Shemaroo Entertainment Limited (Shemaroo) has entered the capital markets with its issue in a price band of Rs 155-170 to raise Rs 120 crs. The issue offers a discount of 10% to retail investors and closes today, Thursday 18th September. The company has allotted to 2 entities and within them 9 anchor investors 60% of the QIB book or overall 30% of the issue size. The subscription at the end of the penultimate day shows that the issue has been subscribed 1.01 times. QIB potion is subscribed 0.23 times, HNI on non-institutional investor portion 0.06 times and retail 1.77 times.
The retail portion needs about 29,000 forms to be subscribed on one lot basis. As of yesterday the company has already received 34,700 application forms which indicates that allotment will be by lottery only. Considering the fact that retail discount of 10% is being offered to retail investors, the comfort factor goes up and retail investors may apply for the minimum one lot of 85 shares or Rs 13,005. The possibility of making money at this price considering the support the issue has received from the community is more or less assured.
There are concerns with the company which need to be mentioned. The receivables of the company are high with the same doubling from Rs 70.93 crs in year ended March 2013 to Rs 140.55 crs in March 14 while sales in the same period rose from Rs 214.73 crs to Rs 264.61 crs. If one does a simple division of debtors by the sales figure the outstanding has grown from 184 days in March 2013 to 194 days. While the management believes this to be the industry practice with TV channels typically paying for content in 180-210 days, analysts find it to be on the higher side. Secondly the system of write off of inventory is a bit confusing for analysts as the predictability of the same is not known. The third concern is on the growth of this business. Everyone is aware that films are available on the net and anyone can have a look at them.
Shemaroo believes that growth will come from two sectors where the bulk of revenues would be from the entertainment segment or the films segment which would consist of new releases and also classics. The other segment is digital media and one such example is you tube where content is screened free and where revenue earned from ads displayed during the screening are shared between the website (google) and Shemaroo.
The company has not shared the breakup of revenue in the RHP for reasons best known to them and their merchant bankers but suffice to say that film distribution and rights is a lottery business to some extent as well. One “Dirty picture” can make the difference between an average year and a great year. With the number of big budget films being made increasing and the new trend where just released pictures are screened on television within a month of their theatrical release opportunities exist.
The net profits of the company have grown from Rs 24.55 crs to Rs 27.14 crs. The EPS on historical basis is Rs11.81 for year ended March 2013 and it has increased to Rs 13.74 for the year ended March 2014. Based on the issue price band of Rs 155-170 and the fact that the anchor investors have come at Rs 170, the issue in all probability would be priced at R 170 which is the top end of the band. At this price the fresh issue of shares would be 70.58 lac shares and the EPS Rs 10.13. The PE at which shares are being offered effectively becomes 16.78 times on a fully discounted but based on historical numbers of March 25. If one were to assume that the EPS would grow by say 20% the PE would come down proportionately.
The objects of the issue are for augmenting working capital required for buying content and then the receivables when this content is sold/screened through television channels.
In conclusion in the short term this issue is a good speculative play and with retail investors to get allotment on lottery basis and that too at a 10% discount there seems to be money in the making. In the medium term they need some few movies to click to make the superlative difference between average and super year, while in the long term we all need to see what shape and contours the digital media platform unfolds.
SEBI Disclaimer: – I intend to apply for that one lot as a speculative play.
