ESGC - ErosSTX Global

[Luma21]

1. COMPANY OVERVIEW

Founded in 1977, Eros International is an Indian leading ( global ) company in the media and entertainment industry, which acquires, co-produces Indian and other content from third parties and distributes them across several formats such as theaters, TV, DVDs and VCDs. Eros International had always operated as a family-run business with Kishore Lula as CEO. Furthermore, STX investors ( TPG, Tony Capital and PCCW ) own respectively 19.6%, 17.7% and 5.31% of the company and directors separate from STX have a 7.28% stake in the company.

 

 

2.      STX MERGER

As of July 8, 2020, CCI ( Competition Commission of India ) approved the merger between Eros International and STX, an independent Hollywood studio founded in 2014.  The new combined company will have headquarters both in Mumbai, India and Burbank, California. The new global entertainment content powerhouse will be named Eros STX Global Corp and will be the first independent content and distribution company with worldwide range and in a special position in order to exploit the fastest growing entertainment market. The new merged entity will have a stable capital structure, including:

• $125 millions of incremental equity from STX investors: TPG, Hony Capital, PCCW and Liberty Global

 

• Total net debts of $264 millions considering their cash position

 

• $350 million credit facility from JP Morgan: the revolving line of credit will be extremely beneficial for Eros, because they are going to have access to extremely cheap capital compared to the 15-20% that the company were paying in India. The access to cheaper capital is going to provide a significant advantage, because they will be able to acquire and produce new content in a more efficient way and also distribute them at a lower cost than they had in the past.

 

• $120 million of available revolver capacity as of December 31, 2019

 

• The combined company is expected to generate roughly $50 million in operating synergies by 2022

 

 

 

3. Valuation

With regards to Eros Now platform, it is conservative to estimate that between this and the next fiscal year they should have revenues between $200-250 million with 40% EBITDA ( $100M EBITDA ). Furthermore, revenues and operating profit are also expected to rise when management will launch ads and Eros Prime targeting tier 1 cities.

Eros Now owns 12,000 digital rights, which 5,000 are into perpetuity ( Eros Now library represents 41% of the total Indian library ). The Indian OTT platform has produced contents with maximum $1 million budget and below, so it is reasonable to consider an average cost per film of about $400K, giving us a total replacement value of

$2 Billion. The streaming service’s robust content line-up also enables it to have a significant competitive advantage over its competitors due to cultural aspects. Indeed, Eros Now has a market share of 60% in Tier 2,3 cities in India and Eros Now viewership has experienced a 104% CAGR from 2017 ( 2.1 million sub ) to 2Q FY 21 or March 2020 ( 36.2 million sub ). So Eros has a cutting edge in the content creation and distribution field, because both Amazon Prime and Netflix could simply buy the library, but they cannot produce it themselves because of their inability to deeply relate with the Indian public from a cultural standpoint.

If we assume a multiple of 12X revenue for Eros Now (EV of $2.4B ) and $1.6 Billion for STX theatrical business, we get a total EV of $4B less total debt ( $254 million ) is $3.74 Billion ( divided by total outstanding shares we have $8.83 share price per share ).

 

What do you think? Anyone have insights about this company and the entertainment industry in both US and Asia?

[cameronfen]

I feel like with companies like software with large benefits to scale, it’s probably better to pay a higher valuation for the market leaders.  It looks like Eros share in India is less than 4%.  I didn’t look at the stock price so maybe it’s like super undervalued but betting on a sub-scale company to be a successful compounder is generally no a good idea. 

 

Here is statista illustration of market share in OTT streaming in India: https://www.google.com/amp/s/www.statista.com/chart/amp/23009/market-share-streaming--ott--platforms-in-india/

[cameronfen]

Eros Now library represents 41% of the total Indian library, which can't be reproduced for the reasons I described and this is a huge competitive advantage, while Netflix has only 5%. With regards to the number of sub Eros has 200+ subscribers and 40 Million paying subscribers ( 50 Million in September ), while Netflix has only 2 Million. The last year the Indian government legislated a law, which put limits on foreign OTT platform like Netflix and Amazon Prime.

ErosStx is in a unique position in order to exploit the Indian and the Chinese entertainment market.

 

According to the statista I linked to you, Eros has less than a 4% market share as they are not shown.  Even if all the dominant foreign firms are kicked out of the market there are 4 or 5 local OTT shown that have more market share and likely significantly more as I Eros MS not shown.  Regardless of the size of their library, if they don’t have customers what good does that do.  They could have the long tail of really mediocre content. 

[Luma21]

I'm sorry but I would highly recommend you to dig deeper on this investment idea because the datas you mentioned are clearly wrong. For example Eros Now has 60% of the market share in Tier 2,3 cities and Netflix has only 2 Million sub against Eros Now with 40 Million (There are many other examples). I reported official datas against yours that come from an unreliable source. Please I expect views that are based on reliable facts.

