By Geetanjali Kedia
Shemaroo Entertainment is entering the primary market on Tuesday 16th September 2014, to raise Rs. 120 crore via fresh issue of 71 to 77 lakh equity shares of Rs.10 each (depending on the price discovered). Priced in the band of Rs. 155 to Rs. 170 per share, retail discount of 10% is being offered, translating into price band of Rs. 139.50 to Rs. 153 per share for retail investors. The issue represents 26-28% of the post issue paid-up capital and will be listed on NSE and BSE. Issue closes on Thursday 18th September.
Shemaroo Entertainment is a content aggregator and distributor over television and new media platforms, owning a library of over 2,900 titles spanning new and old Hindi films, as well as regional language content. In FY14, it clocked revenue of Rs. 266 crore, on a consolidated basis, and earned net profit of Rs. 27.3 crore (10.3% net margin), leading to an EPS of Rs. 13.74 on equity of Rs. 19.85 crore. Promoter holding is currently at 90.14%, which will decline to about 65-66% (based on price discovered), post IPO.
As of 31st March 2014, company’s net worth stood at Rs. 174 crore, resulting in BVPS of Rs. 88. Company’s balance sheet shows debt of Rs. 151 crore and liquid investments of less than a crore. Interest charges of Rs. 19 crore for FY14 are seen very high, as most of the funding is through short term debt (Rs 141 crore).
Moreover, company’s working capital management is extremely poor. While the statement of income and expenditure shows double digit growth annually, the balance sheet is quite weak. Net current assets have more than tripled in last 3 years – from Rs. 38 crore as on 31st March 2011, to Rs. 150 crore, on 31st March 2014, which reflects very poorly on the company’s financial strength.
Inventory, as of 31st March 2014, stands at Rs. 200 crore, up 36% YoY, which now represents an eye-popping 9 months of sales. Company is not into any seasonal business (like air conditioning or umbrella manufacturing), where it is compelled to hoard raw material or stock. The debtors’ position is worse-off. At Rs 140 crore, on 31st March 2014, debtors doubled from Rs. 71 crore a year ago, and now represent 6.3 months of sale, from 4 months sale on 31st March 2014. Over 6 months of outstanding debtors is alarming, for any business, irrespective of the industry it operates in! Also, no provision is made for debtors worth Rs 6.4 crore which are outstanding for more than 6 months, as of 31st March 2014. Thus, the company not only has difficulty in monetizing its content / library, collection of payments is even more challenging for it.
No wonder that object of the IPO is to fund working capital worth Rs 106 crore (of which, Rs 26 crore will be used only in FY16 i.e after 18 months). Balance IPO proceeds will be used for general corporate purposes.
At the lower and upper band of Rs. 155 and Rs. 170, shares are being issued at PE multiple of 11.3x and 12.4x, respectively, on historic basis. At Rs. 170, company’s market cap will be Rs. 457 crore, and enterprise value will be at Rs. 608 crore. This implies EV/sales of about 2 times, on upper band.
Company can be compared to RP-Sanjeev Goenka Group’s Saregama India, which clocked consolidated revenue and net profit of Rs. 177 crore and Rs. 19 crore respectively in FY14. Saregama’s net margins of 10.7% is not only marginally better than Shemaroo’s 10.3%, Saregama is near debt-free (net debt of less than Rs.5 crore) with very low inventory (mere Rs. 3 crore) and debtor levels (2.5 months of sale). Saregama is currently trading at PE multiple of 15 times on historic basis and about 13 times on expected FY15 earnings, with enterprise value (EV) of Rs. 292 crore, implying EV/sales multiple of 1.7 times.
Larger peer Eros International with revenue of Rs. 1,135 crore and net margins of 17.6% in FY14, trades at historic PE of 11 times and on PE of 10 times, based on expected FY15 earnings, while its EV/sales multiple is 1.7 times. Thus, relative to peers, Shemaroo’s EV of Rs. 608 crore looks steep.
However, one should not consider EV of Shemaroo at price of Rs.170 per share. Effective cost to HNIs increases by approximately 75 paise per share, in the event of one time subscription to the issue. Ratio of allotment will be low and poor for retail investors as well, since huge demand is expected. If we expect share to list above Rs.225 per share, market cap of the company will rise by about 32%, with an increase of about Rs.150 crore in its EV as well. This will make the stock to look more expensive on listing.
One may be attracted by the current grey market premium and 10% retail discount on offer. To capture this, one can apply in retail category, but same advice is not given to HNIs. Infact, higher subscription is increasing cost of acquisition for prospective investors, without giving any benefit to promoters or issuers. Moreover, higher listing implies tougher growth targets to be met by the company and promoters in future.