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• Price range: Rs 155 – 170
• Date Sept 17, 2014 and IPO Period:  16-18 Sept 2014
• Industry – Media & Entertainment
• Small Cap with 457 cr. mkt cap
• Advice: Avoid IPO

 

Summary:

• Shemaroo is engaged in entertainment media content aggregation and distribution.
• It has a good library consisting of more than 2,900 titles.
• While there is Growth in overall financials, we are concerned about rising debts, negative cash flows and a stressed balance sheet.
• Funds from the IPO will be aimed more at working capital rather than growth opportunities.
• Avoid this IPO. It may be better to revisit this company after a few quarters to see performance before investing. 

Here is a note on Shemaroo Entertainment Ltd (Shemaroo) IPO.

IPO Highlights

• Shemaroo plans to raise 120-132 cr from the IPO market through an issue of new shares at a price range of 155 – 170. There are 77.4 lakh shares on offer. Period of offer is 16 – 18th Sept 2014.
• Of these 50% is allocated to Institutions, 15% to non-Institutions and 35% to retail.
• There is a 10% discount for retail investors, so their price band is Rs 139.5-153/ share.
• Objects of the fundraising – Shemaroo will use 106 cr. for working capital and the rest for general corporate purposes. It plans to use 80 cr. in FY15 and Rs 26 cr. in FY16.
• Valuation – the P/E range is 11.3-12.4 times its FY14 EPS, at the Lower-Upper of IPO price range.
• Price to Book Value is at 1.8-1.9 times for FY14, which is fair.
• Subscribers may bid for a minimum 85 shares or thereafter in multiples of 85 shares.
• News – the company has raised 36 cr. from two anchor investors — Birla Mutual Fund and HDFC MF. Anchor investors were allotted 21.17 lakh shares at Rs 170 apiece.

Introduction

• Shemaroo is a Mumbai based firm engaged in media content aggregation and distribution. It started as a book circulating library in 1962, then Video cassettes and DVDs, and has evolved into its current form over the last 52 years.
• Revenues in FY14 were Rs 266 Crores with a net profit of 27.1 Cr.
• It has a content library of 2,900 titles with segments like Hindi Film Titles, Regional Film Titles and Special Interest Contents such as Kids documentary, devotional contents, etc. See Fig 1. This content is distributed and sold over TV, mobile, Internet, DTH, home entertainment and other media.
• The leadership team is Buddhichand Maroo – Chairman and Raman Maroo – MD.
• It has recently become a channel partner for Google’s You Tube and manages 32 channels.

Business and Industry Notes

• Shemaroo’s Media content library creation and distribution processes are mapped in Fig 2.

• Shemaroo is engaged in aggregation, Production and Co-Production of Cinematograph Films, Dramas etc., and subsequently exploiting and distributing rights of Films, Dramas across the world through various medium such as television licensing, DVD and VCD release.
• The company’s activities spans across content acquisition, value addition to content and content distribution. Apart from home video the company is providing content for partners such as –
  • Airtel digital television with an interactive devotional service, namely ‘iDarshan’
  • British Telecom’s (UK) IPTV service BT Vision for their South-Asian content pack and
  • Tata DOCOMO’s video platform for 3G services.
• Industry Notes: The Indian Media and Entertainment (M&E) industry is one of the fastest growing industries in the country. The size of the Indian M&E sector increased to almost Rs 82,050 crore in 2012 from about Rs 72,840 crore in 2011, representing year-on-year growth of 12.6%.
• This growth was driven by cable TV digitization, growth of regional media, continued strength of the filmed entertainment sector, fast increasing new media businesses and new levels of transparency.
• The industry is projected to grow at a CAGR of 15% between 2012-17 to reach INR 1,66,100 crores.
• The recent 74% FDI in broadcast may be a game-changer for M&E sector. Fig 3.

Financials

• The financials are described in Fig 4. We can see that it has grown rapidly in the last 5 years.
• Revenues and EBITDA have grown 27% and 36% CAGR over last 5 years. But FY10 was a poor year for profits. In last 3 years Revenues, EBITDA, Profits and EPS are up by 19%, 13%, 12% & 14% CAGR.
• The margins are fair with Operating and Profit margins at 24.7% and 10.2% for FY14.
• The Cash Flow diagram Fig 5 shows that in the last two years, FCF has turned negative.
• The company has been paying a token dividend of 5 percent since FY 2012.

