batlivala & karani...shemaroo entertainment 2 b&k r esearch april 2016 index ..... page no....

INITIATING COVERAGE Shemaroo Entertainment

© B&K Securities 2016

All Rights Reserved

Attention is drawn to the disclaimer andother information on the last page

Batlivala & Karani

Attractive play on digital media growth

We initiate coverage on Shemaroo Entertainment with Outperformer rating andtarget price of Rs 410. The company is amongst the largest aggregator of films(especially Hindi) with the library of ~3,000 titles. It is expected to benefit fromrising demand from traditional and, especially, digital media – the film contentbeing a staple source for content for both. The impending boom in broadbandinfrastructure (Reliance Jio, 4G, Docsis 3.0) and launch of new video platformswould keep new media growth elevated for extended period of time. Limitedcontent risk and relatively lower reporting issues (within film distribution space)limits the risk profile of Shemaroo’s business and the stock, in our view.

Sameer Pardikar Yogesh [email protected] [email protected]+91-22-4031 7151 +91-22-4031 7275

Shemaroo has one of the largest film library comprising of 3,000 catalogtitles (including 1,700 Hindi ones). Considering the scattered ownership offilm titles in India, Shemaroo is an indispensable player in the market.

We expect new media revenues to grow at 41% CAGR over FY16-18 onrising broadband penetration and consumption. We expect traditional mediarevenues to grow at 10.5% CAGR (digitisation, new channel launches).

We expect 16% and 22% CAGR in revenues and EPS over FY16-18, withrising revenue contribution from new media would aid topline growth as wellas margins.

The stock had seen steady re-rating since the listing on back of strongexecution (new media revenue, earnings growth). Our March 2017 targetprice of Rs 410 is based on 16x FY18 EPS multiple, which is broadly similarto current one-year forward P/E.

Key investment concerns pertain to the company being in expansion mode(negative FCFs, elevated debt until FY18-19) and competition from largerand integrated film studios.

22 April 2016

Relative Performance

Share Data

Market Cap. Rs 8.6 bn (US$ 131 mn)

Price Rs 320

Target Price Rs 410

BSE Sensex 25,880

Reuters SHEM.BO

Bloomberg SHEM IN

6M avg. daily turnover (US$ mn) 0.4

52-week High/Low (Rs) 375/171

Issued Shares 27 mn

Valuation Ratios

Yr to 31 Mar. FY17E FY18E

EPS (Rs) 20.2 25.6

+/- (%) 17.1 26.8

PER (x) 15.9 12.5

PBV (x) 2.1 1.8

Dividend/Yield (%) 0.3 0.3

EV/Sales (x) 2.7 2.4

EV/EBITDA (x) 9.8 8.2

Shareholding Pattern (%)

Promoters 66

FIIs 9

MFs 3

Public & Others 22

SMALL CAP

(Outperformer)

Year to March FY15 FY16E FY17E FY18E CAGR (%)

P&L data (Rs mn) FY15-18E

Revenue 3,235 3,658 4,301 4,942 15.2

EBITDA 869 968 1,178 1,475 19.3

Adjusted net profit 423 469 549 696 18.1

Margin (%)

EBITDA 26.9 26.5 27.4 29.8 –

Adjusted net profit 13.1 12.8 12.8 14.1 –

Per share data (Rs)

EPS 17.9 17.3 20.2 25.6 12.6

CEPS 19.5 18.5 21.7 27.2 11.7

Returns (%)

RoCE 20.4 17.9 17.3 18.4 –

RoE 17.2 13.8 14.1 15.6 –

0

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Shemaroo Entertainment(Actual)Sensex

Prepared for [email protected] - Sent on Friday, April 22, 2016 2:23:02 PM

2SHEMAROO ENTERTAINMENT

B&K RESEARCH APRIL 2016

Index ...................................................................... Page No.

Investment arguments .................................................................................. 3

Outlook and valuation ................................................................................ 16

Investment concerns .................................................................................. 18

Financials .................................................................................................... 19

Company background ................................................................................ 23

Detailed financials ....................................................................................... 26




Investment arguments

Strong library of long tail film content

The film content has a long shelf life and is a staple source of content for the

fast growing TV and digital media markets in India. Shemaroo has one of the

largest film library comprising of 3,000 catalog titles (including 1,700 Hindi

ones). Considering the scattered ownership of film titles in India, Shemaroo is

an indispensable player in the market.

Library built over years

The Mumbai-based company was in a video rental business in 1979 and forayed into acquisition

of home video rights in 1987. As the business grew, the company started buying cable and

satellite rights from 1993. The business opportunity and Shemaroo’s scale expanded through

1990s on back of growth of satellite television in India. The company eventually has also

started buying perpetual rights and new media rights from mid-noughties.

Being early mover and credibility allowed Shemaroo to build a vast library of films, especially

Hindi. The company did not buy rights for newly released films, but focused on films which are

in second or subsequent cycle of monetization. At present, the company’s library has ~1,700

Hindi films, which includes marquee films released over the last 50 years.

While Shemaroo also hassignificant non-Hindi filmlibrary, the Hindi filmsaccount for ~75% of itsrevenues

Exhibit 1: Details of Shemaroo’s content library

(Numbers) Hindi films Regional films Special interest

Perpetual rights/titles (complete ownership) 366 373 42

Aggregated rights/titles (limited ownership) 1,336 750 144

Total 1,702 1,123 186

Source: Company

Exhibit 2: Some of the marquee films in the library

1950s/60s 1970s 1980s 1990s 2000s 2011 onwards

Anari (Raj Kapoor) Amar Akbar Anthony Zanjeer (Amitabh) Sarfarosh Mujhse Shaadi Karogi Queen

Mughal-E-Azam Gol Maal (Amol Palekar, Dil (Aamir Khan) Kabhi Haan Kabhi Naa Jab We Met Bhag Milkha Bhag

( Dilip Kumar) Utpal Dutt) (Shah Rukh Khan)

Madhumati Anand (Rajesh Khanna) Disco Dancer Judwaa (Salman Khan, Chalte Chalte Dedh Ishqiya

(Dilip Kumar, (Mithun) Karishma Kapoor) (Shah Rukh Khan,

Vyjaynthimala) Rani Mukherjee)

Don (Amitabh Bachchan) Namak Halaal Jab Pyar Kisise Hota Hai Phir Bhi Dil Hai The Dirty Picture

(Amitabh) Hindustani

Chupke Chupke Kaalia (Amitabh) Beta (Anil Kapoor) Black (Rani Mukherjee) Kahaani

(Dharmendra, Amitabh)

Ishqiya Oh My God

Source: Company




Details of rights and library

• Perpetual rights cover all rights (C&S, new media, Home Video) across all geographies for

lifetime.

• Aggregated rights are limited by time and/or geography and/or platform.

• Term of aggregated rights is typically for five years; however, there are rights with 10-year

term (~10% of library).

• There are several rights that Shemaroo is holding for decades through renewals.

Amongst the largest player in the market

Ownership of film titles in India is scattered across large number of film producers, aggregators

and studios. Typically, producer sells all/most rights of a film to the film distributor for a term

5-10 years at the time of release. At the end of the term, the rights revert to the producers, who

may decide to renew the rights with distributors, retain it himself or sell it to independent

aggregators like Shemaroo. While the data on film ownership is not centrally available, the list

of some of the largest holder of film rights is mentioned below.

