Eros International Media (EIML) IPO Review and Analysis – Good Media Content Play available at a moderately cheap valuation

Eros International Media Limited (EIML) is  one of the biggest owners and distributors of Indian Films.It owns a Film Library of around 1000 Indian Films including some iconic titles.The Company is involved in the business of sourcing,creating and distributing media content which is mainly films.It has grown at a fast clip in the past 3-4 years though the last year was slower on account of the GFC.It is a part of the Eros Group Plc and has till now grown mainly through the financial backing and networking of its parent.There is a lot to like about this IPO and very little to dislike.The valuation on a P/E basis is also not expensive at around 19x.Given that the Indian economy is booming with Entertainment one of the hottest sectors,this is a good play on this sector.Here are some of the highlights from their DHRP

Advantages

1) Solid Content Ownership – The company’s ownership of 1000 Indian Films is its biggest USP.It also continuously buys rights of new films adding to its stock.With newer distribution channels like video on demand and mobiles to grow at an explosive space,this content library may be undervalued

2) Distribution Networks  and Talent Relationships – The Company has a good national and international distribution system.It also is connected with top Indian actors and directors producing films from top banners.

3) Huge Operating Cash Flows and Good Margins – The Company makes almost 50% PBLIDT Margin and around 10% Net Profit Margin.This 10% Net Profit Margin is deceptive because of its huge depreciation expenses.Its Operating Cash flow of Rs 250 crores dwarfs its Net Profit of Rs 88 crores.The business throws off huge amounts of cash each year which is mostly reinvested into buying more film rights

4) Good Industry Sector – The Indian Media and Entertainment Sector is expected to grow between 10-15% and is a direct play on the Indian consumption story.This might be an underestimation as the India poor graduates into the middle class

Disadvantages

Large inter group dealings – The company has major financial dealings with other companies of the Eros Group.This makes the interests of the promoters conflicted as there is  little transparency about transfer pricing within the group.The Company has derived major advantages from its parent company’s strengths though.

Competition – The Indian market potential has brought attention from international media groups like Sony etc.Also domestic competition is provided by the well funded ADAG  Group,UTV and others .

Summary

The Company is not expensively priced at around 17-19x P/E and around  5 times P/B (note real book value is much higher in my opinion).The Company has the potential grow at a good pace if it executes well in its strategy.The management has performed well till now though the future performance is uncertain.Compared to the Junk being offered in the Indian markets,this issue seems much better.