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The RP Sanjiv Goenka Group purchased Saregama India from EMI UK in 1902, making it the country's oldest music firm and a multilingual TV programming supplier and film studio. It is involved in the recording and releasing of music, films, and various TV series. The company boasts the world's largest repository of intellectual property rights, with over 1 lakh 40 thousand songs, film dialogues, and background soundtracks in its library as well as approximately 6,000 hours of TV shows and sixty-one films.
The majority of Saregama's revenue comes from licensing fees, which accounts for about 60% of total revenue. Since 2017, the Company's license income has steadily climbed. The main reason for this increase is because all music streaming sites, like Spotify, Gaana, Saavn, and YouTube pay a set fee to Saregama for music IP rights. The corporation has 25 YouTube channels with 36 billion views in Q4FY22.
In 2017, the firm began collecting new Hindi and Tamil film soundtracks. Over the next three years, the business expects to release 60 new films, Web series episodes, and 1,200 to 1,500 hours of new TV serial programming.
Saregama's production costs have decreased during the last ten years. However, royalty costs have continuously climbed. The production expenditure in FY12 was 22% and the royalty expense was 9%, whereas the production expense in FY21 was 13%, and the royalty expense was 13%.
The optimal monetization of a company's intellectual property rights is crucial to the music industry's revenue generation. As a result, content piracy through other media outlets result in a loss of revenue for music labels and a considerable reduction in their pricing power.
The company faces tough competition from Tips Industries, Zee Entertainment and T-series, but it holds up well because the majority of Saregama’s music dates from the 1960s through the 2000s. Therefore, given the restricted availability of these tunes, the rising interest in retro music allows it to gain an advantage.
So, what is our view on company valuation?
Over the last five years, the share price of Saregama has increased by almost 20 times. Saregama trades at P/E (TTM) multiple of around 55 times, and is a practically debt-free business. Moreover, the company's profit has increased at a CAGR of 80% in the last five years.
Saregama doesn’t have a good capital allocation policy. As a result, the Open magazine of the company is not a profitable venture. Furthermore, the company spent a lot of money on "Carvaan" advertising without commensurate product revenues, resulting in a stock downgrade.
We believe Saregama's expansion is sustainable, although the stock is currently overvalued. In the future, the Company intends to monetize its IP through NFTs.
As for the risks to this analysis, high entertainment taxes have an impact on the revenue of the company.
So, would you invest in Saregama India Limited?
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