Company Profile outlook on 30, 2013) - 24122013.pdfCompany Profile Eros International Media Ltd. (Eros), a part of the Eros International Group (Eros Plc.) is a leading global company

December 24, 2013

Eros International Media Limited.

Capitalizing on Movie Express…

CMP Rs.169 Target Rs.220 Initiating Coverage - BUY

SKP Securities Ltd www.skpmoneywise.com Page 1 of 13

Face Value (Rs) 10Equity Capital (Rs.Cr) 91.92M.Cap (Rs.Cr) 158152‐wk High/Low (Rs) 212.40/106.50Avg Daily Vol (in Qty) 89243BSE Code 533261NSE Code EROSMEDIAReuters Code EROS.BOBloomberg Code EROS:IN

Key Share Data

Share Holding Pattern (as on Sept 30, 2013)

Promoters74.88%

FII12.16%DII

1.87%Others11.09%

Source: BSE Key Financials (Rs.Cr) FY12 FY13 FY14E FY15ENet Sales 943.9 1068.0 1100.7 1330.4growth (%) 13.1% 3.1% 20.9%EBITDA 212.4 226.3 246.8 298.7margin (%) 22.5% 21.2% 22.4% 22.5%PAT 149.1 155.8 165 203margin (%) 15.8% 14.6% 15.0% 15.3%EPS (Rs) 16.16 16.83 17.80 21.97BVPS (Rs) 90.98 107.32 123.32 143.48Key Ratios FY12 FY13 FY14E FY15EP/E (x) 10.46 10.04 9.49 7.69P/BV (x) 1.86 1.57 1.37 1.18M.Cap/Sales (x) 1.68 1.48 1.44 1.19EV/EBITDA (x) 37.14 35.26 32.72 26.95ROACE (%) 24.7% 18.9% 17.9% 20.1%ROANW (%) 19.6% 17.0% 15.4% 16.4%ROAA (%) 12.5% 10.6% 10.1% 11.2%D/E (x) 0.52 0.39 0.37 0.30Source: Company, SKP Research Price Performance Eros vs. BSE 500

‐0.5

‐0.4

‐0.3

‐0.2

‐0.1

0

0.1Eros BSE 500

Analyst: Mamta SinghTel: +91 22 4922 6006; Mob: +91 9833003848Email: [email protected]

Company Profile Eros International Media Ltd. (Eros), a part of the Eros International Group (Eros Plc.) is a leading global company in the Indian film entertainment industry. Since the incorporation in 1994 and listing in 2010 the company is running under the guidance of Mr. Kishore Lulla, Executive Chairman and Mr. Sunil Lulla, MD. The company co‐produce, acquire and distribute Indian language films in multiple formats worldwide including theatrical, television syndication & digital platforms. Eros has aggregated rights to over 1,100 films in its library, plus an additional 700 films for which it holds digital rights only. Future outlook Capitalizing from strategized business model: Eros has strategized its business model in order to capitalize most with

minimum risk from each stream. Eros monetizes its content at a specified time frame from different streams with respect to its initial release following three types of business models for its sourcing contents i.e. Co‐Production, Acquisition and Own‐Production.

Eros generates revenues across all phases of the film release cycle. The theaters revenue contributes approx. 40‐45% of the total revenue. Its overseas distribution revenue through its parent and satellite TV licensing contributes approx. 50% (20‐25% each) and rest is contributed by music, internet channels, new media, etc.

Consistently Delivering Strong Content Slate: Eros has consistently been able to deliver 3‐4 movies annually in the

Top 10 Grossing Hindi Films at the box office. The average collection of top 3 movies for Eros has doubled from last 3 years due to the release of a movie across large number of screens and strong content.

Eros continues to expand its film content through diversified approach of acquiring a healthy mix of movies that are slated to be released.

Topline to grow at a CAGR of 12% between FY13‐15E with stable EBITDA margins: Eros has registered a 13% growth in total revenues of Rs.1067 cr in

FY13. We expect the revenues of Eros will report at a CAGR of 12% during FY13‐15E on the back of theatrical revenue, sale of satellite rights and ancillary revenue.

Going forward we expect the EBITDAM to remain stable at approx 22% for FY14E and FY15E while PAT to report Rs.163.70 cr & Rs. 201.30 cr in FY14E & FY15E respectively.

Outlook & Recommendation: Eros has a strategized business model, strong content pipeline and

new initiatives to monetize content library defining healthy financials. The India M&E industry growth at a considerable rate, greater penetration of multiplexes in Tier II and Tier III markets, increasing penetration of digital & internet subscribers and increasing disposable income together is going to prove beneficial for Eros in coming future.

We recommend ‘BUY’ rating on the stock with the 15 month target price of Rs.220 per share, implying an upside of ~30% from the CMP of Rs.169. We have arrived at the target by assigning to P/E methodology of 10x.


