Content monetisation to drive Eros' earnings

Diversified revenue streams and strong movie pipeline key positives

Film production and distribution company Eros International’s scrip touched a new 52-week high of Rs 567.95 on July 2. The gain is fuelled by a healthy response to the company’s digitised content (Bollywood movies/music/TV shows) playing/downloading portal Eros Now, recent tie-ups with Chinese film companies to promote, co-produce and distribute Sino-Indian films in both countries, and the scope to increase content monetisation significantly. The buzz around a possible de-listing is another factor. The company, though, has remained silent on the de-listing buzz.

Eros Now’s subscriber base stands at 19 million currently, of which 15 million are in India. Given that large part of these subscribers are using free subscription, Eros plans to spend $10 million on marketing campaign to convert them to paid subscribers. Though some content will continue to be free, it will be supported by higher advertising revenues. Eros aims to convert its users into monthly subscribers, similar to the approach by Netflix — an American provider of on-demand Internet streaming media. Premium subscribers will get ad-free content and other benefits such as device portability, for a fee. Eros’ partnership with Chinese firms will provide the opportunity to distribute select Bollywood movies in 23,600 screens in China.

Eros’ revenues and net profit growth is pegged at 16 per cent and 20 per cent, respectively, in FY16. Ebitda margin might rise 130 basis points to 25.8 per cent on the back of increasing revenue share from non-box office, high margin revenues from music rights, satellite rights, cost recovery from parent, among others. “We expect the collective revenues from non-box office segments to grow at 24.2 per cent CAGR (compounded annual growth rate) over FY15-17 to reach Rs 686.4 crore in FY17, forming 35.2 per cent of overall revenues,” says Karan Mittal, media analyst, ICICI Securities.

“We believe that there are significant opportunities for monetisation of content on digital platforms which would provide upside triggers to our and consensus forecast. We expect Eros to see significantly re-rating from current price to earnings of 12.8 times for FY17 and assign target price to earnings ratio of 15 times FY17,” says Urmil Shah, analyst, IDBI Capital.

Eros’ movie release pipeline for FY16, which includes big-budget movies such as Bajrangi Bhaijaan and Bajirao Mastani, looks healthy. Any delay in release of large movies, increasing bargaining power of multiplexes, and any adverse change in transfer pricing agreement with parent are among key downside risks.