Exhibit 3: Some large holders of film library

Name No. of titles (approx.)

Shemaroo Entertainment 3,000

Eros International 2,000

Ultra India 1,500

Source: Companies, B&K Research

Has stepped up investments

Shemaroo has stepped up investments in content acquisition over years, especially after IPO.

The company had raised Rs 1.2 bn in November 2014. The IPO proceeds as well as rising

operating cash flows allowed the company to acquire key film libraries such as Tips film library

(~30 films) and Red Chillies library (12 films). Such acquisitions will help the company to

consolidate the market as well as make its own library more contemporary.

Exhibit 4: Rising content investments*

Source: Company, B&K Research. *Includes charged as well as capitalised costs.

0.0

1.0

2.0

3.0

4.0

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

Rs

bn




Exhibit 5: Notable film acquisitions in recent times

Film producer Notable films

Red Chillies (owned by Shah Rukh Khan) Om Shanti Om, Main Hoon Na, Chalte Chalte, Phir Bhi

Dil Hai Hindustani, Asoka.

Tips Industries Ajab Prem Ki Gajab Kahani, Jab Pyar Kisise Hota Hai.

Shree Ashtavinayak Cine Vision Jab We Met, Golmaal:Fun Unlimited.

Nadiadwala Grandson Ent. Mujhse Shaadi Karogi, Judwaa.

Source: Company

Film content has long tail revenues

Shelf life of films is one of the longest among various types of content. The revenue cycle for a

reasonably strong film content is typically characterized by initial spurt (theatrical revenues, TV

premier/initial screenings), then rapid decline (no theatrical revenues, TV viewership falls) and

steady increase thereafter (viewership stabilises or steadily declines, media inflation) for a considerable

period. This trend reflects in the value of film rights as well. As per Shemaroo management, after

the sharp fall in value of rights after first five year cycle, the value typically doubles (1.8x-2.2x) in

subsequent cycle, implying ~15% annual increase (earnings call for 2QFY16).

Time

Rev

enue

s

Other revenuesSatellite revenuesTheatrical revenues

Exhibit 6: Typical revenue cycle of film content

Source: B&K Research

Aggregation adds value

As an aggregator, Shemaroo adds significant value (legal, commercial, technical) to the ecosystem

comprising of its clients (TV broadcasters, digital platforms, etc.) as well as content owners.

This makes aggregation a vital link in the ecosystem.

How Shemaroo adds value:

• Legal: Shemaroo undertakes necessary legal due diligence to ensure the title of films it

buys or sells is clear. Owing to its long presence and vast experience and relationships in

the field, it can be more effective and efficient at this than the TV broadcasters or other

platforms.

• Commercial: Shemaroo offers media platforms a single window access to large collections

of films. Through content bundling, it allows monetization of tough to sell content. Shemaroo

also helps platforms in running special programming (such as actor specific film festivals) by

cumulating relevant films acquired from different owners.




• Technical: The content needs to be processed in about 20 separate formats for

monetization across media platforms (YouTube, Google Play, iTunes, online stores of mobile

operators, etc.). The company has facilities to do this as well to improve/enhance the

quality of content (especially old ones). The reputed film production houses such as Yash

Raj utilize services of Shemaroo for their content processing requirements.

Galloping demand from new media

We expect Shemaroo’s new media revenues to grow at ~49% CAGR over FY15-

18. The growth would be driven by ongoing buoyancy in digital advertising (has

grown at 40% CAGR over CY12-15) and offtake of paid platforms such as Hooq,

Spuul and Netflix. With a vast library of long-life film content, Shemaroo can

effectively capitalise on opportunities.

New media revenues are rising sharply

The revenues from new media accounts for ~17% of Shemaroo’s revenues and has been

growing rapidly (54% CAGR over FY11-15 compared to 18% CAGR in traditional media).

The new media revenue streams of Shemaroo can be broadly classified into two buckets –

(i) Mobile operator ecosystem: These are services where billing is undertaken by the

mobile operators (For e.g. caller ringback tones, ring tones, wallpapers, imagery, videos, full

songs, etc.). Typically, the services are paid for by the end users, while Shemaroo gets a

share in revenues.

(ii) Internet ecosystem: These are services delivered over internet regardless of device.

YouTube accounts for bulk of the revenues on internet ecosystem. Other platforms include

Apple iTunes, Google play, Spuul, Hooq, etc. We believe internet-driven revenues with

account for increasing share of new media revenues going ahead.

Revenues from mobile operators were amongst the early source of new media monetisation

for Shemaroo. At present, they form 55% of overall new media revenues. As broadband

penetration started rising, the demand from internet ecosystem began to account for increasing

share of new media revenues. The growth ahead too is expected to be driven by internet.

0

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500

750

1,000

1,250

1,500

FY13 FY14 FY15 FY16E FY17E FY18E

Rs

mn

0

10

20

30

40

50

60

70%

New Media revenue (LHS) Growth (RHS)

Exhibit 7: New media revenues and growth

Source: Company, B&K Research




Video advertising driving new media revenues

Digital ad spending in India has grown by 40% CAGR in the last three years. The video

advertising has been amongst the fastest growing category, having seen a 94% CAGR in the

same period. YouTube accounts for the bulk of the video advertising in India. Rising digital

consumption can be attributed to changing consumer behaviour (‘What is on TV’ mindset to

‘what I do feel watching’) and favourable trends in the devices and internet networks. Indian

smart phone users spend on an average 3 hours and 18 minutes daily on their smart phone

versus 2 hours and 8 minutes on TV, as per a study by Ericsson Consumer Labs.

CAGR over CY12-CY1494.2

68.2

17.8

77.3

(2.9) (6.1)(20)

0

20

40

60

80

100

Video Mobile SocialMedia

Search Email Display

%

Digital ad revenue

21.7 30.1 43.5 60.10

10

20

30

40

50

60

70

CY12 CY13 CY14 CY15

Rs

bn

Exhibit 8: Digital ad spend has grown at 40% CAGR Exhibit 9: …driven by video advertising

Source: FICCI-KPMG reports

CAGR o

f 40%

Source: IAMAI, B&K Research

Shemaroo enjoys strong viewership metrics on YouTube

YouTube accounts for most of Shemaroo’s revenues from internet ecosystem (i.e. non-mobile

operator revenues). The company has over 40 channels on YouTube, few of which are amongst

the most viewed on YouTube in India (Exhibit 11). Notably, Shemaroo is among leading players

in terms of minutes per visitor, as per Comscore (Exhibit 13). More minutes per visitor is an

indicator of high viewer engagement and has positive implications on ad realisations.

The monthly views across all its channel stood at ~100 mn for the last three months and have

been growing rapidly. The company’s flagship channel, Shemaroo Entertainment (40 mn average

views per month in 2HFY16) has seen its monthly views growing 66% in FY16. The second

most viewed channel, Filmi Gaane (27 mn average monthly views) has grown by 60% in FY16,

respectively.

