Stock Review: Eros International Media

Following the recent decline in broader market indices, the stock of film studio company Eros International Media has dropped by over 32% from its listing price of . 190 six months ago.

The company reported robust numbers during the December quarter. Given its unique business model, which offers cushion against the failure of movies, the company is expected to grow at a faster clip in the coming quarters. Unlike other companies in the entertainment business, Eros recovers more than two-third of its investment in movies even before their release. During the pre-production stage, the company earns revenues by selling television rights of the movie.

It also recovers a portion of its investment through the release of DVDs and Direct-to-Home (DTH) services during the post-production stage.

Both these arrangements ensure that the company is insulated from the failure of a film project on the box office. In this arrangement, the company's distribution network plays a key role. Through its investment in UFO Moviez, which ensures digital delivery of content, the company is in a position to release a film in 800 theatres at a time. Besides, Eros also monetises inhouse library of over 1,000 films through syndication deals and selling satellite rights.

Another source of income is presales of overseas film rights to the parent company Eros International Plc. In a fixed-rate agreement, the parent pays 30% of the cost in addition to a 30% mark-up and advances. These arrangements have helped the company secure handsome revenues from its investment. In the December 2010 quarter, the company's net profit increased to . 34 crore — a year-on-year jump of more than 200%.

Net sales rose by 60% to . 217. Due to its strong business model, the company enjoys benefits of revenue diversification. Around 40% of the company's revenues come from theatrical rights, and the remaining from overseas sales and satellite rights. Though its stock has not been able to provide any meaningful returns to investors so far, it may undergo a rerating in the coming quarters, given the company's future growth prospects.