Saregama Ltd - India's Oldest Music Label Company


Company Name – Saregama India Ltd (Saregama)


Current Share Price – INR 366 (Jun 27, 2022)


Market CapINR 7,054 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 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 60% 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 ~20%, film and television series revenue accounted for ~18% 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 60 new films, Web series episodes, and 1,200-1,500 hours of new TV serial programming.


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.


Key Strengths

  • From INR 139 crores in FY17 to INR 360 crore in FY22, 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 1.4 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. 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%.

Key Weaknesses

  • 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.


Key competitors

  • 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 Q4FY22 results were strong, the company’s revenue increased 46% to INR 180 crore in Q4FY22, compared to INR 123 crore in the same quarter in the previous fiscal year. For the same quarter, the firm recorded a 30% rise in total net profit to INR 48 crore.


Company raised INR 750 cr in FY22 to acquire music labels as well as the aggressive purchase of 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.


Management has given the guidance for the EBITDA margins to fall by ~6%.


3. What is my view on company valuation?


Over the last five years, the share price of Saregama has increased by 13x (from about INR 28 in June 2017 to approximately INR 366 in June 2022). Share price has fallen ~30% since the start of current calendar year.

  • Saregama trades at P/E (TTM) multiple of 46x vs Tips Industries Limited of 27x, Zee Entertainment Enterprises Ltd of 20x

  • The company's profit has increased at a CAGR of 79% in the last five years.

  • Saregama has ROE of 16% and ROCE of 22% - fallen due to recent fund raise

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 March 31, 2022, the company's promoters and promoters group owned roughly 58% of the company's shares, a decrease of ~6% from Sep 2021 due to the recent fund raise.

  • High entertainment taxes also have an impact on the revenue of the company.

 

About the Author


I write about the stock market, cryptocurrency, blockchain. I have Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since 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 purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.


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