SAREGAMA INDIA LTD PRICE: RS. 854 PRIVATE CLIENT RESEARCH NOVERMBER 27, 2017

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1 PRIVATE CLIENT RESEARCH NOVERMBER 27, 2017 Ritwik Rai Stock details BSE code : NSE code : SAREGAMA Market cap (Rs bn) : 14.8 Free float (%) : wk Hi/Lo (Rs) : 181/960 Avg daily volume (nos) : Shares (o/s) (mn) : 174 Summary table (Rs mn) FY17 FY18E FY19E FY20E Sales 2,185 4,178 5,977 7,283 Growth (%) EBITDA ,049 EBITDA margin (%) PBT ,092 PAT EPS Growth (%) CEPS (Rs) BV (Rs/share) Div/share (Rs) ROE (%) ROCE (%) Net cash (debt) NWC (Days) P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) Source: Company, Kotak Securities Private Client Research Share holding pattern Public 22.54% Corporates 17.79% DIs 0.14% FIIs 0.42% Source: Capitaline One-year performance (Rel to Sensex) Source: Capitaline Promoters 59.11% SAREGAMA INDIA LTD PRICE: RS. 854 RECOMMENDATION: BUY TARGET PRICE: RS FY19E PE: 33.2X After several decades of low activity, Saregama India Limited has sprung into action, finding new ways to monetize its significant music library. The products business of the company, which had virtually flattened to near-zero in FY16, is likely to rise to c. Rs 3.7 Bn in FY20, largely on account of Carvaan sales. Further, B2B music business of the company is likely to register doubledigit growth in our forecast period (FY18-FY20), as the drag from telecom revenues subsides and OTT/ publishing streams register strong growth. The company intends to utilize these flows to refresh its IP assets, with a foray into low risk movie production (aimed at OTT) and also gradual re-entry into (fresh) music rights. With revenue growth and earnings growth CAGR of 49% and 128% respectively (over FY17-FY20E), we believe high near-term valuations (33X FY19E PER) are a surmountable hurdle. Initiate with BUY, and a price target of Rs 1264 (31X FY20E PER). We note that Saregama is a high-risk, potentially high return idea, suited only for investors with requisite risk proclivity. Awakenings : Saregama owns music rights of 120,000 songs, mostly acquired prior to 1990s. The company experienced reduced activity later, as competition stepped in, and as the legal music industry in India suffered a piracy jolt starting in late 90s (continuing till date). As music accessibility has been enabled through lower data costs/ rising smartphone penetration/ technology options, the company has awakened to the new environment. Saregama has taken several steps to monetize its significant and loved music library. These include, among others: a/ extensive work on metadata that has enabled greater use of its library on digital platforms, b/ product launches that can compete with the pirated prices and/ or fulfill need gaps, including music cards, and Carvaan (5000 pre-recorded songs+fm+usb+bluetooth player). Carvaan, a game changer for earnings: Carvaan is the most significant B2C initiative of Saregama. The device has sold c. 95K units in the very first quarter of its launch (2QFY18). We believe the device could sell over 2 mn units (cumulatively) over the next 2.5 years (starting with 0.5 mn units in FY18, and rising to c.1 mn units in FY20). Along with secular growth expected in the licensing income of the company (enabled by OTT platforms, publishing, youtube), this sharp run-up in sales of Carvaan would enable sales growth of 49% over FY17-FY20E; although on a low base (Rs 62 mn PAT in FY17), earnings growth would likely come in at about 128% CAGR over FY17- FY20E.. Carvaan as a signal: To us, 2QFY18 sales figure of Carvaan is a signal - a validation of the monopoly that Saregama enjoyed in the years past while platforms may change, the value of its music library is on full display. Saregama has displayed that it is, owing to its monopoly in old Hindi music, likely the only company that can sell music in a large bouquet format. Given the awareness about Carvaan (low, as of now), and distribution (still rising, several languages and geographies to explore), we believe there is sufficient reason to believe Carvaan sales shall be strong over the next 2-3 years. As regards longer-term, given the creativity that the management has displayed in Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