SKP Securities Ltd. www.skpmoneywise.com Page 2 of 13

The Industry: Overview

In 2012, the Indian M&E (Media & Entertainment) industry had an exciting year, contrasting from the rest of Indian economy having a sluggish growth due to both domestic and external factors. The government can pave the way for gradual recovery of the Indian economy by enhanced policy measures. With some improvement also likely in the global economy in 2013 & 2014, the scenario for the Indian economy also looks somewhat better. According to the KPMG‐Indian Analysis report the M&E industry grew from Rs.728 bn in CY2011 to Rs.821 bn in CY2012, registering an overall growth of 12.6%.

Global box office for all films released in each country around the world reached US$34.7 bn in 2012, up by 6% over 2011. U.S./Canada box office was US$10.8 bn in 2012, up by 6% compared to US$10.2 bn in 2011, and up 12% from five years ago. Asia Pacific the led international box office growth for all films released in 2012 registering a combine growth of plus 15% over last year. Chinese box office grew by 36% in US$2.7 bn in 2012, moving it to the largest international market ahead of Japan. European box office decreased 1%, attributable to crisis in Euro Zone including France, Italy (US$1.01 bn) & Spain (US$900 mn).

CY2012 Top 10 International Box Office Markets‐All Films (US$‐Billions)

$10.8

$2.7

$2.4

$1.7

$1.7

$1.4

$1.3

$1.3

$1.2

$1.2

$0.8

$0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0

USAChina JapanU.K.

FranceIndia

GermanySouth Korea

RussiaAustralia

Brazil

Source: IHS Screen Digest & SKP Research

Films saw robust growth of approx 21% on the back of content that addressed various consumer segments. Over 2/3rd of the world’s nearly 130,000 cinema screens are now digitalized. According to Frames 2013, KPMG report the digitization of theatres is approx 80% in India and projected to be complete in next two years – improving access for audiences and the economics for the business as a whole. Also, macro factors will enable the film industry in India to continue with its robust growth for years to come – rapid urbanization, multiplex growth and increasing sophistication in production and marketing will continue to drive revenue at near 11% for the next several years.

According to the statistics, as many as 1602 films were produced in India during 2012 a sizable

increase from the previous year 2011 when 1255 films were made. Central Board of Film Certification (CBFC) figures show that the Tamil film industry has shove out Bollywood from the number one position to gain the top slot. According to 2012 figures with as many as 262 Tamil films are on the top, while the close second position with 256 films has been occupied by Telugu films. Hindi films are on the third position with 221 films in the year 2012 which was number one position in 2011 with 206 films.

In 2012, the sector witnessed an addition of 152 new screens with major growth attributable to

expansion of multiplexes. Total number of screens now stands at 5,625 which include 1,625 multiplexes. India’s domestic theatrical revenues grew by 23.8% Y‐o‐Y basis with the footfalls returning to the big screen, contributing approx 75% to the overall Rs.112.4 bn revenue of the



Indian film industry. Digital distribution played a significant role in increasing the reach of the industry. The industry has begun penetrating Tier II and III markets and entertaining the un‐served population. All this has been made possible by leveraging technology which allows for a movie watching experience at an affordable cost and in a secure environment. Indian cinema has continued to enchant the Indian audience for almost a century now and it is expected to continue on its growth trajectory.

Indian Film Industry Performance Revenue (Rs. Bn) 2008 2009 2010 2011 2012 CAGR (2008‐12)% 2013E 2014E 2015E 2016E 2017E CAGR (2012‐17)%

Domestic Theatrical 80.2 68.5 62.0 68.8 85.1 1.5% 92.4 104.7 115.3 127.6 142.2 10.8%Overseas Theatrical 9.8 6.8 6.6 6.9 7.6 ‐6.2% 8.3 9.0 9.8 10.8 11.9 9.4%Home Video 3.8 4.3 2.3 2.0 1.7 ‐18.2% 1.4 1.2 1.1 1.0 0.9 ‐11.9%Cable & Satellite Rights 7.1 6.3 8.3 10.5 12.6 15.4% 14.1 16.2 19.1 22.8 27.3 16.7%Ancillary Streams 3.5 3.5 4.1 4.7 5.4 11.5% 6.2 7.2 8.3 9.6 11.1 15.5%Total 104.4 89.4 83.3 92.9 112.4 1.9% 122.4 138.3 153.6 171.8 193.4 11.5%Source: FICCI‐KPMG 2013 & SKP Research

Domestic theatricals will continue to be the major growth driver for the Indian film industry while Ancillary Streams will also grow rapidly although it has a smaller base. 2012 witnessed 9 films crossing the desirable Rs.1 bn mark, as compared to only 5 films in 2011. The aspirations have been set higher after the box office collection of ‘Ek Tha Tiger’ (approx Rs.1.90 bn) close to Rs.2 bn. Continuous success on the box office driven by strong content and expansion of multiplexes is expected to establish Rs.10 bn as the new benchmark for success. It is not only Hindi films which are contributing to the Rs.1 bn club but also the regional cinema. A Tamil action thriller film ‘Thuppakki’ was not only a blockbuster in the Southern market, but collected Rs.1 bn within 11 days of its release worldwide. ‘Thuppakki’ collected Rs.11.8 mn in UK and Rs.17.6 mn in USA in its first week of release. The increasing preference amongst consumers for local taste in content has seen regional cinema growing over the years.

