DQ ENTERTAINMENT

DQ Entertainment has entered the capital market on 8^th March, 2010 with a public issue of 1.60 crore equity shares of Rs. 10 each, in the band of Rs. 75 to Rs. 80 per share.

If it after a long time that we are coming across an IPO from the entertainment sector and it’s a welcome change! The company came into existence in 2007, by acquiring DQ Entertainment Ltd., a company engaged in the development of animation product services. Thereafter, it has become a leading producer of animation, visual effects, game art and entertainment content for India as well as global media and entertainment industry. Presently, the company has 10 production facilities in India, with talent pool of over 2,851 employees. 8 of these facilities are in Hyderabad, with 1 each in Mumbai and Kolkata, with third party sales representatives in Paris, Tokyo and Los Angeles.

The company has been posting good financial performance over last 2 ½ years, with total income at Rs. 151 crores in FY09 with PAT at Rs. 16.10 crores. During 6 months ending 30-09-09, the total income of the company was at Rs. 69 crores with PAT at Rs. 10.25 crores, resulting in an annualised EPS of Rs. 3.50. However, the equity of the company, ballooned to Rs. 59.46 crores in FY10, due to issue of bonus shares of Rs. 58 crores on pre bonus equity base of Rs. 1.45 crores, in a liberal ratio of 40 bonus shares for every 1 share held. Pre-IPO equity is at Rs. 63.24 crores including Pre-IPO issue, made at Rs. 68.11 per share, in January 2010.

The company is now going in for an expansion of Rs. 172 crores, mainly to make investments in co-production of feature films and television programmes focusing on IP content creation. Infact, company gets a reasonable profit by doing job work for IP content creator, who have abnormal profit margins. Crest Animation, an existing player in the sector has also been focusing on the same model now. To match with the increased volume, the company is also making fresh investments of Rs. 52 crores in infrastructure and production facilities, while Rs. 105 crore is proposed to be invested in IP content creation. The total fund requirement is estimated at Rs. 172 crores which is partly financed by debt of Rs. 57 crores and Rs. 8 crores from internal accruals, with close to Rs. 128 crores coming from proposed IPO.

The present order book of the company is at Rs. 456 crores, with 40% of such orders in various stages of production and balance likely to start next year.

The only negative seen in the company is its high equity base, post IPO, at Rs. 79.28 crores, which is thanks to liberal bonus as discussed earlier. Barring this, IPO looks good even at the upper price band of Rs.80 per share. On expected EPS of Rs. 5 from FY11, the share is issued at a PE of close to 16 times, which is way below the multiple given to the peers in the secondary market.

One can apply in the IPO even at the upper price band of Rs. 80.