2 Carvaan launch, we are of the view that the benefit of doubt should be given to the company. Company chasing growth options aggressively, could be a player to watch for in content in the new era: Helped by cash flows from license earnings, and Carvaan, the company is making cautious re-entry into music IP, and also into content production (films). We view these as experiments with contained risks, which could open up a significant market for the company. On the content production (movie) business, we note that while the market is small as of now, it could scale up quite rapidly, opening up new avenues for the company. As of now, we model for near-zero impact on earnings/ valuation from movie production (FY17-FY20E). The company could also find some earnings upside in Tamil content (has over 3,000 hours of content library of Tamil serials, unexploited as of now) from OTT players. Cash Flows, Balance Sheet supportive to medium-term objectives: We project gross cash flows of c. Rs 1.4 Bn through FY18-FY20E. The company is debtfree, and has significant land assets (Rs 1.8 Bn; future exploitation options being looked at) and investments (Rs 1.5 Bn at market value, in CESC stock, not for sale). Given the likely budget of movies (12/ year@rs 40 mn budget/ movie), and new music (likely less than Rs 250 mn/ year) over the mediumterm, we believe the company can meet its cash requirements comfortably, even with a few misses. Exposure to high growth platforms, Clarity in strategy, Imagination/ execution in monetizing music library; we initiate with BUY and price target of Rs 1264: We value Saregama at 31X FY20E (five years mean being 32X forward earnings), or Rs We initiate with a BUY, while noting that Saregama, due to a lack of track record in the primary earnings driver we are projecting, is a high-risk, high return opportunity, and should be bought into by investors with the requisite risk proclivity. Risks: 1/ high dependence of our projections on strengthening traction in Carvaan, 2/ high exposure to changes in technology, 3/ other industry level risks. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

3 INTRODUCTION TO INVESTMENT THESIS A part of the RP Sanjiv Goenka group, Saregama India Ltd. is involved in music and content production industries. With a music library of 120,000 songs, the company is involved in monetization of its library through physical sales, and license fees generated from telecom/ digital services/ radio FM. The company has also been producing content for Sun TV Network. Since Saregama owns the IP for the content it produces, the company also has a substantial library of Tamil TV content (3,000 hours). Saregama owns Open magazine, which generate advertising and newsstand revenues. Revenue Pie FY2017 Others 0% Sale of Products 3% Advertising 3% News-stand 0% Income from TV Serials 31% Licence fees 63% Source: Company Reports, Kotak Securities Private Client Research For the past few years, Saregama has been largely a B2B company (deriving revenues through sales of music to telecom/ other businesses; and selling content to Sun TV); however, the company is making significant attempts to enter the B2C space, starting with its music cards (FY17), and more recently with its product Carvaan (5000 pre-recorded songs assorted into playlists, along with a Bluetooth speaker and FM radio). Most of the music content owned by Saregama is vintage 90s or prior. Until the 1980s, Saregama bought the rights of virtually every important title. In the 90s, the company faced competition from other players (T-Series, Tips, Venus, among others). In the 90s, piracy emerged as a significant problem for the industry, and monetization became difficult. Following this, Saregama went into a hibernation of sorts, when the company refrained from buying new music rights. In recent years ( ), the company has been working at strengthening its B2B model (relevance of the company s channels on youtube, availability of songs and metadata on OTT platforms such as Gaana, Saavn, Wynk, Reliance Jio, Idea Music Lounge, itunes, and the like). Until recently, revenues from telecom (CRBT and the like) accounted for the largest chunk of the license fee stream. However, that is fast changing, with strong growth in OTT/ YouTube and a sharp decline in telecom revenues. Most recently, the company has, after extensive market research, actively begun to pursue B2C models in music. The company launched music cards (4GB, 200 songs, priced at Rs 600, prices subsequently raised) in FY17, with some success (revenues c. Rs 50 mn in two quarters of FY17). These are aimed at replacement from CDs, and also in-car music. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