[ander]

Has anyone dug into the extensive fraud allegations at EROS International?  I was always positively inclined on the library but the allegations scared me off a few years ago. Might not be relevant here but probably worth looking into the history.

[Luma21]

All the claims were baseless and remember that this is not anymore Eros International but ErosSTX Global, a brand new company that was recapitalized and it is in a unique position in the Asian entertainment market with new liquidity.

[cameronfen]

Honestly I think he’s pumping the stock as he sent me a personal message asking me to not comment anymore because my research was “faulty”.  (Which is fine if true but he’s welcome to provide reasons here). 

[Luma21]

Look, I told you simply that you can't reply with informations that are clearly false and misleading. I respect everyone's opinions, but they have to be based on true datas, which is essential for a constructive debate.

 

[Luma21]

Statista is not a data source, but an image source. It's a web site with lousy informations that are unofficial and not confirmed and also there is no citation material and no link to data sources. Try again.

[Spekulatius]

^ LOL, This was presented at MOI Global apparently:

https://moiglobal.com/naveen-jeereddi-202101/

 

Why did they merge with an CA film studio (STX) if they want to distribute films in India?

[cameronfen]

I mean I don’t want to get into an argument maybe it’s a legit pitch, but there’s no need to go into my pm’s to shut down opinions you don’t want to hear.  Btw, statista is legit enough that many businesses pay for access to their data.

[villainx]

^ LOL, This was presented at MOI Global apparently:

https://moiglobal.com/naveen-jeereddi-202101/

 

Why did they merge with an CA film studio (STX) if they want to distribute films in India?

 

Pipeline for new content?

[cameronfen]

There’s also plenty of evidence has Netflix prime and Disney hotstar are the dominant players in India: https://qz.com/india/1897888/netflix-amazon-beat-disney-hotstar-amid-india-covid-19-lockdown/amp/

 

(And look their data is exactly the same as statista from a different source (albeit probably ultimately the same source).  Are they both wrong?).

 

Now it looks like Eros has a decent number of non-paying accounts (129m) but they have only about 30m paying subscribers.  Potentially also with a lower price as they target tier 2,3 cities, I fail to see why those numbers don’t imply there share is somewhere around 4% or lower considering the size of the Indian market. 

 

 

[cameronfen]

The correct thing for me to do is to apologize for accusing you of pumping the stock, which I am doing here.  I apologize for implying you were doing anything untoward. However, the original point that you took so much offense too, I’ve corroborated multiple times and I don’t understand why you would send me a PM telling me not to continuing participating on a public thread and posting faulty information, especially because you couldn’t contradict my evidence. 

[villainx]

There’s also plenty of evidence has Netflix prime and Disney hotstar are the dominant players in India: https://qz.com/india/1897888/netflix-amazon-beat-disney-hotstar-amid-india-covid-19-lockdown/amp/

 

(And look their data is exactly the same as statista from a different source (albeit probably ultimately the same source).  Are they both wrong?).

 

Now it looks like Eros has a decent number of non-paying accounts (129m) but they have only about 30m paying subscribers.  Potentially also with a lower price as they target tier 2,3 cities, I fail to see why those numbers don’t imply there share is somewhere around 4% or lower considering the size of the Indian market.

 

My understanding is that the non paying accounts also have little ad rev too.

 

Though I should add that I have a small speculative position here too.

[cameronfen]

There’s also plenty of evidence has Netflix prime and Disney hotstar are the dominant players in India: https://qz.com/india/1897888/netflix-amazon-beat-disney-hotstar-amid-india-covid-19-lockdown/amp/

 

(And look their data is exactly the same as statista from a different source (albeit probably ultimately the same source).  Are they both wrong?).

 

Now it looks like Eros has a decent number of non-paying accounts (129m) but they have only about 30m paying subscribers.  Potentially also with a lower price as they target tier 2,3 cities, I fail to see why those numbers don’t imply there share is somewhere around 4% or lower considering the size of the Indian market.

 

My understanding is that the non paying accounts also have little ad rev too.

 

Though I should add that I have a small speculative position here too.

 

Sure but that’s immaterial.  I don’t even think it’s necessarily a bad investment, I just think better to buy market leaders if your looking for compounders at higher valuations.  I didn’t look at the valuation, but could be decent value. 

[villainx]

I think some comments on Seeking Alpha were saying Eros had been under leveraging the non paying accounts with poor ads distribution. 

 

 

[Parsad]

Hi All,

 

Please keep debates to the message board and don't PM people unless it is a cordial message or you know them.

 

I also would not assume someone's intentions simply because they are new, PM'ed you to question your data sources.  It should be kept to the message board, but I can see a newbie mistake occurring as well.

 

If it continues then that's a problem.  Thanks!

