Is it worth investing in premier production houses in India

In the times of the Netflixes and Amazon Prime Videos trying to crack the Indian web series code, where does India’s preeminent legacy soap opera creator with the backing of India’s largest conglomerate stand?

Directed towards a young audience who has limited interest in regular television shows, web series are a fast growing trend all over the world. The lack of strict censorship that rules commercial television has made it possible for makers to highlight issues and trends that are appealing to youngsters without having to beep out every offensive word. The increasing bandwidth and popularity of smart devices like tablets, phones and laptops have made watching shows a personal, instead of communal, experience. In fact, production houses that traditionally made films and programs for television are now also trying to catch up on this trend and cater to a fast growing internet audience.

The points detailed above make web series creators sound like the goose that lays the golden egg. But is investing in a company that makes web series really worth it? At Multi- Act, we went in-depth into the financials of one such company to see whether it makes sense to jump on the web series bandwagon.

Company Background

We studied an established company famous for making popular television series and films in India. The company has been in the business of making TV shows for over 23 years and in 2007 ventured into making Bollywood films. It has now jumped into the realm of making web series.

To Invest or Not to Invest?

Web series are a relatively new phenomenon in the media industry. At this nascent stage when even industry giants are barely profitable, it is difficult to comment on fate of these ‘me too’ companies. The company we studied, however, has a long established history of TV content creation. So we analyzed their existing business and financial history to study the company’s potential as an investment.

Television

In their television business, the revenue growth and margins were great until 2009. The tide then turned and the company faced sudden losses. The company attributed this decline to the global economic crisis. However, the Indian television industry’s revenues continued to grow in that period.

Revenue growth & Profit margin for India's premier soap opera creator

Further analysis of Indian television industry indicated that the change in business fortunes was attributed to:

a. Launch of new Hindi GEC channels which resulted in fall in viewership of the older GEC channels. At that time, company had been overly dependent on one particular channel which suffered the most as of result of new channels cropping up.

b. Genres like mythology and reality shows became more popular than family drama therefore programming hours on GEC channels shifted in the favor of reality shows, Games and Talent shows, etc. However, this company’s programming was only directed towards the drama genre.

Motion Pictures:

In film production business, despite a number of hit films and increasing revenues, the losses continued piling up

Reported losses in film production

Financial Shenanigans?

Generally, box office collection against the budget can be an indicator of the films profitability. However there does not seem to be any strong co-relation between theatrical collection and budget of films’ produced by this company and revenue and profit reported in Annual Report.

YearsGross BO collections (1) 

Budget

(2)

Derived Gross Profit

(3)=(1) – (2)

Reported Operating Profit (4)Difference

(3) – (4)

20061689078699
20082971801179126
2009492750(258)(211)-47
2010854540(89)129
201158335023329204
201294841553388445
201342019023020210
20142,5142,690(176)(267)91
20151,521865656(62)718
201642019023020210
20171,3391,810(471)(249)-222

Sources- http://boxofficeindia.com/movie.php?movieid=3300 , company annual reports

In many cases in spite of good box office collection over the budget of a film, company has reported operating losses/low profits. Refer note at the end of the article to learn more about correlation between Box Office performance of a film and producer’s profitability.

These findings imply that:

  1. Either the company is under reporting its profits in the film segment or
  2. The benefits of the film’s performance are accruing to other stakeholders in the value chain and not reaching the company.

Both possibilities lead to the conclusion of “Poor quality of business“.

Overall Business Quality

We firmly believe in investing in companies with strong moats i.e. companies with sustainable competitive advantages and high barriers to entry. With this particular company we found:

    1. In media industry competition is high. There are no barriers to entry. Multiple entities compete for audience’s viewership. Customer stickiness depends on quality of content without any loyalty to the producers’ brand. Non-performance of television shows/films is a major risk for the creators.These risks in the business model were evident even in good old days when company’s profits were soaring high.
    2. Talent owners (artists, directors, actors etc.) are the company’s suppliers and there is high competition for obtaining services of good talent. While established production houses have some advantage in attracting good talent, established talented artists have bargaining powers and thus cost of their services is also higher. In the film aspect of the business, artists have started sharing in films’ profits.
      So producers are unlikely to earn above average profits for a long period.
    3. Absence of long term audience captivity, risk of frequently changing audience preferences and lack of any substantial cost advantage leaves this company without any Moat.