4 Saregama Music Cards Launched in FY17 Source: Company Website In 2QFY18, the company launched its boldest product yet Carvaan. This is a product that can play 5,000 pre-recorded songs, assorted by artiste. In addition, the product gives an option of Bluetooth, USB, and FM radio. The company has positioned this as a gifting product, meant to be consumed by 40+ age-group, but expected to be bought by younger (as a gift). Carvaan was launched at Rs 6,000, and its current price is Rs 5990/ Rs 6390 (post a price hike, followed by GST benefits). Carvaan Launched 2QFY18 Source: Company Website The company has followed this up with a Carvaan Mini product, which is essentially a USB/ Bluetooth device, and comes with a smaller number (250 versus 5000) of pre-recorded songs. The product is aimed at a much younger demographic, and is more price competitive for the Bluetooth speaker market. We note that Carvaan and Carvaan mini are aimed at very different markets one is aimed as a gifting product, the other is more likely to be bought by the user. The distribution of these is also different while Carvaan is aimed at larger stores, Carvaan mini aims at smaller distribution points (telecom/ DTH oriented) too. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

5 Carvaan Mini Source: Company Website Carvaan/ Carvaan Mini have met with conspicuous success the company has sold 95,000 units of the product in the very first quarter of launch. On the conference call for 2QFY18 results, the management has said that it would expect to sell 300,000 units of the product at the very least in FY18. Carvaan is expected to expand its market significantly in 2HFY18, with launch of a Tamil version of Carvaan (3QFY18), and a Bangla version of Carvaan (later). Further, the company is also expanding into international markets with Carvaan/ music cards, and has launched in North America in 3QFY18. Saregama has also begun to acquire Indian music afresh, although cautiously. The strategy in new music acquisitions is to start slowly, vet assumptions, and start building up a slate over time. Apart from music, the company is also making an attempt to develop its content production business further (apart from Tamil serials that the company continues to produce, for Sun TV Network). Saregama has decided it would not be producing content for which it does not own the IP. As such, the company has exited from its brief foray into Hindi serials production. Saregama has launched its banner Yoodlee Films, under which it would be aiming to produce a movie a month, within a budget of Rs 40mn. The company is experimenting with a model wherein it would be producing films with little money spent on stars (no stars, the story is the hero ) and the director, but would invite directors/ aspiring film-makers to make their dream stories on a profit-sharing basis (the company would share profits after the movie has covered its costs). Further, the theatrical revenues are expected to yield little revenues (instead, they are to be used as tools to improve the valuation of the films, for C&S rights, and exclusive sales to OTT players such as Amazon Prime). The company keeps a close watch on the expenses, and insists that the movies should be shot on location, and completed within 21 days. As per management, the company has been able to complete shooting for eight such films, with seven of them completing within the given time, and budget. The first of these movies, Ajji, has won rave reviews at film festivals, and has just been released in Indian theatres. Reviews of the movie have been encouraging. Brij Mohan Amar Rahein, the next film of the banner, is set to be released on December 1. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

6 Ajji- The First release from Yoodlee Films Source: Company Website Brij Mohan Amar Rahein Upcoming release (December 1) Source: Company Website Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