 

Sanjeev

[cameronfen]

^yea that seems interesting.  I don’t want to give the impression that I investigated this company thoroughly.  I was intrigued so I looked up the market share information and reported that back as I felt like that was adding something to the conversation.  Not an expert, but I do imagine much of emerging market Internet services are under earning in terms of ads etc since you still are in the consolidation and establishing market share stage of growth.  I think the consequence is they will be under earning for a long time (as they should) as they are trying to increase share.  These are just my thoughts, could be wrong of course. 

[Spekulatius]

^ LOL, This was presented at MOI Global apparently:

https://moiglobal.com/naveen-jeereddi-202101/

 

Why did they merge with an CA film studio (STX) if they want to distribute films in India?

 

Pipeline for new content?

 

New content for India produced in CA, the most expensive location to produce films. That seemingly makes not sense. These out of country listings (company operating in country X and listing in country Y) are a yellow flag to being with and I think one would need to have a good handle on the Indian consumer space to gage the investing merit.

 

Also, while then first incarnation of Eros was recapitalized , aren’t it still the same players here?

[Luma21]

I analyzed and invested in ESGC during the last months of 2020. Naveen Jeeredi is also an investor in this company and he did an insightful presentation at MOI Global.

Eros and STX merged for many reasons:

1) To better scale the international entertainment market ( especially in Asia with an addressable market of  1-2 Billion subscribers) with the back up of STX investors, which have a unique position in China.

2) The combination with STX ( TPG, Hony Capital and PCCW ) will allow Eros to target higher paying subscribers in tier 1 cities, increasing at the same time their growth rate in ARPU (see Eros Now Prime launch and also the conversion from the B2B2C to B2C model, which will allow Eros Now to maximize its revenue stream and cash inflows ).

3)ErosSTX will have so much more contents (see the partnership with NBC Universal) in an environment that is currently experiencing an explosive demand.

[Luma21]

The correct thing for me to do is to apologize for accusing you of pumping the stock, which I am doing here.  I apologize for implying you were doing anything untoward. However, the original point that you took so much offense too, I’ve corroborated multiple times and I don’t understand why you would send me a PM telling me not to continuing participating on a public thread and posting faulty information, especially because you couldn’t contradict my evidence.

 

I didn't tell you to stop continuing to partecipate to this discussion, but that you used informations of a web site that is famous for using wrong and misleading datas without citing reference materials. That's it. Netflix and Disney price points are also so much higher ( 4x-5x higher than Eros) and clearly not sustainable ( Netflix has only 2 million sub against the 40M of Eros) in a market with 1 to 2 Billion potential sub. So the value proposition here is that Eros has and will have in the future a much higher pricing power than Netflix, Amazon Prime, etc.

 

[Luma21]

There’s also plenty of evidence has Netflix prime and Disney hotstar are the dominant players in India: https://qz.com/india/1897888/netflix-amazon-beat-disney-hotstar-amid-india-covid-19-lockdown/amp/

 

(And look their data is exactly the same as statista from a different source (albeit probably ultimately the same source).  Are they both wrong?).

 

Now it looks like Eros has a decent number of non-paying accounts (129m) but they have only about 30m paying subscribers.  Potentially also with a lower price as they target tier 2,3 cities, I fail to see why those numbers don’t imply there share is somewhere around 4% or lower considering the size of the Indian market.

 

 

And again you post old datas.

[cameronfen]

^ the data is 2020 Q2. 

[hasilp89]

Lol luma21 you need to chill. I spent some time looking at this given how cheap it “appears”.

There will definitely be some value appreciation as it gets analyst coverage, stx mgmt gets in and cleans up accounting and actually gets some clean PF financials out but to say it will be a leader in DTC streaming in India is not a given. Luma show me the hard market share numbers you have? Even if sub share is decent their $ share is likely very weak. Probably because 1) their content isn’t as good or worth as much as Disney/Netflix/Amazon’s and 2) they’re are in tier 2/3 markets where pricing will always be relatively weaker. Monetization isnt a given here. I also had concerns about Eros management, RP transactions and structure (I couldn’t figure out if they actually own 100% of Indian assets). While the daughter is well spoken and seems knowledgeable about DTC from my research nothing indicated they have the tech/personnel/drive to beat Netflix, Amazon and Disney, sorry. My feeing was they are just reliant on the name and existing library. Trust me Netflix will figure out how to translate content to all those languages.

 

To their credit STX seems like a decent studio that has been flexible on monetization (theater, direct, both) and structures projects smartly (tax credits, take off agreements, into partnerships) etc. CFO is from Discovery, CEO didn’t impress me much (had a bad burn with Heckmann/Nueverra of which he was on the board - story for another day).

 

Anyway there was something that got me interested given liberty / hony and the valuation but it’s one that I think would pop and I wouldn’t have conviction to hold and for my concentration there are better options out there.

But yeah luma chill out. Good investors should be asking for their ideas to be scrutinized.

 

Apologies for typos, multitasking with the SB.