DQ Entertainment

 

DQ Entertainment is seen very expensive compared to its peers. Investors are advised to take exposure in the secondary market only when there is a trigger

IPO details

Price Band: Rs 75-80
issue size: Rs 120-128 crore
Date: March 10

DQ Entertainment (International), one of the leading players in animation business, is entering the capital market with a public issue of 16 million shares at the face value of Rs10 each. The Hyderabad-based company, which began as an IT training and consultancy firm in 1993, forayed into animation business in 2000.

   The company branched out into gaming and distribution business in the past eight years; however, it still derives a substantial portion of its revenues from its animation business. Considering the half-year period of this fiscal ended September 30, 2009, the company's animation business accounted for around 93% (Rs 61 crore) of the total revenues of Rs 65 crore.

   The issue will help the company raise around Rs 150 crore at the higher end of the price band. This includes Rs 25 crore already raised through the pre-IPO placements to IDFC Investments and a clutch of highnetworth individuals. The company would spend around Rs 51 crore for developing IT parks at its SEZ in Hyderabad. It would use around Rs104 crore in co-production and IP content generation.

THE INDUSTRY:

With advancement in technology, products associated with animation business are no longer restricted to specific age group especially children in early teens. Animations films (2D, 3D) like Hanuman Returns, Roadside Romeo and Bal Ganesha in India and Hollywood productions like Madagascar, Finding Nemo, Shrek series, Ratatouille and the recently Avataar have audiences that traverse all age groups.

   Besides this, television channels like Cartoon Network and Nickelodeon, a Zee group channel, and animation games based on celebrated characters have led to an explosion in the demand for animation. Also there is growing use of animation in education as textbooks are being animated to improve the learning experience for students. Then there is booming demand for animation from advertising and film industry.

   A key trend observed in the animation business is the outsourcing of animation projects by Hollywood production houses to firms in India and other Asian countries. As Indian animation industry matures and gets bigger, the extent of outsourcing is expected to grow dramatically.

   A Nasscom-Ernst & Young report had valued the global animation industry at around $68 billion in 2008 and the reports expects it to grow at a compounded annual growth rate of 10% to become $100 billion industry by 2012.

BUSINESS POTENTIAL:

Animation business is capital intensive and especially involves long-gestation projects to get the desired product. Foreseeing listed players, such as Compact Disc and Crest Animation, have de-risked their business models by hiving off animation division into SPVs. This helps the latter raise capital to finance their various projects. DQ Entertainment also has de-risked business model to an extent. The company searches for pre-sales funding and then commences the project. This approach ensures uninterrupted project completion and benefits in the long term. It derives a chunk of revenues from co-producing projects. Some it's past projects include series like Balkand and Ravan. It is in the process of completing series of The Jungle Book, Omkar, and Mysteries of Feluda, Toomai – the Elephant Boy. Besides it is working with Walt Disney to co-produce Mickey Mouse Club House. As of January this year, the company's order book through coproduction is around Rs 470 crore. Its net profit margin through co-production has been maintained between 35% and 40%. Going forward, the company intends to secure IP rights to content produced by writers or developing its own content. A substantial part of the company's FY09 revenues, around 91%, have come from these production ventures. These production ventures are with clients based in Europe and North America and they account for around 70% of its revenues.

VALUATION:

The issue is valued at around 30-32 times the company annualised net revenues in FY10 considering the post-issue fully diluted equity. This is quite expensive compared to its much bigger peer Compact Disc (revenues of Rs184 crore as of FY09) which is trading a price to earnings of around two times. Given this, investors are advised skip the issue and may take exposure in the secondary market based on the new flow post listing.

CONCERNS:

The company has provided financial date for only two years even though it's in the business for eight years. This makes it difficult to gauge company historical performance.