7 INVESTMENT THESIS Textbook Strategy: Utilizing Uniqueness to The Fullest, Targeting Fast- Growing Markets, Staying Cautious Our bullish stance on Saregama relies significantly on the belief that the company has, after a long period of allowing itself to be carried along with the market, is now using its rudders to guide itself to the most promising areas and strengthen its long-term competitiveness. The company has been unique in the kind of dominance it has had in several Indian languages, including Hindi. Thus far, the utilization of the extensive library that the company has was similar to any other company. What has changed in Saregama over the recent years is that the company has searched for its uniqueness, found it (monopoly over music content preferred by 40+ age group), and realized that it can exploit the uniqueness perhaps in a manner that no other music company can, in India. But even more than this realization, we are struck by method that Saregama has followed in its transformation. Saragama has employed extensive market research to judge whether the market is yet ready for its B2C intent. It has used insights from the market research for all key actions, starting from the design of Carvaan (looks like a vintage product, because what Saregama is selling is essentially nostalgia), to the positioning of the product (since older Indians, the intended users of the product, tend to be cautious spenders, the product has been positioned as a gifting product) to the pricing of it (while an average analyst/ investor might have thought Rs 6,000 is a price too steep, team Saregama apparently never had any doubts about it market research showed no price reservations at Rs 5,000). Even so, the company has been fairly cautious in the product s rollout, and the inventory it keeps. Such caution in the face of optimism and hope should be helpful to note for investors. We are also positive on the company s early focus on the OTT market. This is motivated by the key insight that the screen is becoming more and more private. The company believes there is a high likelihood that the demand for edgier, differentiated content, shall rise dramatically on OTT platforms. Saregama is willing to look at producing any content provided that the IP remains with the company. As such, while the company is starting out with films, Saregama could (the pricing being the key factor along with IP ownership) enter into other original formats too. The following table shows the original content budget of various significant OTT players. Original Content Budget Rs Bn Amazon Prime Video 5 Sony Liv <4 Voot <4 Eros Now <4 Alt 0.5 Netflix NA Hotstar <4 Source: Company Strong adoption of OTT platforms could have an additional benefit for Saregama in Tamil (serials) content. The company has a library of over 3000 hours of content, which may be exploited/ monetized on OTT platforms. We believe the company is taking all steps to contain the risks that it could, subject to the constraint of developing a sizable library that will aid signaling (as a serious player), bargaining power (with a bouquet approach, even if the studio gets 2-3 movies right, it can help a minimum price that other films get), and reducing transactions costs for potential buyers. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

8 Carvaan Success in first quarter a big signal for c. 1mn unit sales per year/ big profit driver for the company In the very first quarter of launch, Carvaan has clocked sales of 95K units (Carvaan and Carvaan Mini put together). This is not a small achievement, considering: a/ the launch has received minimal advertising and marketing support in the first quarter, b/ we expect sales have been more dependent on metro cities/ online sales through amazon/ other online channels. The management has said (2QFY18 conference call) that the company expects to sell at least 300K units of Carvaan in FY18 (full year, i.e. c. 200K units in 2HFY18). In terms of potential market, the management notes that the target market for a product like Carvaan is (all India, all languages) likely in the range of 25 mn, if one were to look at all households which fall in SEC A/B/ C and which have at least one member of the family over 40 years of age. We believe that actions taken by the company are indicative of a significantly higher sales number (than 300K units) in FY18, for the following reasons: 1/ Struggling to meet its supply requirement, the company is now sourcing from three vendors (from one), 2/ the company is likely to raise its retail outlet reach to 10,000 stores from 5,000 (end of 2QFY18), 3/ the company is expanding into the Tamil market in 3QFY18, 4/ the company will launch ATL activities to support sales from end-3q/ 4QFY18. It is also useful to remember the fact that Saregama has reported these sales in the quarter when Indian economy has likely hit a bottom of 5.7% in GDP growth. From a macro perspective, we believe a few indicators may help in sensing the number that Saregama can generate: 1/ the number of HD subscriptions in India is in the range of 10 mn households, 2/ the number of iphones sold in India last year numbered 2.5 mn,3/ the number of RE Bullets sold last year numbered 0.7 mn, 4/ the number of SUVs sold last year amounted to 0.8 mn. We look at the above statistics to provide a likely number of such people who are not likely to think twice before buying Carvaan as a gift for their near ones. We believe, using the statistics above as an indication that the likely number is close to 1 mn. Given: a/ the take-off figure for Carvaan in 2QFY18, b/ its entry into the Tamil Nadu market, which tends to adopt new products faster than the rest of India, c/ the figures discussed above, and d/ our intuitive sense of you struggle to find a gift for your older relatives, we are convinced that Carvaan is likely to clock around 500K units sales in FY18 (we note that more recent interviews of the management with the media also indicate greater optimism about FY18 sales). With a run-rate of about 200K in a quarter, and factoring in some growth as we go into FY20 (much higher penetration, entry into Tier-2/Tier-3 markets), we believe Carvaan sales in FY20 are likely to be around 1 mn. Carvaan, as per the company, makes gross margin of around 17-18%. The distributor margin in the product is about 25% (with the product priced at Rs 6000 initially, the company s realization was about Rs 4000, post taxes and distributor margin). As we go forward, we expect the company to make higher expenses in advertising and promotion of the product but we expect the company to gain in realization (declining distributor margin, and higher pricing). We believe that pricing actions taken by the company the company first introduced an upgrade, a remote control, which helped its raise price by Rs 500, then hiked prices by (further) 10% after 2QFY18 indicate that there is significant room for pricing benefits. We note that in its most recent conference call, the management has indicated that the company is working on a Carvaan Plus and a Carvaan minus model, which would further help segment the company s potential consumer base, and help appropriate a part of the consumer surplus. We finally come to the point of whether Carvaan sales are sustainable over the longer-term (that is, beyond 3-5 years). On this matter, while we agree that the product may lose its novelty value and sales growth could be constrained, we think Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