YouTube monthly views (mn)

0

20

40

60

80

100

120

Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16

Exhibit 10: Combined YouTube monthly views of all Shemaroo channels (mn)





Exhibit 11: Shemaroo's YouTube channels amongst the most viewed in India

Source: Social Blade

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Chu

Chu

TV

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TV

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indi

Prem

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Toy

Mas

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Film

i Gaa

ne

Monthly views

280

189

173

169

137

114

92 75 68 68 61 53 51 48 47 45 44 40 38 34 32 29 28 27

427

0

100

200

300

400

500

mn

Exhibit 12: Shemaroo's YouTube channels witnessing strong growth in monthly views

Source: Social Blade

Wav

e M

usic

Sony

Mus

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ndia

Col

ors

TV

UT

V m

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Shem

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Vik

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Prem

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Mom growth - average 12m

13.5

13.4

12.2

11.6

11.1

11.0

10.2

10.0

9.3

8.6

7.7

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5.3

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5.0

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12

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%

Exhibit 13: Shemaroo enjoys high minutes per visitor on YouTube

Channel Minutes per visitor

STAR India 27.6

T-Series Music 15.3

Shemaroo Entertainment 9.2

Eros International 8.0

Source: Comscore, Media reports

Content innovation and repackaging helps in driving views and retention

The content on Shemaroo channels comprises of full length movies, song videos*, movie clips

and repackaged content. As at end March 2016, the company had ~8,150 videos on its flagship

channel. Considering the content is not fresh and bandwidth limitations/costs in India, the

repackaging of content (see exhibit 14) is an important aspect of driving viewership count and

quality. Some of the repackaged content has generated enormous views for the Shemaroo, such

as Lata Ke Gaane (5 mn cumulative views) and Ishqiya 15 minute movie synopsis (0.3 mn).




Exhibit 14: Content innovation/repackaging by Shemaroo

Content type Description

15-mins movie Well known film covered in ~15 mins by including key sequences.

Playlists Playlists of songs as per artiste or genre or period.

Timeline Sequence of notable songs associated with an artiste over a time period.

Collection of dialogue Famous dialogues of actor or actresses.

Movie reviews/news


New digital platforms to drive video advertising and subscription revenues

Apart from established platforms such as YouTube, iTunes and Google play, India has seen

launch of several ad supported and subscription platforms. The prominent ones include

Hotstar, Netflix, Eros Now, Hooq and Spuul (Exhibit 15). Almost all platforms carry film

content to more or less extent. These platforms represent additional revenue opportunity for

Shemaroo. The company is already supplying its contents to various new platforms, including

vast library (~1,000 films) made available to Hooq. Notably, the films rights are sold to digital

platforms mostly on non-exclusive basis.

The company is alreadysupplying its contents tovarious new platforms,including vast library(~1,000 films) madeavailable to Hooq

Exhibit 15: Video streaming platforms in India

Name of Date of Owner/ Type of Revenue Monthly

platform launch promoters service model charges

YouTube May 08 YouTube Streaming Ad supported

Playstore Sep 08 Google Download/rent Pay per view

iTunes Aug 08 Apple Download/rent Pay per view

Dittoo Feb 12 Zee Entertainment Streaming Subscription Rs 150 onwards

Spuul Apr 12 Independent Streaming Ad supported, NA

pay per view,

subscription

Sony Liv Jan 13 Sony Pictures Streaming Ad supported, Rs 149

subscription

Amazon Jun 13 Amazon Download/rent Pay per view

Hotstar Feb 15 Star India Streaming Ad supported

Eros Now Jul 15 Eros International Streaming Subscription Rs 49-99

Hooq May 15 Singtel, Sony Pictures, Streaming Subscription Rs 199

Warner Bros

OZEE Feb 16 Zee Entertainment Streaming Ad supported

Lukup Media Feb 16 Lukup Media Streaming + Subscription Rs 990

broadband

VOOT Mar 16 Viacom 18 Streaming Ad supported


Several new videoplatforms have beenlaunched in the last 15months




Booming broadband infrastructure to spur the growth

Despite a strong growth in recent years, the internet ecosystem has a long way

to go. Ongoing uptake of 3G services, launch of Reliance Jio, growth of 4G

networks of mobile operators and expansion of Docsis 3.0 based cable broadband

networks are expected to bridge the gap in internet reach.

Broadband penetration has long way to go

The penetration of broadband services significant lags behind that of other media platforms

in India and broadband penetration in middle-income and high-income countries.

% of connection > 4mps9690 87

93

72

52

33

17 14 10

0

20

40

60

80

100

120

S K

orea

Japa

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Sing

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Tha

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Aus

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ia

Mal

aysi

a

Chi

na

Indo

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a

Indi

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Phill

ipin

es

%

Internet penetration

6053

46

27

868790

0

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20

30

40

50

60

70

8090

100

UK USA Japan Rus s ia Brazil China India

%

Population reached

350

12060

800

0

100

200

300

400500

600

700

800

900

TV (mn) Internet Broadband You Tube (uniquevis itors per month)

mn

Exhibit 16: Broadband reach significantly lags behind TV


Exhibit 17: India lags other countries in internet penetration and speeds

Source: KPMG-FICCI reports

3G has driven broadband penetration, but prices have been firm

Launch of 3G services in 2010 has greatly contributed to rising internet penetration and

usage. However, owing to limited competition (only 3-4 3G operators in each telecom circle),

the data charges have remained high and steady. As a result, the platform is not preferred for

consumption of long form or rich media content.




23 2325

27 27 27 2624

2728 28 27 26 25

23

0

5

10

15

20

25

30

Q1F

Y13

Q2F

Y13

Q3F

Y13

Q4F

Y13

Q1F

Y14

Q2F

Y14

Q3F

Y14

Q4F

Y14

Q1F

Y15

Q2F

Y15

Q3F

Y15

Q4F

Y15

Q1F

Y16

Q2F

Y16

Q3F

Y16

Ps/M

B

Exhibit 18: 3G prices have been firm in recent years


Reliance Jio, 4G and Docsis 3.0 are expected to boost internet reach and

consumption

With the impending launch of Reliance Jio’s bouquet of services (4G, FTTx, Wifi hotspots)

and 4G networks of more telcos, the broadband is expected to become more accessible and

affordable. Furthermore, in Docsis 3.0, the cable companies have found a potent vehicle to tap

broadband opportunity. We believe rising fixed broadband (with wifi at customer premises)

under FTTX, Docsis 3.0, wifi hotspots would lead to explosive growth of long form and rich

media content, due to low per unit prices.

Exhibit 19: Broadband revolution in the works – to drive affordability and reach

Player/Platform Description

Reliance Jio The company would have invested about Rs 1 trn by the time of its launch in

2HCY16. The company is expected to launch a full suite of services, including

mobile broadband, FTTH, wifi zones, etc.

4G 4G networks are launched selectively by Bharti, Vodadone and Idea; the networks

are expected to see a ramp-up in the coming years.

3G 3G accounts for ~120 mn broadband subscribers and witnessing ~70% YoY

growth in subscribers.

Docsis 3.0 Leasing MSOs are aggressively investing in Docsis 3.0; each of the top 5

MSOs can be expected to have ~1 mn subscribers in the two-three years time.

