Strong movie pipeline, receivables key for Eros

Stock could see a bounce-back, if the collection cycle improves going ahead

Eros International Media (EIM) shed 19 per cent on Monday after analysts at US-based Wells Fargo Securities downgraded the stock of Eros International Plc (Eros; EIM’s holding company) listed on the NYSE. Wells Fargo raised concerns about the rise in Eros’ receivables on the back of spurt in revenues from the United Arab Emirates (UAE) market, Eros’ ability to meet its free-cash-flow-positive forecast for FY16 and accuracy of ErosNow user numbers.

Eros Plc’s revenues from UAE market rose to 36 per cent of its consolidated revenues in FY15 from 10-12 per cent; receivable days, too, increased 67 per cent to 269 days. Wells Fargo analysts say while receivables should drop to $150 million by the March 2016, it is difficult to ascertain the collection cycles and movement of funds, especially for deals booked in UAE. While Eros had guided for a fall in receivables from $230 million (at end of March 2015 quarter) to $150 million, analysts say it has so far collected $40-50 million of this.

However, not all analysts are worried. Those at Philip Capital say while receivables will be a key monitorable of Eros’ financial health, the issue has been known. It says Eros Plc’s receivables is partly explained by an advance recognition of dues from TV and Cable networks as well as the longer duration library content distribution to international networks. While receivable days for EIM have also increased, analysts say it is not as acute as it is in Eros Plc as the receivables are at two-thirds of revenues.

If Eros can improve its receivables position, its cashflows would increase. The key event will be September quarter results, which are expected in early November where the management could spell out more details.

While EIM has clarified to the exchanges there has been no material change in the company’s strong fundamentals, the market has reasons to feel worried. EIM’s role is that it makes movies in India for which it takes an initial upfront amount of 40 per cent of the movie production cost. EIM gets the right to market these in India and a few countries with the remaining rights belonging to Eros. Nevertheless, EIM garners a significant portion of its revenues from Eros.

EIM’s core movie business performance continues to be strong. While the near-term outlook is strong, investors will keep an eye out for improvement in receivables in the coming quarters.