9 the larger point that Carvaan has made is that the company is in a position to make a bouquet sale of its music, in a convenient format to its target group. B2B Music Business Drag of Telecom Likely to Wear off, strong doubledigit growth likely Saregama management has been, at least over the past couple of years, extremely concerned about ensuring the relevance of the company s music library on the internet. A large part of the employee expenses of the company have been generated in ensuring that each of its songs is represented with the relevant metadata. A large part of the company s legal expenses incurred is to protect its songs from piracy. In the digital stream, it is a case of preparation meets opportunity for Saregama. The company s revenues from OTT/ YouTube have been galloping in recent quarters. Saregama registered 37% y/y growth in this particular sub-segment of license revenues in FY17. FY18 growth has come in stronger, at double-digit m/m. While the company s overall license revenue growth does not look as impressive in recent quarters, we note that telecom, which used to be the largest chunk of this revenue stream, has been declining very rapidly, and is likely nearing a bottom. In the most recent quarter, the company s B2B business has registered 19% y/y. Within the B2B business, OTT income has registered 45% y/y growth, publishing income has registered 19% growth, YouTube income has registered growth, while telecom has declined. In 4QFY18, the company shall also begin to register revenues from licensing arrangements with Apple and Amazon. There is, as such, a case for building in strong growth in licensing income of Saregama. We believe that growth in the licensing income would come in at c. 15% CAGR through FY17-FY20E. Quarterly Financials (standalone) Trending Positive, Set to gather Further Momentum Rs mn, FY Ends Mar 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Revenue from Operations Growth, % -7.0% -14.2% 0.7% 8.4% 28.4% 76.3% Expenses Contract Manufacturing Charges Changes in Inventories Cost of Production of TV Serials Employee Expenses Advertising and Sales Promotion Royalties Provision for doubtful debtors/ advances Other Expenses EBITDA Margin 7.8% 1.8% 4.4% 3.0% 10.3% 8.8% Depreciation and Amortization EBIT Other Income Financial Expenses PBT Exceptional Items Provision for Tax PAT Effective Tax Rate 52.5% 42.1% 50.5% 53.8% 51.3% 50.5% PAT Growth -34.7% 127.2% % 118.9% 57.9% 305.5% Source: Company Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

10 Segment financials (standalone) (Rs mn, FY Ends Mar) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Segment revenues Music TV Serials Total Segment Revenues Segment profits Music TV Serials Total Segment profit Less: Finance Costs Other Unallocable Expenses Other Unallocable Income Profit before Tax Source: Company Reports We would like to note the following regarding the quarterly financials of Saregama: a/ there is visible traction in revenues/ profit growth helped by the B2C initiatives of the company, b/ we expect about 200K units of Carvaan to be sold in 3QFY18, which should further aid revenue/ profit growth, c/ the company has noted that 4QFY18 profits are likely to be helped by deals with Amazon/ Apple on the B2B side, d/ the company has said that banked inventory (TV serials) shall be liquidated in 2HFY18, which shall bring some more luster in earnings. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