Source: Media reports, B&K Research




Exhibit 20: Fixed broadband to explosive growth of long form and rich media content

Tariff plans of Vodafone (Delhi) Tariff plans of DEN Networks (Delhi)

5 Mbps connection 20 Mbps connection

Data (GB) Validity Price Rs/GB/ Data Price Rs/GB/ Data Price Rs/GB/

(days) (Rs) Month (GB) (Rs) Month (GB) (Rs) Month

1 28 255 273 15 599 40 30 900 30

2 28 455 244 30 750 25 50 1,300 26

3 28 655 234 50 1,000 20 100 1,550 16

5 28 855 183 100 1,250 13

12 28 1,547 138

Source: Company websites, B&K Research

As the broadband penetration and consumption rises, the digital revenues (Ad based as well as

subscription) are expected to grow at a robust pace for an extended period of time. Globally,

digital ad revenues have already exceeded TV ad revenue and yet continue to outperform.

Traditional media to witness steady growth

While new media revenues would gallop, the traditional media revenues are

also expected to grow at a healthy pace on the back of rising demand, rising

content investments and media inflation. Traditional media revenues are set

to grow at 13% CAGR over FY14-16 and we expect it to grow at 10% CAGR over

FY16-18E.

Traditional media demand also growing

Traditional media revenues mainly comprise of revenues from sale of film rights to satellite/

terrestrial TV channels and cable TV networks (~83% of total). Digitisation has expanded the

channel carrying capacity of TV networks, which is fuelling demand and supply for new

channels. There has steady growth in the number of movie channels over the last few years.

Exhibit 21: New Hindi movie channel launches





Rising content investments

The company has stepped up its content investments over years, by newer and marquee

content, especially after its IPO. We expect these investments to yield revenues in the coming

years.

Exhibit 22: Content investments

Source: Company, B&K Research *Net refers to amount after deducting capitalised amounts.

1.041.49

1.77

2.20

2.91

3.48

0.951.16

0.880.540.500.44

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY11 FY12 FY13 FY14 FY15 FY16E

Rs

bn

Gros s Inves tments Net Inves tments *

Media inflation

As discussed earlier, the shelf life of the film content is amongst the longest. We expect monetisation

from existing library to grow at a steady rate (3-5%) reflecting the broader media inflation.

Low business risk with good earnings track record

Limited content risk, relatively lower reporting issues limits the risk profile

of Shemaroo’s business and the stock. This makes the company a clean play on

rising demand for film content on both traditional and new media.

Limited content risk

Owing to the bulky nature of film investments, the adverse content performance could

significantly mar the near-to-medium term financials and possibly preempt the long-term

potential of a company. High content risk is thus a put off for capital market investors.

However, as a strategy Shemaroo does not buy the rights of the film in the first cycle of monetisation,

where the content risk is quite high. In second and subsequent cycles, the track record of film

monetisation across platforms is fairly established and content pricing is relatively objective.

Relatively lower reporting issues

Unlike in a company engaged in new film distribution business, there is limited discretion/

subjectivity involved in the cost recognition and capitalisation decisions at Shemaroo, in our

view. The reasons are as follows:

(i) The bulk of the company operations today comprise of buying and selling of satellite

rights of the films. The rights on both sell and buy sides are mostly of five year terms. On

acquisition of a film right, the cost is recognised in balance sheet as inventory. Once the film

is sold the revenues are recognised and entire cost is charged to P&L.

(ii) Some discretion/subjectivity is involved in cost accounting in case of perpetual library.

However, perpetual titles accounts for only 40% of the inventory, as per the discussions

with the management.




(iii) Furthermore, similar discretion is involved in case of new media rights, where Shemaroo

buys rights for typically 5-year term, but monetisation takes place in shorter cycles. However,

the cost of new media rights is quite low (~20% of satellite rights) as of now. If the costs

rise, the cost accounting/recognition issues would become more important.

Long receivable and inventory cycle reflects the industry practices

A key area of observation in case of Shemaroo is the long receivable cycle – 143 days in FY15.

Long cycles are common in case of companies involved in film distribution. One of the key

reasons for this is the prevalence of forward deals, i.e. rights are bought and sold much ahead

of them becoming effective. As monetisation for clients is quite far in future (sometimes even

two-three years), the demand for longer credit periods are commonly accommodated.

Exhibit 23: Long receivable cycles are common in film distribution

Company Receivable days Data as on

Shemaroo Entertainment 145 FY16E

Eros International 135 FY16E

UTV Software Communications Ltd. 137 FY15

Source: Company

An argument can be made out that the sale transactions should be recorded on the date the

rights becoming effective. However, this has negative tax implications (delay in input credit).

Furthermore, recording transactions immediately, meets key norms for record of sale –

Shemaroo holds valid title and delivers the product (tapes/recording) to its clients.

It’s important to note that the receivables cycle has been improving, from 218 days in FY10 to

143 days in FY15. This has been on back of conscious efforts of the company and improving

sales mix – new media revenues have shorter receivables cycle. Considering the share of new

media is expected to increase going ahead, the overall receivables days can be expected to

come down.

Exhibit 24: Receivables days have been falling for Shemaroo

Source: Company

126143

194

218

195 190

100

120

140

160

180

200

220

240

FY10 FY11 FY12 FY13 FY14 FY15

The inventory and inventory days for Shemaroo have increased substantially for Shemaroo

over years. This is largely the function of rising content investments over years, especially

after IPO. So as long as the company is in the investment mode, the inventory would rise.




Exhibit 25: Content investments pushing the inventory days

Source: Company, B&K Research1.

0

1.5

1.8

2.2

2.9

3.5

3.7

3.9

4.2

0.00.51.0

1.52.02.53.0

3.54.04.5

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18ER

s bn

0

100

200

300

400

500

600

Gros s content inves tments (LHS) Inventory days (RHS)

The company records all its film rights as inventory. In fact, one could argue that some rights

(perpetual or long duration rights) should be classified as intangible asset. Inventory is the

single largest asset of the company, comprising 60% of total assets.

The inventory cycle for the company is thus a less of a working capital aspect, but more a

reflection an asset turnover. Seen in such context, sales/inventory ratio of 1.3x is not quite

extraordinary. Besides, the fact that film content has long shelf life, also explains low sales/

inventory ratio compared to other media companies.

Long track record of revenue and earnings growth

The company has been profitable in seven of the last eight years. The profitability has steadily

been rising as well – from 0.3% in FY10 to 13.1% in FY15. The RoEs have ranged between

16% and 19% during FY10-15. Given the lower reporting issues as discussed above, the

earnings and RoE track record is a good indicator of underlying trends, in our view.

Exhibit 26: PAT margin and RoE


5

6

7

8

9

10

11

12

13

14

15

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

%

5

7

9

11

13

15

17

19

21

PAT Margin (LHS) RoE (RHS)




Outlook and valuation

Stock has seen steady re-rating

In its short trading history (the stock listed in September 2014), Shemaroo’s valuations have

ranged between 9x and 18x forward P/E, with an average of 13.1x. The stock had seen steady

re-rating since the listing; it currently trades at 16.4x one-year forward P/E.

We believe re-rating is driven by: (i) strong growth in new media business (average growth of

~70% during 3QFY15-3QFY16); (ii) expectations of growth in broadband consumption

(Reliance Jio, 4G, Docsis 3.0); (3) robust earnings growth (~30% during the period).

Exhibit 27: Valuation comparisons for pay TV companies

Peer comparison: No direct comparables

There are no direct comparable companies against which valuations of Shemaroo can be

benchmarked. Eros International (not covered) comes close, but differs significantly on the key

aspect of content risk (high for Eros, low for Shemaroo). Besides, Eros International faces

overhand related to corporate governance issues. These factors can explain discount in Eros’

valuations.