The Overseas segment experienced a moderate growth of approx 10% in 2012. UK, USA and

Middle East together generated about 70% of the international revenues. USA, UK, Australia, New Zealand and U.A.E accounted for 98% of all the overseas revenue for the top 20 Bollywood movies of 2012. In the Tamil film industry, for the top 10 movies, Malaysia generated 75% of the revenues.

Television clearly continues to be the dominant segment, however new media sectors has also emerged as a growth driver. The impact of new media revenue for music companies reach critical mass, Youtube became a significant revenue driver, the App economy in India began to take off and OTT models (Over‐the‐top) are being experimented for TV. There is a renewed push on 3G and limited launches of 4G services – which are likely to go wider in the coming years. This should provide content companies a whole new platform to reach, entertain and – engage its audience in a country of billion.

The M&E sector in India has tremendous dynamism and growth prospective to perform at its full

potential. Increasing consumption in tier II and III cities, growing importance of regional markets, greater focus on market research, innovation in content and evolution of marketing and delivery platforms will enable the Indian M&E sector to reach new heights and become truly global. Also, the impetus introduced by digitization, continued growth of regional media, strength in the film sector and rapidly increasing new media businesses, the industry is estimated to achieve a growth rate of approx 11.8% in CY2013 to touch Rs.917 bn. The sector is projected to grow at a healthy CAGR of 15.2% to reach Rs.1661 bn by CY2017.



Company: Snapshot

Eros International Media Ltd. (Eros), a part of the Eros International Group (Eros Plc.) is a leading global company in the Indian film entertainment industry. Since the incorporation in 1994 and listing in 2010 the company is running under the guidance of Mr. Kishore Lulla, Executive Chairman and Mr. Sunil Lulla, Managing Director. The company co‐produce, acquire and distribute Indian language films in multiple formats worldwide including theatrical, television syndication & digital platforms. Eros has aggregated rights to over 1,100 films in its library, plus an additional 700 films for which it holds digital rights only. Eros has released total 231 films in last 3 years and 77 films released in FY13.

Being vertically integrated means that Eros is not only a production house but it also distributes

and finances films across formats globally via cinemas, home entertainment, television formats and new media. It also has a valuable film library containing more than 1,300 titles and contains in excess of 5,000 music videos, making it one of the largest content owners in the business.

Eros distributes to Indian multiplexes and single screen theatres through its distribution offices in Mumbai, Delhi, Chennai, Mysore and Punjab and also through sub‐distributors. The group has a distribution network that spans over 50 countries, with offices in India, UK, USA, Dubai, Australia, Fiji, Isle of Man and Singapore. The distribution capability enables Eros to target a majority of the 1.2 billion people in India, being the primary market for Hindi language films. Eros also has access to a global network for the digital distribution of content including movies, music, videos, clips and other video content. It distributes content through IPTV, VoD and online internet channels. The Eros channel on YouTube has already exceeded one billion views.

Eros has acquired 51% stake in Ayngaran International, which produces and distributes Tamil films

in India and overseas. Ayngaran has distributed various Indian‐produced Tamil films in Europe, North America and Australia having a library of over 2,000 films. It is also responsible for production of Tamil films into home media, such as VHS, DVD, and Blue‐ray disc. Ayngaran controls over 90% market share internationally having permanent screens in Srilanka, Singapore, UK, Malaysia, Paris and Canada while operating a chain of retail video stores located in Canada, France, and Singapore. The largest retail store is located in Toronto, Canada.

Eros licenses it content to major Indian television channels which are typically released on satellite

television 3‐6 months after the initial theatrical release apart from its movie library of 1100+ movies. The satellite licenses are monetised around the world through the parent company. The company has deal with the Top 4 GEC broadcasters Sony, Star Network, Colors and Zee.

Some of the major releases of Eros during 2012‐13 include Housefull 2, Cocktail, Son of Sardar and

until now for 2013‐14 Yeh Jawaani Hai Deewani, Ram Leela, R…Rajkumar were some major releases. Of the, two films (Housefull 2 and Son of Sardar) have been among the Top 10 Grossing films for the year 2012. Eros has also released some low budget films with differentiated concepts like Vicky Donor, English Vinglish. Some of the notable Tamil high profile releases include Thuppaki, Maatraan and Kadal. This shows that Eros has a diverse portfolio of films including Hindi, Tamil and other regional language films.