11 FINANCIAL PROJECTIONS AND VALUATION Carvaan to Lead 49% CAGR in sales through FY17-FY20E We project 49% CAGR in sales of the company through FY16-FY20E. We factor in Rs 3.7 Bn in sales from Carvaan in FY20. Although smaller in scale, the company s other businesses are expected to witness high double- digit growth over the next few years. Our revenue projections for the company are detailed in the table below: Revenue Projections Saregama Ltd. Rs mn, FY Ends Mar FY15 FY16 FY17 FY18E FY19E FY20E a. Revenues from Products Carvaan Music Cards Other b. Revenues from Services Advertising License Fees Television Serials Other (incl. films) c. Other Revenues Total Revenues (a+b+c) Growth, % 18.8% -1.4% 91.2% 43.1% 21.8% Source: Company Reports Revenue Growth, Operating Leverage to Aid robust growth in EBITDA/ EPS through FY17-FY20E On Carvaan, we note that the product, while priced at Rs 6000/Rs 6500, the realization of the company is about Rs 4000/ unit, and the gross margin of the company is about 18%. All expenses allocated, and judging by the most recent release of the company, the PBIT/ unit of Carvaan is about Rs 320/ unit (i.e. about 8%). The management believes that the company can add about 2 ppt to the margin as greater scale comes in (lower procurement costs, lower distribution expenses). The company also has some margin levers from its other businesses, particularly online music. Certain cost heads, including employee expenses, legal and consulting charges are unlikely to rise significantly as sales pick up. Further, while the company is likely to advertise more aggressively in FY18/ FY19, Carvaan sales going forward shall likely take a word-of-mouth route, which will further aid margin expansion in FY20E. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 11

12 Profit Model Saregama India Ltd. Rs mn, FY Ends Mar FY16 FY17 FY18E FY19E FY20E Revenues from Operations Growth, % (y/y) Expenses: Raw Material Expenses Employee Expenses Programming and Production Exps Royalties Other Expenses EBITDA Margin 6.5% 4.8% 9.2% 11.2% 14.4% Depreciation and Amortization EBIT Other Income Interest Expenses PBT Provision for Tax PAT Shares O/S EPS EPS Growth, % 20.0% -66.4% 334.7% 66.4% 58.4% Source: Company Reports, Kotak Securities Private Client Research Return Ratios to Improve Substantially Following margin Expansion Saregama has been a low margin business for several past years, as the company has been incurring substantial costs in preparation for greater relevance in a digital environment (high monitoring expenses, expenses on metadata preparation), and legal expenses are also high, relative to revenues. Essentially, the problem has been an inadequate exploitation of music. Following margin expansion/ improving asset turnover, we expect RoE to expand substantially, providing basis for a re-rating. Rising Margins/ Asset Turnover to Aid RoE 20.0 EBITDA Margin RoE FY16 FY17 FY18E FY19E FY20E Source: Company Reports, Kotak Securities Private Client Research Balance Sheet/ Cash Flows are supportive to ambitions in new growth areas We expect Saregama to generate Rs 1.4 Bn in gross cash flows over FY18-FY20E. With Rs 250 mn investment in new music rights, and about Rs 500 mn in movies (rolling basis), we believe the company shall be able to manage the required investments from operations. Even so, we note that the company has substantial assets that it can utilize in case its cash flows are insufficient to meet requirements of the business. These include: a/ land holdings of Rs 1.8 Bn, and b/ 1.5 mn shares of CESC (current market value of c. Rs 1.5 Bn). The company has clearly stated that it would continue to hold on to the CESC stock, but would look for better utilization of its land. As of now, Saregama is a debt-free company. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 12

