Eros International Media: Avoid this Seducing Vamp... UFO Moviez: Have faith in the Alien

Last day one reader put a query on Eros International Media and asked me to further my views as it was recommended at this blog also (Click here).

First of all i am really sorry for not posting an update on Eros after the news breakout of its doubtful accounting practices in its International parent Eros Plc as i exited from it around 200 (My avg was 140) soon after the news after some analysis. I sold some of my shares around 425 before the news breakout ( It touched 600 after that) as i was getting doubtful due to bad state of cash flows and no dividend policy in spite of showing huge profits year after year but still i tried to keep the faith thinking it is early time. But when the news came...i got the clue and sold my shares after some time.

It is having some real lousy accounting standards...all the profit is just on the surface. Its assets base has been increased to 1300 cr in 2016 from 500 cr in 2012 but its turnover is just at 1500 cr from 940 cr. It is showing 1300 cr under capital work in progress. Now i'll tell you the real mystery....Amortization.

Mortality of its accounting Treatment of Amortization

 Let me further explain to you...it has mostly films distribution rights and movie produced by it as its assets. So when it is buying the movie rights and producing the movie…all the related costs are capitalized and after movie is released the costs are amortized over the LIFE PERIOD of Movie...and it just used this to its benefit to show higher profits yet it never paid any dividends. I always take dividend policy as the first management test. As per FASB/USA, ASC 926 requires that film costs be amortized under the individual film forecast method using the ratio of current period revenue to expected unrecognized ultimate revenue at the beginning of the year. Although Revenue streams are a subjective phenomenon but subjectivity scope is not that high with regard to the timing/period of the revenue and one has to follow the industry practices at the end of the day. So in Hollywood, as per industry practices by major studios like Disney, Dreamworks, MGM, they amortize around 50% of costs in first year of release and then up to some 90% by third year...very logical. But let me tell you, in Piracy full country like India the value of movie should be amortized even faster and Eros flops here. I even feel that for flop movies much shorter time period should be used....i am not sure about the standards of neither Hollywood nor Bollywood here. But in my view, flop films should be written down to fair market value instead of expected net realizable value. I am pasting below the amortization policy of Eros from their latest annual report (2015-16):

(d) Intangible assets and amortisation Investment in film and associated rights are recorded at their acquisition costs less accumulated amortisation and impairment losses, if any. Cost includes acquisition\and production cost, direct overhead cost, capitalized foreign currency exchange differences and capitalized interest. When ready for exploitation, advances granted to secure rights are transferred to film rights. These rights are amortised over the estimated useful lives, writing off more in year one which recognises initial income flows and then the balance over a period of up to nine years, or the remaining life of the content rights, whichever is less.

You can see that they are using 9 years to amortize dumb (Sorry! But most are) Indian Movies. So if in a year they are showing 100 cr as amortization cost the same cost as per more reliable accounting will be around 300 cr (I am leaving first year movies). You can see here that all the profit is just a melodrama…just like a Vamp seducing our Hero. Also, most of the Hollywood studios revise their expected revenues from a movie time to time in line with the economic realities. They provide a detail of all the movies in their portfolio (finished, under progress) and their expected revenue and life span. All these details are missing from the Annual report of Eros International.

When I first bought it in 2013…I didn’t do that much study…I just bought it as I want to buy something related to Indian movie business which I think will see high growth with huge demand for content post digital dawn. So it was the first choice...but i left the management part due to its name. But i was surprised due to no dividend policy and cash flows as higher and higher amount was getting blocked in Assets...i am sure most of these assets were created with related party transactions. So promoters got the dividends from related party transactions.

They have big related party transactions. Now I am coming to their international movie business. They are selling International movie rights of Hindi movies to its holding company at very low prices. Their International parent EROS Plc pays them the 30% of the cost of Movie right/Production and gets the international rights (so cheap). But Eros International gets to share just 30% of profits only after EROS PLC recovers its cost (30%) first!!! Analysts say that this is safe model for Eros Inter...but they are fooling us as we can see safety is with EROS PLC. Like for a 100 cr movie, Eros International spends 70 cr and EROS PLC 30 cr. So if EROS PLC earns 70 cr from global markets then Eros International will get 30% of 40 cr ( 70-30) i.e 12 cr as its share of revenues. However global market is a huge growing market for Indian movies...and selling movies this cheap (Eros Plc has revenues of around 2000 cr; higher than indian arm!!!) just shows the cheapness of Promoters to grow at the cost of shareholders.

