Company Name – Saregama India Ltd (Saregama)
Current Share Price – INR 359 (January 20, 2023)
Market Cap – INR 6,935 cr
The Indian Music Industry (IMI) is the leading organization in India that represents the interests of the recorded music industry. Its purpose is to secure the survival of a vibrant music business in India and foster and spread a diverse musical culture. The IMI includes record labels such as Saregama (HMV), Universal Music India, Tips Industries Limited, Sony Music Entertainment India, Virgin Records, Magnasound, Aditya Music, Times Music, Zee Music Company, and T-Series, as well as several other well-known international, national, and regional labels. Over 75% of all legal music sales in India are represented by the IMI. The Indian music industry is valued at INR 15,300 crore and has grown at a compounded annual growth rate (CAGR) of 10.3% over the past five years. By 2023, it is expected to rise at a 15% CAGR to INR 23,200 crore. Digital consumption propelled by the use of smartphones has fueled India's growth. Audio streaming services' popularity is due to their cheaper data prices, ease of availability, and efficient data mode.
1. What is interesting about the stock?
The RP Sanjiv Goenka Group purchased Saregama India Limited (previously The Gramophone Company of India) from EMI UK in 1902. Saregama is the country's oldest music firm and a multilingual TV programming supplier and film studio. It is involved in the recording and releasing of movie-related and non-movie-related music, films, and various TV series. Not only does the firm produce content in Hindi, but it also has a presence in regional languages like Tamil, Bhojpuri, Punjabi, Gujarati, Telegu, etc. It also boasts the world's largest repository of intellectual property rights, with over 1 lakh 30 thousand songs, film dialogues, and background soundtracks in its library. The company controls the intellectual property rights to approximately 6,000+ hours of TV shows and sixty-four films. The company's licensing business involves licensing its diverse songs to various players such as OTT music, OTT videos, broadcast platform, social media, and society. The corporation has 25 YouTube channels with 64 million subscribers on the platform.
Saregama also produced a consumer electronic product “Carvaan” in 2017. It has close to 5,000 songs in each device and is sold as a collection, especially vintage. Yoodle Films, a small production company focused on generating content for third-party digital platforms, is another line of business for Saregama. Generally, Yoodle works on low-budget films. The studio's primary focus is on script selection, which is a time-consuming process overseen by a staff of script readers who rate each script on a numerical scale. They've worked on pre-licensed projects for Zee and Netflix.
Most of Saregama's revenue comes from licensing fees, accounting for about 60% of total revenue in FY22. The Company monetizes its existing IPs while also developing new ones. Since 2017, the Company's license income has steadily climbed. The main reason for this increase is that all music streaming sites, like Spotify, Gaana, Saavn, and YouTube pay a set fee to Saregama for music IP rights.
Music accounted for ~83% of revenue in Q3FY23. Films and Television accounted for ~15%.
In 2017, the firm began collecting new Hindi and Tamil film soundtracks. Over the next three years, the business expects to gain 20-25% market share in new films, release 60 new films, Web series episodes, and 1,200-1,500 hours of new TV serial programming.
As of FY22, the company's highest expense was production expense, which accounted for 25% of revenue, followed by employee costs, which accounted for nearly 13%.
From INR 139 crore in FY17 to INR 360 crore in FY22, license income increased at a CAGR of roughly 20%, strengthening the company's revenue flow.
It features India's largest music library, with over 1.4 lakh songs in 18 different languages. The majority of the company'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 use its collection.
Because there are minor costs in between, it is an asset-light company. All the firm needs to do now is pay royalties. The royalty expense was 9.3%, whereas the royalty expense was 10.9% in FY22.
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. Recently, the Company launched a mobile phone pre-loaded with songs but it doesn't have any competitive advantages to compete against established players in the mobile.
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 might result in a loss of revenue for music labels and a considerable reduction in their pricing power.
Tips Industries Ltd - is a listed film production, promotion, and distribution firm based in India. The company has about 29,000 songs in its library.
Zee Entertainment Enterprises Ltd - (formerly Zee Telefilms) is a media corporation based in India.
T-Series - is an Indian music record label and film production firm owned by Super Cassettes Industries Private Limited.
Dr. Sanjiv Goenka is the company's current Chairman and Non-Executive Director. The business's current managing director, Vikram Mehra, has been with the company since 2014. He handled the launch of Carvaan, a ground-breaking physical device.
2. Key Historical Financials
Saregama's Q3FY23 results were strong, the company’s revenue increased 23% to INR 185 compared to INR 150 crore in the same quarter in the previous fiscal year. The Company recorded a 30% rise in total net profit for the same quarter.
Company raised INR 750 cr in FY22 to acquire music labels and aggressively purchase new content. The first acquisition was a Telugu music label's catalog of 1500 music IPs from 280 films. The revenue of INR 581 crore in FY22 was up 31% year on year, mainly due to a 26% jump in licensing revenue. On the other hand, EBITDA for FY22 was INR 187 crore, up 44% year over year. As a consequence, the EBITDA margin improved from 29% in FY21 to 32% in FY22. However, due to improved operating performance, PAT increased to INR 153 crore from INR 113 crore.
Cash flow conversion was poor in FY22 with an increase in working capital (inventory and receivables).
Saregama has a cash balance of ~ INR 650 cr as of March 31, 2022. Another thing to note is that the MD salary was ~6% of PAT in FY22 which is unusually high and this doesn't include a fresh loan of INR 13 cr (8% of PAT) to MD in FY22.
3. What is my view on company valuation?
Over the last five years, the share price of Saregama has increased by 4x (from about INR 75 in January 2018 to approximately INR 360 in January 2023). Share price has fallen ~30% since January 2022.
Saregama trades at P/E (TTM) multiple of 37x vs Tips Industries Limited of 29x, Zee Entertainment Enterprises Ltd of 26x
The company's profit has increased at a CAGR of 78% in the last five years.
Saregama has an ROE of 16% and a ROCE of 22% - which fell due to recent capital raise
We believe Saregama's expansion will be more sustainable, although the stock is currently significantly overvalued.
4. What are the risks to the investment analysis?
As of December 2022, the company's promoters and promoters group owned roughly 58.5% of the company's shares, a decrease of ~5% from Sep 2021 due to fundraising.
High entertainment taxes also have an impact on the revenue of the company.
About the Author
I write about the stock market, cryptocurrency, and blockchain. I have a Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.
I have had no stock, option, or similar derivative position in any of the companies mentioned for the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.