No. of Recommendations: 38
I covered dotDigital (DOTD) a few days ago – my 2nd pick for this years NFSC. That was the aperitif, so now onto the main course.

Eros International is my 1st pick and I believe the company displays a number of attributes that will eventually see it multi-bag from the current share price. An entertainment play on emerging markets, they are the market leader in their industry by some distance and on a derisory single digit PER despite forecasts indicating that they will grow earnings by 30%-40% in the current year and mid teens % in 2013.

I also expect the company to announce a dual listing or Full London listing in 2012 and this coupled with current low valuation and growth opportunies suggests that there’s a good chance of a positive re-rating at some stage this year…or so I hope ;-)

Pro's and Con's at the foot of the post.

What do they do?

In essence Eros International ARE the “Kings” of Indian cinema or Bollywood which is undergoing phenomenal growth. The company was established in 1977, so they have something of a track record and have maintained market leadership as they create a global platform for growth. During the last few years the Indian film market became professionalised. The company is the market leader, competing with companies such as UTV and Reliance. Eros has implemented its own process of pre-selling the movie to distributors and pay TV networks around a year in advance of release in order to cover the production costs. They have increased the scale of the movies they co-produce and the creation of these blockbusters assists to bundle older films in pay TV syndication deals.

A quick check reveals that Eros were covered as an entry in last years competition and the recipient of a write-up by warren12

I therefore didn’t plan to go into as great detail as my recent post on DOTD who are new to the Pub, but in the end up I couldn’t help myself.

It is interesting to note that the starting Eros share price in last years competion was 240p, so they have simply treaded water in share price terms over the last year while earnings grew by 6% and as I mentioned above, forecast to grow 40% in the current year.

As I’ll explain (see Background), the 34 year old business has developed an enviable film library and have rights to over 2,100 films and I found it interesting to note that a figure mooted in the valuation of their IP was a figure well in excess of $1.5 billion when discussed at a recent analysts visit to the company’s Indian businesses. They have a multi-platform approach to exploit and develop their catalogue of films via Theatre, TV and Digital/ Home Entertainment and have de-risked their business model by covering much of the production costs through licensing and pre-sale agreements well before a films release date.
Interested? Read on.

Market Data

Eros International

EPIC: EROS (AIM listed)


Price 230p
Shares in issue 118m
Market cap £271m
AIM Listed

52-week range 190p-273p


Quick run through Full year & Interim results

2011 Preliminary Results – 31st March 2011

Financial Highlights

• Group turnover up 9.9% to US$164.6 million (2010: US$149.7 million)
• Profit before tax up 12.6% to US$55.8 million (2010: US$49.5 million)
• Basic EPS up 5.8% to 38.6cents (2010: 36.5 cents)
• Net debt reduced by 30.2% to US$72.8 million(2010: US$104.3million)

2012 Interims Results – 30th September 2011

Financial Highlights
• Turnover up 35.3% to US$92.0 million (H1 2010: US$68.0 million)
• Profit before tax up 3.9% to US$29.0 million (H1 2010: US$27.9 million)
• Basic EPS down 7.5% to 18.64 cents (H1 2010: 20.16 cents)*
*Basic EPS of 18.64 cents was 5.6% higher to H12010 EPS of 17.65 cents on a like for like basis, adjusting dilution of Indian subsidiary IPO.
• Net debt at 30 September 2011 of US$114.2 million (31 March 2011: US$72.8million)

Earnings(in cents)

Just to provide a flavour of the earnings growth Eros have achieved over the last 5-years with a 30%-40% increase forecast in 2012.

2007 29.9c
2008 33.5c
2009 35.1c
2010 36.5c
2011 38.6c


4 brokers covering the stock, all with BUY recommendations.

Consensus forecasts: -

03/ 2012

PTP £51.43m
EPS 33.38p
PER 6.9

03/ 2013

PTP £58m
EPS 37.79p

Amortilization of intangibles

JT Cod, a much respected investor and poster over on ADVFN provided the following in-depth analysis in May 2010. It is worthwhile noting his comments in relation to the large scale amortilization of intangibles which have impacted the reported profitability of the company.

As JT’s post indicates Eros have basically ramped up the IP/ content for the business since 2007. To put this into context, Eros have invested c. US$603m (per 2011 Annual Report) in its library in the past five years, an incredible spend in content. They are now be reaching an inflection point where operating cashflow exceeds spend.

Background – History & recent developments

Established in 1977 the company has come a long way from financing 3 movies per year and this year content distribution/ production will total 120 movies. Quite a step-change.
In 2006, Eros PLC, the holding company of the Eros Group, became the first Indian media company to obtain a listing on the Alternative Investment Market (AIM) of the London Stock Exchange and maintain a free float of 29% with 71% held by founding family interests (likely to be reduced to facilitate a move to the Official List or secondary listing).

In order to take advantage of growth opportunities in a number of areas they successfully listed their Indian subsidiary on the Indian Market during October 2010. While doing so they sold a 21.88% stake in the Indian subsidiary, Eros International Media Ltd (EIML), with the offer 30x over subscribed. This raised $79m for use in expanding their content portfolio and development of further business streams.

