Company Name – Saregama India Limited (Saregama)
Current Share Price – INR4,741 (March 10, 2022)
Market Cap – INR 9,140 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-one 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 44 million subscribers on the platform. The firm has a distribution network of roughly 30,000 retail stores as of March 2021.
Saregama also produced a consumer electronic product “Carvaan” in 2017. It has close to 5,000 songs in each device and is sold as collections, 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 projects for Zee and Netflix.
The majority of Saregama's revenue comes from licensing fees, which accounts for about 65% of total revenue. 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 because all music streaming sites, like Spotify, Gaana, Saavn, and YouTube pay a set fee to Saregama for music IP rights.
Product sales resulted in revenue of 19.5%, film and television series revenue accounted for 11.8% of total income.
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 50 new films, Web series episodes, and 1,200-1,500 hours of new TV serial programming.
In FY21, India accounted for 76% of Saregama’s income, down from 79% in FY20.
As of FY21, the company's highest expense was production expense, which accounted for 26% of net sales, followed by employee costs, which accounted for nearly 16%, raw material costs, which accounted for 5%, and selling and distribution costs, which accounted for ~9%.
Saregama has six subsidiaries, in four of which it has a 100% ownership, and in two, the company has 76.4% ownership each. In addition, the company owns a 26% stake in a joint venture.
From INR 139 crores in FY17 to INR 284 crore in FY21, license income increased at a CAGR of roughly 20%, strengthening the revenue flow of the Company.
It features India's largest music library, with over 1.3 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. Saregama's production costs have decreased during the last ten years; however, royalty costs have continuously climbed. The production expenditure in FY12 was 21.6% and the royalty expense was 9.3%, whereas the production expense in FY21 was 13.1%, and the royalty expense was 12.8%.
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.
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 Limited - 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 Q3FY22 results were strong, the company’s revenue increased 12% to INR 150 crore in Q3FY22, compared to INR 134 crore in the same quarter in the previous fiscal year. For the same quarter, the firm recorded a 34% rise in total net profit to INR 43 crore.
In FY21, Saregama gained its market share primarily through non-film music. This was due to the year's reduced film release schedule. The company purchased global audio and video rights to 162 new film and non-film songs in FY21. The revenue of INR 442 crore in FY21 was down 15% year on year, mainly due to a 14% reduction in music revenues, which were hit heavily by Carvaan sales, which fell 54% year on year to 3,44,000 units in FY21. On the other hand, EBITDA for FY21 was INR 130 crore, up 115% year over year, mainly because of 1) an 80% YoY decrease in contract manufacturing costs due to lower Carvaan sales, and ii) a 60% y-o-y drop in marketing and promotion spending, mostly due to Carvaan and negligible new content. As a consequence, the EBITDA margin improved from 17.4% in FY20 to 29.4% in FY21. However, due to improved operating performance, PAT increased to INR 113 crore from INR 44 crore.
3. What is my view on company valuation?
Over the last five years, the share price of Saregama has increased by 18.5x (from about INR 238 in October 2016 to approximately INR 4,440 in October 2021). The company currently has a market capitalization of INR 9,140 crore as its share price nearly tripled in the past 12 months.
Saregama trades at P/E (TTM) multiple of 62.7x vs Tips Industries Limited of 39.1x, Zee Entertainment Enterprises Ltd of 22.2x, and Industry P/E at 39.7x.
The business is practically debt-free.
The company's profit has increased at a CAGR of 59.5% in the last five years.
Saregama has ROE of 25% and ROCE of 34%.
We believe Saregama's expansion will be more sustainable, although the stock is currently overvalued. In the future, the Company intends to monetize its IP through NFTs.
4. What are the risks to the investment analysis?
As of December 31, 2021, the company's promoters and promoters group owned roughly 58% of the company's shares, a decrease of 9.6% from the previous quarter's ownership.
High entertainment taxes also have an impact on the revenue of the company.
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