unthinkable even 5 years back. There are more than 1500 full length Indian movies on YouTube. Each time you watch one or listen to a music video there and you see those irritating ads, a little over 50% of the revenue gets sent to the copyright owner (T-Series, Sony, Shemaroo, Saregama) with Google keeping the rest. That’s just one distribution channel for content. There are multitudes of them such as iTunes, Spotify, Gaana etc. And it’s apparent in the numbers and the pace will only increase from here. And as I’ve noted before, the beauty of the model requires little exertion from the so-so promoters. They just need to upload the content, strike content deals and let these distribution mediums handle the rest. The incremental revenues are practically 100% margin ones.

Earlier there was content but poorly available and accessibility was poor. Now you have content that is more easily available and demand that is going through the roof because of improved accessibility. The world has changed.

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R Jain,

As I look over your picks I got caught up by your musical note… Saregama, did you see that Rainbow Investments has picked up majority interest in the company on July 8th? I could’nt find much about them (forgive the beginner’s ineptitude, but are they a subsidiary of RPG?).

Another interesting fact for me is that the new MD seems to have good experience with Digital platforms.

Any thoughts on the above?

Disc: Not invested, but interested.

1). Yes - its an RPG company. They’ve simplified the structure by consolidating the shares held by 8 entities into one single entity owning 59% (why? I don’t know. We can speculate that it now becomes easier to sell the stake but that’s just a hunch) There are also various other corporate entities that own 20%+ shares - some of which are also likely RPG proxies. So the overall float in this stock is small - say 45 crores only.

2). new MD would do well to focus on reducing corporate flab. Demand side will take care of the rest and he’s not really responsible for the demand side, which is being essentially handled by distribution platforms like youtube, itunes etc. Actually, he doesn’t even have to do too much on the supply side - since content has already been bought. They just need to create tags, metadata and compilations etc through use of third party companies. He has to do very little. Even a fool can run this business now, in my view.

R jain,

The new CEO Vikram Mehra(IIT, IIM) is from Tata Sky and has rich experience.Mehra has the unenviable task of transforming an old-world music label into a digital business, and more importantly, expanding what is likely to be its core business in the future: films. As you rightly pointed out, not much work on the supply side. They just need to digitize and monetize the content, which has been already done to an extent by the former hear Surya Mantha. More on this link and i would not like to clutter ur thread.

Thanks for the link Krishna. Hopefully he would focus on the bird in hand (monetizing music library) first before going aggressively after the ones in the bush (movies, TV serials etc). Besides, movies are an expensive affair these days - Saregama doesn’t have those kind of resources (not yet anyway).

experience.Mehra Link: http://www.medianama.com/2014/08/223-saregama-appoints-tata-sky-cco-vikram-mehra-as-md/

R jain,

I was going through the annual reports of saregama and found that their licencing fees increased from 40 crs to 104 crs from 2009-2013. However it has been static in 2014 at 106. Do you have any idea as to why it did not grow last year.(since there has been huge growth in the digital content especially in the last 2 years) with the advent of 3G and smart phones and platforms like youtube, itunes, napster etc. Also there has been huge cut down on the cost of materials consumed/Manufacturing cost from 11 crores in FY2013 to approx 4 crs in 2014. Similarly depreciation has been reduced from 12 crores to 3 crores. Do you think this is in line with their concentrated idea to move in to the licencing model(with digitized content) and cut down the physical format.

I believe the management would be cutting down on Film business and TV softwares (low yielding and loss making) which will increase the profit significantly while concentrating on the digitized content and licencing model.

Another company in same business as Saregama- Shemaroo is coming up with an IPO with issue size of 120 crore. There is a 10% discount to retail investors.

Here is further info Business Overview An established integrated media content house in India with activities across content acquisition, value addition to content and content distribution Content Library consists of more than 2,900 titles spanning new Hindi films like Queen, Bhaag Milkha Bhaag, Dedh Ishqiya, The Dirty Picture, Kahaani, OMG: Oh My God!, Black, Ishqiya, Ajab Prem Ki Ghazab Kahani, Omkara, Dil Toh Baccha Hai, Bheja Fry 2, amongst others, Hindi film classics and titles in various other regional languages like Marathi, Gujarati, Punjabi, Bengali among others as well as non-film content One of the largest independent content aggregators in Bollywood Strengths Shemaroo, an established brand name Vast, Diverse and Growing Content Library Diversified Distribution Platforms De-risked business model Experienced Directors and Management Team Strong Relationships in the Industry Business Strategy Scaling up Content Library driven by return on investment Enhancing monetization of Content Library through existing and emerging media platforms Enhancing revenue predictability through strategically packaged sales Optimizing content monetization across its life-cycle Creating a sustainable competitive advantage through marketing strategy and moving up the value chain Risk Factor: Difficult to predict performance of a movie at box office Escalation in content cost Piracy menace

@R JAIN and others

Manjushree has been a disaster for me. Entered around 360 odd and upward averaged during the journey, when catastrophe struck. Q2 has been a complete washout with top line and bottom line, looking like as if they are in a shutdown mode. Quarterly EPS has fallen from a heady 11 to just 1. With crude prices falling, I am unable to understand how things can be this bad. The stock has been tanking since then and I expect it to come to the 2013 levels of around 200 plus. What will be the best strategy from here? Did anyone listen to the concall or post-result briefing? All inputs are welcome…thx a ton

I am not invested in Manjushree, but here is a post results briefing:

One quarter does not a trend make. Many industries with crude derived inputs have reported weak nos. Lower crude - doesn’t always mean better margins - it also means lower realizations as producers compete to share the benefits of lower cost with their customers to win business. So it drives down revenues as well sometimes. Often with a lag.