Business Streams

Theatrical (2011: $56.9 million revenue) - 35% of revenue

Eros released a total of 77 films in 2011. The Indian theatrical market has seen growth in both multiplex and single screen theatres with the number of digital screens overtaking physical print distribution thereby creating high margin revenue increases.

The increased availability of screens has seen a trend towards wide releases and therefore a greater skew towards opening box office weekend (can be as high as 70%) as a percentage of total box office revenue across the run of a film.

High-budget films are increasingly being released in digital screen format with the model in India a revenue share from multiplexes based on a pre-agreed share and minimum guarantee advances from single screen chains.

Eros has released a number of blockbusters during Q3 2012 and I expect a trading update shortly that will showcase blockbuster revenue and profitability that will underline the prospect of significant earnings growth this year.

Television (2011: $60.6 million revenue) – 37% of revenue

License new and library content to all the major television networks in India such as Star, Sony, Zee and Colours as well as International networks Eros pre pre-sells a large proportion of their future slate to secure visibility of revenues that underwrite a significant part of IP/ content costs.

Digital and Home Entertainment (2011: $47.1 million revenue) – 28% of revenue

Digital media has been a strong area of growth as music monetisation grows through digital avenues such as online and mobile. For example, they have experienced over a billion video views on YouTube channels.

Considerable investment has been made in digitalising existing content with an experienced industry figure brought in recently to exploit this area. There is possibility of an agreement with global online platform owners (such as Netflix or Lovefilm) or perhaps the launch of an Eros-branded online film rental business which could generate substantial subscription revenue streams or pay on demand.

This arm also includes the EyeQube visual effects studio, established by Eros and operational since 2008. This provides work for Hollywood film studios as well as an in-house facility for Eros. They were involved recently in work for Disney (computer-generated effects for Tron Legacy).

Given the low labour costs of their Indian domicile EyeQube can undercut visual effects production in other countries and still make mouth-watering margins of 100%.

…those all important Pro’s & Con’s


• Indian box office growing strongly - Driven by rising average ticket prices and a greater number of screens.
• Geographic expansion – Number of recent announcements provide indication that Eros are leveraging their IP/ content and developing a number of other markets including the Far East and SE Asia.
• Current movie slate delivering blockbusters - The key 2011 blockbuster movie releases have outperformed management expectations at the box office. This success drives TV syndication deals, with box-office success creating better pricing power for Eros.
• Excellent visibility on future projects - The company has locked in all film projects for all of FY2012 and FY2013 and some of FY2014. The costs of these movies have been partially underwritten through TV syndication pre-sales, significantly reducing the risk of this pipeline.
• TV syndication market remains buoyant - Intense competition for subscribers among the major four satellite platform owners has kept content prices high.
• Developing digital strategy gaining traction - Eros has a number of existing digital initiatives, but these are being unified and enhanced by the company’s new Head of Digital. There is possibility of an agreements with global online platform owners (such as Netflix or Lovefilm) or launch of an Eros-branded online film rental business which could generate subscription revenue streams,
• India’s Entertainment Tax under review - At present, large-scale entertainment shows (including cinema releases) in India are subject to a tax of 25-30%, included in the price of the ticket. This regime is currently under review, with a proposal to reduce this rate to around 14%, with any savings likely to be shared between the cinema owners and the production companies.


• Shareholding structure – Eros are controlled by the Lulla family who hold 70% of the equity. I would anticipate that this will reduce as the company are actively exploring a secondary of Full market listing and this will provide the opportunity to attract institutional investors and opportunity to sell down the family stake.
• High level of content costs – (See amortilization in write up). Eros’s model is built on continued investment in content to drive revenues ($140m annually forecast). Cash inflows from exploiting its content more than offsets this amount, so the company is cash-generative.
• Content – Analysts have noted that Hindi content is relatively formulaic and there is always the danger of audience fatigue.
• Domestic competition - Film production remains fragmented in India and Eros have something of a monopoly in this area as I’ve discussed. This opens up the possibility that an Indian Media conglomerate could make a strategic decision to enter the industry and result in an increase in competition.
• Piracy - Likely to remain an issue and dictates aggressive first week film launch strategies and rapid follow through of DVD/CD products.
• Release dates crowded - Increasing output and requirement for weekend/holiday windows (only 52 weeks/year). Eros is concentrating on fewer mid to larger Hindi releases.
• Hollywood competition - Dubbed Hollywood films gaining acceptance.
• Movie failure - Scale/portfolio approach helps but some decent hits are required each year to boost catalogue performance but Eros mitigates risk by aggressive first week openings and pre-sales which imply poor reviews hit figures less.
• Distribution - The multiplex ‘stand off’ in 2009 hit audience sales and production.
• Currency weakness – Two thirds of Eros sales are Indian Rupees (INR) and recent fall in INR/$ exchange rate (was recently as low as 53 INR/$ but subsequently has recovered) could impact $ quoted EPS figures. In the longer term more revenue will be in $ and therefore exchange rate will probably be neutral.

