Eros International Media - Rising debt discomforting; Buy - Anand Rathi

Eros International Media's (Eros) 2Q revenues/earnings were above estimated (~60%), driven by pre-sales from movies to be released in 3Q (not factored in our estimates). YoY results were subdued (PAT down 4.6%), due to high base and fewer releases in 2QFY13. Rise in net debt of Rs.1bn is discomforting, but is partly driven by seasonality. We cut our estimates (weak 3Q releases so far, low margins) and TP, but retain Buy.

Buoyant revenues, subdued earnings. Eros' revenues were up 31%/48% in 2Q/1H FY13, driven by strong box office performance of movie slate (Housefull 2, Vicky Donor, Cocktail) and pre-sales from 3Q releases (music/international rights, minimum guarantees). EBIT margin was down 520bps/220bps in 2Q/1H on 50% rise in film costs. PAT growth (-4.6%/+17.3%), was dragged by ~10ppt rise in effective tax rate.

Takeaways from discussions with management: (1) Most investments towards 3Q releases (Mattaarraan, English Vinglish, SoS) already in 2Q balance sheet, driving net debt higher; (2) net debt could decline in 2H; (4) opportunities exist for picking up distribution rights for major movies in 2H (such as Dabangg 2); (5) margin pressures in 1H, partly driven by higher marketing spends, and start-up costs related to new venture (erosnow.com); and (6) effective tax rate for full year estimated at ~30% (versus 39% in 1H).

Rising net debt. We believe increase in net debt was driven by combination seasonal (major movie releases and catalogue monetisation lumped in 2H) and structural (higher content cost, lower margins, wind down in advances from parent) factors. We don't expect balance sheet to further deteriorate in 2H. We cut our estimates factoring in lower margins/higher content investments, taking cues from rising net debt, jump in film costs (booked in P&L) in 1H.

Valuations. We have cut our TP to Rs.215 (10x FY14e EPS) from Rs.240 (10.5x Sep '13e EPS). Risks. (1) Failure of big-budget films; (2) slow refill of film slate; and (3) above anticipated increase in film/key talent cost.

Source : Equity Bulls

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