Quality of the Company:

Our proprietary grading system assesses a company’s quality based on company’s fundamentals, corporate governance, capital allocation, nature of business and industry in which it operates. The grade ranges between A to C, A being the best and C being the Worst.

Our Quality of Earnings analysis gave this company a grade of B- because of recurring losses, long cash conversion cycle, negative Free Cash Flow generation and poor quality of earnings and business.

Bottom-line:

Although web series are growing in popularity across the country, looking at the past financial history of this company, one must be discerning when it comes to investing. While it is tempting to catch up with a popular trend in the form of web series, user loyalty is not guaranteed.

The company does not pass the rigors of our analysis due to less than optimal reporting, poor grade, and absence of a moat. So we will not join the street in applauding this company for their foray into the digital world.

This article is just a trailer that covers the business analysis/assessment of the said company. For a complete analysis of the company contactus@multi-act.com.

Note: Film business – BO performance and producer’s profits

Box office performance is an indicator of a film’s profitability. Nonetheless, the revenue of a film producer is also affected by the deals it negotiates with the distributor (here it has 2 options either to pre-sell and lock-in the revenues or share the films collections in some pre decided proportion), it may also become its own distributor and negotiate directly with the exhibitor. Sometimes, producers also enter into a profit sharing model with the artists. Additionally, it earns revenue from overseas collections, sale of film rights to TV channels, DVD rights etc. For these reasons, BO performance of a film and the producer’s profitability are not perfectly correlated. In summary, it is worth noting that in spite of good BO collections, if company is continuously making losses then it raises questions on the management’s ability to negotiate deals with the counter parties.


Statutory Details:- Multi-Act Equity Consultancy Private Limited
(SEBI Registered Portfolio Manager – Registration No. INP000002965)

Disclaimer
The views expressed in this article are for educational and reading purpose only. Multi-Act Equity Consultancy Private Limited (MAECL) does not solicit any course of action based on these views and the reader is advised to exercise independent judgment and act upon the same based on its/his/her sole discretion, their own investigations and risk-reward preferences.
The article is prepared on the basis of publicly available information, internally developed data and from sources believed to be reliable. Due care has been taken to ensure that the facts are accurate and the views are fair.
MAECL, its associates or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such views and consequently are not liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way for decisions taken based on the said article.
It is stated that, as permitted by SEBI Regulations and the Company’s Employee Dealing Policy, the associates, employees, affiliates of MAECL may have interests in securities referred to in the information.
The contents herein – information or views – do not amount to distribution, guidelines, an offer or solicitation of any offer to buy or sell any securities or financial instruments, directly or indirectly, in the United States of America (US), in Canada, in jurisdictions where such distribution or offer is not authorized and in FATF non-compliant jurisdiction and are particularly not for US persons (being persons resident in the US, corporations, partnerships or other entities created or organized in or under the laws of the US or any person falling within the definition of the term “US person” under Regulation S promulgated under the US Securities Act of 1933, as amended) and persons of Canada.

Risk factors
General risk factors

a. Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved.
b. Past performance of MAECL does not indicate its future performance.
b. As with any investment in securities, the value of investments can go up or down depending on the factors and forces affecting the capital market. MAECL is not responsible / liable for any losses resulting from such factors.
c. Securities investments are subject to external risks such as war, natural calamities, and policy changes of local / international markets which affect stock markets.
d. MAECL has renewed its SEBI PMS registration effective October 14, 2011 and has commenced its portfolio management activities with effect from January 2011. However MAECL has more than 10 years of experience in managing its own funds invested in the domestic market.


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Portfolio Management Services (SEBI Registration No. INP000002965) are offered through Multi-Act Equity Consultancy Private Limited (CIN: U67120PN1993PTC074692), which is a wholly-owned subsidiary of Multi-Act Trade and Investments Private Limited; Investment Advisory Services (SEBI Registration No. INA000008589) are offered through Multi-Act Trade and Investments Private Limited (CIN: U65920MH1997PTC109513).