So don’t book any ticket here. There is no merit in taking chances with doubtful promoters. So if you are already having it then just sell it and buy UFO Moviez.

UFO Moviez (CMP 455): UFO Moviez was recommended around 550 at this blog (Click here). I have used the recent fall to 400/- to buy major quantity. Results for this quarter can be bad due to demonetization…although I feel at 455/- the negative is already prized.

Apart from Digital cinema distributorship and exhibition business; it is venturing into new territories to be more relevant and diverse.

Caravan Talkies: It has carved out “Caravan Talkies” to provide movie screening in the media dark hinterlands of India free of cost through Vans. The revenues are earned through advertisements. Just imagine the scale of advertisement revenues from captive audiences. Rural India is always a challenge for advertisers due to lower penetration of digital TV and radio. UFO can use its huge client list of around 2500 advertisers (up from 500 in 2013) to use Caravan Talkies for their advertisements in rural India. Rural India is the next big consumption story which nobody can afford to lose.

Nova Cinema: It has just launched its new business under Nova cinemas which is a franchisee based digitized single screens cinemas targeted at small cities...a natural expansion from its movie distribution business. Under this initiative, UFO will provide support in converting the analogues single screens in small cities into top class digital theatre equipped with best in class technology from UFO. But costs related to setting up of theatre and day to day expenditure will be borne by the owner. Multiplexes with huge overheads and big capacities can't survive in small cities. Small digital cinemas with one or two screens are the way to go. UFO is early into the game. Opened one in Moga, Punjab. Distributors don’t feel comfortable in licensing the newly launched movies to these small analogues screens due to piracy issues. But the UFO brand and top class provides the high level of credibility. Advertisers can monitor the use of advertising from their consoles.

 India has just one screen per 1 lakh residents, while USA has 1 for 7800 and China has one for 40000. So movies (made at hefty costs) do not reach the maximum possible scale resulting in revenue loss to all the stakeholders including Government. Moreover number of Indians in big cities watching movies are falling consistently; from 8.2 cr to 7.8 cr. This, I feel, is due to other entertainment options available with urban customers. I also feel that high food/beverage costs in multiplexes are a big deterrent…and watching movie with empty stomach significantly reduce the experience. This has resulted into low occupancy levels of just 30% in Indian Multiplexes!! So multiplexes need to grow these numbers before they invest further in small cities. Multiplexes (90%) are opened in Malls due to costly real estate in cities. Multiplexes has high technology costs as compared to in-house technology of UFO limiting their capacity to offer lower ticket prices without food and beverages as in small cities F&B revenues are very low. With all these high overheads, multiplexes gain in metros due to showing of a number of films at same time with common fixed overheads leading to better margins. Indian movie industry is regional as in place of one language movies are made in around 15-20 language leading to very high marketing and distribution costs and so lower profits. So addition of more cinemas into the engine is the best preferred mode of action and Nova will do just that. 

Also, at present Movies pay both the taxes; service tax and high entertainment tax. So our top class public servants with high level of intellect need to use high end of their brains to understand either something is a service (due to necessity) or a frivolous/luxury activity. But I can understand their mental block as they have been shown Cane crushing machine as brand image of taxation departments in their training days, so they see common man as cane. I hope GST will change this and technology enablers like UFO will see an increase in their margins as they’ll be able to claim input for CST/VAT paid on equipment purchase which under current regime is not available to them (Will explain Input and GST to non financial background people in some other post). I haven’t made a calculation for this but this should be good.

So Nova cinema can be a great addition to the UFO portfolio.

