NCD ISSUE Note. Shemaroo Entertainment Ltd.

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1 Recommendation SUBSCRIBE BACKGROUND Price Band Rs 155-Rs 170 Shemaroo Entertainment Ltd (SEL) is an integrated media content house Bidding Date 16 th Sept-18 th Sept 2014 Book Running Lead Manager Registrar Sector Yes Bank & ICICI Securities Link Intime Media Minimum Retail Application- Detail At Cut off Price Number of Shares 85 Application Money Amount Payable Discount to retail 10% Consolidated FY13 FY14 Financials (Rs in Cr) Total Income EBITDA PAT Valuations Lower Band Upper Band Market Cap (Rs in cr) Diluted EPS BV/share Post P/E ratio Rs Pre P/E Ratio Rs Post Issue Shareholding Pattern Promoters 66.5% Institutions 13.1% Bodies Corporates & Public 20.4% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional 15% Retail 35% Post Issue Equity (Rs. in cr) 27.0 Issue Size (Rs in cr) Face Value (Rs) 10 Runjhun Jain Sr. Research Analyst ( ) runjhun.jain@nirmalbang.com in India with activities across content acquisition, value addition to content and content distribution. Its content Library consists of more than 2,900 titles including 700+ of perpetual rights. Perpetual Rights, allows the company to distribute content worldwide for a perpetual period across all mediums. Titles over which it has limited ownership rights are referred to as Aggregation Rights. Shemaroo brand is more than 50 years brand and has strong brand recall. The company is not involved with licensing content to cinemas but is into licensing to third party vendors such television, airplanes, and the Internet. SEL s primary distribution channels are Broadcast Syndication (Satellite, Terrestrial and Cable T), which generates over 50% of the Company s revenues, New Media (Mobile, IPTV, YouTube, etc), Home Video (VCD, DVD, Blu ray) and Others (In flight entertainment and overseas sales). Objects of the Issue Shemaroo Entertainment would be using Rs 106 cr (out of issue size of Rs 120 cr) towards funding of working capital requirement i.e. acquisition of rights. Retail investors are offered 10% discount Investment Rationale Diverse Content Library Strong growth in New Media & diversified distribution platform De-risked Business Model Well Known Brand Valuation and Recommendation Between FY11-14 SCL s revenues grew at CAGR of 18.7% while EBIDTA grew at a CAGR of 4.0% and PAT 5.9%. On the valuation front, at the given price band of Rs 155-Rs 170, SCL is commanding at PE of 15.4x 16.9x its FY14 EPS on its post issue fully diluted equity and 11.4x 12.4x on pre issue equity. EV/EBIDTA is x on post issue equity. Considering the healthy balance sheet, strong double digit growth of around 30% in new media, we recommend subscribing the issue for listing gains. Financial Snapshot FY10 FY11 FY12 FY13 FY14 Revenues %growth 56% 15% 18% 23% EBIDTA % margins 17% 22% 26% 27% 24% PAT % margins 0% 9% 12% 11% 10% Rs 170 On Pre Issue Equity 7.6 P/E Rs 170 On Post Issue Equity 16.9 P/E Rs 170 On Pre Issue Equity 12.5 Rs 170 On Pre Issue Equity P a g e

2 Business Shemaroo Entertainment Ltd (SEL) is an integrated media content house in India with activities across content acquisition, value addition to content and content distribution. Its 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!, etc., titles in various other regional languages like Marathi, Gujarati, Punjabi, Bengali among others as well as non-film content. It is one of the largest independent content aggregators in Bollywood. Shemaroo has 700+ of perpetual rights. Perpetual Rights, allows the company to distribute content worldwide for a perpetual period across all mediums. Titles over which it has limited ownership rights are referred to as Aggregation Rights. Complete Ownership Rights In-house creation Limited Ownership Rights Perpetual Rights Aggregation Rights Content Library Broadcast Syndication New Media Platforms Home Video Others Satellite Terrestrial Cable Mobile Internet OtherPlatforms VCD DVD Blu Ray In Flight Overseas Etc. Investment Rationale Diverse Content Library The company has vast and diverse content library and which is growing continuously with the addition of new releases as well as through catalogue acquisitions. As of July 31, 2014, the Company has 2918 titles including 759 Perpetual Rights out of which 355 are Hindi films. Company s content Library includes a mix of Hindi films, regional content, devotional content, and special interest content. The ongoing addition to its Content Library helps the company generate diversified revenues and reduce reliance on the success of a single film. The size, extent and diverse nature of Content Library allow the company to package and distribute a diverse portfolio of content together. 2 P a g e