Positives for the IPO and Shemaroo

• M&E is one of the fastest growing industries in India. Demand is likely grow fast in the near future.
• They say that in modern society, ‘Content is King’, and Shemaroo is a leader in content with its vast library of digital assets.
• If Shemaroo is able to align with the right platforms and distribute its content well while keeping costs in check, there is a big demand for the uniquely Indian content with Indians, NRIs and Indophiles globally.
• Shemaroo has grown at a good rate over the last 3-5 years.
• Shemaroo’s tie up with Google Inc.’s You Tube puts it at the cutting edge of new technologies and quality distribution partners.
• Their films like ‘Omkara’ and ‘Anuranan’ were awarded National Film Awards; the ‘Baghban’ DVD made by the company won the ‘Best DVD Creation for Telecine and Authoring Excellence’ award at the DVD Disc – Tech Awards.
• Shemaroo is a good old Indian media brand and the firm has a fair reputation in the industry.
• The equity market is doing well, and investor sentiments for IPOs are positive after the success of recent offering like Wonderla Holidays, Snowman Logistics and Sharda Cropchem.
• Retail investors have been offered a 10% discount on the issue price.

Risks and Challenges

IP and legal issues:

• The M&E industry has a lot of piracy and IP related challenges. Film related piracy is rampant with grey markets releasing movies very quickly after official launches. Numerous websites, and Peer-to-Peer content sharing sites like the Pirate Bay are rapidly distributing movies without charge, undermining the assets.
• Shemaroo is an applicant for several trademarks, copyrights, and design patent applications, which are pending registration. A delay in, or failure to obtain, registration may result in company’s inability to adequately defend the Intellectual property rights (IPRs).
• The legal and policing system are important for protection of Shemaroo assets. The legal system in India is slow and still has antiquated laws. This is a challenge for Shemaroo.
• Criminal proceedings are pending against the Company. Any adverse order or direction in these cases could have adverse an impact on Company’s business and reputation.

Content Challenges: 

• The revenues and profitability are linked to the growth and exploitation of the Content Library. Any failure to source new content could adversely affect profitability and business growth.
• Every distribution platform /channel has to be evaluated for costs, revenues and security. Many platforms are avoided after such evaluation. Shemaroo can be adversely affected by rapid technological changes with respect to distribution platform.
• Intensified competition may result in content cost escalation which may restrict company’s ability to access content at favorable terms. Direct competition in India is high from Hungama Digital and Moser Baer, which will limit Shemaroo’s ability to price its subscription higher.
• Potential entry of Netflix into India. They are a very successful subscription model internet content provider successful in USA and elsewhere.
• Changing consumer tastes can have the negative impact on the business of the company.

Financial Issues: 

• Shemaroo’s inventories have risen to over ₹200 crore in 2013-14, which is a burden on the balance sheet. The piling inventories and high trade receivables have necessitated higher working-capital requirements for content acquisition.
• Shemaroo has availed secured working capital / term loans of 101 cr and unsecured loans for 91 cr. This is a visible stress on the balance sheet of the company. Consolidated finance costs have ballooned to Rs 19.2 crores in FY14. This is high.
• Shemaroo has not shared the revenue break up segments for last few years or growth rates of the same, in the Red Herring Prospectus.

Benchmarking

Shemaroo does not stand out from the peer group, and actually looks like it has low valuations.

Overall Opinion

• We like the M&E industry and its potential, especially in new media. However the challenges here are tough with piracy, archaic laws and difficult implementation.
• Shemaroo appears to have weak financials and balance sheet challenges.
• Complexity of evaluating content assets and future costs and revenues of library.
• Too many IP and legal issues as detailed earlier.
• The IPO has been 0.28 times subscribed on the first day itself, mostly by Retail. This is not a very clear signal or sign of popularity.
• Avoid this IPO.

 

Instead invest in the secondary market, where better information is available, with JainMatrix Investments that offers a high quality subscription based Investment service.

JainMatrix Knowledge Base:

See other useful reports. We have had wonderful success in our IPO/ FPO/ NFO reports.

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This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com