Compared to valuations of media companies at large, Shemaroo’s valuations are towards to

the lower end of the range and closer to print media companies. We believe this is fair – while

Shemaroo has stronger growth outlook, print companies score high on brand strength,

profitability and cash flows. Valuation discount vis-à-vis Zee Entertainment can be attributed

to latter’s size and market position.

We believe the valuations of Shemaroo can rise as the execution pans out and the company

grows in size.

One-year forward P/E bands One-year forward P/E

Source: Company, Bloomberg Consensus, B&K Research

-2 Sd

-1 Sd

Mean

+1SD

+2SD

8

10

12

14

16

18

20

Sep-

14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

9

11

13

15

17

100

150

200

250

300

350

400

Sep-

14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16




Exhibit 28: India Media & Entertainment: Valuation summary

Mkt cap P/E (x) EPS CAGR (%) RoE (%) Net debt-to-EBITDA

(Rs bn) FY16E FY17E FY18E FY16-18E FY16E FY17E FY18E FY16E (x)

Zee TV 384 42.3 34.5 27.4 24.3 23.7 24.9 26.7 (1.2)

Sun TV 139 14.8 13.6 12.2 10.3 26.8 26.8 27.6 (0.5)

ENIL 33 35.4 37.0 27.8 13.0 13.1 11.4 13.7 0.1

DB Corp 61 18.8 16.0 13.2 19.2 23.9 25.4 27.8 (0.4)

HMVL 20 11.2 9.4 8.0 17.9 21.7 21.2 20.6 (2.9)

Jagran 54 19.3 15.0 13.5 19.6 22.9 25.2 25.7 0.0

HT Media 20 8.0 10.1 7.5 3.1 8.6 9.4 11.5 (3.6)

PVR 34 38.6 29.4 25.7 22.6 16.0 14.5 14.5 1.2

Shemaroo 9 18.6 15.9 12.5 21.9 13.8 14.1 15.6 2.3

Eros Int’l 16 5.8 4.9 4.4 15.7 15.9 15.4 17.5 1.0


Target price based on 16x FY18 EPS

Our target price implies 24% upside over the current share price. The upside is mainly on

account of earnings growth (22% CAGR over FY16-18E). Our target multiple is broadly

similar to current one-year forward P/E, but towards the higher end of its trading range since

listing. We believe the valuations could at least sustain on back of ongoing buoyancy in new

media revenues.




Investment concerns1. The company is in the investment mode: Shemaroo is building its library and

expected to incur negative free cash flows in the next two-three years. As per management

comments on 3QFY16 earnings call, the company’s inventory is expected to increase by

Rs 1.5-2 bn over the next two years. We believe the company’s net debt to rise over Rs 3

bn and net debt-to-EBITDA to remain in 2.2-2.3x range over FY16-19 (versus 1.4x in

FY15). This would keep financial risk of the company elevated in the medium-term.

Exhibit 29: Growth plans to impact medium-term financial risk

Source: Company, Bloomberg Consensus, B&K Research

(800)

(600)

(400)

(200)

0

200

400

600

800

FY15 FY16E FY17E FY18E FY19E FY20E

Rs

mn

FCF

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY15 FY16E FY17E FY18E FY19E FY20E

Rs

mn

0.0

0.5

1.0

1.5

2.0

2.5

x

Net debt Net debt EBITDA

2. Competition from larger film studios: Shemaroo could face competition from film

distribution studios if they decide to expand their catalog business. Eros International has

already built a catalog of ~1,000 films through acquisition and film production/co-

production. As studios expand and become more integrated, they could engage more in

film production or co-production activity, where they would enjoy perpetual rights or long

duration rights for content. Large studios would have advantage over Shemaroo because

of scale and ability to more effectively bundle its old and new content offerings.

3. Democratisation of new content creation: The ecosystem for content creation has

become affordable and accessible due to fall in equipment prices and emergence of multiple

platforms for promotions/monetisation, apart from traditional ones such as TV and Films.

This is driving the increase in the supply of fresh content. While the rich media content that

Shemaroo owns has a long life, the spurt in new and alternative content could have some

‘crowd out’ effect on the demand for the library content in the long-term.




FinancialsWe estimate Shemaroo’s revenues to grow at 16.2% CAGR over FY16-18 driven

by new media revenue growth. We expect its EBITDA margins to rise by ~340

bps on the back of rising revenue contribution from the high margin new

media business. We expect EBITDA and PAT to grow at 23% and 22%, respectively,

rising finance cost would pull down PAT growth to some extent.

New media to drive revenue growth

We believe Shemaroo’s revenues are set to grow by 13.1% in FY16, implying the FY13-16

CAGR of 19.4%. The new media revenues are set to post 52% CAGR during the period,

while growth for traditional media is expected to be 15.5% average.

Going ahead, we expect growth in new media is expected to sustain at ~40%/year during

FY16-18, driven by rising YouTube views and rising revenue contribution from new platforms.

We have modeled 10% growth in traditional media revenues. Our assumptions imply 16.2%

CAGR in overall revenues.

Exhibit 30: New media to drive revenue growth


1.7 2.02.4 2.9

3.0 3.43.70.1

0.20.2

0.40.6

0.91.2

0

1

2

3

4

5

6

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Rs

bn

Traditional media Digital media

YouTube contributes ~40% of new media revenues. We expect YouTube revenues to grow at

54% CAGR over FY16-18, mainly on back of growth in number of views (40% CAGR versus

50% during FY13-16). We expect growth in revenues from telecom operator driven ecosystem

to moderate from 36% during FY13-16 to 19% during FY16-18, as media consumption is

expected to shift towards operator independent platforms with rising broadband penetration.

Finally, we expect revenues from non-YouTube internet driven revenues (currently 15-20%

of revenues) to grow at 60% CAGR over FY16-18, over a low base.




Exhibit 31: New media revenue drivers

Year end Mar. (Rs mn) FY15 FY16E FY17E FY18E FY15-18E

CAGR (%)

New media revenue break-up

1. Internet eco-system 168 348 597 851 71.8

1 (a) You Tube 117 244 412 579 70.1

Monetisable views (mn) 250 451 676 879 52.1

Realisation (US$/000 views) 7.7 8.3 9.0 9.7 8.0

1 (b) Others 50 104 185 272 75.5

2. Mobile operator eco-system 205 267 327 376 22.3

Total new media revenues 373 615 924 1,227 48.7


EBITDA margins to rise by ~350 bps over FY16-18

Most of the increase would be primarily driven by rising revenue contribution from new media.

The company has large library of new media rights (~2,000) acquired and renewed over the

years. The term of the rights are typically five years, however, revenue monetisation happens in

shorter cycles. As a result, new media revenues would capture the growth in broadband ecosystem

more effectively than costs in the near-to-medium term. This will aid the overall margins.