The Company aims to generate strong cash‐flows and is targeted towards building a strong content

slate comprising a healthy mix of low budget – high concept and high profile movies that can be monetized through various existing, new and emerging platforms. Eros has been able to develop strong relationships in the Indian film industry helping it secure and build a strong portfolio of movies. Some of the big starrer movies to which Eros has the rights include Ra One, Housefull 2, Ready, Golmaal 3, Om Shanti Om, Love Aaj Kal, Cocktail, Son of Sardar, Khiladi 786, Yeh Jawaani Hai Deewani, Krrish 3, Ram Leela, etc.



Investment Rationale:

Capitalizing from strategized business model: Eros has strategized its business model in order to capitalize most with minimum risk from each

stream. The company monetizes its content in a specified time frame from different streams with respect to its initial release in the theaters. Eros follows three types of business models for sourcing the contents i.e. Co‐Production, Acquisition and Own‐Production. The production costs of movie making have escalated by 15‐20% in 2012‐13 but the relationship agreement with its parent company Eros Plc. ensures 39% recovery of the total cost for movie making. The cost structure varies based on the budget and star cast, artist fees to form a major component of film’s budget for most large productions. Business Model

Satellite, Terrestrial TV

Music Group

Eyeqube Studious

(Prodn Planning & VFX)

EMI & Universal

HBO Asia

ErosNow

Production

End to End Distribution

India Overseas

Theatrical

& Cable TV/DTH

Digital New Media

Home Entertainment

Overseas Revenue

through the

Relationship Agreement

with its parent,

Eros International

Sourcing Content

Content Library

Co‐Production

Acquisitions

New Initiatives

Eros International Media

Source: Company & SKP Research

The company generally co‐produces 60% of its movie slate, acquires 30% of the movies from third party and produces only 10% movies on its own.

Co‐production Model is usually preferred by the company due to its valuable advantages. The company acquires the content of the movie in the initial stage of the production once the script, star cast and budget is finalized. As per the agreement, Eros finances the movie and the creative part is handled by the producer for a pre‐determined fee. In return, Eros owns worldwide distribution rights and minimum 50% share in Intellectual Property rights (IP) of the film in perpetuity. Also, the company gets a first position to receive 20% fixed profit on all the revenues collected by the movie, followed by the recovery of print and advertising costs (P&A) along with the entire investment on the movie. The remaining profits are then shared between the co‐producers in a pre‐agreed ratio that normally tends to be 50:50, 60:40 or 70:30 with Eros getting the higher share. Thus, Eros gets compensated at every stage of movie completion, thereby de‐risking its investment in the venture allowing it to simultaneously work on other projects. Less The production houses are moving into regional markets as the new generation is more receptive to non‐mainstream films and is encouraging experimentation with content. For these films, co‐production continues to be the preferred business model while being caution in teaming with the producers. Acquisition Model is beneficial due to its lower cash outflow. The company acquires movie from third party producers typically 3‐4 months before the movie is completed/released. The involvement of Eros in other aspects of production such as script, star cast is nominal as the making of movie is near to its completion. In acquisition model 35‐50% of the total acquisition cost is



payable when the film is delivered by the producer to the company and Eros tends to get distribution rights for a period of 15‐20 years along with the pre‐decided minimum guarantee price. Also, the company gets a first position to receive 20% fixed profit on all the revenues collected by the movie, followed by the recovery of print and advertising costs (P&A) of the movie. The remaining profits are then shared between the co‐producers in a pre‐agreed ratio. Own‐Production Model is least preferred by the company due to its issue of capability to yield. Though in a very small number, only 2‐3 movies made each year, the company produces movies on its own when it likes a particular script.

In October 2009, the company entered into a five year relationship agreement with Eros Plc. which

is subject to renew/review in the third quarter of FY15. According to the agreement Eros Plc. would bear 30% of the movie making cost produced by Eros with an additional mark‐up of 30% on the amount totaling to 39% of the total cost of the movie. Eros Plc. would acquire exclusive distribution rights in 50 countries for Indian films except Tamil films that Eros co‐produces, acquires and distributes in India (Nepal and Bhutan). This agreement ensures that Eros recovers 39% of the cost of the film even before the film is released which can be productively resourced elsewhere. The company has further overflow arrangement with the parent. Content Monetization Timeline for New Releases

3‐2 months prior TR

1 month from TR

2‐3 month from TR

3‐4 month from TR

4‐5 month from TR

5‐6 month from TR

1 year onwardTR 1 month from TR

Music Release

Theatrical Release (TR) Ancillary DVD

DistributionHBO Asia DTH Satellite

TelecastEros Now

Eros Library


Eros monetizes its film catalogue comprising content library of approx. 1900 of films and new releases through digital exploitation. Eros generates revenues across all phases of the film release cycle. The theaters revenue contributes approx. 40‐45% of the total revenue generation of Eros. Revenue sharing with exhibitors (screen owners of multiplexes and single screen) depends on the pre‐determined ratio (week after week of movie release) after deducting entertainment tax, indirectly also sharing the box‐office collection risk of the movie released. Its overseas distribution revenue through its parent and satellite TV licensing contributes approx. 50% (20‐25% each) and rest is contributed by music, home entertainment, internet channels, new media, etc.

