Sunday, 29 January 2017

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 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)


  1. Hi Gurpreet, how do you like hcl infosystems after today's results. Thanks.

    1. Hi Dear, Nothing to talk about results...but as expected due to demonetization. Also HCL is trying for a big U-turn in its fortunes which may take some time as it needs to shed the old weight while getting the new muscle. As shared earlier, my main catalysts are its warranty and after sales service business (under the Brand name HCL Touch) and growth in other services and Aadhaar business. HCL Infosys is the first authentic Indian manufacture of PC's from 1976. It made its first microcomputer in 1976 just when Steve jobs made its first Macnitosh.Then Licence raj and useless Govt regulations made sure that HCL would left comprehensively behind.

      But HCL has the chip level knowledge of processing units whether they are of PC's, smartphone or Laptops. So i think it can do something big in this area. But still risky....i am holding from around 40 levels.

      Also kindly append your name with the query always...