Exhibit 32: Common-sized P&L

Year end Mar. (Rs mn) FY14 FY15 FY16E FY17E FY18E

Direct operational 83.2 90.0 95.1 85.1 79.4

Increase in inventory (20.4) (27.3) (31.8) (22.1) (18.2)

Net direct operational expenses 62.8 62.7 63.2 63.0 61.1

Staff costs 7.0 5.7 5.9 5.6 5.3

Other operating costs 5.8 4.7 4.4 4.0 3.7

Total operating costs 75.7 73.1 73.5 72.6 70.2

EBITDA 24.3 26.9 26.5 27.4 29.8

Depreciation 1.1 1.1 0.9 0.9 0.9

EBIT 23.2 25.7 25.5 26.5 29.0


Finance costs to increase

We expect gross debt to rise from Rs 1.4 bn in FY15 to Rs 3.6 bn in FY18 on the back of rising

investments in content (reflected in inventory). As a result, we expect interest cost to broadly

double over FY15-18. We have factored cost of debt at 12%.

Exhibit 33: Debt and interest costs

Year end Mar. (Rs mn) FY14 FY15 FY16E FY17E FY18E

Finance costs 192 212 243 345 423

Gross debt 1,832 1,372 2,372 3,372 3,672

Cost of debt (%) 13.1 13.2 13.0 12.0 12.0





Working capital cycle to shrink gradually

Shemaroo’s business model is working capital intensive with gross working capital and net

working days standing at 450 and 415 days, respectively, as of March 2015, having steadily

increased from 390 and 320 days in March 2011. Bulk of working capital is composed of

inventories (275 days in March 2016). Net working capital excluding inventory has ranged

between 125 and 140 during FY13-15, mainly comprising of trade receivables. We expect net

working capital days (ex-inventory) to gradually decline to 130 days by FY18, on back of rising

contribution from new media revenues (where receivables are lower).

Exhibit 34: Working capital days (excl. inventory) to decline


315332

373415

479514 531

165125 134 139 133 129 128

0

100

200

300

400

500

600


Working capital days (incl.Inventory) Working capital days (excl. Inventory)

FCF to almost break-even by FY18

Considering inventory changes as a capital investment, the company generated operating cash

flows Rs 350-600 mn during FY12-15; we expect the same to increase to ~Rs 900 mn by

FY18. The inventory rose by Rs 450-550 mn during FY12-14. The company stepped up

content investments in the last two years, resulting in higher increases – Rs 900 mn in FY15

and expected ~Rs 1 bn in FY16. We expect inventory investments to remain elevated at Rs

900-950 mn/year in FY17 and FY18 (broadly in line with management indication of Rs 1.5-2

bn over the two-year period); suggesting operations would be FCF negative in FY17 and

almost break-even by FY18.

Exhibit 35: Free cash flows to reach near break-even by FY18


(1,500)

(1,000)

(500)

0

500

1,000


Rs

mn

Operating cash flows* Capex * Free cas h flows




Steady RoE improvement expected ahead

RoE has ranged between 16% and 19% during FY11-15, but is expected to soften to ~14% in

FY16 on rising content investments. We expect RoE to rise steadily to ~16% by FY18 (new

media revenue ramp-up, rising margins). We expect that in the long-term, RoE would sustain at

16-18%.

Exhibit 36: Return ratios to steadily rise


15.614.113.8

17.216.917.1

19.3

0

5

10

15

20

25


%




Company backgroundFounded in 1962, as a book circulating library, Shemaroo Entertainment Ltd.

has evolved as a leading aggregator of film rights. It generates bulk of its

revenues from licencing content to satellite channels, but is increasingly

focusing on new media platforms such as YouTube.

Evolution of business

Shemaroo was formed in 1962 as a family enterprise by Maroo brothers (Budhichand, Atul

and Raman) and Shethias. The Maroos subsequently took over the business and started video

library in 1979. The business of the company steadily evolved over years.

Exhibit 37: Evolution of business

Source: Company websites

1962-2003

• 1962 – Started bookcirculating library in Mumbai

• 1987 – Home videodistribution started

• 1993 – Broadcast syndicationstarted

2000-2005

• 2001 – Digital postproduction started

• 2003 – Entered overseasmarkets for distribution

• 2005 – Commencedacquiring of perpetual rights

2006-2009

• 2008 – Commenced contentaggregation and distributionfor MVAS platforms

• 2009 – Commenceddistributing content over newmedia platforms like YouTube

2011 onwards

• 2011 – Achieved a total of600 perpetual right titles andconverted to Public Limited

• 2012 – Completed 50 years

• 2014 – Got listed on BSE andNSE

Current business mix

The revenues streams of Shemaroo can be broadly classified in to traditional media and new

media. Traditional media revenues mainly comprise of broadcast syndication revenues

(satellite/cable/terrestrial TV), but also include other streams such as sale of DVDs, licencing

for in-flight entertainment, international film festivals, etc.

The new media revenue streams of Shemaroo can be broadly classified into two buckets –

Mobile operator ecosystem (customer billing/payments is undertaken by the mobile operators),

and (ii) Internet ecosystem (services delivered over internet regardless of device).

YouTube accounts for bulk of the revenues on internet ecosystem. Other platforms include

Apple iTunes, Google play, Spuul, Hooq, etc. We believe internet-driven revenues with account

for increasing share of new media revenues going ahead.

Shemaroo is trying to explore new revenue opportunities such as ad free TV channel (Shemaroo

Miniplex) and content syndication in more countries. On intermittent basis. The company has

produced six movies so far – including Ishqiya, Dedh Ishqiya, Hunterrr. However, investment

in film production would be limited and selective; we believe there is movie in pipeline as of

today.




Management

Shemaroo is a largely family managed business. The first generation of management comprise

of Budhhichand Maroo (Chairman) and his brothers – Raman (MD) and Atul (Joint MD), who

are currently active in the supervisory roles. The day-to-day operations are increasingly looked

after by the second generation – Hiren Gada (Director, CFO) and Jai Maroo (Director) – the

nephew and son of Buddhichand, respectively.

Exhibit 39: Profile of select key management personnel

Name Designation Brief description

Buddhichand Chairman Co-founder of the group and associated with the Group since 1962, over 50 years of business experience,

Maroo over 30 years in media & entertainment industry.

Raman Maroo Promoter, MD Co-founder of the Group and associated with the Group since 1974. Over 40 years of business experience,

over 30 years in media & entertainment industry and instrumental in expansion into television rights

syndication and transformation of Shemaroo into a content house.

Atul Maru Promoter, Joint MD Over 30 years of experience in the media & entertainment industry, actively involved in the operations

of the company and has spearheaded various initiatives including the home video division of the company.

Hiren Gada Whole Time Director Over 18 years of work experience, over 10 years in media & entertainment industry, handles the Strategy

& CFO and Finance functions in the company regular speaker at industry forums; quoted in media on issues

pertaining to the industry.

Jai Maroo Non Executive Director Experience - four years as a software engineer and over 10 years in media & entertainment. Holds a

Masters degree in Computer Science & Engineering from Pennsylvania State University, USA, worked

with Citrix Systems Inc., USA investor in several technology ventures. Guiding the company on digital

distribution activities mainly on mobile and internet.

Source: Company

Exhibit 38: Revenue mix (FY15)


6%2%4%

13%

75%

TV licens ing

Other traditional media

YouTube

Non-YoutTube internet

Mobile operator driven




Exhibit 41: Shareholding structure and key shareholders

Name No. of shares % of total

held (mn) shares

Promoter and Promoter Group 17.9 65.8

Promoter HUF 16.1 59.1

Technology and Media Group Pte Limited (Foreign promoter) 1.8 6.7

Public shareholders 5.6 34.2

Copthall Mauritius Investment Limited 2.3 8.7

Tata Investment Corporation 0.3 1.1

Other Public 3.0 24.4

Source: BSE

Exhibit 40: Independent directors

Name Details

Ganesh Gala Graduated with a B.Com degree from the University of Bombay in 1982. He is the Managing Director of Navneet Education

Limited.