Indian films are also well appreciated in overseas market. Eros Plc. distributes movies, especially big

budget movies & star‐cast movies that have huge fan following in the countries which have considerable Indian population living there. Eros Plc. also distributes Indian films that are dubbed in various foreign languages. Eros is also capitalizing on the popularity of Indian films in the growing South East Asia market.

According to Frames 2013, KPMG report the television industry in India is estimated to grow at a

CAGR of 18% over 2012‐17, to reach Rs.848 bn in 2017. There is an intense competition between TV channels specially the GEC channels to raise the GRPs (Gross Rating Points) of channels. Broadcasters have turned to acquire movies to increase their viewership, working in favor of IP right owners like Eros. Eros can monetize its library with minimum risk and recover a considerable amount of cost invested in the movie even before the movie is released. In 2012, Colors, Viacom18's entertainment channel, had struck an Rs.95 cr exclusive deal with Eros to acquire a slate of 7‐9 forthcoming movies. India currently has a low smart phone penetration and low data usage as compared to the developed countries. Growing internet penetration and higher data usage per subscriber would be a growth driver for ancillary revenue streams. All the DTH subscribers have pay per view available on their platform. Last year, Eros has also launched a subscription based portal Erosnow.com for online viewing of movies.



Consistently Delivering Strong Content Slate: Eros has consistently been able to deliver 3‐4 movies annually in the Top 10 Grossing Hindi Films at

the box office. The company has appointed a Greenlight board for reviewing the creative criteria as well as the financial criteria of the film. The average collection of top 3 movies for Eros has doubled from last 3 years due to the release of a movie across large number of screens and strong content strategy. In 2012, 152 new screens were added, totaling to 5625 screens with major growth attributable to expansion of multiplexes. The company is successfully executing the strategy of diversifying its movies portfolio with a healthy mix of modest budget‐high concept films and high profile‐big star cast films.

Production houses are now focusing on strong content, small budgets and non‐star films with aggressive marketing and distribution spends. Vicky Donor and English Vinglish, illustrated new trend that smaller budget, high concept films can achieve higher returns at box office and other channels of distribution, provided they are marketed and distributed like big high profile films. As part of strategy Eros will continue to support smaller budget, high concept films, which ensures limited downside with unlimited upside.

The company has associated itself with key production houses for acquisition/co‐production of the

movies. Some of its alliances include Red Chillies (Shah Rukh Khan), Excel Entertainment (Farhan Akhtar), Illuminati films (Saif Ali Khan), Dharma Production (Karan Johar), etc. The company’s performance was marked by the success of movies in FY13 like Housefull 2, Cocktail, Son of Sardar, Khiladi 786, etc. and also Tamil based films Maatran & Thuppaki all of which have been monetized over multiple distribution platforms.

Eros has already released 42 films in the first half of FY14, which include 11 Hindi and 15 Tamil &

rest are other regional languages. Eros has an impressive list of movies released like ‘Raanjhanaa’, ‘Go Goa Gone’, ‘Yeh Jawaani Hai Deewani’, etc. and overseas release of ‘Grand Masti’ & ‘Krrish 3’all of which had a strong theatrical release.

‘Raanjhanaa’, a high concept‐modestly budgeted film, earned phenomenal success at the box

office, achieving an impressive gross box office collection of more than Rs.100 cr worldwide. ‘Yeh Jawaani Hai Deewani’, was distributed overseas by Eros Plc, reported a commendable box office collection of more than Rs.60 cr released in multiple international markets. ‘Go Goa Gone’, reported a gross box office collection of approx Rs. 42 cr worldwide.

The performance of first half of FY14 was also backed movies released like ‘Fukery’, ‘Lootera’,

‘Shoot Out At Wadala’, ‘Ek Thi Dayan’, ‘Phata Poster Nikla Hero’, ‘Rangeelay’, etc. Also its recent releases ‘Ram Leela’ and ‘R…Rajkumar’ earned phenomenal success at the box office. ‘Ram Leela’ was released worldwide in over 3,500 screens grossed Rs.68.58 cr in India and Rs.25 cr (US$4 mn) in the overseas markets in its opening weekend. ‘R…Rajkumar’ in its opening weekend grossed Rs.39.77 cr in India released across 2900 screens and Rs.6 cr overseas released across 300 screens.