It also has other initiatives, Club cinema and UFO framez. Club cinema deals in screening of newly launched movies to premium clients in their place/Home theatre/Clubs. This can be a good vertical catering to niche portion of population. UFO framez is a hyper local advertising platform enabling local small city businessmen to use UFO platform to advertise on UFO enabled digital cinemas. This is just in the starting phase…so will explain these better in some other time.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

BSE IPO: Avoid counting Fruits as Seed is becoming a Tree

BSE has become the world’s fastest Stock Exchange with an order response time of 6 microseconds and the largest exchange in the world in terms of number of companies listed. It is the first Asian Stock exchange dating back to 1875. These are the things which shouldn’t be ignored especially when we are talking about an Indian Stock Exchange as we Indians just invest around 3-4% of our financial savings in equities as compared to 15% in China and 40% in USA. Most other developed/developing countries have ratios in the range of 10-15%. We never realized the potential of equity markets. I remember one fine day when I visited one of my friend and one Insurance adviser was trying to sell him a very high valued Insurance policy. My friend introduced me as a share market investor. But the adviser assured my friend that Stock markets were risky but their Debt bond based Insurance policies were safe. I simply asked him that the Bonds his insurance company were investing were issued by large listed companies and if they couldn’t make profits and couldn’t grow then who would pay us the high interest rates on bonds and bank FD’s. Banks can pay us high interest rates on Fixed deposits as they are earning higher from borrowers who are investing for economic growth.

Nothing is safe here. Even Bank FD’s (including Interest) are only secured up to 100000/- per bank. So if a Bank goes down, you’ll only get 1 lakh rupee for all of your FD’s. In fact few years back, it has happened in reality.  The Cyprus Govt decided to use the bank deposits of people in the banks above Euro 100000 to pay off its debts as bank deposits only up to Euro 100000 were insured.
So we are misguided regarding safety. We don’t know that Insurance is never about investment but it is for safety…so instead of buying term Insurance we go for low valued endowment plans. We go for FD’s for returns while they are just for safety; to beat the inflation rate to keep the purchasing power of our money secure. We aren’t earning anything from FD’s…it is not capital formation. We are illiterate when it is about investing and returns.

So I see things changing big time in India. Real estate prices are saturated, one can’t earn now by investing in Real estate. Gold is losing its shine also….although as I shared in my earlier post on Gold (Click here) that Gold is also for safety. So we can see high activity in Equity investments in the future. Earlier we used to invest just 1% in equities which has been grown to 3% now in recent times. So we are growing.

But most of the market is not positive about BSE IPO due to low equity trading share of around 15% as compared to Big brother NSE. Nothing share in equity derivatives. But still I see value in this due to high growth in equity markets and it’ll have its share anyhow. But I think BSE is doing some things right now and is focusing big on some emerging trends. It is investing big in Equity derivatives, commodity Exchange and Bond exchange.

I have talked enough about need to grow commodity trading in India (Click here). MCX is an emerging giant and I am heavily invested in this. World over, Commodity trading is way bigger than equity trading. Just for a perspective; U.S. daily commodity turnover, it is about Rs. 1,64,40,000 cr while daily turnover of equity market is 25,00,000 cr. i.e. commodity turnover is about 6 times the equity turnover. Now if we take chinese equity market daily turnover it is about Rs. 8,00,000 cr while that of commodity exchange is of Rs. 16,50,000 cr which is near about 2 times its equity turnover. Now if you take India where daily equity market ranges from 300,000 cr to 4,00,000 cr while that of commodity market daily turnover is about 25,000 to 30,000 cr which is 1/10th of equities. So we’ll see high growth in commodity exchange as SEBI is very serious about this. Our metal giants like Hindalco and HZL do not hedge their exposure at Indian Commodity exchanges but at Global due to low liquidity in India. 

Just look at the daily Equity turnover of India at Rs. 3 lac cr with China at 8 Lakh cr!! USA is like a Sun at 25 Lakh cr. And people are comparing the market share of both NSE and BSE!! This figure of 3 lakh crore is also superficial as FII's are still the major players of Indian market. They are responsible for around 60-70% of the market (if i am right). They are holding around 40% of free float, retail investors in India hold just 33% which is very low as compared to global markets. Domestic institutional players like MF hold 20%. So Indian markets are heavily impacted by the choice of FII's. Indian retail investors aren't well researched when it comes to investing; they invest when markets are at top (due to short term focus) and then they leave when market falls (due to fear and short term focus).

