OUR CALL. Eros International: betting on budget films, satellite rights - Buy

As the economic recovery gathers steam, discretionary spends are also likely to rise. Entertainment is one segment that will benefit from this trend.

Multiplexes are reporting a steady increase in ticket prices and spends by customers on food and beverages, suggesting increasing interest in the segment.

Eros International Media (Eros), a film distributor and co-producer of Hindi and select regional language movies, looks set to gain as people troop into cinema halls.

The company has built a resilient business model that allows it to thrive even in tough macro environments.

Low-risk, mid-size budget movies, a pipeline of star-studded films and the ability to monetise movie rights by selling them to satellite channels are key positives for the company.

Investors can buy shares of Eros with a two-year horizon. At ₹386, the stock trades at 17 times its estimated per-share earnings for FY16.

This is much lower than the valuation enjoyed by multiplex companies such as PVR, which trade in excess of 30 times.

In this fiscal year, movies such as Kochadaiyaan , which saw a good collection, and the overseas rights of Mary Kom , Ek Villain and Singham Returns helped Eros improve its revenues.

The Tamil movie Kaththi was also a hit. Satellite rights for the movie have been sold to various general entertainment channels.

In the first half of FY15, the company’s revenue grew 22.6 per cent over the same period in the previous year to around ₹465 crore, while its net profit rose 29.7 per cent to ₹ 86 crore.

Eros focussed on mid-size budget films without too many megastars as it wanted to stay away from risky high-cost movies in the ₹100-150 crore range.

Though the Rajinikanth starrer Lingaa was not a chartbuster domestically, it was well received in overseas locations (for which Eros owned the distribution rights) such as Malaysia and even the US.

The company de-risks its business by pre-selling the overseas rights to overseas entities that have a significant reach in those markets.

With this strategy, Eros has generally been able to recover nearly 40 per cent of a film’s acquisition cost.

This significantly reduces the risk associated with a film’s offtake and also ensures cash flows.

The company also recovers 35-40 per cent of its costs by selling movie rights to channels such as Colors, Zee TV and Star Plus.

Eros has thus been able to gain from multiple revenue streams and limit the risk of a movie not performing well.

Apart from Hindi movies, Tamil and Telugu films, too, feature in Eros’s radar. This appears to be targeted at the NRI population overseas.

While the company has indicated its intention to remain focused on mid-size budget films, a few big-ticket releases are also on the anvil.

Movies such as Shamitabh (just released), NH10 , Uttama Villain and Farzi are in the pipeline.

The cast in these movies includes established stars such as Amitabh Bachchan, Kamal Haasan, Shahid Kapoor and Anushka Sharma.

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