Dr (CA) Reeta She has over 27 years of experience in the field of education & administration in various capacities and is currently the HOD

Bharat Shah (accountancy) at SIES College of Commerce & Economics. She has written articles in various magazines/books and is a

regular speaker, panel member and trainer at various conferences/seminars.

Vasanji Mamania Holds a diploma in Mechanical Engineering from M.S. University, Baroda. Over 53 years of experience in various industrial

sectors including film processing, civil constructions, heavy engineering and non-ferrous metals and also co-founder of Adlabs.

Shashidhar Sinha B.Tech from IIT Kanpur and post graduate from IIM Bangalore, India Drives Advertising Standards Council of India, AAAI's

Indian Broadcasting Federation joint body on industry practices, Audit Bureau of Circulation and the Joint Industry Body set

up to monitor TV measurement CEO of Lodestar Um India.

Kirit Gala Mechanical Engineering from Mumbai in 1984, MBA from Mumbai in 1986 and doctoral research in marketing at Tennessee,

USA in 1987. Managing Director of Gala Precision Engineering Private Limited.

Source: Company websites




Detailed financials

Exhibit 42: Income Statement (Consolidated)

Year end Mar. (Rs mn) FY13 FY14 FY15 FY16E FY17E FY18E

Revenue 2,147 2,646 3,235 3,658 4,301 4,942

Operating costs

Direct operational expenses (1,767) (2,203) (2,911) (3,478) (3,660) (3,922)

Changes in inventories 495 540 882 1,165 950 900

Employee benefit expenses (165) (185) (185) (215) (240) (264)

Operating expenses (137) (155) (152) (163) (173) (181)(admin+selling for FY08)

Total operating costs (1,574) (2,003) (2,366) (2,690) (3,123) (3,468)

EBITDA 574 643 869 968 1,178 1,475

EBITDA margin (%) 26.7 24.3 26.9 26.5 27.4 29.8

Depreciation and amortisation (30) (30) (37) (34) (40) (43)

EBIT 544 614 832 935 1,139 1,432

EBIT margin (%) 25.3 23.2 25.7 25.5 26.5 29.0

Finance costs (183) (192) (212) (243) (345) (423)

Interest income 3 7 13 19 38 46

Other income 11 7 – – – –

PBT 374 435 633 710 832 1,055

Taxes (129) (163) (208) (242) (283) (359)

Effective tax rate (%) 34.4 37.6 32.9 34.0 34.0 34.0

- Current (126) (129) (222) (249) (291) (369)

- Less: MAT credit – – – 7 8 11

Fringe benefit tax

PAT before minority interest 246 271 424 469 549 696

Share of minority interest (11) 1 (1) – – –

PAT 234 273 423 469 549 696

Adjusted PAT 234 273 423 469 549 696

Adjusted PAT margin (%) 10.9 10.3 13.1 12.8 12.8 14.1

Number of shares – Basic & diluted (mn) 19.8 19.8 27.2 27.2 27.2 27.2

Number of shares – Wt average 19.8 19.8 23.6 27.2 27.2 27.2

EPS – Basic and diluted (Rs) 11.8 13.7 15.6 17.3 20.2 25.6

EPS – Weighted average (Rs) 11.8 13.7 17.9 17.3 20.2 25.6

Dividends

Dividend per share (Rs) 0.5 0.5 0.4 0.6 0.9 1.1

Total dividend payout (incl. tax) 12 12 12 20 28 35

Dividend rate (%) 50.0 50.0 36.5 6.2 8.7 11.2

Dividend payout (%) 5.0 4.3 2.7 4.2 5.0 5.1

Costs to sales ratio (%)

Direct operational expenses 82.3 83.2 90.0 95.1 85.1 79.4

Changes in inventories (23.1) (20.4) (27.3) (31.8) (22.1) (18.2)

Employee benefit expenses 7.7 7.0 5.7 5.9 5.6 5.3

Operating expenses 6.4 5.8 4.7 4.4 4.0 3.7

Effective tax rate (%)

Current 33.8 29.7 35.1 35.0 35.0 35.0

Deferred 0.6 7.8 (2.6) (1.0) (1.0) (1.0)

Total effective tax rate (%) 34.4 37.6 32.9 34.0 34.0 34.0





Exhibit 43: Balance Sheet (Consolidated)

Yr end 31 Mar. (Rs mn) FY13 FY14 FY15 FY16E FY17E FY18E

Shareholders’ funds

Equity capital 198 198 272 272 272 272

Reserves and surplus 1,285 1,546 2,902 3,351 3,873 4,533

Total shareholders’ funds 1,484 1,745 3,174 3,623 4,144 4,805

Non-current liabilities

LT borrowings 2 101 3 3 3 3

Deferred tax liabilities 51 85 68 61 53 42

LT provisions 5 6 5 – – –

Total non-current liabilities 58 192 77 64 56 46

Current liabilities

ST borrowings 1,099 1,411 1,054 2,054 3,054 3,354

Current portion of LT loans 2 320 315 315 315 315

Trade payables 90 306 165 184 214 238

Other current liabilities 177 61 24 29 34 38

ST provisions 43 89 77 88 103 114

Total current liabilities 1,411 2,187 1,634 2,671 3,720 4,058

Total capital employed 2,953 4,124 4,885 6,358 7,920 8,909

Non current assets

Fixed assets 343 332 287 286 292 306

- Tangible 8 9 8 8 8 8

- Intangible 1 – – – – –

Non-current investments 88 89 168 168 168 168

LT loans and advances 9 8 71 71 71 71

Other non-current assets 34 – – – – –

Total non-current assets 483 439 535 534 540 554

Current assets

Inventories 1,465 2,005 2,887 4,052 5,002 5,902

Trade receivables 709 1,406 1,268 1,453 1,650 1,869

Cash and bank balances 11 9 25 119 493 314

ST loans and advances 270 243 170 200 236 271

Other current assets 15 22 – – – –

Total current assets 2,470 3,684 4,350 5,824 7,380 8,355

Total capital deployed 2,953 4,124 4,885 6,358 7,920 8,909

Key data and ratios (%)

Gross debt 1,104 1,832 1,372 2,372 3,372 3,672

Gross cash 99 99 193 287 661 482

Net debt 1,004 1,733 1,179 2,085 2,711 3,190

Net debt/Equity (%) 68 99 37 58 65 66

Net debt/EBITDA (trailing, %) 1.8 2.7 1.4 2.2 2.3 2.2

Working capital assets 2,469 3,684 4,397 5,777 6,959 8,113

Working capital liabilities 315 462 271 302 351 390

Net working capital 2,154 3,221 4,126 5,475 6,608 7,723

Net working capital days 366 444 466 546 561 570

RoE (%) 17.1 16.9 17.2 13.8 14.1 15.6

RoCE (%) 14.5 12.5 13.7 11.8 11.4 12.1

Return on operating assets (%) 15.7 12.6 14.0 12.1 11.9 12.6





Exhibit 44: Cash Flow (Consolidated)

Yr end 31 Mar. (Rs mn) FY13 FY14 FY15 FY16E FY17E FY18E

Operating cash flows

Net profit/(loss) before tax 374 435 633 710 832 1,055

Depreciation and amortisation 30 30 37 34 40 43

Other non-cash items (mainly (3) 1 7 – – –

comprising of bad debts and provs.)