Eros continues to expand its film content through diversified approach of acquiring a healthy mix of

movies. In the current future slate there are several high profile movies lined up like ‘Jai Ho’, ‘1’ ‘Kochadaiyaan’, ‘Happy Ending’, etc. and a number of high concept movies that are slated to be released in FY 2015.



Content Pipeline

Movie Star Cast Director ReleaseEk Thi Dayan Emraan Hashmi & others Kannan Iyer FY14

Shoot Out At Wadala Anil Kapoor, John Abraham & others Sanjay Gupta FY14

Go Goa Gone Saif Ali Khan & others Raj Nidimoru, Krishna D.K. FY14

Yeh Jawani Hai Deewani Ranbir Kapoor, Deepika Padukone & others Ayan Mukerji FY14

Fukrey Pulkit Samrat, Ali Fazal, Manjot Singh & others Mrighdeep Singh Lamba FY14

Raanjhanaa Dhanush, Sonam Kapoor Anand Rai FY14

Lootera Ranveer Singh, Sonakshi Sinha Vikramaditya Motwane FY14

Rangeeley Jimmi Shergill & others Navaniat Singh FY14

Bajatey Raho Tushar Kapoor & others Shashant Shah FY14

Warning (3D) Santosh Barmola, MadhurimaTuli & others Anubhav Sinha FY14

Ram Leela Ranveer Singh, Deepika Padukone Sanjay Leela Bhansali FY14

Singh Saab The Great Sunny Deol Anil Sharma FY14

R... Rajkumar Shahid Kapoor, Sonakshi Sinha Prabhu Deva FY14

Dekh Tamasha Dekh Satish Kaushik & others Feroz Khan FY14

Jai Ho Salman Khan, Tabu Sohail Khan FY14

1 Mahesh Babu, Kriti Sanon Sukumar FY14

Happy Ending Saif Ali Khan, Ileana D’Cruz Raj and DK FY14

Dishkiyaaoon Sunny Deol, Harman Baweja Sanamjit Singh Talwar FY14

Purani Jeans Aditya Seal Tanushree Basu FY14

Illuminati Untitled Armaan Jain Arif Ali FY14

Ku Ku Mathur Ki Jhand Ho Gayi Siddharth Gupta, Simran Kaur Mundi Aman Sachdeva FY14

Kochadaiyaan Rajnikanth, Deepika Padukone Soundarya Rajnikanth FY14

Chalo China Lara Dutta, Vinay Pathak ‐ FY15

Tanu Weds Manu Season 2 R. Madhavan, Kangana Ranaut Anand Rai FY15

Untitled (Okkadu remake) Arjun Kapoor, Sonakshi Sinha Boney Kapoor FY15

Sarkar 3 Amitabh Bachchan, Abhishek Bachchan Ram Gopal Varma FY15

Rana Rajnikanth K.S.Ravikumar FY15

Untitled ‐ R.Balki FY15

Bajirao Mastani ‐ Sanjay Leela Bhansali FY15

Tamil Untitled Rajnikanth ‐ FY15

Aankheen 2 Abhishek Bachchan Apoorva Lakhia FY15

Untitled Paresh Rawal, Amit Sadh, Konkena Sen ‐ FY15

Illuminati Untitled Saif Ali Khan Saket FY15

3 films Endemol India Various ‐ FY15

3 films Phantom films Various ‐ FY15Source: Company & SKP Research



Unlocking value of content from new distribution platforms HBO & ErosNow: Eros & HBO Asia:

In February, 2013 Eros and HBO Asia jointly launched two new premium advertising‐free movie channels that will showcase compelling content from Hollywood and Bollywood. The channels HBO Defined and HBO Hits went live on the DISH and AIRTEL DTH platforms in India and are expected to launch on other DTH and digital cable platforms later in the coming years. The deal offers a lucrative way of monetizing its huge content library.

Eros would provide 10‐12 premiers per year after their initial theatrical release and DVD distribution. The strategy is to introduce a new window for premium television between theatrical and free satellite television. Additionally, Eros will also provide 100 movies per year from its library of movies to HBO Asia which will include Hindi as well as other regional movies. The channels will showcase approx. 30% Bollywood content along with other regional languages while the balance 70% would be Hollywood content. The Hollywood content would be provided mainly by Paramount and Warner Brothers.

The 50% of the revenues earned from the paid viewers will be the profit share of DTH/Cable

operator and rest 50% is the Channel’s revenue. The 50% Channel’s Revenue is further divided between the three content providers Eros, Paramount & Warner Brothers having an equal share of 16% each (total 48%). Also, Eros & HBO Asia will equally share (50:50) the profits from the remaining 52% after HBO recovers its incurred operational expenses for the two channels. The collaboration provides a huge upside for Eros as it can monetize its content library with minimum cash outflow (if any). The profits earned from this deal would directly flow to the Profit before Tax (PBT) of Eros.