13 Valuation and Risks Comparison of Saregama with other listed M&E entities is, we believe, a futile exercise, since none of the listed entities share the drivers of growth that we project for in Saregama, or the extent of growth that we have envisaged. Saregama s profits have been volatile through the past few years, as the company has been experiencing high volatility in profits, along with waves of optimism about the positioning of IP players in the data revolution. Average NTM (Next twelve months) valuation of the stock has been 32X, with a standard deviation of 28. NTM P/E for Saregama ( ) Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Source: Bloomberg, Kotak Securities Private Client Research We value the stock at 31X FY20E PER, and set a (August, 2018) price target of Rs As noted earlier in the report, Saregama s earnings are based on assumptions for sales of Carvaan that do not have a trend/ track record to back. Further, there are risks relating with other assumptions in our models the company is getting involved in a large number of activities that have potential for loss (purchase of music rights, film production). While we believe that the company is cognizant of these risks and is taking steps to reduce risks, there may be at least medium-term risks to earnings that are not captured in our model. Lastly, there are industry-level risks, such as lower consumption growth than expected, rising costs of talent (relevant for music/ film production). We note that the company, along with other music companies was raided by the Enforcement Directorate in November 2017, in connection with royalty payments Saregama has, in a letter to the exchanges, stated that the company does not foresee these having a significant impact on the company s financials. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 13

14 FINANCIALS Profit and Loss Statement (Rs mn) FY17 FY18E FY19E FY20E Revenues 2,185 4,178 5,977 7,283 % change yoy EBITDA ,049 % change yoy Depreciation EBIT ,002 % change yoy Net Financial Income Profit Before Tax ,092 % change yoy Tax as % of PBT Adj. Net Income % change yoy Shares outstanding (m) EPS (Rs) DPS (Rs) CEPS (Rs) BVPS (Rs) Source: Company, Kotak Securities - Private Client Research Cash Flow Statement (Rs mn) (Rs mn) FY17 FY18E FY19E FY20E Pre-Tax Profit ,092 Depreciation Change in WC (186) (323) (303) (208) Cash Taxes Paid (81) (145) (241) (382) Other Operating Cash Flow (40) Change in Investments Capex 35 (100) (100) (100) Investment cash flow 35 (100) (100) (100) Equity Raised Debt Raised Other Financing Cash Flows (30) (30) (99) (159) Cash Flows from Financing (64) (30) (99) (159) Change in Cash (69) (123) Opening Cash Closing Cash Source: Company, Kotak Securities - Private Client Research Balance Sheet (Rs mn) FY17 FY18E FY19E FY20E Paid - Up Equity Capital Reserves 2,811 3,050 3,399 3,950 Net worth 2,985 3,224 3,573 4,124 Borrowings Other Non-Current Liabilities Creditors ,092 Other Current Liabilities 933 1,133 1,233 1,333 Total Current Liabilities 1,317 1,759 2,129 2,425 Total Liabilities and Equity 4,273 4,972 5,706 6,562 Net Fixed Assets 1,985 2,042 2,096 2,148 Investments/ Assoc Other Non-Current Asstes Inventory Debtors ,255 1,529 Cash Current Investments Loans & Advances 972 1,263 1,453 1,525 Other Current Assets Current Assets 1,818 2,451 3,120 3,911 Total Assets 4,273 4,972 5,706 6,562 Source: Company, Kotak Securities - Private Client Research Ratio Analysis (Rs mn) FY17 FY18E FY19E FY20E Margins and Growth EBITDA margin (%) EBIT margin (%) Net profit margin (%) Adjusted EPS growth (%) Balance Sheet Ratios: Receivables (days) Fixed Assets Turnover (x) Interest coverage (x) Net Debt/ Equity (%) Return Ratios: ROE (%) ROA (%) ROCE (%) Multiples (x) EV/ Sales EV/EBITDA Price to earnings (P/E) Source: Company, Kotak Securities - Private Client Research Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 14

15 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta K. Kathirvelu Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology Production sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com k.kathirvelu@kotak.com Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement FMCG, Media Metals & Mining Economy teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com Arun Agarwal Sumit Pokharna Pankaj Kumar Ashini Shah Auto & Auto Ancillary Oil and Gas Midcap Midcap arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com ashini.shah@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15

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