But India has huge capital requirements (Trillion Dollars) to finance its infrastructure. But here people are wasting their money in unproductive real estate and Gold investments. This is going to stop eventually due to falling returns in real estate/Gold. This money will come to equity market.  We need to see the vast sky. BSE and NSE won't compete with each other for market share but they will share the incremental growth. It is not like Indian telecom market which is mature and everybody is fighting for market share...eating the share of others...just like JIO. It is just like the initial Indian telecom market a decade back which had enough for everybody.

Same is the case for Currency Derivatives where RBI and SEBI are trying to grow the liquidity and lowering the speculation opportunities due to timing issues. They are going for extending trading time in synch with global exchanges. BSE is already a big player in Currency derivatives. It is having around 37% share. Actually Commodity and currency trading is highly inter connected as commodity players are also required to hedge their currency exposure also. So with the growth of Commodity trading currency trading will also see higher growth.

Next big thing will be the growth of Bond market in India. As shared in the post related to CARE Ltd (Click here). Indian Bond market will see high growth from now on. Even RBI has put the limits on banks in giving loan to big corporates. So Big corporates are going for Bonds now. We picked AK Capital services, which is a big bond player in India, at 280 and it has already run up to 440 today. Bond issuance has been increased from Rs. 174781 cr in 2008-09 to 413879 cr in 2014-15. This year figures could be way higher. RBI and SEBI are trying to get more people invest in Bonds along with Govt bonds in order to have more liquidity and to have more diverse holding to address the price volatility issues. BSE has a fairly developed Bond trading platform and Bond trading can be a big surprise factor. I am betting on the growth of bond trading big time.

So market may have its own views about the growth prospectus of BSE but I am seeing high growth in its business fortunes. It is also available at cheap valuations of below 20 which provide the margin of safety. So just sense the growth opportunities and exchange your money with it. No need for doing a comparison and an evaluation as seed is just becoming a tree. Avoid counting Fruits. I am going for it and will be holding for long term.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the IPO of the share discussed in this Post)

General Insurance sector-2nd Part: Nothing General about it. Stocks Covered: Tube Investments of India, Sundaram Finance, Bajaj Finserv, Max India, Future Enterprises

In my earlier post about general insurance (Click here), I mentioned about the rerating prospectus of general insurance companies once the IPO’s of these would come. SEBI was also pressing General Insurance companies for IPO. So today Govt has approved plans for divesting 25% in 5 public sector General insurance companies. This is as per my expectation and will surely make our Stock market better understand the valuation of General Insurance companies. General insurance sector is way underpenetrated in India with around 28 players fighting for small scale of business available. Everybody is fighting with low prices to lure customers making us think that General insurance is useless low cost phenomenon mostly forced upon us. However it is ,in fact, a specialized service which can save us from unforeseeable costly accidents. So quality of service is very important. But as most of the players are busy in the price war so nowhere focus is on to improve the customer experience and service quality. They need to make themselves more relevant so that more people understand the value of insurance. But I find it hard to understand what growth they can achieve with low prices and with even low quality services.

WHY IPO IS RELEVANT

IPO is all about getting the most for your equity stake. For this, we need better business model with quality balance sheet. But at present, PSU General insurance companies have dismal balance sheets and operating model. Four public-sector giants had massive underwriting losses for the half year — New India's underwriting loss was Rs 1,803 crore, followed by United at Rs 1,533 crore, Oriental at Rs 1,465 crore and National at Rs 991 crore.

But Insurance business is very different from other businesses where incremental revenue brings more profits. But in Insurance, in quest for growth, one can underwrite riskier insurance case which can destruct even the profitability of 10-20 earlier cases. So growth is never a blind game for Insurance sector.

IPO will make these General insurers to put profits into perspective and to focus on repairing their dismal balance sheets. So I see an end to price war and more focus on profits with high levels of service with more innovative plans.

