Eros International Media - Strong results driven by 'Grand' success; Buy - Anand Rathi

Strong earnings grwoth. Eros reported a strong 2QFY14, with EBIT and net profit rising respectively 23% and 42% yoy. Fewer and smaller releases led to revenue sliding 12.3% yoy. Earnings were driven by the phenomenal success of its mid-budget Grand Masti (net box-office collections in India: Rs. 1bn), robust revenue from catalogue sales (the figure was not shared) and a lower effective, 19%, tax rate. In fact, the lower tax rate reflects the greater sales of catalogues, which are more tax efficient. For 1HFY14, earnings were up 15% yoy and broadly on target to meet our FY14 earnings forecast.

Success of mid-budget films aid results. In the last nine months, Eros has been slow in replenishing its big-budget film slate. The focus on mid-budget films (backed by aggressive marketing) enabled it to improve margins (EBIT margin in 1HFY14 up ~400bps yoy), despite the small scale of operations. 1H saw the release of Raanjhanaa (a success), Go Goa Gone (a modest success) and Grand Masti (a huge success). In all, the company released 26 films in 1H (14 in 2Q) - 11 in Hindi (four in 2Q) including five overseas only, and 15 in other languages (10 in 2Q).

Expect a revenue scale-up in 2HFY14. 3Q would be flush with major film releases such as the Rajnikant-starrer Kochadaiyyan, Ram Leela (director: Sanjay Leela Bhansali, starring Deepika Padukone), Krissh 3 (overseas only) and the Saif Ali Khan-starrer Happy Ending. Late-stage film acquisitions are also possible.

Our take. We raise our target from Rs. 165 (8x Sep'14e EPS) to Rs. 180 (8x FY15e EPS) We retain our Buy due to overall buoyancy in the film industry (driven by rising multiplex penetration, buoyant satellite-rights prices, widening talent pool) and Eros' strong position in film co-production/distribution markets. Valuations are undemanding at 7x FY14e P/E. Risks: 1) Persistent failure of big-budget films; 2) slow refill of the film slate and 3) further increase in film/key talent cost.

Source : Equity Bulls

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