3 Types of Content Perpetual Rights Aggregation Rights Total Hindi Films Regional Titles Special Interest Content Total Strong growth in New Media and Diversified Distribution Platforms The management has reiterated that the new media is growing at 30% and offering interesting opportunity to grow for the company which is already present in the segment. The company has diversified distribution platform which includes traditional platforms like broadcast syndication and new emerging platforms like Internet and MVAS. Broadcast Syndication Content owned by the company, especially films, are regularly broadcasted on various television networks. Broadcast syndication rights to television channels continues to be one of SEL s major revenue activities contributing more than 50% of the revenue in each of last five years. With channels becoming more and more competitive, content providers have experienced more bargaining powers vis-à-vis broadcasters, which have led to higher realization. MVAS The Company has entered into agreements with major telecom operators to distribute their product portfolio which inter alia includes caller ringback tones, ringtones, wallpapers, imagery, videos, games, full songs, celebrity chats, etc. As of today, the company has more than 30,000 caller ringback tones available on these platforms. SEL also distribute content through various handset manufacturers, either through pre-embeding or through their online services in addition to distribuinge/ licensing their content for embedding on memory cards, mobile phones, USB Drives and kiosks. The commencement of 3G services in India has further boosted the MVAS industry. We believe that an increased penetration and usage of 3G in India will increase the usage of digital media platforms for the purpose of entertainment, especially video, benefitting content providers companies like Internet It has agreements with various internet video destinations like YouTube, Daily Motion, Yahoo India, Spuul etc. and several services for the distribution of content on the internet to internet connected televisions, internet connected set top boxes and applications running on various devices. SEL is an official channel partner of Google Inc s YouTube and has around 32 channels like Shemaroo Movies, Shemaroo Ent and Filmi Gaane with both film and non-film content running on it. De-risked Business Model Following are factors, which de-risk the business model of the company i. Large Number of Titles: Companies revenues are not dependent on the success of individual titles or content. Given the size of their Content Library, they are able to package diverse content and improve the overall returns. ii. Width and depth of distribution Platforms: SEL monetize their Content Library by exploiting thier content over various existing and emerging distribution platforms. This reduces the dependence on any single customer or platform. Within platforms, they optimize the monetization throughout the lifecycle of the content. 3 P a g e

4 iii. Multiple genres and Types of Content It is also expanding the Content Library to include other regional content, as currently their Content Library focuses predominantly on the Hindi film segment. Further, they are also expanding their library beyond filmed entertainment content to various types of content such as special interest content, music content, devotional content, MVAS content etc. This helps them diversify their revenue mix. Well Known Brand Shemaroo brand is more than 50 years brand. We believe that over the years the Shemaroo brand has high consumer recall as being associated with quality entertainment. Their content appears regularly on several television channels and is widely available on new media platforms such as mobile and internet and across a vast network of retail outlets. This gives the Shemaroo brand a considerable and constant media visibility. Industry Prospects According to a joint report of KPMG and FICCI an industry chamber the Indian Media and Entertainment (M&E) industry grew from INR 728 billion in 2011 to INR 821 billion in 2012, registering an overall growth of 1.6 per cent and is projected to grow at a CAGR of 15 percent between 2012 and 2017 to reach INR 1661 billion. It is one sector, which responds extraordinarily to GDP growth with a multiplier. When incomes rise, more resources get spent on leisure. Rs in Bn P 2014P 2015P 2016P 2017P Television Print Film Radio Music Animation Gaming Internet Outdoor Total Size Risks and Concerns 1. Failure to source content can adversely affect our profitability and business growth: It earns revenues by exploiting content that they distribute through various distribution channels. Acquisition of content is an integral part of their business and includes content licensed from third parties on fixed term basis. There can be no assurance that, upon expiry or termination of these arrangements, content will be available to them at all or on acceptable financial or other terms. If any such relationship were to be adversely affected, or they are unable to form new relationships or renew these arrangements in a timely manner or at all, it could have a material adverse effect on their business prospects, financial condition and results of operations. 2. Cannot predict or forecast if a film will be successful: The demand for film production business depends substantially on consumer tastes or preferences that often change in unpredictable ways. There is no assured way that will help them in predicting whether any film will be successful or not. This could result in anticipated profits not being realized, which could have a material adverse effect on their business prospects, financial condition and results of operations. 4 P a g e