(Note to self – removed the rose tinted specs with con’s exceeding pro’s, as acknowledged in my DOTD write up ;-)


Hopefully I’ve managed to provide a snapshot of the business which will assist future research.

As highlighted in my opening gambit, Eros are forecast to grow earnings significantly this year and at the current price are on a PER below 7 which surely undervalues the business by some margin.

Many investors will see an investment into the Entertainment Industry as high risk but as I’ve indicated in the write-up, Eros pre-sells a film through satellite pre-licensing, music, brand tie-ups, etc, and therefore in most cases they will have recovered the costs of c.50% of a movie before it’s release. In this manner then even if a movie is a flop at the box office then Eros will have recouped the great majority of the costs and downside is limited to c.10-15% loss while the upside for a hit or blockbuster can range up to 100%.

I also appreciate the AIM listing and family share ownership (c. 70%) will put many off but I reckon that this share ownership structure will change in 2012 as the company achieves a Full London listing or listing on a market that attributes a more realistic valuation on the company.

A recent analyst visit to India provided mouth watering valuations on the company IP/ content with figures between $1.5 billion and $10 billion mentioned. When you consider that the company have invested $603m in content since 2006 and own the rights to over 2,100 films not to mention a considerable music catalogue, then a figure within this range is certainly not fanciful and leaves the current market cap of £271m well behind.

I also expect their digital development to bear fruit and the company to either develop an in-house platform or go sign up with pre-existing model such as Netflix or Lovefilm to exploit their IP/ content with their expansion into other geographical territories also making a greater positive impact.

The write-up is intended to stimulate research and no investment advice is intended.

There is a thread running over at the other place.


I have built a modest holding in EROS.

Kind regards,
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No. of Recommendations: 30
I'm surprised there has been no further comment on this share as it's quite an interesting case and has garnered a lot of recs. The story looks good, the profits look good and the potential looks even better.

However, I'm now going to argue that not everything is as rosy as it currently seems. I'm a bit old fashioned in that I think the value of a business is the present value of the future cash flows it can generate. EROS, as it currently stands, does not generate any cash flow. It burns cash at a pretty sizeable rate and has done for the past five years.

So why then is it churning out such impressive profit growth? If I had to title this post, it would be 'Not all earnings are worth the same'. Investors would be well served by paying more attention to the cash flow statement to understand what's happening to their money.

All the 'profits' of the last five years have just been due to a gigantic build up in intangibles, my least favourite asset. If the accounting were to be more conservative and they expensed all this asset build up directly they'd have made no profit at all. The company has only been cash flow generative in one year of the last five and needs to keep tapping the equity and debt markets to keep up with this cash burn. Not only that, the huge capex spends haven't even been all that successful in producing growth even with the generous accounting, with return on equity having dropped every year in the last five.

I try and view the cash flow like I would if I were a private owner of the business, so I ask myself 'what cash am I left with, after taking in all my revenues and paying out all my expenses?'. Due to the way EROS capitalise a large proportion of their operating expenses, it takes costs out of the operating cash flow line and in to the investing cash flow line. For example, here is what they showed for last year:

Net Operating cash flow (After Interest & Tax): £62,947

Investing cash flows (Capex): -£85,432

Combined cash flows from operating and investing lines: £-22,485

This is what I mean by cash flow negative - the activities of the business, so operating and investment, burn cash rather than generate it. They've done this in every year of the last five apart from 2010. The reason operating cash flow is positive is due to the large capitalisation of their expenses. An alternative accounting treatment would be to not capitalise any costs at all, in which case the cash flow statement would look like this:

Net Operating cash flow (After Interest & Tax): £-22,485

Investing cash flows (Capex): £0

Combined cash flows from operating and investing lines: £-22,485

Which looks far less rosy! Profits would also be negative if this alternative accounting treatment were used. In fact, here's what the profits would have been if the company didn't do any capitalisation at all over the past five years:

2007: -£23,032
2008: -£46,677
2009: -£37,866
2010: £18,121
2011: -£22,485

Now, it might be that this huge capitalisation is justified by the cash flows these intangible assets will generate in the future but the issue is that they aren't justified yet in terms of the cash flow they currently do so any valuation of the business needs to be based on what the business looks like when it reaches maturity.

I'm concerned that this investment in the future has been going on in a cash flow negative manner for five years now, so I'd want to see the proverbial light at the end of the tunnel i.e. the business is generating considerably more cash flow than it consumes and I just don't see it right now. It's especially worrying that given the business managed to turn cash flow generative in 2010 to then take a step backwards and go back to consuming cash. New and start-up businesses will have a cash consumption period, I accept that, but I'd expect this business to be in a cash generating stage and it just isn't.

I'd be very interested in seeing the assumptions underlying the projected future cash flows of the business and how the back catalogue valuations were arrived to try and determine if they are reasonable but right now I'd need something very convincing to justify an investment. In fact, given that the management have been deliberately using very aggressive accounting techniques to boost profits in order to show wonderful 'growth' I'm now incredibly sceptical of anything they'd tell me.

I've read too many stories about financial manipulation to know that when management try to tell a story with the numbers that doesn't reflect the real, underlying economics of the business that you should avoid them like the plague.
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