Anyway, the stock correction could also be driven by increased regulatory risk. See the attached article. Until there’s more clarity on this regulatory front, the stock may well remain weak.

http://chemicalwatch.com/21508/india-publishes-draft-ban-on-pet-bottles-for-oral-drugs

Thx Samir and R Jain.

@R Jain. Didn’t see much of your activity in forum. Missing your sane posts, like the one above

For better or worse, plans afoot to delist the Manjushree shares. See the company press release issued today. One offer at Rs 455 per share for 24% of capital.

Manjushree Technopack hits 20% upper circuit

Have rotated out of Manjushree. The position is up 1.8x since initial mention here in Jan-2014 and with the pending delisting proposal, it gives me a decent exit. I don’t mind leaving some chips on the table (it remains an interesting business).

Have moved into Fluidomat (Current price: 226). It is in some ways similar to AIA Engineering, another business that I admire. Oligopoly characteristics, technocrat founder, pricing of its products is very competitive (of the order of 1/5 to 1/10x) vis-a-vis Voith, its key MNC peer. That difference in pricing, with quality not materially different, should allow Fluidomat to gain market share from Voith, much like AIA’s did/does from Magotteaux. Fluid couplings are not a fast moving industrial good like AIA products are. Infact they are the opposite. But overtime, you build a nice pipeline of spare parts/replacement business. About half of Fluidomat’s business is of this replacement kind, recurring in nature. This business is a project kind of business, so returns will be lumpy as project wins will be. One needs to evaluate its numbers over a 4-6 quarter context, not 1-2 quarter one.It’s a slow process but one builds a pipeline over time. At 110 odd crore market cap, i find its franchise value very cheap given the essential nature of this product. Search fluid couplings on Google, and you find fluidomat is a top 10 listing. The stock currently trades at around 15 times next year’s earnings, so not expensive even on PE basis - obviously it is very cheap on market cap basis, given its widespread use in India and few players in the market. This can be a much bigger company in my view. It is only now achieving a certain critical mass to undertake bigger projects. Its capacity is misunderstood since its a project based business. They can run multiple shifts and overnight double the capacity. And at the same capacity, they can generate a much higher revenue, depending upon the complexity of the fluid couplings. The website is phenomenal and the R&D focus is apparent. The one risk is the key person risk since the founder is the prime mover of the business vision. If one can live with that risk, this is a great story. Net cash balance sheet and pays regular dividends. Last 10 years have been an impressive track record. As always, please do your own due diligence.

This is my first post, been a passive member for over a month.

Jain, I really like your posts and the your reasons behind a stock pick, been following keenly ever since I joined valuepickr. Please do share your views regularly, will help novices like me.

p.s: Being a mechanical engineer I love your last pick :slight_smile:

Dear R Jain , Please post your views on fiem industries , i have read some where that management is expecting to clock turnover 5 x from fy 14 levels by 2020

Apologies for not being able to respond. I only rarely post due to time+ constraints.Have made some changes recently.Exited the Internet names mentioned above as better opportunities became available. Have made 2-3x on each of them.

Added a new name. Technocraft (CMP 247). It’s virtues are not apparent in first level analysis but if one digs a bit deeper one sees 2 quite unique businesses where they have a competitive edge relative to competition,good margins, limited Capex needs/WC, so reasonably high RoICs in aggregate (20-80%). To be clear, these two businesses do not have pricing power but there are entry barriers allowing good sustained volume driven RoIs. The stock is uber cheap. Trades at 1/3rd the valuation of its US peer despite 3-4x the growth, much higher margins, much much lower leverage and better CF conversion. Plus the management seems ambivalent about the stock price (they care more about CFs than stock price. That’s an attitude I like). They have made mistakes here and there (who hasn’t?) but their integrity is above board, I think. The above two segments by themselves should be enough to give a multi fold return (net of the obvious drag 3rd segment). There’s also a 4th business of theirs growing 30%+ CAGR with improving margins that itself could be half the current pie in 12-18 months.

Apologies again for not being more active or being able to respond.

Disclaimer: This is not a recommendation. I am hashing out my own arguments and this page is just meant as a forum record. Please do your own due diligence if you decide to read this.

@R Jain. Thx. Technocraft looks an interesting play ( in fact, our forum has a thread on it) but from a value investing perspective, looks too diverse a firm - from drum closures to garments - almost like a holding co! Are you anticipating future demerger? Will it get the right attention?

PS - got a small tracking position

Pls suggest where to invest now.