Second; as explained in my previous post that in spite of making underwriting losses General Insurance companies are still profitable due to Investment income. Insurance companies receive premiums and pay the claims against premiums received. But there is a time Gap between these two events…they are not paying claims immediately…there is always a time gap between premium period and claim period during which Insurance companies can use this float to earn investment income from the premium amount. Float is the money that doesn’t belong to Insurance companies but which they temporarily hold. So Insurance companies invest this float money into so many investment options like Bonds etc. and earn investment income. Indian general Insurance companies are profitable only due to this investment income.

But this investment income will fall due to falling interest rates. Interest rates are falling due to low inflation (RBI cutting Repo rates) but the rates will fall even more due to high bank deposits courtesy Demonetization. So this falling investment income will put more pressure on General Insurers to focus on profits at underwriting levels. Although I think they will post high profits this quarter due to rise in Bond prices (Bonds they are holding in their portfolio) pursuant to fall in interest rates (Bond prices are inverse to Interest rates).

I have mentioned many times that Banks, in their quest for growth, aren’t constrained by deposits or reserves (as is commonly thought) but by Capital. Banks are always short of capital. They need to maintain minimum Capital adequacy ratio; a capital base adequate to absorb any unpredictable losses in the future. The current NPA issues of our PSU Banks have the potential to destroy any chance of future growth as in the absence of adequate capital they can’t offer more credit.

SOLVENCY RATIO: Fat is good

In the same way, Insurance companies are also constrained by capital. The adequacy in case of General Insurance companies is a function of Solvency ratio. Insurance is a very risky business (riskier than banks) where one calamity like Chennai floods or an earthquake can create havoc on their business. So these companies need to have enough capital to absorb any such shocks on our behalf….which is their business. We are paying them only for this. It is not like equity money invested into current retail startups like Flipkart (Startup!!) which can burn this cheaply for acquiring more customers. Insurance is big responsibility…requiring careful business mind. They are supposed to get fatty in order to bear the pain during starvation. But our General insurance companies at present are devoid of any such fat…they are way too lean.

PSU General Insurance giant National Insurance’s solvency ratio (1.2) is well below the mandatory ratio as prescribed by IRDA (1.5). Oriental Insurance has solvency ratio of 1.14….and they are planning for IPO?? What special valuation will Govt get from these general balance sheets?

Solvency Ratio is a measure of total assets of an Insurance company relative to its total liabilities. As per current IRDA rules, assets must be 150% of total liabilities. The process involves valuation of the assets and determination of the liabilities. The value is assigned to assets as per the provisions laid down in IRDA Rules. For instance, advances of unrealizable character, deferred expenses, preliminary expenses in the formation of the company, etc are to be assigned zero value. Assets also include the insurance company’s investment in approved securities, non-man-dated investments; etc. The determination of liabilities is more complicated. IRDA Rules have prescribed a detailed method for the determination of liability by both life insurance as well as general insurance companies. I’ll try to post another study on this when time permits.

We live in a dangerous world now. Our capacity to create destruction has only grown multifold. Events such as the terrorist attack on the World Trade Centre in New York can create unexpected liabilities of a magnitude difficult to anticipate and cover. A giant earthquake and terrorist attack can impose unbearable burden on the Insurer and it can go insolvent. That’s why Solvency ratio is very important.

In my post related to GDP (Click here), I have mentioned that being resilient is one of the factors of growth. Solvency ratio is just that…it demonstrates the resilience of an Insurance company. It needs to have extra cushion. Imagine a situation when a Life Insurance company with inadequate solvency ratio is required to pay for claims due to some big natural calamity and in the process it goes insolvent…we’ll lose all our money…our investment.

Insurance is not about Cheap and Low Cost Products

That’s why I feel that Insurance is a specialized service requiring high business acumen. I always tell that cheap policy or High promised returns are not the prime metrics in choosing an Insurance company. We are misled here as Solvency ratio is the biggest relevant figure to look out while choosing an insurer. Higher the ratio higher the chance that you insurer can meet any calamity. And calamities are inevitable…once in a while they are coming always. So Insurance companies can’t relax in wasting money in acquiring cheap customers by offering low priced insurance policies. Just for putting things into perspective, among Life Insurers Bajaj Allianz was having Solvency ratio of around 7 and also it was the only company in General Insurance earning underwriting profits (Bajaj Finserv is the holding company, I always like Bajaj for their great Business insights).