Interest expense (net) 180 186 200 224 307 377

Cash profits 582 651 876 968 1,178 1,475

(Increase)/decrease in net working capital* (25) (220) (16) (184) (183) (215)

Income taxes (72) (85) (277) (249) (291) (369)

Cash flow from operations 485 347 582 536 704 890

Investing cash flow

Purchase of fixed assets (20) (19) (24) (33) (46) (56)

Change in inventory (495) (540) (882) (1,165) (950) (900)

Investments/others 10 6 (72) – – –

Investments/others (506) (553) (978) (1,198) (996) (956)

Financing cash flow

Proceeds/(repayment) from borrowings 163 415 634 1,000 1,000 300

Dividends paid (12) (12) (12) (20) (28) (35)

Net interest/finance costs (185) (199) (212) (224) (307) (377)

Cash flow from financing activities (33) 204 411 756 666 (112)

Net increase/decrease in cash (54) (2) 15 94 374 (179)

and cash equivalents)

Opening cash and bank balance 65 11 9 25 119 493

Closing cash and bank balance [a] 11 9 25 119 493 314

Free cash flow (30) (213) (324) (662) (292) (66)

Source: Company, B&K Research *Change in inventories is included in investment cash flow.




Balance Sheet

Period end (Rs mn) Mar 15 Mar 16E Mar 17E Mar 18E

Share Capital 272 272 272 272

Reserves & surplus 2,902 3,351 3,873 4,533

Shareholders’ funds 3,174 3,623 4,144 4,805

Non-Current Liabilities 77 64 56 46

Long-term borrowings 3 3 3 3

Other Long term liab, Prov, DTL 74 61 53 42

Current liabilities 1,634 2,671 3,720 4,058

Short-term borrowings, 1,369 2,369 3,369 3,669

Curr Maturity

Other Current Liab + Provi 265 302 351 390

Total (Equity and Liab.) 4,885 6,358 7,920 8,909

Non-current assets 535 534 540 554

Fixed assets (Net block) 295 294 300 314

Non-current Investments 168 168 168 168

Long-term loans and advances 71 71 71 71

Current assets 4,350 5,824 7,380 8,355

Cash & Current Investment 25 119 493 314

Other current assets 4,325 5,706 6,887 8,041

Total (Assets) 4,885 6,358 7,920 8,909

Total Debt 1,372 2,372 3,372 3,672

Capital Employed 4,619 6,056 7,569 8,520

Income Statement


Net Sales 3,235 3,658 4,301 4,942

Growth (%) 22.2 13.1 17.6 14.9

Operating expenses (2,366) (2,690) (3,123) (3,468)

Operating profit 869 968 1,178 1,475

EBITDA 869 968 1,178 1,475

Growth (%) 35.0 11.4 21.7 25.1

Depreciation (37) (34) (40) (43)

Other income 13 19 38 46

EBIT 845 954 1,176 1,478

Finance Cost (212) (243) (345) (423)

Profit before tax 633 710 832 1,055

Tax (current + deferred) (208) (242) (283) (359)

P/(L) for the period 424 469 549 696

P/L of Associates, Min Int, Pref Div (1) 0 0 0

Reported Profit/(Loss) 423 469 549 696

Adjusted Net profit 423 469 549 696

Growth (%) 55.1 10.9 17.1 26.8

Cash Flow Statement


Profit before Tax 633 710 832 1,055

Depreciation (37) (34) (40) (43)

Change in working capital (905) (1,349) (1,133) (1,115)

Total tax paid (225) (249) (291) (369)

Others (893) (1,340) (1,078) (1,065)

Cash flow from oper. (a) (261) (629) (246) (10)

Capital expenditure 9 (33) (46) (56)

Change in investments (79) 0 0 0

Others 13 19 38 46

Cash flow from inv. (b) (57) (14) (8) (11)

Free cash flow (a+b) (317) (643) (254) (21)

Equity raised/(repaid) 73 0 0 0

Debt raised/(repaid) (460) 1,000 1,000 300

Dividend (incl. tax) (12) (20) (28) (35)

Others 731 (243) (345) (423)

Cash flow from fin. (c) 333 737 628 (158)

Net change in cash (a+b+c) 15 94 374 (179)

Key Ratios

Period end (%) Mar 15 Mar 16E Mar 17E Mar 18E

Adjusted EPS (Rs) 17.9 17.3 20.2 25.6

Growth 30.5 (3.8) 17.1 26.8

CEPS (Rs) 19.5 18.5 21.7 27.2

Book NAV/share (Rs) 134.6 133.3 152.5 176.8

Dividend/share (Rs) 0.4 0.6 0.9 1.1

Dividend payout ratio 2.7 4.2 5.0 5.1

EBITDA margin 26.9 26.5 27.4 29.8

EBIT margin 26.1 26.1 27.4 29.9

Tax Rate 32.9 34.0 34.0 34.0

RoCE 20.4 17.9 17.3 18.4

Total debt/Equity (x) 0.4 0.7 0.8 0.8

Net debt/Equity (x) 0.4 0.6 0.7 0.7

Du Pont Analysis - ROE

Net margin 13.1 12.8 12.8 14.1

Asset turnover (x) 0.7 0.7 0.6 0.6

Leverage factor (x) 1.8 1.7 1.8 1.9

Return on equity 17.2 13.8 14.1 15.6

Valuations

Period end (x) Mar 15 Mar 16E Mar 17E Mar 18E

PER 10.2 17.1 15.9 12.5

PCE 9.4 16.0 14.8 11.8

Price/Book 1.4 2.2 2.1 1.8

Yield (%) 0.2 0.2 0.3 0.3

EV/EBITDA 6.5 10.6 9.8 8.2




B&K Securities is the trading name of Batlivala & Karani Securities India Pvt. Ltd.

B&K Investment Ratings.

LARGE CAP MID CAP SMALL CAP(Market Cap > USD 2 bn) (Market Cap of USD 200 mn to USD 2 bn) (Market Cap +20% (absolute returns) >+25% (absolute returns) >+30% (absolute returns)

OUTPERFORMER +10% to +20% +15% to +25% +20% to +30%

UNDERPERFORMER +10% to -10% +15% to -15% +20% to -20%

SELL

B & K SECURITIES INDIA PRIVATE LTD.Equity Research Division: City Ice Bldg., 298, Ground/1st Floor, Perin Nariman Street, Behind RBI, Fort, Mumbai - 400 001, India. Tel.: 91-22-4031 7000, Fax: 91-22-2263 5020/30.

Registered Office: Room No. 3/4, 7 Lyons Range, Kolkata - 700 001. Tel.: 91-33-2243 7902.

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2. B&K or its Affiliates have not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.

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Enclave Capital is the distributor of this document in the United States of America. Any US customer wishing to effect transactions in any securities referredto herein or options thereon should do so only by contacting a representative of Enclave Capital and any transaction effected by a U.S. customer in thesecurities described in this report must be effected through Enclave Capital (19 West 44th Street, suite 1700, New York, NY 10036).

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