Shemaroo Entertainment IPO Note by ARM Research (Subscribe)

Review By ARM Research Pvt. Ltd. on Sep 16, 2014

Issue opens for subscription on 16.09.14 and will close on 18.09.14. Bids can be made for minimum 85 equity shares and in multiples of 85 shares thereafter. The price band of Rs155 – Rs170 implying a market cap range of Rs 419.1 Cr to Rs 448 Cr based on the final price determined through the book building process. A discount of 10% to the issue price is being offered to the retail individual bidders. Post issue promoters shareholding ~64%, Corporate Bodies 10 % & Public 26%.

Utilization of Funds

SEL is raising Rs 120 Cr from Maiden IPO of which Rs 106 Cr will be used as working capital i.e. expanding the library of movies and enhancing the monetization strategies on broadcast syndication of movies and digital. The remaining to be utilized for general corporate purposes including strategic initiatives, brand building exercises. A discount of 10% to the issue price is being offered to the retail individual bidders.

Lead Manger & IPO Grading

Issue is lead managed by Yes Bank Limited and ICICI Securities Limited whereas Link Intime India Pvt Ltd is the registrar to the issue. Since Issue size less than Rs 500 Cr monitoring agency is not required

Shemaroo Entertainment Limited, Founded on October 29, 1962, in Mumbai, as a book circulating library, Together with film based copyrights and other entertainment rights, the brand "Shemaroo" is synonymous with quality entertainment. It is one of the largest independent content aggregators in Bollywood.

Shemaroo Entertainment Limited, is today an established integrated media content house in India with activities across content acquisition, value addition to content and content distribution.. Over the years, the Company has successfully adapted to changing content consumption patterns by expanding into content aggregation and distribution for broadcasting on television platforms. It is continuing its expansion into New Media platforms. Shemaroo acquires content only after the movie is released from its first copyright holders (usually TV broadcasters). So essentially, Shemaroo is a trading company which buys content, re-packages and markets it to various Exhibitors.

The Content Library consists of more than 2,900 titles spanning new Hindi films like Queen, Bhaag Milkha Bhaag, Dedh Ishqiya, The Dirty Picture, Kahaani, OMG: Oh My God!, Black, Ishqiya, Ajab Prem Ki Ghazab Kahani, Omkara, Dil Toh Baccha Hai, Bheja Fry 2, amongst others. Hindi films classics like Zanjeer, Beta, Dil, Disco Dancer, Mughal-e-Azam, Amar Akbar Anthony, Namak Halaal, Kaalia, Madhumati etc., titles in various other regional languages like Marathi, Gujarati, Punjabi, Bengali among others as well as non-film content. They are one of the largest independent content aggregators in Bollywood. The company distributes its content through various mediums such as satellite, terrestrial and cable television and new age media platforms like Internet and Mobile.

Currently, the Company distributes content over which it has either complete ownership rights or limited ownership rights. Shemaroo's recent initiatives include tying up as an official channel partner for Google Inc.'s You Tube where it is managing 32channels. It is also moving beyond providing just content, to providing content management solutions to partners including Reliance Communications Re 1 WAP store and Airtel digital television in connection with an interactive devotional service, namely "iDarshan".

Strengths

  • Shemaroo, an Established Brand Name: On October 2012 "Shemaroo" brand completed its 50th year of existence. From 1962 to date, the "Shemaroo" brand has been used by company in various media related activities including books and magazines rental business, a video rental business, content aggregation, content distribution, home video distribution and content creation. Over the years the "Shemaroo" brand has high consumer recall as being associated with quality entertainment
  • Vast, Diverse and Growing Content Library: SEL has a diverse Content Library, which is growing continuously with the addition of new releases as well as through catalogue acquisitions. This enables company to distribute to platforms catering to a wide range of audiences. Co's Content Library consists of more than 2,900 titles spanning new Hindi films like Queen, Bhaag Milkha Bhaag, Dedh Ishqiya, The Dirty Picture, Kahaani, OMG etc
  • Diversified Distribution Platforms: Presence in various distribution platforms such as television, home entertainment, digital New Media and other media. Company has an extensive distribution network which is co's key strength and sustainable competitive advantage. Company is one of the few companies within the Indian media and entertainment industry to have a comprehensive distribution capability backed by an in-house television syndication team, a New Media marketing team for mobile value added services ("MVAS"), internet, DTH and IPTV, and a nationwide home entertainment distribution network.
  • Strong Relationships in the Industry: Business transactions with known names in the industry for acquisition of content such as R.K. Studios, Mukta Arts, Shree Ashtavinayak Cine Vision Ltd., Percept Limited, Venus Worldwide Entertainment Pvt. Ltd. and Boney Kapoor as well as for distribution of content with platforms such as SONY, STAR, Colors amongst others. SEL has worked with more than 500 producers of film and television content, having access to content across various media.

Business Strategy

  • Scaling up its Content Library driven by return on investment
  • Enhancing monetization of its Content Library through existing and emerging media platforms
  • Enhancing revenue predictability through strategically packaged sales
  • Optimizing content monetization across its life-cycle
  • Creating a sustainable competitive advantage through marketing strategy and moving up the value chain.

Risks

  • The objects of the issue have not been appraised by any bank / FI.
  • Company faces competition from both new as well as existing players in the films and television media segment.
  • Content production, distribution is highly regulated segment.
  • High Debtors level - Out of Rs 266 Cr revenue in 2014, more than Rs 140 crores (53%) are outstanding as on 31-03-2014. If proper provisions are made for debtors outstanding beyond 90 days, there may not be any profits.
  • Negative cash flow - in Fiscal Years 2014 and 2013, the company had negative cash flow of Rs 1,937 lakhs and Rs 107 lacs respectively.
  • Threats from piracy and other online conte
  • Co's revenues and profitability are directly linked to the exploitation and growth of co's Content Library. Any failure to source content could adversely affect co's profitability and business growth.

Strong Anchor Investor Interest

The company has raised Rs 36 crore from two anchor investors Birla Mutual Fund and HDFC MF. Anchor investors were allotted 21.17 lakh shares at Rs 170 apiece.

 


Conclusion / Investment Strategy

Shemaroo has a total inventory of Rs. 142 Cr against the total sales of Rs. 266 Cr. The high inventory is an outcome of content acquisition that has a usable life 10+ years. This inventory is slowly written off by depreciating 65% in first 5 years and another 35% in 5 years thereafter. SEL has total receivable of 180 days which are extremely high. However, after interacting with industry sources; it emerges that this is a norm in this industry. Due to a continuous pipeline of content being supplied to broadcasters the receivable cycle is fairly long. 

Shemaroo Entertainment Ltd. (SEL) is one of India's largest Film and Entertainment Content House involved in content aggregation, distribution, production and post‐production. & having film library of over 2900 films. Based on content that they have, Shemaroo will easily be able to monetize it for years through various platforms like TV Channels, DTH operators, and Internet based platforms. On the higher band Rs 170 the company is valued at P/E multiple of 12.3x of FY14 EPS & as retail clients are eligible for a 10% discount makes the IPO lucrative

Grey Market Commanding Premium ~ Rs 60 per share & expected retail oversubscription 20-25x

We advise "Subscribing" the issue for potential Listing gains...

Reviewer recommends Subscribing to the issue.

Review By ARM Research Pvt. Ltd. on Sep 16, 2014

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