So these General Insurers can’t think of getting high valuations with low valued balance sheets and business models. PSU General Insurers can’t always look towards Govt for their capital needs; they need to have self-sufficient model. Sometimes I think that this reckless behavior from PSU business houses like Banks and Airliners should have been penalized by competition watch dog. These PSU’s do bad business…bad management…terrible choice of customers (Mallaya/Jaypee)….they compete on cheaper prices. But when they are into losses due to their terrible business models, they beg to Govt for capital which our Govt does with public money. This is pure looting and should be stopped.

So I think good time for General Insurance industry will come shortly. We may witness some consolidation. We’ll see players with more specialized set of services. Like Max Bupa is catering to Health Insurance and due to synergy of Max hospital can become a force in health insurance.

Some time back I have shared about the potential of Internet of things (IOT) in business. IOT can provide big benefits to General Insurance sector. Sensors in Cars can detect the driving pattern of a person and on the basis of the same premiums will be charged (High premiums for bad driving, Salman khan!!). Health Insurance companies can use wearable devices to monitor the health of its customers and can take advance decisions/steps in case of emergency and thus reducing its costs. But these things will become a reality when they have profits to back up these specialized set of services. That’s why I feel quality of services and innovative products are the key.

General insurance penetration is extremely low in India...around 30% for 2 wheeler, 40% for commercial 4 wheeler (private is good at 70%), health insurance is just at 20%. Crop insurance is the new high growth segment.

So as explained in earlier post also, General Insurance stocks like Tube Investments of India (CMP 570), Sundaram Finance (CMP 1230) , Bajaj Finserv (CMP 3011), Max India (CMP 140) are a great fit for investing. Even Future enterprises, CMP 18.30 (Holding 30% share in Future Generali Life Insurance and 50% in Future Genereli General Insurance) can be worthy...and this can surprise as it is focusing big on health insurance. Its Gross written premium was 1600 cr in 2016. I am never a follower of Reliance (Reliance Capital) and Religare…so I am leaving these from my study....because we are looking for Special companies in General.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

Happy New Year 2017: Let's Make More Time This Time

….and another year is passed. I constantly hear people pointing out the incredible speed at which time is running away from them. Years look like months. One hour phone call to my love life (of course before marriage) now appears bigger than 5 years of married life. Time appears to be moving slow in young age and quite fast as we age. Well, there are some strange theories which say that this perception of time (moving fast or slow) has its roots linked with the ratio of time interval to the total life span we have been alive. Like for a 10 year old young boy, one year is a long period of time since one year is 10% of his total life so far. But for a 50 year old this one year is just 2% of his total life. So no doubt we can see here that 10% is more than 2%.

But I have always felt that somehow this time perception is related to level of my consciousness. How conscious or we can better say “aware” I am?  And we are aware only when we are doing something novel, when we are in some adventure, when the moment is a quest for life and death….and time is slow. We can see that as we age our routine becomes repetitive, there is nothing new in it….we just get up (or gather ourselves) from the bed, breakfast, routine job, some flirt/gossip, back home and sleep. There is nothing novel in it….nothing new to challenge our mind. In fact our mind can do these things for us in sleep also. Our Mind can only Re-act….it can’t act…it filters through the stored memories and then suggests the route of action. Act is the responsibility of Consciousness or Soul….when we challenge the order of our life to experience something new. Remember our first love proposal…of which we had no experience, job interview, a warrior fighting for life and death….and these moments are eternal.

So the more we learn new things, new adventures, challenge our notions and principles…more alive we are for we are not an entity but a flow. We are not here to pass time, to please some God…but we are here to experience ourselves…and through this experience we absorb this mysterious phenomenon called life…we move forward towards our quest to know what we are.

So let’s plan something new for ourselves this year…learn something new…anything that we are yearning for long…anything that makes us more alive….music…martial arts…language….stock market. This is the path of a warrior…to explore life…to live more and follow less.

MY BEST WISHES FOR A GREAT LIFE FROM THIS YEAR…HAPPY NEW YEAR.