The premium channels have started to receive an encouraging response as it is also available on

digital cable platforms such as Hathway & GTPL. Eros is expecting that it would take another 2‐3 years to penetrate the existing digitized subscribers base. Although the company has not specified an exact timeline and subscriber base, the prospects of this collaboration based on the early response from subscribers will unlock the value of the content catalogue as it grows. It is very early to predict the revenue generation from these distribution platforms therefore, we have currently not included the financials of these segments into our estimates.

ErosNow: The company’s new initiative Eros Now is an online entertainment portal for free subscription that

will showcase the film library, music videos, audio tracks and regional programming on demand. The company also added a host of Bollywood titles acquired from UTV and Viacom. It also showcases the latest release for premium subscribers. As the broadband connectivity in India grows, with the advent of 3G and 4G, and as mobile smartphones and tablets gain popularity, ErosNow, will gain popularity amongst consumers and will help monetize the content library with another distribution platform.

These new initiatives of the company depend on the subscription base of new channels and internet penetration. Although these distribution platforms seem to be lucrative in coming future. We expect that HBO Asia & ErosNow will have a slow growth in their initial phase and take some time to escalate, hence we have currently not included these segments in our projections.



Financial Outlook:

Topline to grow at a CAGR of 12% between FY13‐15E with stable EBITDA margins: Eros has registered a 13% growth in total revenues of Rs.1067 cr in FY13. The performance in the

revenue is mainly driven by the theatrical release of movies released in the wide number of screens, strong content portfolio and TV syndication revenue. Eros has consistently been able to deliver 3‐4 movies annually in the Top 10 Grossing Hindi Films at the box office. We expect the revenues of Eros will report at a CAGR of 12% during FY13‐15E on the back of theatrical revenue, sale of satellite rights and ancillary revenue.

The company focuses on investing in high concept‐modestly budgeted movies that yield high returns along with its operational efficiencies. Going forward we expect the EBITDAM to remain stable at approx 22% for FY14E and FY15E whereas PAT to report Rs.163.70 cr & Rs.201.30 cr in FY14E & FY15E respectively.

Revenue & Revenue Growth EBITDA & EBITDAM

706.97

943.88

1067.95

1100.67

1330.40

0%

10%

20%

30%

40%

0.00200.00400.00600.00800.001000.001200.001400.00

FY11 FY12 FY13 FY14E FY15E

Revenue Growth

Revenue (In Cr) G

rowth

(%)

156.14

212.39

226.27

246.77

298.67

20%

21%

22%

23%

0.0050.00

100.00150.00200.00250.00300.00350.00


EBITDA EBITDAM (%)

EBITDA(In Cr)

EBITD

AM (%

)

Source: Company & SKP Research Source: Company & SKP Research

Net Profit & NPM Return Ratio

118.21

149.11

155.81

163.70

201.93

13.5%14.0%14.5%15.0%15.5%16.0%16.5%17.0%

0.00

50.00

100.00

150.00

200.00

250.00


Net Profit NPM (%)

Net Profit(In Cr)

NPM (%

)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%


ROACE (%) ROANW (%) ROAA (%)

Source: Company & SKP Research Source: Company & SKP Research

On account of moderate growth in revenue, strong content pipeline and distribution platforms

together will lead the company to sustain its healthy return ratios during FY14‐15E.



Key concerns: Contribution from theatrical revenues is higher than other segments, thus the performance of

the movies released is highly significant which otherwise will affect the return ratios. Delay in completion of projects. Unforeseen disputes with the production houses. Unforeseen disputes/ Negotiations with multiplex & single screens for revenue sharing will

affect the company. Increase in Content prices will affect the margins.

Valuations:

Eros has a strategized business model, strong content pipeline and new initiatives to monetize content library defining healthy financials. The India M&E industry growth at a considerable rate, greater penetration of multiplexes in Tier II and Tier III markets, increasing penetration of digital & internet subscribers and increasing disposable income together is going to prove beneficial for Eros in coming future. One year forward P/E Band

0

50

100

150

200

250

300

Price 7.50x 10.00x 12.50x 15.00x


We recommend ‘BUY’ rating on the stock with the 15 month target price of Rs.220 per share, implying an upside of ~30% from the CMP of Rs.169. We have arrived at the target by assigning to P/E methodology of 10x.