5 3. Illegal use of content: Media industry is highly dependent on maintenance of intellectual property rights in the entertainment content. Piracy, namely the infringement of exclusive rights in creative works, is rampant globally and has also been affected by wide spread access to technology that can easily make copies of most digital content. The rampant growing sales of such pirated goods can diminish the demand of company s products and adversely impact their brand goodwill. Piracy of SEL s content through counterfeit media, including digital versatile discs and compact discs and continued or increased unauthorized use of theirr proprietary and intellectual property could result in lost revenue, result in significantly reduced pricing power and could have a material adverse effect on their business prospects, financial condition and results of operations. 4. High Working capital Cycle: The Company has working capital of 13 months as the company sells its content in advance and recovers money over the years. This is more of industry nature as well. Valuation and Recommendation Between FY10-14 SCL s revenues grew at CAGR of 27% while EBIDTA grew at a CAGR of 38.4% and PAT grew by an impressive CAGR of 204.3%. On the valuation front, at the given price band of Rs 155-Rs 170, SCL is commanding at PE of 15.4x 16.9x its FY14 EPS on its post issue fully diluted equity and 11.4x 12.4x on pre issue equity. EV/EBIDTA is x on post issue equity. Though there are no direct listed peers to compare with (as the peers are present in production also whereas shemaroo s business is mainly content distribution), we are comparing SEL with Eros International and Balaji Telefilms. FY14 Sales EBITDA Margins % PAT EPS P/E EV/EBITDA ROE Eros International % % Balaji Telefilms % NA NA NA% Shemaroo % % Considering the healthy balance sheet, strong double digit growth of around 30% in new media, we recommend subscribing the issue for listing gains. 5 P a g e

6 FINANCIALS Profit & Loss (Rs cr) FY10 FY11 FY12 FY13 FY14 Net Sales growth % 55.6% 15.0% 18.0% 23.2% Direct Operational Exps Changes in inventories 2.3 (1.7) (43.8) (49.5) (54.0) Employee Cost Other Expenses Total Expenditure EBIDTA margins % 17.2% 21.6% 25.6% 26.7% 24.3% Interest Depreciation Other Income Profit Before Tax Tax Deferred Tax PAT margins % 0.3% 8.6% 11.9% 11.4% 10.3% Share of associted - (0.0) (0.7) (1.1) 0.1 PAT margins % 0.3% 8.7% 12.3% 11.9% 10.2% EPS Rs. (Post Issue) P/E Rs 170 NA B.V Per share P/BV Rs Debt/Equity (x) EV/Sales EV/EBIDTA ROCE % 15.7% 30.1% 35.7% 36.2% 32.4% ROE % 0.4% 15.1% 17.2% 16.5% 15.6% Source: Company data, Nirmal Bang Research 6 P a g e

7 Balance sheet FY10 FY11 FY12 FY13 FY14 Equity & Liabilities Share Capital Reserves Total Total Shareholders Funds Minority Interest Long term borrowing Deferred Tax Liabilities Long term provisions Total Non-current Liabilities Short term borrowings Trade Payables Other Current Liabilities Short term provisions Total Current Liabilities Total Equity & Liabilities Assets Fixed Assets Tangible assets Intangible assets Intangible assets u/devlop Non current investments Long term Loans & Advances Other non Current Assets Tota Non-current Assets Inventories Trade receivables Cash & Bank balance Short term Loans & advances Other current assets Total Current Assets Total Assets P a g e

8 Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt. Ltd). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e