Financial Performance: (consolidated)

Income Statement (March Ending) (Rs.Cr) Balance Sheet (March Ending) (Rs.Cr)Particulars FY12 FY13 FY14E FY15E Particulars FY12 FY13 FY14E FY15ENet Sales (Revenue) 943.88 1067.95 1100.67 1330.40 Equity Capital 91.74 91.92 91.92 91.92Operating Expenditure 731.49 841.68 853.90 1031.72 Reserves 742.87 894.58 1041.65 1226.94EBITDA 212.39 226.27 246.77 298.67 Networth 834.61 986.50 1133.57 1318.86Dep & Am 6.00 6.45 6.90 7.76 Minority Interest 6.41 7.69 7.69 7.69EBIT 206.39 219.82 239.87 290.91 Deferred Tax Liabilities (Net) 103.68 155.63 155.63 155.63Interest 13.44 9.22 10.48 9.93 Long term debt 436.24 384.08 419.08 397.08EBT 192.95 210.60 229.39 280.99 Sources of Funds 1380.94 1533.90 1715.97 1879.26Other Income 19.30 6.40 9.36 13.17 Gross Block 1905.40 2655.71 3345.71 4045.71PBExp items 212.25 217.00 238.75 294.16 Less: Depreciation 1375.12 1863.45 2316.12 2832.76Exceptional item 0.00 0.00 0.00 0.00 Net Fixed Assets 956.78 1230.90 1475.36 1721.83PBT 212.25 217.00 238.75 294.16 Investments 8.00 8.00 8.00 8.00Tax 63.14 61.19 74.01 91.19 Deferred Tax Assets (Net) 1.45 2.16 2.16 2.16PAT 149.11 155.81 164.74 202.97 Current Asstes 426.58 391.41 420.22 433.69Less: Minority Interest 1.27 1.28 1.28 1.28 Cash and Bank Balance 300.36 172.50 112.19 114.29Adj PAT 147.84 154.53 163.46 201.69 Total Current Assets 726.94 563.91 532.41 547.98EPS (Rs.) 16.16 16.83 17.80 21.97 Total Current Liabilities 312.23 271.07 301.96 400.71BV (Rs.) 90.98 107.32 123.32 143.48 Uses of Funds 1380.94 1533.90 1715.97 1879.26

Cash Flow Statement (Rs.Cr) Ratio AnalysisParticulars FY12 FY13 FY14E FY15E Particulars FY12 FY13 FY14E FY15EPBT 212.25 217.00 238.75 294.16 Earning Ratio (%)Depreciation 353.69 475.62 476.90 507.76 EBITDAM 22.50% 21.19% 22.42% 22.45%Interest Expense 13.44 9.22 10.48 9.93 NPM 15.80% 14.59% 14.97% 15.26%Other (Inc)/Dec (19.30) (6.40) (9.36) (13.17) ROACE 24.74% 18.86% 17.92% 20.11%(Inc)/Dec in WC (62.65) (5.99) 2.08 85.28 ROANW 19.65% 16.97% 15.42% 16.45%Taxes Paid (63.14) (61.19) (74.01) (91.19) ROAA 12.51% 10.60% 10.06% 11.22%Operating Cash Flows 434.29 628.26 644.84 792.76 Valuation Ratio (x)Capital Expenditure (531.62) (749.74) (721.36) (754.23) P/E 10.46 10.04 9.49 7.69Other Income 19.30 6.40 9.36 13.17 P/BV 1.86 1.57 1.37 1.18Investing Cash Flows (512.32) (743.34) (712.00) (741.06) EV/EBITDA 37.14 35.26 32.72 26.95Inc/(Dec) in Debt 197.51 (52.16) 35.00 (22.00) EV/Sales 8.36 7.47 7.34 6.05Inc/(Dec) in Capital 2.14 5.21 0.00 0.00 Balance Sheet RatioInterest Paid (13.44) (9.22) (10.48) (9.93) D/E 0.52 0.39 0.37 0.30Dividend Paid incl Tax 0.00 (16.39) (16.39) (16.39) Current Ratio 2.33 2.08 1.76 1.37Minority Interest (1.27) (1.28) (1.28) (1.28) Interest Coverage 15.36 23.84 22.89 29.31Other Adjustments 49.91 61.06 0.00 0.00 FA Turnover Ratio 1.09 0.98 0.81 0.83Financing Cash Flows 234.85 (12.78) 6.85 (49.60) Inventory Days 3 4 4 4Chg in Cash & Cash Equ. 156.82 (127.86) (60.31) 2.11 Debtors Days 73 79 75 70Opening Cash Balance 143.54 300.36 172.50 112.19 Creditors Days 40 62 62 62Closing Cash Balance 300.36 172.50 112.19 114.29 DuPont Analysis

PAT/ PBT 0.70 0.71 0.68 0.69PBT/ EBIT 1.03 0.99 1.00 1.01EBIT/ Net Sales 0.22 0.21 0.22 0.22Net Sales/ Total Assets 0.68 0.70 0.64 0.71Total Assets/ Equity 1.65 1.55 1.51 1.42ROE (%) 17.71% 15.66% 14.42% 15.29%




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Documents

Company Profile outlook on 30, 2013) - 24122013.pdfCompany Profile Eros International Media Ltd. (Eros), a part of the Eros International Group (Eros Plc.) is a leading global company